UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
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FRANKLIN STRATEGIC SERIES
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
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Date of fiscal year end: 4/30
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Date of reporting period: 10/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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OCTOBER 31, 2006
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Franklin Aggressive
Growth Fund
Franklin Flex Cap
Growth Fund
Franklin Small Cap
Growth Fund II
Franklin Small-Mid Cap
Growth Fund
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER GROWTH
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Economic and Market Overview .............................................. 3
Franklin Aggressive Growth Fund ........................................... 5
Franklin Flex Cap Growth Fund ............................................. 13
Franklin Small Cap Growth Fund II ......................................... 21
Franklin Small-Mid Cap Growth Fund ........................................ 29
Financial Highlights and Statements of Investments ........................ 38
Financial Statements ...................................................... 75
Notes to Financial Statements ............................................. 80
Shareholder Information ................................................... 94
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Semiannual Report
Economic and Market Overview
During the six months ended October 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product growth slowed to annualized
rates of 2.6% in the second quarter and an estimated 2.2% in the third quarter.
Housing market weakness contributed to the slowdown. Growth was supported
primarily by corporate profits and consumer and government spending. Export
growth picked up some momentum, but a record trade deficit remained. Although
labor costs rose and new job creation slowed to 1% annually, hiring generally
increased and the unemployment rate fell from 4.6% to a five-year low of
4.4%. 1
Elevated energy and other commodity prices were a primary economic concern for
much of the period. Oil prices were volatile and declined from a record high of
$77 per barrel in July to nearly $59 at period-end. Shifting oil prices appeared
to raise the anxiety level among consumers and businesses alike. Consumers
curbed spending on large purchases, such as homes and cars. Home prices fell in
many parts of the country, mortgage rates crept up, and borrowing against home
equity flattened. Lower retail prices for cars, computers and clothing in
September and October signaled that inflationary pressure appeared to be
diminishing somewhat. Inflation was still a concern, however, as the core
Consumer Price Index (CPI) rose 2.7% for the 12 months ended October 31, 2006,
which was higher than the 2.2% 10-year average. 2
The Federal Reserve Board (Fed) raised the federal funds target rate to 5.25% on
June 30. However, since June, the Fed left the rate unchanged, citing a slowing
economy, widespread cooling in the housing market and the lagging effect of
prior tightening. The Fed stated that even with lower oil prices toward
period-end, inflation risks remained.
1. Source: Bureau of Labor Statistics.
2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Semiannual Report | 3
The Fed's inaction helped restore investor confidence, and equity markets
experienced dramatic rallies late in the period. Overall, the blue chip stocks
of the Dow Jones Industrial Average posted a six-month total return of +7.47%,
and the broader Standard & Poor's 500 Index (S&P 500) returned +6.11%, while the
technology-heavy NASDAQ Composite Index had a total return of +3.03%. 3
Utilities, telecommunications and consumer staples performed particularly well.
3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. The S&P 500 consists of 500
stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2006. 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.
4 | Semiannual Report
Franklin Aggressive Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Aggressive Growth Fund seeks
capital appreciation by investing substantially in equity securities of
companies demonstrating accelerating growth, increasing profitability, or
above-average growth or growth potential, when compared with the overall
economy.
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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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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This semiannual report for Franklin Aggressive Growth Fund covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Aggressive Growth Fund - Class A had a
- -5.90% cumulative total return. The Fund underperformed its narrow benchmark,
the Russell 3000(R) Growth Index, which returned +2.95%, and its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.11% for
the same period. 1 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 8.
1. Source: Standard & Poor's Micropal. The Russell 3000 Growth Index is
market capitalization weighted and measures performance of those Russell
3000 Index companies with higher price-to-book ratios and higher
forecasted growth values. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The
indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
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 43.
Semiannual Report | 5
PORTFOLIO BREAKDOWN
Franklin Aggressive Growth Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Electronic Technology* 21.1%
Technology Services* 15.5%
Health Technology* 13.0%
Finance 7.7%
Retail Trade 6.7%
Health Services 6.5%
Communications 4.6%
Consumer Services 3.5%
Commercial Services 3.3%
Transportation 2.0%
Distribution Services 1.9%
Producer Manufacturing 1.9%
Industrial Services 1.9%
Energy Minerals 1.0%
Other 1.8%
Short-Term Investments & Other Net Assets 7.6%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio. There are specific
risks to investing in technology company stocks, which can be subject to
abrupt or erratic price movements and have been volatile, especially over
the short term.
INVESTMENT STRATEGY
We are research driven, fundamental investors pursuing an aggressive growth
strategy. As "bottom-up" investors focusing primarily on individual securities,
we choose companies that have clear indicators of future earnings growth and
that present, in our opinion, the best trade-off between that earnings growth,
business and financial risk, and valuation. We rely on a team of analysts to
help provide in-depth industry expertise and use both qualitative and
quantitative analysis to evaluate companies for distinct and sustainable
competitive advantages likely to lead to growth in earnings and/or share price.
Competitive advantages such as a particular product niche, proven technology,
sound financial profits and records, strong management and industry leadership
are all factors we believe may contribute to strong growth potential.
MANAGER'S DISCUSSION
During the six months under review, the Fund's top contributors came from a
variety of sectors. Shares of leading biotechnology company Celgene gained 27%
in value and benefited the Fund's performance during the review period. Driven
primarily by the strong sales of its blood cancer drug Revlimid, Celgene's
revenue growth exceeded analyst expectations. The company also received a boost
from its recent addition to the S&P 500.
As online video has become more accessible and grown in popularity, Fund
holdings such as technology software and services company Akamai Technologies
and electronic technology giant Cisco Systems benefited from the increased
availability of online video content, higher traffic and strong broadband
subscriber growth. Akamai's shares increased 39% in value during the reporting
period and Cisco's stock price rose 10% from the time that we bought it in May
through the end of the reporting period.
The Fund also had detractors from performance. In particular, semiconductor
companies generally performed poorly, hampered by increased inventories. In
addition, despite strong third quarter sales and revenue growth, Broadcom's
stock price slid 26% in value during the review period due to an ongoing patent
dispute with QUALCOMM and as irregularities regarding the company's stock option
grants surfaced. Marvell Technology Group warned that third quarter revenues
would be down from the previous quarter, and the company's shares declined 38%
in value from the beginning of the period until we sold them in August. Jabil
Circuit, which we also sold during the reporting period, encountered operational
problems. Its shares lost nearly 35% for the time we held it during the period.
6 | Semiannual Report
Thank you for your continued participation in Franklin Aggressive Growth Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Robert R. Dean
Robert R. Dean, CFA
[PHOTO OMITTED] /s/ Conrad B. Herrmann
Conrad B. Herrmann, CFA
Portfolio Management Team
Franklin Aggressive Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
TOP 10 HOLDINGS
Franklin Aggressive Growth Fund
10/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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NII Holdings Inc. 3.4%
COMMUNICATIONS
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Roche Holding AG, ADR (Switzerland) 3.3%
HEALTH TECHNOLOGY
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Celgene Corp. 3.0%
HEALTH TECHNOLOGY
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Cisco Systems Inc. 3.0%
ELECTRONIC TECHNOLOGY
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The Goldman Sachs Group Inc. 2.8%
FINANCE
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Paychex Inc. 2.3%
TECHNOLOGY SERVICES
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Gilead Sciences Inc. 2.2%
HEALTH TECHNOLOGY
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Cognizant Technology Solutions Corp., A 2.1%
TECHNOLOGY SERVICES
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Google Inc., A 2.1%
TECHNOLOGY SERVICES
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Network Appliance Inc. 2.0%
ELECTRONIC TECHNOLOGY
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Semiannual Report | 7
Performance Summary as of 10/31/06
FRANKLIN AGGRESSIVE GROWTH FUND
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. The performance table does 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.
PRICE INFORMATION
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CLASS A (SYMBOL: FGRAX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) -$1.09 $17.21 $18.30
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CLASS B (SYMBOL: FKABX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) -$1.10 $16.43 $17.53
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CLASS C (SYMBOL: FKACX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) -$1.09 $16.40 $17.49
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CLASS R (SYMBOL: FKARX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) -$1.09 $17.03 $18.12
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ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) -$1.07 $17.61 $18.68
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8 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 -5.90% +11.60% +47.68% +76.32%
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Average Annual Total Return 2 -11.33% +5.19% +6.84% +7.15%
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Value of $10,000 Investment 3 $ 8,867 $10,519 $13,921 $16,618
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Avg. Ann. Total Return (9/30/06) 4 +2.87% +8.78% +6.90%
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CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 -6.22% +10.78% +42.58% +68.21%
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Average Annual Total Return 2 -9.97% +6.78% +7.05% +7.33%
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Value of $10,000 Investment 3 $ 9,003 $10,678 $14,058 $16,821
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Avg. Ann. Total Return (9/30/06) 4 +4.36% +9.06% +7.09%
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CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 -6.23% +10.74% +42.48% +67.78%
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Average Annual Total Return 2 -7.17% +9.74% +7.34% +7.29%
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Value of $10,000 Investment 3 $ 9,283 $10,974 $14,248 $16,778
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Avg. Ann. Total Return (9/30/06) 4 +7.31% +9.33% +7.05%
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CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
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Cumulative Total Return 1 -6.02% +11.23% +41.45% +23.85%
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Average Annual Total Return 2 -6.02% +11.23% +12.25% +4.53%
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Value of $10,000 Investment 3 $ 9,398 $11,123 $14,145 $12,385
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Avg. Ann. Total Return (9/30/06) 4 +8.82% +14.64% +4.12%
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ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (6/23/99)
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Cumulative Total Return 1 -5.73% +11.88% +49.74% +80.39%
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Average Annual Total Return 2 -5.73% +11.88% +8.41% +8.35%
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Value of $10,000 Investment 3 $ 9,427 $11,188 $14,974 $18,039
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Avg. Ann. Total Return (9/30/06) 4 +9.41% +10.41% +8.11%
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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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 9
Performance Summary (CONTINUED)
ENDNOTES
THE MANAGER OF THE FUND USES AN AGGRESSIVE GROWTH STRATEGY SO AN INVESTMENT IN
THE FUND INVOLVES A GREATER DEGREE OF RISK. THE FUND MAY BE MORE VOLATILE THAN A
MORE CONSERVATIVE EQUITY FUND, AND IT MAY BE BEST SUITED FOR LONG-TERM
INVESTING. THE FUND'S INVESTMENTS IN SMALLER- AND MIDSIZE-COMPANY STOCKS INVOLVE
SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES AND
SMALLER MARKET SHARE. SMALLER- AND MIDSIZE-COMPANY STOCKS HISTORICALLY HAVE
EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER
THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH
HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than
Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have
differed. These shares have higher annual fees and expenses
than Class A shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher
annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
10 | Semiannual Report
Your Fund's Expenses
FRANKLIN AGGRESSIVE GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 11
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
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BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
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Actual $1,000 $ 941.00 $ 6.60
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Hypothetical (5% return before expenses) $1,000 $1,018.40 $ 6.87
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CLASS B
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Actual $1,000 $ 937.80 $10.01
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Hypothetical (5% return before expenses) $1,000 $1,014.87 $10.41
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CLASS C
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Actual $1,000 $ 937.70 $10.06
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Hypothetical (5% return before expenses) $1,000 $1,014.82 $10.46
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CLASS R
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Actual $1,000 $ 939.80 $ 7.63
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Hypothetical (5% return before expenses) $1,000 $1,017.34 $ 7.93
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ADVISOR CLASS
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Actual $1,000 $ 942.70 $ 5.19
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Hypothetical (5% return before expenses) $1,000 $1,019.86 $ 5.40
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* Expenses are equal to the annualized expense ratio for each class (A:
1.35%; B: 2.05%; C: 2.06%; R: 1.56%; and Advisor: 1.06%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
12 | Semiannual Report
Franklin Flex Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks
capital appreciation. The Fund invests predominantly in equity securities of
companies that the manager believes have the potential for capital appreciation.
The Fund has flexibility to invest in companies located, headquartered or
operating inside and outside the U.S., across the entire market capitalization
spectrum from small, emerging growth companies to well-established, large cap
companies.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Flex Cap Growth Fund covers the period ended
October 31, 2006.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Flex Cap Growth Fund - Class A had a
- -0.92% cumulative total return. The Fund underperformed its narrow benchmark,
the Russell 3000 Growth Index, which returned +2.95%, and its broad benchmark,
the Standard & Poor's 500 Index (S&P 500), which returned +6.11% for the same
period. 1 The Fund also underperformed its peers in the Lipper Multi-Cap Growth
Funds Classification Average, which returned -0.81%.2 You can find the Fund's
long-term performance data in the Performance Summary beginning on page 16.
1. Source: Standard & Poor's Micropal. The Russell 3000 Growth Index is
market capitalization weighted and measures performance of those Russell
3000 Index companies with higher price-to-book ratios and higher
forecasted growth values. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The
indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Lipper Inc. The Lipper Multi-Cap Growth Funds Classification
Average is calculated by averaging the total returns of all funds within
the Lipper Multi-Cap Growth Funds classification in the Lipper Open-End
underlying funds universe for the period indicated. Lipper Multi-Cap
Growth Funds are defined as funds that normally invest in companies, of
any size, with long-term earnings expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indexes. For the six-month period ended 10/31/06, there were 540 funds in
this category. Lipper calculations do not include sales charges, but
include reinvestment of any income or distributions. The Fund's
performance relative to the average may have differed if these or other
factors had been considered. Past performance does not guarantee future
results.
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 51.
Semiannual Report | 13
PORTFOLIO BREAKDOWN
Franklin Flex Cap Growth Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Electronic Technology* 17.6%
Health Technology* 14.8%
Technology Services* 11.6%
Finance 11.2%
Health Services 6.6%
Communications 6.0%
Commercial Services 4.2%
Retail Trade 3.6%
Consumer Services 3.5%
Consumer Non-Durables 2.7%
Transportation 2.7%
Process Industries 2.6%
Energy Minerals 2.4%
Industrial Services 2.1%
Producer Manufacturing 2.1%
Distribution Services 2.1%
Other 2.3%
Short-Term Investments & Other Net Assets 1.9%
* Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
INVESTMENT STRATEGY
We are research driven, fundamental investors pursuing a growth strategy. As
"bottom-up" investors focusing primarily on individual securities, we seek
companies that have identifiable drivers of future earnings growth and that we
believe present a good trade-off between that potential earnings growth,
business and financial risk, and valuation. We believe that examples of
identifiable drivers of future earnings growth are a particular product niche,
proven technology, sound financial profits and records, strong management, and
industry leadership. We rely on a team of analysts to help provide in-depth
industry expertise and use both qualitative and quantitative analysis.
MANAGER'S DISCUSSION
During the six months under review, the communications sector had the greatest
positive impact on Fund performance relative to the benchmark Russell 3000
Growth Index. This was largely due to the Fund's investment in Mexico-based
America Movil, which was not an index component. Despite political unrest in
Mexico, the company continued to benefit from strong growth in the Latin
American wireless telecommunications market.
Health technology was the Fund's largest contributing sector to absolute
performance as shares of drug makers Celgene and Gilead Sciences rose in value
during the review period. Strong product sales drove the performance of both
companies and Celgene received a boost from its recent addition to the S&P 500.
Health services company Allscripts Healthcare Solutions was another strong
contributor to performance during the review period. We believe the medical
software industry has strong growth potential as many of the services and
functions performed by doctors and hospitals become automated.
Although the technology services sector had a net negative effect on relative
performance, on an individual security basis, Cognizant Technology Solutions and
Akamai Technologies rose in value and were among the Fund's top contributors.
Many analysts believed the outlook for leading information technology services
provider Cognizant was positive as the company confirmed its plans for
international expansion. Akamai is best known for its Internet content delivery
services, and until recently, Akamai had little direct competition and benefited
from the increased availability of high-quality streaming content and strong
broadband subscriber growth.
The Fund had several detractors from performance. On a sector basis, the Fund's
electronic technology holdings detracted most from absolute and relative Fund
performance. In particular, semiconductors generally performed poorly, hampered
by increased inventories. Semiconductor companies that detracted from
14 | Semiannual Report
performance during the review period included Broadcom, Microsemi and Marvell
Technology Group, and we sold them by period-end.
Several of the Fund's energy-related holdings, such as coal producer Peabody
Energy and oilfield services and equipment companies Halliburton and Helix
Energy Solutions, also detracted from performance as oil prices eased. The Fund
sold its holdings in Peabody and Halliburton during the reporting period.
Thank you for your continued participation in Franklin Flex Cap Growth Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Conrad B. Herrmann
Conrad B. Herrmann, CFA
Portfolio Manager
Franklin Flex Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
TOP 10 HOLDINGS
Franklin Flex Cap Growth Fund 10/31/06
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
Cognizant Technology Solutions Corp., A 2.2%
TECHNOLOGY SERVICES
- -------------------------------------------------------------------------------
Celgene Corp. 1.9%
HEALTH TECHNOLOGY
- -------------------------------------------------------------------------------
VCA Antech Inc. 1.9%
HEALTH SERVICES
- -------------------------------------------------------------------------------
Apple Computer Inc. 1.8%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Google Inc., A 1.8%
TECHNOLOGY SERVICES
- -------------------------------------------------------------------------------
CVS Corp. 1.8%
RETAIL TRADE
- -------------------------------------------------------------------------------
Microchip Technology Inc. 1.7%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
America Movil SA de CV, L, ADR (Mexico) 1.7%
COMMUNICATIONS
- -------------------------------------------------------------------------------
Harris Corp. 1.7%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
NII Holdings Inc. 1.7%
COMMUNICATIONS
- -------------------------------------------------------------------------------
Semiannual Report | 15
Performance Summary as of 10/31/06
FRANKLIN FLEX CAP GROWTH FUND
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. The performance table does 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.
PRICE INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKCGX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.39 $42.06 $42.45
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FKCBX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.52 $39.62 $40.14
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCIIX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.52 $39.70 $40.22
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FRCGX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.44 $41.57 $42.01
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.34 $42.29 $42.63
- --------------------------------------------------------------------------------
16 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -0.92% +10.92% +47.63% +154.45%
- ------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -6.62% +4.55% +6.83% +9.14%
- ------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,338 $10,455 $13,913 $23,978
- ------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +0.49% +7.75% +9.02%
- ------------------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -1.30% +10.09% +42.26% +73.83%
- ------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -5.24% +6.09% +7.00% +7.31%
- ------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,476 $10,609 $14,026 $17,383
- ------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +1.79% +7.93% +7.08%
- ------------------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -1.29% +10.09% +42.24% +136.22%
- ------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -2.28% +9.09% +7.30% +8.98%
- ------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,772 $10,909 $14,224 $23,622
- ------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +4.81% +8.22% +8.85%
- ------------------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -1.02% +10.65% +31.14% +30.56%
- ------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.02% +10.65% +9.46% +5.68%
- ------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,898 $11,065 $13,114 $13,056
- ------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +6.31% +11.63% +5.25%
- ------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 5 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -0.77% +11.20% +48.44% +155.84%
- ------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.77% +11.20% +8.22% +9.85%
- ------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,923 $11,120 $14,844 $25,584
- ------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +6.86% +9.15% +9.72%
- ------------------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 17
Performance Summary (CONTINUED)
ENDNOTES
THE FUND IS NONDIVERSIFIED, WHICH MEANS IT MAY INVEST A GREATER PORTION OF ITS
ASSETS IN THE SECURITIES OF ONE ISSUER THAN A DIVERSIFIED FUND. THE FUND MAY
INVEST A SUBSTANTIAL PORTION OF ITS ASSETS IN SECURITIES LINKED TO THE STATE OF
CALIFORNIA, WHICH INVOLVES INCREASED VOLATILITY ASSOCIATED WITH ECONOMIC OR
REGULATORY DEVELOPMENTS IN THE STATE. SMALLER, NEWER OR UNSEASONED COMPANIES CAN
BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS
FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES.
THE FUND ALSO INVESTS IN TECHNOLOGY STOCKS, WHICH CAN BE HIGHLY VOLATILE AND
INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE
MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower
initial sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than
Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have
differed. These shares have higher annual fees and expenses
than Class A shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher
annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Effective 8/2/04, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 8/2/04, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 8/1/04, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 8/2/04
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +26.81% and +11.15%.
18 | Semiannual Report
Your Fund's Expenses
FRANKLIN FLEX CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 19
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 990.80 $4.72
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.47 $4.79
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 987.00 $8.46
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.69 $8.59
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 987.10 $8.41
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.74 $8.54
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 989.80 $5.97
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.21 $6.06
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 992.30 $3.46
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.73 $3.52
- ----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.94%; B: 1.69%; C: 1.68%; R: 1.19%; and Advisor: 0.69%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
20 | Semiannual Report
Franklin Small Cap Growth Fund II
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund II seeks
long-term capital growth by investing at least 80% of its net assets in equity
securities of small-capitalization companies with market capitalizations not
exceeding that of the highest market capitalization in the Russell 2000(R) Index
or $1.5 billion, whichever is greater, at the time of purchase. 1
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Small Cap Growth Fund II covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Small Cap Growth Fund II - Class A had
a -5.68% cumulative total return. The Fund underperformed its narrow benchmark,
the Russell 2000 Growth Index, which had a -2.69% return, and its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.11% for
the same period.2 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 24.
1. The Russell 2000 Index is market capitalization weighted and measures
performance of the 2,000 smallest companies in the Russell 3000 Index,
which represent approximately 8% of total market capitalization of the
Russell 3000 Index.
2. Source: Standard & Poor's Micropal. The Russell 2000 Growth Index is
market capitalization weighted and measures performance of those Russell
2000 Index companies with higher price-to-book ratios and higher
forecasted growth values. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The
indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
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 60.
Semiannual Report | 21
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund II
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Electronic Technology* 25.6%
Technology Services* 10.6%
Health Technology* 10.4%
Consumer Services 7.8%
Finance 7.7%
Health Services 5.9%
Transportation 4.4%
Producer Manufacturing 4.1%
Industrial Services 3.8%
Retail Trade 3.8%
Consumer Durables 2.7%
Energy Minerals 2.6%
Commercial Services 2.6%
Process Industries 2.6%
Real Estate Investment Trusts 2.5%
Other 1.8%
Short-Term Investments & Other Net Assets 1.1%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio. There are specific
risks to investing in technology company stocks, which can be subject to
abrupt or erratic price movements and have been volatile, especially over
the short term.
INVESTMENT STRATEGY
We are research driven, fundamental investors pursuing a growth strategy. As
"bottom-up" investors focusing primarily on individual securities, we choose
companies that have identifiable drivers of future earnings growth and that
present, in our opinion, the best trade-off between that earnings growth,
business and financial risk, and valuation. We rely on a team of analysts to
help provide in-depth industry expertise and use both qualitative and
quantitative analysis to evaluate companies for distinct and sustainable
competitive advantages likely to lead to growth in earnings and/or share price.
Competitive advantages such as a particular product niche, proven technology,
sound financial profits and records, strong management and industry leadership
are all factors we believe may contribute to strong growth potential.
MANAGER'S DISCUSSION
During the six months under review, several of the Fund's top contributors to
performance were health care-related stocks. On an absolute basis, health
services was the greatest contributing sector largely due to the strong
performance of prescription software provider Allscripts Healthcare Solutions,
which we acquired in May. We believe the medical software industry has strong
growth potential as many of the services and functions performed by doctors and
hospitals become more automated. Other health care-related stocks that helped
Fund performance included biopharmaceutical companies Myogen (sold during the
reporting period) and The Medicines Company. Shares of Myogen, whose primary
focus is the development of cardiovascular disorder treatments, increased in
value as a result of Gilead Sciences' agreement to acquire the company at a
significant premium. The Medicines Company's stock price appreciated in value
during the reporting period due to promising clinical trials of the company's
lead product, blood-thinning drug Angiomax, which experienced increased sales.
Notably, some of the Fund's biggest contributors to and detractors from
performance were electronic technology stocks. Stock selection contributed to
the Fund's performance relative to the Russell 2000 Growth Index and offset the
negative effect of our overweighted allocation to this underperforming sector.
Several of the Fund's top contributing electronic technology holdings were
highly specialized companies such as FLIR Systems, Varian Semiconductor
Equipment and Rackable Systems. Shares of FLIR Systems, maker of thermal imaging
cameras used for surveillance, rose in value largely due to government contract
awards, which seemed to increase investor optimism for future sales growth.
Varian designs, manufactures and services semiconductor processing equipment
used in making integrated circuits. Sales of memory-based semiconductors
remained strong and Varian gained market share during the period. In
22 | Semiannual Report
July, we purchased shares of Rackable Systems, a leading provider of servers and
storage for large-scale data centers, which house the servers that are integral
to the Internet. The company's customers include such Internet giants as
Amazon.com, Yahoo! and Electronic Arts. The company uses its proprietary
technology to develop products that are highly regarded for their compact
design, energy efficiency and relatively moderate heat generation.
Disappointments among our electronic technology sector holdings included Argon
ST, Microsemi and NetLogic Microsystems, which detracted from Fund performance
during the review period. Argon is an engineering firm that specializes in
building command and control systems used in surveillance,
intelligence-gathering and reconnaissance. Despite the trend in increased
security awareness, Argon's shares declined in value due to fears of slower
near-term growth. Although shares of semiconductor manufacturer Microsemi
declined in value as the company cut its quarterly sales and earnings targets,
we believe growth opportunities still exist for the company. NetLogic's stock
price also fell as the company announced that it expected fourth-quarter
earnings results would be short of analysts' expectations due to an inventory
glitch and potential weakness in its Asian market. However, we believed these
issues were short term in nature, and at period-end our longer-term outlook for
the company remained intact.
Thank you for your continued participation in Franklin Small Cap Growth Fund II.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Michael P. McCarthy
Michael P. McCarthy, CFA
Portfolio Manager
Franklin Small Cap Growth Fund II
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
TOP 10 HOLDINGS
Franklin Small Cap Growth Fund II
10/31/06
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
Varian Semiconductor Equipment
Associates Inc. 1.8%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Power Integrations Inc. 1.7%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
FLIR Systems Inc. 1.7%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Orient-Express Hotels Ltd., A 1.6%
CONSUMER SERVICES
- -------------------------------------------------------------------------------
ViaSat Inc. 1.6%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Sapient Corp. 1.6%
TECHNOLOGY SERVICES
- -------------------------------------------------------------------------------
Penn National Gaming Inc. 1.4%
CONSUMER SERVICES
- -------------------------------------------------------------------------------
Microsemi Corp. 1.4%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Helix Energy Solutions Group Inc. 1.4%
INDUSTRIAL SERVICES
- -------------------------------------------------------------------------------
Trimble Navigation Ltd. 1.3%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Semiannual Report | 23
Performance Summary as of 10/31/06
FRANKLIN SMALL CAP GROWTH FUND II
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. The performance table does 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.
PRICE INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FSGRX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.79 $13.11 $13.90
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBSGX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.80 $12.52 $13.32
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCSGX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.80 $12.53 $13.33
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FSSRX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.79 $12.96 $13.75
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.78 $13.37 $14.15
- --------------------------------------------------------------------------------
24 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -5.68% +12.63% +52.62% +31.10%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -11.12% +6.15% +7.55% +3.31%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $8,888 $10,615 $14,391 $12,356
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 -3.78% +8.60% +2.54%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -6.01% +11.79% +47.12% +25.20%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -9.77% +7.79% +7.73% +3.52%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,023 $10,779 $14,512 $12,520
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 -2.64% +8.80% +2.76%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -6.00% +11.78% +47.07% +25.30%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -6.94% +10.78% +8.02% +3.53%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,306 $11,078 $14,707 $12,530
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +0.36% +9.08% +2.78%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -5.75% +12.40% +27.81% +31.17%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -5.75% +12.40% +8.52% +5.78%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,425 $11,240 $12,781 $13,117
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +1.90% +10.75% +4.76%
- ---------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -5.51% +12.92% +54.75% +33.70%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -5.51% +12.92% +9.12% +4.57%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,449 $11,292 $15,475 $13,370
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +2.34% +10.16% +3.80%
- ---------------------------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 25
Performance Summary (CONTINUED)
ENDNOTES
SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING
ECONOMIC CONDITIONS AND THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF
LARGER, MORE ESTABLISHED COMPANIES. THE FUND IS INTENDED FOR LONG-TERM INVESTORS
WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE PRICE. THE FUND'S
PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S
MOST VOLATILE SECTORS AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than
Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have
differed. These shares have higher annual fees and expenses
than Class A shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher
annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
26 | Semiannual Report
Your Fund's Expenses
FRANKLIN SMALL CAP GROWTH FUND II
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 27
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 943.20 $5.93
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.11 $6.16
- --------------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 939.90 $9.58
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.32 $9.96
- --------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 940.00 $9.54
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.38 $9.91
- --------------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 942.50 $7.15
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.85 $7.43
- --------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 944.90 $4.71
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.37 $4.89
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.21%; B: 1.96%; C: 1.95%; R: 1.46%; and Advisor: 0.96%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
28 | Semiannual Report
Franklin Small-Mid Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks
long-term capital growth by investing at least 80% of its net assets in equity
securities of small and midsize companies. The Fund defines small-cap companies
as those having market values less than $1.5 billion or the highest market cap
value in the Russell 2000 Index, whichever is greater, at the time of purchase.1
Mid-cap companies are those with market cap values not exceeding $8.5 billion.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Small-Mid Cap Growth Fund covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Small-Mid Cap Growth Fund -Class A had
a -2.52% cumulative total return. The Fund underperformed its benchmarks, the
Russell Midcap(R) Growth Index and the Standard & Poor's 500 Index (S&P 500),
which had total returns of -0.58% and +6.11% for the same period.2 You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 33.
1. The Russell 2000 Index is market capitalization weighted and measures
performance of the 2,000 smallest companies in the Russell 3000 Index,
which represent approximately 8% of total market capitalization of the
Russell 3000 Index.
2. Source: Standard & Poor's Micropal. The Russell Midcap Growth Index is
market capitalization weighted and measures performance of those Russell
Midcap Index companies with higher price-to-book ratios and higher
forecasted growth values. The S&P 500 consists of 500 stocks chosen for
market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The
indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
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 69.
Semiannual Report | 29
PORTFOLIO BREAKDOWN
Franklin Small-Mid Cap Growth Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Electronic Technology* 25.8%
Health Technology* 10.7%
Technology Services* 10.5%
Finance 8.4%
Health Services 6.6%
Producer Manufacturing 5.7%
Consumer Durables 4.3%
Communications 3.9%
Commercial Services 3.8%
Transportation 3.4%
Energy Minerals 3.2%
Industrial Services 3.1%
Consumer Services 2.3%
Retail Trade 2.3%
Other 5.9%
Short-Term Investments & Other Net Assets 0.1%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio. There are specific
risks to investing in technology company stocks, which can be subject to
abrupt or erratic price movements and have been volatile, especially over
the short term.
INVESTMENT STRATEGY
We are research driven, fundamental investors pursuing a growth strategy. As
"bottom-up" investors focusing primarily on individual securities, we choose
companies that have identifiable drivers of future earnings growth and that
present, in our opinion, the best trade-off between that earnings growth,
business and financial risk, and valuation. We rely on a team of analysts to
help provide in-depth industry expertise and use both qualitative and
quantitative analysis to evaluate companies for distinct and sustainable
competitive advantages likely to lead to growth in earnings and/or share price.
Competitive advantages such as a particular product niche, proven technology,
sound financial profits and records, strong management and industry leadership
are all factors we believe may contribute to strong growth potential.
MANAGER'S DISCUSSION
During the six months under review, market leadership shifted as economists
debated the outlook of the economy and interest rates. By period-end, companies
whose fortunes are linked to economic growth -- energy, minerals and electronic
technology -- generally experienced stock price declines, while those linked to
a slow growth economy and lower interest rate environment -- utilities, banks,
and consumer-related companies -- generally experienced stock price
appreciation.
The Fund's electronic technology sector exposure, although a detractor in
absolute terms, included several positions that benefited the Fund's performance
relative to the Russell Midcap Growth Index during the six months under review.
For example, FLIR Systems, which develops specialized thermal imaging systems
used for surveillance, was a significant contributor on an individual security
basis. Our positions in F5 Networks, whose products and services help companies
efficiently and securely manage their Internet traffic, and computer peripherals
manufacturer Logitech International also benefited the Fund's returns.
Stock selection in the technology services sector contributed positively to the
Fund's relative performance for the period under review. Notably, our
overweighted position in information technology services company Cognizant
Technology Solutions was a key contributor, as were our holdings in business
software company Hyperion Solutions and Internet software and services firm
Akamai Technologies, which was purchased in June. Consistent with our investment
strategy, we found compelling growth prospects in a variety of technology
companies, and overweighted positions in both the electronic technology and
technology services sectors increased over the period.
30 | Semiannual Report
Stock selection in the producer manufacturing sector also helped the Fund's
relative returns. The Fund's best performer in the sector was Terex, which
manufactures industrial capital equipment used in the construction,
infrastructure, mining, transportation, and refining industries.
As bottom-up managers, our focus generally is at the individual stock level in
terms of selecting stocks and evaluating the results of our decisions. Other
significant positive contributors to relative performance on an individual
security basis for the past six months included our positions in freight
forwarding and logistics services company Expeditors International of
Washington; CapitalSource, a specialty finance company that provides loans to
small- and medium-sized businesses; Allscripts Healthcare Solutions, which
provides clinical software and information solutions to the health care market;
and Fisher Scientific International, which provides products and services to the
scientific research and clinical laboratory markets. We sold our investment in
Fisher Scientific by period-end.
The Fund's relative underperformance during the period was largely due to stock
selection in the retail trade sector. Our overweighted position in women's
clothing retailer Chico's FAS was the most significant detractor on an
individual stock basis. We sold out of our position in Chico's in July, just
ahead of the stock's sharp drop in August, as we believed disappointing
comparable sales and continued margin pressure would weigh on the company for
some time. Our position in sports-related apparel retailer Zumiez also hindered
Fund performance as the company's stock price fell during the reporting period,
and we sold it by period-end.
Stock selection in the consumer services sector also hampered relative
performance. Key detractors in this sector included subscription-based
broadcaster XM Satellite Radio Holdings and casino owner and operator Station
Casinos. We exited our position in Station Casinos during the period as we
believed the growth outlook for the company had deteriorated.
Stock selection in the health services sector also hindered relative
performance. Overweighted positions in Community Health Systems, which operates
primary and acute care hospitals in mostly non-urban communities, and Omnicare,
which provides pharmaceutical services to nursing homes, dragged on returns. We
sold our Omnicare holding by period-end.
Other significant detractors on an individual security basis included our
positions in semiconductor manufacturers Microsemi and Intersil. Rowan Cos.,
which provides contract drilling services, Oshkosh Truck, which manufactures
commercial specialty vehicles and Tektronix, a company that supplies test,
measurement, and monitoring products and services to the communications,
TOP 10 HOLDINGS
Franklin Small-Mid Cap Growth Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Tektronix Inc. 2.1%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
NII Holdings Inc. 2.0%
COMMUNICATIONS
- --------------------------------------------------------------------------------
Harris Corp. 2.0%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Amdocs Ltd. 1.8%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Cognizant Technology Solutions Corp., A 1.8%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Varian Medical Systems Inc. 1.7%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Affiliated Managers Group Inc. 1.6%
FINANCE
- --------------------------------------------------------------------------------
Harman International Industries Inc. 1.6%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Microchip Technology 1.6%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Bunge Ltd. 1.5%
PROCESS INDUSTRIES
- --------------------------------------------------------------------------------
Semiannual Report | 31
computer, and semiconductor industries, also dampened relative and absolute
performance for the period.
We continue to follow our investment strategy, focusing on companies that
exhibit what we consider to be clear growth drivers. We invest in those
companies we believe provide the best trade-off between growth opportunity, and
business and valuation risk. Our emphasis continues to be on owning "growth
leaders" that have the opportunity to significantly increase their sales,
earnings and cash flow over a three-to-five year period.
Thank you for your continued participation in Franklin Small-Mid Cap Growth
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small-Mid Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
32 | Semiannual Report
Performance Summary as of 10/31/06
FRANKLIN SMALL-MID CAP GROWTH FUND
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. The performance table does 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.
PRICE INFORMATION
- -------------------------------------------------------------------------------
CLASS A (SYMBOL: FRSGX) CHANGE 10/31/06 4/30/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$1.03 $39.39 $40.42
- -------------------------------------------------------------------------------
CLASS B (SYMBOL: FBSMX) CHANGE 10/31/06 4/30/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$1.14 $38.17 $39.31
- -------------------------------------------------------------------------------
CLASS C (SYMBOL: FRSIX) CHANGE 10/31/06 4/30/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$1.11 $37.14 $38.25
- -------------------------------------------------------------------------------
CLASS R (SYMBOL: FSMRX) CHANGE 10/31/06 4/30/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$1.05 $38.93 $39.98
- -------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 10/31/06 4/30/06
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.98 $39.95 $40.93
- -------------------------------------------------------------------------------
Semiannual Report | 33
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -2.52% +10.21% +45.33% +119.87%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -8.14% +3.88% +6.49% +7.56%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,186 $10,388 $13,697 $20,723
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 -1.61% +7.58% +7.03%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION (7/1/02)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -2.90% +9.40% +34.40% +56.88%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -6.78% +5.40% +9.53% +10.62%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,322 $10,540 $13,140 $15,488
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 -0.42% +11.24% +10.03%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -2.90% +9.40% +39.99% +104.04%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -3.87% +8.40% +6.96% +7.39%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,613 $10,840 $13,999 $20,404
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +2.59% +8.06% +6.85%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -2.63% +9.98% +36.44% +25.01%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -2.63% +9.98% +10.91% +4.73%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,737 $10,998 $13,644 $12,501
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +4.12% +12.61% +4.13%
- ---------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 5 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -2.39% +10.52% +47.18% +128.28%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -2.39% +10.52% +8.04% +8.60%
- ---------------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,761 $11,052 $14,718 $22,828
- ---------------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +4.63% +9.13% +8.06%
- ---------------------------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
34 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
SMALL AND MIDSIZE COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY OVER THE SHORT
TERM. SMALLER OR RELATIVELY NEW COMPANIES CAN BE PARTICULARLY SENSITIVE TO
CHANGING ECONOMIC CONDITIONS AND THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN
THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND'S PORTFOLIO INCLUDES
INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE
SECTORS AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower
initial sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than
Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have
differed. These shares have higher annual fees and expenses
than Class A shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher
annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 1/2/97, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 1/2/97
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +114.82% and +8.09%.
Semiannual Report | 35
Your Fund's Expenses
FRANKLIN SMALL-MID CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
36 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 974.80 $4.88
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.27 $4.99
- ------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 971.00 $8.59
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.48 $8.79
- ------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 971.00 $8.59
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.48 $8.79
- ------------------------------------------------------------------------------------------------------------------
CLASS R
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 973.70 $6.12
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.26
- ------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 976.10 $3.64
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.53 $3.72
- ------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.98%; B: 1.73%; C: 1.73%; R: 1.23%; and Advisor: 0.73%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Semiannual Report | 37
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN AGGRESSIVE GROWTH FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 18.30 $ 13.33 $ 12.57 $ 9.50 $ 12.39 $ 15.30
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.05) (0.15) (0.14) (0.15) (0.13) (0.15)
Net realized and unrealized gains (losses) ... (1.04) 5.12 0.90 3.22 (2.76) (2.76)
---------------------------------------------------------------------------------
Total from investment operations .............. (1.09) 4.97 0.76 3.07 (2.89) (2.91
---------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 17.21 $ 18.30 $ 13.33 $ 12.57 $ 9.50 $ 12.39
=================================================================================
Total return c ................................ (5.90)% 37.28% 6.05% 32.32% (23.33)% (19.02)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $102,659 $113,713 $ 80,611 $ 86,983 $ 67,934 $100,240
Ratios to average net assets:
Expenses before waiver and payments
by affiliates ............................... 1.35% e 1.39% 1.51% 1.62% 1.80% 1.57%
Expenses net of waiver and payments
by affiliates ............................... 1.35% e,f 1.39% f 1.51% f 1.62% 1.80% 1.50%
Net investment income (loss) ................. (0.63)% e (0.92)% (1.05)% (1.26)% (1.35)% (1.12)%
Portfolio turnover rate ....................... 105.70% 183.31% 157.48% 114.66% 93.49% 120.87%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
38 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 17.53 $ 12.87 $ 12.22 $ 9.30 $ 12.20 $ 15.17
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.11) (0.26) (0.23) (0.22) (0.19) (0.23)
Net realized and unrealized gains (losses) ... (0.99) 4.92 0.88 3.14 (2.71) (2.74)
---------------------------------------------------------------------------------
Total from investment operations .............. (1.10) 4.66 0.65 2.92 (2.90) (2.97)
---------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
------------------ --------------------------------------------------------------
Net asset value, end of period ................ $ 16.43 $ 17.53 $ 12.87 $ 12.22 $ 9.30 $ 12.20
=================================================================================
Total return c ................................ (6.22)% 36.21% 5.32% 31.40% (23.77)% (19.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 16,667 $ 19,508 $ 17,017 $ 18,059 $ 13,100 $ 20,259
Ratios to average net assets:
Expenses before waiver and payments
by affiliates ............................... 2.05%e 2.13% 2.21% 2.28% 2.47% 2.24%
Expenses net of waiver and payments
by affiliates ............................... 2.05% e,f 2.13% f 2.21% f 2.28% 2.47% 2.17%
Net investment income (loss) ................. (1.33)% e (1.66)% (1.75)% (1.92)% (2.02)% (1.78)%
Portfolio turnover rate ....................... 105.70% 183.31% 157.48% 114.66% 93.49% 120.87%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 39
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 17.49 $ 12.84 $ 12.19 $ 9.28 $ 12.18 $ 15.14
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.11) (0.26) (0.23) (0.22) (0.19) (0.23)
Net realized and unrealized gains (losses) ... (0.98) 4.91 0.88 3.13 (2.71) (2.73)
---------------------------------------------------------------------------------
Total from investment operations .............. (1.09) 4.65 0.65 2.91 (2.90) (2.96)
---------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 16.40 $ 17.49 $ 12.84 $ 12.19 $ 9.28 $ 12.18
=================================================================================
Total return c ................................ (6.23)% 36.21% 5.33% 31.36% (23.81)% (19.55)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 27,791 $ 31,167 $ 24,450 $ 30,054 $ 25,660 $ 40,877
Ratios to average net assets:
Expenses before waiver and payments
by affiliates ............................... 2.06% e 2.14% 2.22% 2.29% 2.48% 2.24%
Expenses net of waiver and payments
by affiliates ............................... 2.06% e,f 2.14% f 2.22% f 2.29% 2.48% 2.17%
Net investment income (loss) ................. (1.34)% e (1.67)% (1.76)% (1.93)% (2.03)% (1.77)%
Portfolio turnover rate ....................... 105.70% 183.31% 157.48% 114.66% 93.49% 120.87%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
40 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 g
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 18.12 $ 13.24 $ 12.51 $ 9.47 $ 12.38 $ 13.75
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.07) (0.19) (0.17) (0.17) (0.14) (0.06)
Net realized and unrealized gains (losses) ... (1.02) 5.07 0.90 3.21 (2.77) (1.31)
---------------------------------------------------------------------------------
Total from investment operations .............. (1.09) 4.88 0.73 3.04 (2.91) (1.37)
---------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 17.03 $ 18.12 $ 13.24 $ 12.51 $ 9.47 $ 12.38
=================================================================================
Total return c ................................ (6.02)% 36.86% 5.84% 32.10% (23.51)% (9.96)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 6,835 $ 5,171 $ 3,041 $ 1,761 $ 608 $ 53
Ratios to average net assets:
Expenses ..................................... 1.56% e,f 1.64% f 1.72% f 1.79% 1.98% 1.75% e
Net investment income (loss) ................. (0.84)% e (1.17)% (1.26)% (1.43)% (1.53)% (1.48)% e
Portfolio turnover rate ....................... 105.70% 183.31% 157.48% 114.66% 93.49% 120.87%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to April 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 41
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN AGGRESSIVE GROWTH FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 18.68 $ 13.58 $ 12.77 $ 9.62 $ 12.51 $ 15.40
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.03) (0.11) (0.10) (0.11) (0.10) (0.10)
Net realized and unrealized gains (losses) ... (1.04) 5.21 0.91 3.26 (2.79) (2.79)
-------------------------------------------------------------------------------
Total from investment operations .............. (1.07) 5.10 0.81 3.15 (2.89) (2.89)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 17.61 $ 18.68 $ 13.58 $ 12.77 $ 9.62 $ 12.51
===============================================================================
Total return c ................................ (5.73)% 37.56% 6.34% 32.74% (23.10)% (18.77)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 79,191 $ 36,744 $ 22,731 $ 22,374 $ 17,369 $ 10,839
Ratios to average net assets:
Expenses before waiver and payments
by affiliates ............................... 1.06% e 1.14% 1.22% 1.29% 1.48% 1.25%
Expenses net of waiver and payments
by affiliates ............................... 1.06% e,f 1.14% f 1.22% f 1.29% 1.48% 1.18%
Net investment income (loss) ................. (0.34)% e (0.67)% (0.76)% (0.93)% (1.03)% (0.77)%
Portfolio turnover rate ....................... 105.70% 183.31% 157.48% 114.66% 93.49% 120.87%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
42 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ----------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------
LONG TERM INVESTMENTS 92.4%
COMMON STOCKS 92.0%
COMMERCIAL SERVICES 3.3%
a Concur Technologies Inc. ............... United States 117,100 $ 1,866,574
Corporate Executive Board Co. .......... United States 45,160 4,056,271
SEI Investments Co. .................... United States 30,750 1,730,610
-----------
7,653,455
-----------
COMMUNICATIONS 4.6%
a NII Holdings Inc. ...................... United States 121,220 7,882,937
a SBA Communications Corp. ............... United States 104,890 2,801,612
-----------
10,684,549
-----------
CONSUMER DURABLES 0.9%
a Select Comfort Corp. ................... United States 93,330 1,995,395
-----------
CONSUMER NON-DURABLES 0.9%
a Coach Inc. ............................. United States 50,500 2,001,820
-----------
CONSUMER SERVICES 3.5%
a Panera Bread Co. ....................... United States 19,530 1,206,954
a Starbucks Corp. ........................ United States 68,700 2,593,425
Starwood Hotels & Resorts Worldwide Inc. United States 48,020 2,868,715
a XM Satellite Radio Holdings Inc., A .... United States 125,940 1,468,460
-----------
8,137,554
-----------
DISTRIBUTION SERVICES 1.9%
a MWI Veterinary Supply Inc. ............. United States 63,964 2,143,434
a WESCO International Inc. ............... United States 35,670 2,328,181
-----------
4,471,615
-----------
ELECTRONIC TECHNOLOGY 20.7%
a Apple Computer Inc. .................... United States 57,720 4,679,938
a ASML Holding NV, N.Y. shs .............. Netherlands 152,030 3,472,365
a Broadcom Corp., A ...................... United States 78,400 2,373,168
a Cisco Systems Inc. ..................... United States 288,000 6,949,440
Harris Corp. ........................... United States 83,630 3,562,638
a Hittite Microwave Corp. ................ United States 16,800 576,072
a Juniper Networks Inc. .................. United States 101,800 1,752,996
Microchip Technology Inc. .............. United States 110,650 3,643,704
a Network Appliance Inc. ................. United States 130,360 4,758,140
a NVIDIA Corp. ........................... United States 71,100 2,479,257
Precision Castparts Corp. .............. United States 65,630 4,466,778
QUALCOMM Inc. .......................... United States 92,810 3,377,356
a Rackable Systems Inc. .................. United States 72,600 2,251,326
a Trimble Navigation Ltd. ................ United States 84,050 3,884,791
-----------
48,227,969
-----------
ENERGY MINERALS 1.0%
Peabody Energy Corp. ................... United States 56,400 2,367,108
-----------
Semiannual Report | 43
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
FINANCE 7.7%
BlackRock Inc. ................................ United States 28,540 $ 4,304,974
Chicago Mercantile Exchange Holdings Inc. ..... United States 6,080 3,046,080
The Goldman Sachs Group Inc. .................. United States 34,170 6,485,124
a,b Industrial and Commercial Bank of China, 144A . China 3,520,100 1,575,110
optionsXpress Holdings Inc. ................... United States 85,500 2,657,340
-----------
18,068,628
-----------
HEALTH SERVICES 6.5%
a Allscripts Healthcare Solutions Inc. ......... United States 86,580 2,042,422
a Covance Inc. ................................. United States 59,290 3,468,465
a Express Scripts Inc. .......................... United States 32,130 2,047,324
a Psychiatric Solutions Inc. .................... United States 49,980 1,659,336
a Stericycle Inc. ............................... United States 52,670 3,724,296
a WellCare Health Plans Inc. .................... United States 37,420 2,198,425
-----------
15,140,268
-----------
HEALTH TECHNOLOGY 13.0%
a Celgene Corp. ................................. United States 132,310 7,070,647
a Endo Pharmaceuticals Holdings Inc. ............ United States 39,850 1,137,319
a Gilead Sciences Inc. .......................... United States 73,000 5,029,700
a IDEXX Laboratories Inc. ....................... United States 39,560 3,291,788
a Mindray Medical International Ltd., ADR ....... China 68,200 1,234,420
a Myriad Genetics Inc. .......................... United States 95,660 2,572,297
Novo-Nordisk AS, B ............................ Denmark 30,530 2,305,315
Roche Holding AG, ADR ......................... Switzerland 88,200 7,715,329
-----------
30,356,815
-----------
INDUSTRIAL SERVICES 1.9%
a FMC Technologies Inc. ......................... United States 30,740 1,858,233
Schlumberger Ltd. ............................. United States 40,400 2,548,432
-----------
4,406,665
-----------
PRODUCER MANUFACTURING 1.9%
a Gardner Denver Inc. ........................... United States 71,300 2,423,487
Oshkosh Truck Corp. ........................... United States 45,010 2,034,902
-----------
4,458,389
-----------
RETAIL TRADE 6.7%
American Eagle Outfitters Inc. ................ United States 50,400 2,308,320
Best Buy Co. Inc. ............................. United States 43,300 2,392,325
Fastenal Co. .................................. United States 74,400 2,993,856
a GameStop Corp., A ............................. United States 46,900 2,394,714
a Kohl's Corp. .................................. United States 44,490 3,140,994
a Zumiez Inc. ................................... United States 75,490 2,480,601
-----------
15,710,810
-----------
44 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
TECHNOLOGY SERVICES 15.5%
Adobe Systems Inc. ................................................. United States 61,500 $ 2,352,375
a Akamai Technologies Inc. ........................................... United States 47,530 2,227,256
a Amdocs Ltd. ........................................................ United States 117,910 4,570,192
a Cognizant Technology Solutions Corp., A ............................ United States 65,240 4,911,267
a DealerTrack Holdings Inc. .......................................... United States 77,100 1,965,279
Global Payments Inc. ............................................... United States 76,700 3,352,557
a Google Inc., A ..................................................... United States 10,240 4,878,233
a Intuit Inc. ........................................................ United States 100,110 3,533,883
Paychex Inc. ....................................................... United States 136,700 5,396,916
a Salesforce.com Inc. ................................................ United States 74,410 2,903,478
------------
36,091,436
------------
TRANSPORTATION 2.0%
C.H. Robinson Worldwide Inc. ....................................... United States 57,530 2,401,302
Knight Transportation Inc. ......................................... United States 127,435 2,321,866
------------
4,723,168
------------
TOTAL COMMON STOCKS (COST $176,193,937) ............................ 214,495,644
------------
PREFERRED STOCK (COST $873,300) 0.4%
ELECTRONIC TECHNOLOGY 0.4%
a,c,d Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES .. United States 374,806 873,298
------------
TOTAL LONG TERM INVESTMENTS (COST $177,067,237) .................... 215,368,942
------------
SHORT TERM INVESTMENT (COST $16,042,090) 6.9%
MONEY MARKET FUND 6.9%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% United States 16,042,090 16,042,090
------------
TOTAL INVESTMENTS (COST $193,109,327) 99.3% ........................ 231,411,032
OTHER ASSETS, LESS LIABILITIES 0.7% ................................ 1,732,694
------------
NET ASSETS 100.0% .................................................. $233,143,726
============
See Selected Portfolio Abbreviations on page 74.
a Non-income producing for the twelve months ended October 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2006,
the value of this security was $1,575,110, representing 0.68% of net
assets.
c See Note 8 regarding restricted securities.
d Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2006, the value of this security was
$873,298, representing 0.37% of net assets.
e See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 45
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FLEX CAP GROWTH FUND
----------------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 42.45 $ 35.26 $ 33.76 $ 25.56 $ 30.71 $ 34.05
----------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........ 0.04 0.11 (0.10) (0.09) (0.08) (0.09)
Net realized and unrealized gains
(losses) . ........................... (0.43) 7.08 1.60 8.29 (5.07) (3.25)
----------------------------------------------------------------------------------------
Total from investment operations ....... (0.39) 7.19 1.50 8.20 (5.15) (3.34)
----------------------------------------------------------------------------------------
Redemption fees ........................ -- d -- d -- d -- -- --
----------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 42.06 $ 42.45 $ 35.26 $ 33.76 $ 25.56 $ 30.71
========================================================================================
Total return c ......................... (0.92)% 20.39% 4.44% 32.08% (16.77)% (9.81)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $2,006,895 $2,070,364 $1,505,342 $1,456,685 $1,025,348 $1,398,753
Ratios to average net assets:
Expenses .............................. 0.94% e,f 0.93% f 0.96% f 1.01% 1.07% 1.00%
Net investment income (loss) .......... 0.19% e 0.27% (0.29)% (0.29)% (0.31)% (0.29)%
Portfolio turnover rate ................ 31.30% 66.63% 41.91% 39.92% 32.93% 48.55%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
46 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 40.14 $ 33.59 $ 32.40 $ 24.72 $ 29.92 $ 33.43
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.10) (0.19) (0.35) (0.31) (0.26) (0.32)
Net realized and unrealized gains (losses) ... (0.42) 6.74 1.54 7.99 (4.94) (3.19)
--------------------------------------------------------------------------------
Total from investment operations .............. (0.52) 6.55 1.19 7.68 (5.20) (3.51)
--------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 39.62 $ 40.14 $ 33.59 $ 32.40 $ 24.72 $ 29.92
================================================================================
Total return c ................................ (1.30)% 19.50% 3.67% 31.07% (17.38)% (10.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $127,484 $143,477 $136,052 $134,589 $ 92,632 $116,075
Ratios to average net assets:
Expenses ..................................... 1.69% e,f 1.68% f 1.70% f 1.76% 1.82% 1.75%
Net investment income (loss) ................. (0.56)% e (0.48)% (1.03)% (1.04)% (1.06)% (1.05)%
Portfolio turnover rate ....................... 31.30% 66.63% 41.91% 39.92% 32.93% 48.55%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 47
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 40.22 $ 33.66 $ 32.47 $ 24.77 $ 29.98 $ 33.50
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.10) (0.18) (0.35) (0.31) (0.26) (0.32)
Net realized and unrealized gains (losses) ... (0.42) 6.74 1.54 8.01 (4.95) (3.20)
--------------------------------------------------------------------------------
Total from investment operations .............. (0.52) 6.56 1.19 7.70 (5.21) (3.52)
--------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 39.70 $ 40.22 $ 33.66 $ 32.47 $ 24.77 $ 29.98
================================================================================
Total return c ................................ (1.29)% 19.49% 3.67% 31.09% (17.38)% (10.51)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $366,525 $388,478 $296,868 $298,114 $219,023 $299,840
Ratios to average net assets:
Expenses ..................................... 1.68% e,f 1.68% f 1.71% f 1.76% 1.82% 1.74%
Net investment income (loss) ................. (0.55)% e (0.48)% (1.04)% (1.04)% (1.06)% (1.04)%
Portfolio turnover rate ....................... 31.30% 66.63% 41.91% 39.92% 32.93% 48.55%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 42.01 $ 34.98 $ 33.57 $ 25.49 $ 30.68 $ 31.84
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.01) 0.01 (0.19) (0.18) (0.16) (0.12)
Net realized and unrealized gains (losses) ... (0.43) 7.02 1.60 8.26 (5.03) (1.04)
-------------------------------------------------------------------------------
Total from investment operations .............. (0.44) 7.03 1.41 8.08 (5.19) (1.16)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 41.57 $ 42.01 $ 34.98 $ 33.57 $ 25.49 $ 30.68
===============================================================================
Total return c ................................ (1.02)% 20.07% 4.20% 31.70% (16.92)% (3.64)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 83,596 $ 91,229 $ 69,103 $ 44,988 $ 15,123 $ 443
Ratios to average net assets:
Expenses ..................................... 1.19% e,f 1.18% f 1.21% f 1.26% 1.32% 1.24% e
Net investment income (loss) ................. (0.06)% e 0.02% (0.54)% (0.54)% (0.56)% (1.21)% e
Portfolio turnover rate ....................... 31.30% 66.63% 41.91% 39.92% 32.93% 48.55%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to April 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 49
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
-----------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 g
-----------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 42.63 $ 35.32 $ 33.35
-----------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... 0.09 0.23 (0.01)
Net realized and unrealized gains (losses) ... (0.43) 7.08 1.98
-----------------------------------------
Total from investment operations .............. (0.34) 7.31 1.97
-----------------------------------------
Redemption fees ............................... -- d -- d -- d
-----------------------------------------
Net asset value, end of period ................ $ 42.29 $ 42.63 $ 35.32
=========================================
Total return c ................................ (0.77)% 20.67% 5.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $295,662 $209,680 $ 71,193
Ratios to average net assets:
Expenses ..................................... 0.69% e,f 0.68% f 0.71% e,f
Net investment income (loss) ................. 0.44% e 0.52% (0.04)% e
Portfolio turnover rate ....................... 31.30% 66.63% 41.91%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period August 2, 2004 (effective date) to April 30, 2005.
50 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.1%
COMMON STOCKS 97.1%
COMMERCIAL SERVICES 4.2%
Corporate Executive Board Co. ............... 300,000 $ 26,946,000
Moody's Corp. ............................... 400,000 26,520,000
Robert Half International Inc. .............. 629,300 23,000,915
a SAIC Inc. ................................... 536,200 10,724,000
SEI Investments Co. ......................... 600,000 33,768,000
------------
120,958,915
------------
COMMUNICATIONS 6.0%
America Movil SA de CV, L, ADR (Mexico) ..... 1,150,000 49,300,500
a American Tower Corp., A ..................... 1,250,000 45,025,000
AT&T Inc. ................................... 900,000 30,825,000
a NII Holdings Inc. ........................... 750,000 48,772,500
------------
173,923,000
------------
CONSUMER DURABLES 1.0%
Harman International Industries Inc. ........ 275,000 28,146,250
------------
CONSUMER NON-DURABLES 2.7%
PepsiCo Inc. ................................ 675,000 42,822,000
The Procter & Gamble Co. .................... 550,000 34,864,500
------------
77,686,500
------------
CONSUMER SERVICES 3.5%
Carnival Corp. .............................. 500,000 24,410,000
a Starbucks Corp. ............................. 1,150,000 43,412,500
The Walt Disney Co. ......................... 1,000,000 31,460,000
------------
99,282,500
------------
DISTRIBUTION SERVICES 2.1%
a Beacon Roofing Supply Inc. .................. 1,200,000 23,760,000
a WESCO International Inc. .................... 550,000 35,898,500
------------
59,658,500
------------
ELECTRONIC TECHNOLOGY 17.6%
a Apple Computer Inc. ......................... 650,000 52,702,000
a Cisco Systems Inc. .......................... 2,000,000 48,260,000
a,b FLIR Systems Inc. ........................... 950,000 30,343,000
Harris Corp. ................................ 1,150,000 48,990,000
a Lam Research Corp. .......................... 500,000 24,725,000
Microchip Technology Inc. ................... 1,500,000 49,395,000
a Network Appliance Inc. ...................... 1,025,000 37,412,500
a NVIDIA Corp. ................................ 800,000 27,896,000
Precision Castparts Corp. ................... 650,000 44,239,000
QUALCOMM Inc. ............................... 1,000,000 36,390,000
Rockwell Automation Inc. .................... 350,000 21,700,000
Rockwell Collins Inc. ....................... 350,000 20,328,000
a,b SiRF Technology Holdings Inc. ............... 950,000 26,714,000
a,b SunPower Corp., A ........................... 550,000 18,507,500
Texas Instruments Inc. ...................... 650,000 19,617,000
------------
507,219,000
------------
Semiannual Report | 51
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
ENERGY MINERALS 2.4%
a Newfield Exploration Co. ..................... 850,000 $ 34,671,500
a Southwestern Energy Co. ...................... 1,000,000 35,580,000
------------
70,251,500
------------
FINANCE 11.2%
Assurant Inc. ................................ 200,000 10,532,000
Capital One Financial Corp. .................. 400,000 31,732,000
CapitalSource Inc. ........................... 1,428,925 39,638,379
Chicago Mercantile Exchange Holdings Inc. .... 90,000 45,090,000
a E*TRADE Financial Corp. ...................... 1,300,000 30,264,000
The Goldman Sachs Group Inc. ................. 200,000 37,958,000
Nuveen Investments Inc., A ................... 750,000 36,975,000
T. Rowe Price Group Inc. ..................... 750,000 35,482,500
Wachovia Corp. ............................... 341,591 18,958,301
Wells Fargo & Co. ............................ 1,000,000 36,290,000
------------
322,920,180
------------
HEALTH SERVICES 6.6%
a Allscripts Healthcare Solutions Inc. ......... 1,150,000 27,128,500
a Express Scripts Inc. ......................... 275,000 17,523,000
a Laboratory Corp. of America Holdings ......... 350,000 23,971,500
Pharmaceutical Product Development Inc. ...... 1,000,000 31,650,000
a Stericycle Inc. .............................. 500,000 35,355,000
a VCA Antech Inc. .............................. 1,650,000 53,410,500
------------
189,038,500
------------
HEALTH TECHNOLOGY 13.8%
a Amgen Inc. ................................... 250,000 18,977,500
AstraZeneca PLC, ADR (United Kingdom) ........ 350,000 20,545,000
a Celgene Corp. ................................ 1,050,000 56,112,000
a Endo Pharmaceuticals Holdings Inc. ........... 527,900 15,066,267
a Genentech Inc. ............................... 300,000 24,990,000
a Genzyme Corp. ................................ 500,000 33,755,000
a Gilead Sciences Inc. ......................... 600,000 41,340,000
Johnson & Johnson ............................ 650,000 43,810,000
a Nuvelo Inc. .................................. 900,000 16,596,000
a ResMed Inc. .................................. 500,000 21,995,000
Roche Holding AG, ADR (Switzerland) .......... 250,000 21,868,847
Schering-Plough Corp. ........................ 2,000,000 44,280,000
a Varian Medical Systems Inc. .................. 700,000 38,402,000
------------
397,737,614
------------
INDUSTRIAL SERVICES 2.1%
a Helix Energy Solutions Group Inc. ............ 1,100,000 35,530,000
Smith International Inc. ..................... 650,000 25,662,000
------------
61,192,000
------------
52 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
PROCESS INDUSTRIES 2.6%
Ecolab Inc. ......................................... 850,000 $ 38,547,500
Praxair Inc. ........................................ 600,000 36,150,000
--------------
74,697,500
--------------
PRODUCER MANUFACTURING 2.1%
General Electric Co. ................................ 750,000 26,332,500
a Goodman Global Inc. ................................. 1,000,000 16,070,000
Oshkosh Truck Corp. ................................. 400,000 18,084,000
--------------
60,486,500
--------------
REAL ESTATE INVESTMENT TRUST 0.9%
Alexandria Real Estate Equities Inc. ................ 250,000 24,925,000
--------------
RETAIL TRADE 3.6%
CVS Corp. ........................................... 1,650,000 51,777,000
The Home Depot Inc. ................................. 525,000 19,598,250
Target Corp. ........................................ 550,000 32,549,000
--------------
103,924,250
--------------
TECHNOLOGY SERVICES 11.6%
Adobe Systems Inc. .................................. 1,000,000 38,250,000
a Akamai Technologies Inc. ............................ 600,000 28,116,000
a Amdocs Ltd. ......................................... 750,000 29,070,000
a Cognizant Technology Solutions Corp., A ............. 850,000 63,988,000
a Google Inc., A ...................................... 110,000 52,402,900
Microsoft Corp. ..................................... 700,000 20,097,000
a Oracle Corp. ........................................ 2,100,000 38,787,000
Paychex Inc. ........................................ 900,000 35,532,000
a Salesforce.com Inc. ................................. 700,000 27,314,000
--------------
333,556,900
--------------
TRANSPORTATION 2.7%
C.H. Robinson Worldwide Inc. ........................ 800,000 33,392,000
Expeditors International of Washington Inc. ......... 900,000 42,669,000
--------------
76,061,000
--------------
UTILITIES 0.4%
American States Water Co. ........................... 300,000 12,600,000
--------------
TOTAL COMMON STOCKS (COST $2,141,487,507) ........... 2,794,265,609
--------------
CONVERTIBLE PREFERRED STOCKS 1.0%
ELECTRONIC TECHNOLOGY 0.0% c
a,d,e Anda Networks, cvt. pfd., D ......................... 145,772 65,131
--------------
HEALTH TECHNOLOGY 1.0%
a,d,e Fibrogen Inc., cvt. pfd., E ......................... 2,227,171 14,966,589
d,e Masimo Corp., cvt. pfd., F ........................ 772,727 13,684,995
--------------
28,651,584
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $20,499,995) 28,716,715
--------------
TOTAL LONG TERM INVESTMENTS (COST $2,161,987,502) ... 2,822,982,324
--------------
Semiannual Report | 53
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 3.7%
MONEY MARKET FUND (COST $81,621,216) 2.8%
f Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ................ 81,621,216 $ 81,621,216
---------------
-----------
PRINCIPAL
AMOUNT
-----------
g INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.9%
h REPURCHASE AGREEMENTS 0.9%
Banc of America Securities LLC, 5.32%, 11/01/06 (Maturity Value $4,375,647)
Collateralized by U.S. Government Agency Securities, 5.00%, 3/01/34 - 7/01/35 ....... $ 4,375,000 4,375,000
Barclays Capital Inc., 5.32%, 11/01/06 (Maturity Value $4,000,591)
Collateralized by U.S. Government Agency Securities, 3.50% - 9.50%,
1/01/07 - 10/01/46 ................................................................ 4,000,000 4,000,000
Citigroup Global Markets Inc., 5.32%, 11/01/06 (Maturity Value $5,491,811)
Collateralized by U.S. Government Agency Securities, 3.47% - 10.00%,
6/01/09 - 9/01/45 ................................................................. 5,491,000 5,491,000
Deutsche Bank Securities Inc., 5.31%, 11/01/06 (Maturity Value $3,882,573)
Collateralized by U.S. Government Agency Securities, 4.00% - 7.00%,
1/01/19 - 9/01/36 ................................................................. 3,882,000 3,882,000
Merrill Lynch Government Securities Inc., 5.28%, 11/01/06 (Maturity Value $4,286,629)
Collateralized by iU.S. Government Agency Discount Notes, 1/11/07 - 2/15/36 ......... 4,286,000 4,286,000
Morgan Stanley & Co. Inc., 5.32%, 11/01/06 (Maturity Value $4,000,591)
Collateralized by U.S. Government Agency Securities, 2.62% - 8.28%,
11/22/06 - 10/01/46; iU.S. Government Agency Discount Notes, 11/01/06 - 7/24/07 .. 4,000,000 4,000,000
---------------
TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
(COST $26,034,000) .................................................................. 26,034,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $107,655,216) .................................... 107,655,216
---------------
TOTAL INVESTMENTS (COST $2,269,642,718) 101.8% ...................................... 2,930,637,540
OTHER ASSETS, LESS LIABILITIES (1.8)% ............................................... (50,475,806)
---------------
NET ASSETS 100.0% ................................................................... $ 2,880,161,734
===============
See Selected Portfolio Abbreviations on page 74.
a Non-income producing for the twelve months ended October 31, 2006.
b A portion or all of the security is on loan as of October 31, 2006. See
Note 1(e).
c Rounds to less than 0.1% of net assets.
d See Note 8 regarding restricted securities.
e Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2006, the aggregate value of these
securities was $28,716,715, representing 1.00% of net assets.
f See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
g See Note 1(e) regarding securities on loan.
h See Note 1(c) regarding repurchase agreements.
i The security is traded on a discount basis with no stated coupon rate.
54 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND II
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 13.90 $ 10.63 $ 10.55 $ 7.46 $ 9.79 $ 10.27
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................. (0.05) (0.08) (0.09) (0.07) (0.06) (0.06)
Net realized and unrealized gains (losses) ...... (0.74) 3.35 0.17 3.16 (2.27) (0.42)
-------------------------------------------------------------------------------
Total from investment operations ................. (0.79) 3.27 0.08 3.09 (2.33) (0.48)
-------------------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................... $ 13.11 $ 13.90 $ 10.63 $ 10.55 $ 7.46 $ 9.79
===============================================================================
Total return c ................................... (5.68)% 30.76% 0.76% 41.42% (23.80)% (4.67)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $551,111 $693,084 $765,216 $908,599 $696,642 $1,076,341
Ratios to average net assets:
Expenses ........................................ 1.21% e,f 1.16% f 1.15% f 1.08% 1.32% 1.21%
Net investment income (loss) .................... (0.73)% e (0.61)% (0.84)% (0.70)% (0.76)% (0.63)%
Portfolio turnover rate .......................... 30.94% 44.34% 46.35% 47.08% 34.99% 41.31%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 55
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 13.32 $ 10.26 $ 10.27 $ 7.33 $ 9.66 $ 10.20
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................. (0.09) (0.16) (0.17) (0.15) (0.10) (0.12)
Net realized and unrealized gains (losses) ...... (0.71) 3.22 0.16 3.09 (2.23) (0.42)
--------------------------------------------------------------------------------
Total from investment operations ................. (0.80) 3.06 (0.01) 2.94 (2.33) (0.54)
--------------------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 12.52 $ 13.32 $ 10.26 $ 10.27 $ 7.33 $ 9.66
================================================================================
Total return c ................................... (6.01)% 29.82% (0.10)% 40.11% (24.12)% (5.29)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 92,066 $111,458 $105,070 $122,004 $ 96,077 $ 145,217
Ratios to average net assets:
Expenses ........................................ 1.96% e,f 1.91% f 1.91% f 1.92% 1.97% 1.86%
Net investment income (loss) .................... (1.48)% e (1.36)% (1.60)% (1.54)% (1.41)% (1.26)%
Portfolio turnover rate .......................... 30.94% 44.34% 46.35% 47.08% 34.99% 41.31%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
56 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
----------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 13.33 $ 10.27 $ 10.27 $ 7.33 $ 9.67 $ 10.21
----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................. (0.09) (0.16) (0.17) (0.15) (0.10) (0.12)
Net realized and unrealized gains (losses) ...... (0.71) 3.22 0.17 3.09 (2.24) (0.42)
----------------------------------------------------------------------------------
Total from investment operations ................. (0.80) 3.06 -- 2.94 (2.34) (0.54)
----------------------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- -- --
----------------------------------------------------------------------------------
Net asset value, end of period ................... $ 12.53 $ 13.33 $ 10.27 $ 10.27 $ 7.33 $ 9.67
==================================================================================
Total return c ................................... (6.00)% 29.80% --% 40.11% (24.20)% (5.29)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $131,392 $170,159 $164,117 $200,037 $163,466 $ 249,188
Ratios to average net assets:
Expenses ........................................ 1.95% e,f 1.92% f 1.91% f 1.92% 1.97% 1.86%
Net investment income (loss) .................... (1.47)% e (1.37)% (1.60)% (1.54)% (1.41)% (1.26)%
Portfolio turnover rate .......................... 30.94% 44.34% 46.35% 47.08% 34.99% 41.31%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
---------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 13.75 $ 10.54 $ 10.49 $ 7.45 $ 9.79 $ 9.88
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................ (0.06) (0.11) (0.12) (0.10) (0.07) (0.03)
Net realized and unrealized gains (losses) .... (0.73) 3.32 0.17 3.14 (2.27) (0.06)
---------------------------------------------------------------------------------
Total from investment operations ............... (0.79) 3.21 0.05 3.04 (2.34) (0.09)
---------------------------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................. $ 12.96 $ 13.75 $ 10.54 $ 10.49 $ 7.45 $ 9.79
=================================================================================
Total return c ................................. (5.75)% 30.46% 0.48% 40.81% (23.90)% (0.91)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $ 5,909 $ 6,328 $ 4,392 $ 4,542 $ 2,562 $ 492
Ratios to average net assets:
Expenses ...................................... 1.46% e,f 1.42% f 1.41% f 1.42% 1.47% 1.36% e
Net investment income (loss) .................. (0.98)% e (0.87)% (1.10)% (1.04)% (0.91)% (1.05)% e
Portfolio turnover rate ........................ 30.94% 44.34% 46.35% 47.08% 34.99% 41.31%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to April 30, 2002.
58 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND II
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 14.15 $ 10.79 $ 10.69 $ 7.55 $ 9.86 $ 10.31
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.03) (0.05) (0.07) (0.05) (0.03) (0.03)
Net realized and unrealized gains (losses) ... (0.75) 3.41 0.17 3.19 (2.28) (0.42)
--------------------------------------------------------------------------------
Total from investment operations .............. (0.78) 3.36 0.10 3.14 (2.31) (0.45)
--------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 13.37 $ 14.15 $ 10.79 $ 10.69 $ 7.55 $ 9.86
================================================================================
Total return c ................................ (5.51)% 31.14% 0.94% 41.59% (23.43)% (4.36)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $311,842 $326,475 $235,101 $211,271 $135,529 $157,653
Ratios to average net assets:
Expenses ..................................... 0.96% e,f 0.92% f 0.91% f 0.92% 0.97% 0.86%
Net investment income (loss) ................. (0.48)% e (0.37)% (0.60)% (0.54)% (0.41)% (0.28)%
Portfolio turnover rate ....................... 30.94% 44.34% 46.35% 47.08% 34.99% 41.31%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 59
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS 98.9%
COMMERCIAL SERVICES 2.6%
a aQuantive Inc. ................................ 219,900 $ 5,976,882
a CoStar Group Inc. ............................. 80,000 3,788,000
a LECG Corp. .................................... 477,900 9,409,851
a ValueClick Inc. ............................... 476,500 8,958,200
------------
28,132,933
------------
CONSUMER DURABLES 2.7%
a Select Comfort Corp. .......................... 604,400 12,922,072
a Tenneco Inc. .................................. 334,600 7,595,420
a THQ Inc. ...................................... 302,700 9,102,189
------------
29,619,681
------------
CONSUMER SERVICES 7.8%
a BJ's Restaurants Inc. ......................... 334,300 7,197,479
Four Seasons Hotels Inc. (Canada) ............. 130,800 8,389,512
a Gaylord Entertainment Co., A .................. 190,100 8,847,254
Jackson Hewitt Tax Service Inc. ............... 242,200 8,380,120
Orient-Express Hotels Ltd., A ................. 454,700 17,937,915
a Panera Bread Co. .............................. 147,400 9,109,320
a Penn National Gaming Inc. ..................... 421,800 15,425,226
a Red Lion Hotels Corp. ......................... 343,400 4,103,630
Strayer Education Inc. ........................ 54,500 6,165,040
------------
85,555,496
------------
DISTRIBUTION SERVICES 0.7%
a Beacon Roofing Supply Inc. .................... 374,250 7,410,150
------------
ELECTRONIC TECHNOLOGY 25.6%
a Argon ST Inc. ................................. 561,400 13,260,268
a Arris Group Inc. .............................. 1,065,900 14,283,060
a Atheros Communications ........................ 605,700 13,161,861
a F5 Networks Inc. .............................. 147,600 9,769,644
a FLIR Systems Inc. ............................. 583,000 18,621,020
a FormFactor Inc. ............................... 194,900 7,441,282
a Ixia .......................................... 1,225,700 11,215,155
a K&F Industries Holdings Inc. .................. 28,200 548,208
a Microsemi Corp. ............................... 785,800 15,401,680
a Microtune Inc. ................................ 807,200 4,149,008
National Instruments Corp. .................... 388,702 12,119,728
a NETGEAR Inc. .................................. 247,100 6,622,280
a Netlogic Microsystems Inc. .................... 533,300 10,575,339
a Power Integrations Inc. ....................... 863,900 18,953,966
a Rackable Systems Inc. ......................... 361,800 11,219,418
a Silicon Laboratories Inc. ..................... 422,000 13,769,860
a SiRF Technology Holdings Inc. ................. 281,400 7,912,968
Tektronix Inc. ................................ 433,300 13,159,321
a Trident Microsystems Inc. ..................... 255,100 5,392,814
a Trimble Navigation Ltd. ....................... 310,950 14,372,109
60 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
a Varian Inc. ..................................... 301,700 $ 14,146,713
a Varian Semiconductor Equipment Associates Inc. .. 539,350 19,680,882
a ViaSat Inc. ..................................... 646,400 17,543,296
a Xyratex Ltd. (Bermuda) .......................... 320,700 6,689,802
------------
280,009,682
------------
ENERGY MINERALS 2.6%
a Bill Barrett Corp. .............................. 286,100 8,162,433
a Denbury Resources Inc. .......................... 379,500 10,906,830
a Mariner Energy Inc. ............................. 464,800 9,212,336
------------
28,281,599
------------
FINANCE 7.7%
CapitalSource Inc. .............................. 164,265 4,556,711
a Clayton Holdings Inc. ........................... 528,599 7,437,388
Doral Financial Corp. (Puerto Rico) ............. 847,220 3,897,212
East West Bancorp Inc. .......................... 211,400 7,718,214
Financial Federal Corp. ......................... 270,000 7,430,400
First State Bancorp ............................. 199,714 4,974,876
a Franklin Bank Corp. ............................. 231,487 4,678,352
a GFI Group Inc. .................................. 126,700 7,306,789
Hancock Holding Co. ............................. 21,818 1,119,263
National Financial Partners Corp. ............... 177,600 6,997,440
a Signature Bank .................................. 198,526 6,021,294
UCBH Holdings Inc. .............................. 503,700 8,633,418
UMB Financial Corp. ............................. 87,400 3,134,164
Whitney Holding Corp. ........................... 327,500 10,696,150
------------
84,601,671
------------
HEALTH SERVICES 5.9%
a Allscripts Healthcare Solutions Inc. ............ 564,400 13,314,196
a Healthways Inc. ................................. 130,100 5,509,735
a PAREXEL International Corp. ..................... 377,600 11,176,960
a Psychiatric Solutions Inc. ...................... 328,600 10,909,520
a RehabCare Group Inc. ............................ 223,800 2,878,068
a TriZetto Group Inc. ............................. 650,000 11,108,500
a VCA Antech Inc. ................................. 281,300 9,105,681
------------
64,002,660
------------
HEALTH TECHNOLOGY 10.4%
a Adams Respiratory Therapeutics Inc. ............. 223,900 9,650,090
a American Medical Systems Holdings Inc. .......... 584,300 10,406,383
a Cadence Pharmaceuticals Inc. .................... 282,700 2,713,920
a Coley Pharmaceutical Group Inc. ................. 515,800 5,947,174
a Dexcom Inc. ..................................... 687,700 6,051,760
a Digene Corp. .................................... 156,800 7,280,224
a Impax Laboratories Inc. ......................... 526,900 3,688,300
Semiannual Report | 61
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
HEALTH TECHNOLOGY (CONTINUED)
a Keryx Biopharmaceuticals Inc. ................... 511,700 $ 7,184,268
a The Medicines Co. ............................... 510,300 13,247,388
a Molecular Devices Corp. ......................... 391,100 7,876,754
a Myriad Genetics Inc. ............................ 442,900 11,909,581
a Panacos Pharmaceuticals Inc. .................... 299,500 2,054,570
a Penwest Pharmaceuticals Co. ..................... 507,300 8,989,356
a Telik Inc. ...................................... 437,900 8,298,205
a Trimeris Inc. ................................... 497,935 3,794,265
a Vanda Pharmaceuticals Inc. ...................... 358,400 4,673,536
------------
113,765,774
------------
INDUSTRIAL SERVICES 3.8%
a FMC Technologies Inc. ........................... 160,416 9,697,147
a Helix Energy Solutions Group Inc. ............... 463,300 14,964,590
a Seitel Inc. ..................................... 1,600,100 5,536,346
a Superior Energy Services Inc. ................... 361,600 11,318,080
------------
41,516,163
------------
MUTUAL FUND 0.6%
Ares Capital Corp. .............................. 348,065 6,449,644
------------
PROCESS INDUSTRIES 2.6%
Cabot Corp. ..................................... 126,700 5,010,985
FMC Corp. ....................................... 129,400 8,870,370
a Headwaters Inc. ................................. 287,500 7,115,625
Minerals Technologies Inc. ...................... 126,500 6,977,740
------------
27,974,720
------------
PRODUCER MANUFACTURING 4.1%
a Drew Industries Inc. ............................ 415,600 11,283,540
a Flowserve Corp. ................................. 169,000 8,957,000
Manitowoc Co. Inc. .............................. 214,700 11,782,736
a RTI International Metals Inc. ................... 207,400 12,717,768
------------
44,741,044
------------
REAL ESTATE INVESTMENT TRUSTS 2.5%
FelCor Lodging Trust Inc. ....................... 489,400 10,159,944
Innkeepers USA Trust ............................ 518,200 8,887,130
LaSalle Hotel Properties ........................ 193,800 8,188,050
------------
27,235,124
------------
RETAIL TRADE 3.8%
Christopher & Banks Corp. ....................... 346,400 9,349,336
a Cost Plus Inc. .................................. 273,800 3,271,910
a Guitar Center Inc. .............................. 197,400 8,561,238
a J Crew Group Inc. ............................... 293,000 9,036,120
a Tractor Supply Co. .............................. 224,400 10,865,448
------------
41,084,052
------------
62 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND II SHARES VALUE
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
TECHNOLOGY SERVICES 10.6%
a Ariba Inc. ......................................................... 1,108,200 $ 8,366,910
a BearingPoint Inc. .................................................. 990,400 8,250,032
Blackbaud Inc. ..................................................... 119,400 2,985,000
a Entrust Inc. ....................................................... 1,802,000 6,775,520
Heartland Payment Systems Inc. ..................................... 308,100 8,232,432
a Marchex Inc., B .................................................... 574,600 8,147,828
a MICROS Systems Inc. ................................................ 208,100 10,338,408
a Nuance Communications Inc. ......................................... 1,178,000 13,594,120
a Quest Software Inc. ................................................ 884,100 13,022,793
a RightNow Technologies Inc. ......................................... 585,700 9,675,764
a Sapient Corp. ...................................................... 3,196,800 17,422,560
a VA Software Corp. .................................................. 27,600 111,780
a Witness Systems Inc. ............................................... 483,600 8,579,064
--------------
115,502,211
--------------
TRANSPORTATION 4.4%
a American Commercial Lines Inc. ..................................... 129,800 8,326,670
Forward Air Corp. .................................................. 249,550 8,102,889
a JetBlue Airways Corp. .............................................. 764,300 9,599,608
Knight Transportation Inc. ......................................... 788,050 14,358,271
a Republic Airways Holdings Inc. ..................................... 450,900 8,057,582
--------------
48,445,020
--------------
UTILITIES 0.5%
ITC Holdings Corp. ................................................. 169,800 6,031,296
--------------
TOTAL COMMON STOCKS (COST $875,550,606) ............................ 1,080,358,920
--------------
SHORT TERM INVESTMENT (COST $11,627,136) 1.1%
MONEY MARKET FUND 1.1%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% 11,627,136 11,627,136
--------------
TOTAL INVESTMENTS (COST $887,177,742) 100.0% ....................... 1,091,986,056
OTHER ASSETS, LESS LIABILITIES 0.0% c .............................. 332,591
--------------
NET ASSETS 100.0% .................................................. $1,092,318,647
===============
See Selected Portfolio Abbreviations on page 74.
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
c Rounds to less than 0.1% of net assets.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL-MID CAP GROWTH FUND
------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period . $ 40.42 $ 31.31 $ 29.69 $ 23.14 $ 28.85 $ 34.15
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ...... (0.05) -- d (0.08) (0.14) (0.09) (0.06)
Net realized and unrealized gains
(losses) ........................... (0.98) 9.15 1.70 6.69 (5.62) (5.16)
------------------------------------------------------------------------------------------
Total from investment operations ..... (1.03) 9.15 1.62 6.55 (5.71) (5.22)
------------------------------------------------------------------------------------------
Less distributions from net investment
income .............................. -- (0.04) -- -- -- (0.08)
------------------------------------------------------------------------------------------
Redemption fees ...................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ....... $ 39.39 $ 40.42 $ 31.31 $ 29.69 $ 23.14 $ 28.85
==========================================================================================
Total return c ....................... (2.52)% 29.21% 5.46% 28.31% (19.79)% (15.28)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $5,645,327 $6,532,284 $6,636,792 $7,355,269 $5,791,141 $7,784,125
Ratios to average net assets:
Expenses ............................ 0.98% e,f 0.96% f 0.97% f 0.98% 1.02% 0.89%
Net investment income (loss) ........ (0.28)% e --% g (0.27)% (0.51)% (0.41)% (0.18)%
Portfolio turnover rate .............. 27.51% 39.84% 42.96% 52.84% 36.47% 47.38%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Rounds to less than 0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
---------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 g
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $39.31 $30.65 $29.28 $23.00 $24.33
---------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.19) (0.27) (0.31) (0.36) (0.23)
---------------------------------------------------------------------
Net realized and unrealized gains (losses) ... (0.95) 8.93 1.68 6.64 (1.10)
---------------------------------------------------------------------
Total from investment operations .............. (1.14) 8.66 1.37 6.28 (1.33)
---------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d --
---------------------------------------------------------------------
Net asset value, end of period ................ $38.17 $39.31 $30.65 $29.28 $23.00
=====================================================================
Total return c ................................ (2.90)% 28.25% 4.68% 27.30% (5.47)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $32,389 $36,911 $31,733 $26,161 $7,601
Ratios to average net assets:
Expenses ..................................... 1.73% e,f 1.71%f 1.72% f 1.73% 1.77% e
Net investment income (loss) ................. (1.03)% e (0.75)% (1.02)% (1.26)% (1.16)% e
Portfolio turnover rate ....................... 27.51% 39.84% 42.96% 52.84% 36.47%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period July 1, 2002 (effective date) to April 30, 2003.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
---------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 38.25 $ 29.82 $ 28.49 $ 22.37 $ 28.09 $ 33.41
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.19) (0.26) (0.31) (0.34) (0.26) (0.27)
Net realized and unrealized gains (losses) ... (0.92) 8.69 1.64 6.46 (5.46) (5.05)
---------------------------------------------------------------------------------
Total from investment operations .............. (1.11) 8.43 1.33 6.12 (5.72) (5.32)
---------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 37.14 $ 38.25 $ 29.82 $ 28.49 $ 22.37 $ 28.09
=================================================================================
Total return c ................................ (2.90)% 28.27% 4.67% 27.36% (20.36)% (15.92)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $644,340 $728,710 $654,549 $762,602 $639,524 $948,940
Ratios to average net assets:
Expenses ..................................... 1.73% e,f 1.71% f 1.72% f 1.71% 1.77% 1.64%
Net investment income (loss) ................. (1.03)% e (0.75)% (1.02)% (1.24)% (1.16)% (0.92)%
Portfolio turnover rate ....................... 27.51% 39.84% 42.96% 52.84% 36.47% 47.38%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 39.98 $ 31.04 $ 29.50 $ 23.06 $ 28.81 $31.16
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.10) (0.08) (0.15) (0.22) (0.17) (0.12)
Net realized and unrealized gains (losses) ... (0.95) 9.04 1.69 6.66 (5.58) (2.23)
------------------------------------------------------------------------------
Total from investment operations .............. (1.05) 8.96 1.54 6.44 (5.75) (2.35)
------------------------------------------------------------------------------
Less distributions from net investment income . -- (0.02) -- -- -- --
------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------
Net asset value, end of period ................ $ 38.93 $ 39.98 $ 31.04 $ 29.50 $ 23.06 $28.81
==============================================================================
Total return c ................................ (2.63)% 28.88% 5.22% 27.93% (19.96)% (7.54)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $107,321 $93,916 $54,139 $41,404 $15,309 $1,253
Ratios to average net assets:
Expenses ..................................... 1.23% e,f 1.21% f 1.22% f 1.23% 1.27% 1.14% e
Net investment income (loss) ................. (0.53)% e (0.25)% (0.52)% (0.76)% (0.66)% (1.26)% e
Portfolio turnover rate ....................... 27.51% 39.84% 42.96% 52.84% 36.47% 47.38%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to April 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
----------------------------------------------------------------------------------
SIX MONTHS
ENDED
OCTOBER 31,
2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 40.93 $ 31.71 $ 29.99 $ 23.32 $ 29.00 $ 34.37
----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... (0.01) 0.10 -- d (0.07) (0.04) 0.02
Net realized and unrealized gains (losses) ... (0.97) 9.26 1.72 6.74 (5.64) (5.20)
----------------------------------------------------------------------------------
Total from investment operations .............. (0.98) 9.36 1.72 6.67 (5.68) (5.18)
----------------------------------------------------------------------------------
Less distributions from net investment income . -- (0.14) -- -- -- (0.19)
----------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 39.95 $ 40.93 $ 31.71 $ 29.99 $ 23.32 $ 29.00
==================================================================================
Total return c ................................ (2.39)% 29.55% 5.74% 28.60% (19.59)% (15.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $722,945 $794,395 $347,518 $320,154 $266,723 $321,921
Ratios to average net assets:
Expenses ..................................... 0.73% e,f 0.71% f 0.72% f 0.73% 0.77% 0.64%
Net investment income (loss) ................. (0.03)% e 0.25% (0.02)% (0.26)% (0.16)% 0.05%
Portfolio turnover rate ....................... 27.51% 39.84% 42.96% 52.84% 36.47% 47.38%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
68 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.9%
COMMON STOCKS 99.8%
COMMERCIAL SERVICES 3.8%
a aQuantive Inc. ........................................... 1,397,900 $ 37,994,922
a Laureate Education Inc. .................................. 1,528,600 80,587,792
Robert Half International Inc. ........................... 2,036,800 74,445,040
a SAIC Inc. ................................................ 1,348,100 26,962,000
SEI Investments Co. ...................................... 904,200 50,888,376
------------
270,878,130
------------
COMMUNICATIONS 3.9%
a Crown Castle International Corp. ......................... 2,013,900 67,767,735
a NII Holdings Inc. ........................................ 2,239,340 145,624,280
a SBA Communications Corp. ................................. 2,526,900 67,493,499
------------
280,885,514
------------
CONSUMER DURABLES 4.3%
a Activision Inc. .......................................... 4,650,400 71,709,168
Harman International Industries Inc. ..................... 1,096,600 112,237,010
a,b NVR Inc. ................................................. 80,800 45,369,200
a Scientific Games Corp., A ................................ 1,611,000 45,156,330
a Tenneco Inc. ............................................. 1,512,800 34,340,560
------------
308,812,268
------------
CONSUMER NON-DURABLES 1.1%
Wolverine World Wide Inc. ................................ 2,896,910 82,156,368
------------
CONSUMER SERVICES 2.2%
Hilton Hotels Corp. ...................................... 2,034,800 58,846,416
Orient-Express Hotels Ltd., A ............................ 1,296,100 51,131,145
a XM Satellite Radio Holdings Inc., A ...................... 4,083,400 47,612,444
------------
157,590,005
------------
DISTRIBUTION SERVICES 1.9%
a Henry Schein Inc. ........................................ 707,800 35,170,582
a WESCO International Inc. ................................. 1,523,900 99,464,953
------------
134,635,535
------------
ELECTRONIC TECHNOLOGY 25.8%
a Argon ST Inc. ............................................ 158,250 3,737,865
a Coherent Inc. ............................................ 553,900 17,852,197
Embraer-Empresa Brasileira de Aeronautica SA, ADR (Brazil) 2,546,300 106,002,469
a F5 Networks Inc. ......................................... 1,387,000 91,805,530
a,b FLIR Systems Inc. ........................................ 2,757,900 88,087,326
a,b FormFactor Inc. .......................................... 1,464,800 55,926,064
Garmin Ltd. (Cayman Islands) ............................. 1,330,600 71,067,346
Harris Corp. ............................................. 3,287,800 140,060,280
a Integrated Device Technology Inc. ........................ 4,310,100 68,315,085
Intersil Corp., A ........................................ 2,927,800 68,656,910
Jabil Circuit Inc. ....................................... 1,891,400 54,302,094
a Juniper Networks Inc. .................................... 2,038,200 35,097,804
Semiannual Report | 69
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
a Lam Research Corp. .................... 1,963,900 $ 97,114,855
a Logitech International SA (Switzerland) 3,450,500 90,674,931
Microchip Technology Inc. ............. 3,397,000 111,863,210
a,b,c Microsemi Corp. ....................... 5,584,100 109,448,360
a Network Appliance Inc. ................ 1,532,300 55,928,950
Precision Castparts Corp. ............. 1,537,310 104,629,318
Rockwell Collins Inc. ................. 1,651,571 95,923,244
a Silicon Laboratories Inc. ............. 2,354,200 76,817,546
a,b SiRF Technology Holdings Inc. ......... 722,500 20,316,700
c Tektronix Inc. ........................ 4,835,700 146,860,209
a Trimble Navigation Ltd. ............... 2,361,380 109,142,983
a Varian Inc. ........................... 607,230 28,473,015
--------------
1,848,104,291
--------------
ENERGY MINERALS 3.2%
a Mariner Energy Inc. ................... 1,667,500 33,049,850
Murphy Oil Corp. ...................... 975,300 45,995,148
a Newfield Exploration Co. .............. 2,262,300 92,279,217
a Southwestern Energy Co. ............... 1,543,700 54,924,846
--------------
226,249,061
--------------
FINANCE 8.4%
a,b Affiliated Managers Group Inc. ........ 1,153,300 115,491,462
Boston Private Financial Holdings Inc. 344,517 9,522,450
Calamos Asset Management Inc., A ...... 649,500 18,978,390
CapitalSource Inc. .................... 3,697,182 102,559,829
City National Corp. ................... 504,500 33,579,520
Cullen/Frost Bankers Inc. ............. 408,400 22,118,944
a E*TRADE Financial Corp. ............... 3,519,200 81,926,976
East West Bancorp Inc. ................ 576,850 21,060,793
Federated Investors Inc., B ........... 2,324,200 79,696,818
Nuveen Investments Inc., A ............ 1,528,200 75,340,260
optionsXpress Holdings Inc. ........... 1,375,700 42,756,756
UCBH Holdings Inc. .................... 41,784 716,178
--------------
603,748,376
--------------
HEALTH SERVICES 6.6%
a,b,c Allscripts Healthcare Solutions Inc. .. 3,259,900 76,901,041
a Cerner Corp. .......................... 146,770 7,090,459
a Community Health Systems Inc. ......... 2,938,800 95,364,060
a Coventry Health Care Inc. ............. 1,659,900 77,932,305
a Express Scripts Inc. .................. 1,057,900 67,409,388
Pharmaceutical Product Development Inc. 1,901,900 60,195,135
a VCA Antech Inc. ....................... 2,593,600 83,954,832
--------------
468,847,220
--------------
70 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
HEALTH TECHNOLOGY 10.7%
a Adams Respiratory Therapeutics Inc. ........... 989,500 $ 42,647,450
a American Medical Systems Holdings Inc. ........ 2,111,800 37,611,158
C. R. Bard Inc. ............................... 1,070,400 87,729,984
a Cytyc Corp. ................................... 2,436,000 64,359,120
a Digene Corp. .................................. 827,100 38,402,253
a Endo Pharmaceuticals Holdings Inc. ............ 2,438,300 69,589,082
a Intuitive Surgical Inc. ....................... 453,800 45,007,884
a Keryx Biopharmaceuticals Inc. ................. 1,202,000 16,876,080
a Kos Pharmaceuticals Inc. ...................... 986,010 49,053,997
a The Medicines Co. ............................. 1,248,700 32,416,252
a,b Stereotaxis Inc. .............................. 1,463,200 17,529,136
a,b Telik Inc. .................................... 1,190,090 22,552,206
a Varian Medical Systems Inc. ................... 2,166,400 118,848,704
a Waters Corp. .................................. 2,025,400 100,864,920
a,b Wright Medical Group Inc. ..................... 852,900 21,075,159
------------
764,563,385
------------
INDUSTRIAL SERVICES 3.1%
a FMC Technologies Inc. ......................... 289,000 17,470,050
a Helix Energy Solutions Group Inc. ............. 1,582,100 51,101,830
a,b National-Oilwell Varco Inc. ................... 1,503,646 90,820,218
Rowan Cos. Inc. ............................... 1,802,700 60,174,126
------------
219,566,224
------------
PROCESS INDUSTRIES 1.5%
Bunge Ltd. .................................... 1,718,890 110,198,038
------------
PRODUCER MANUFACTURING 5.7%
Herman Miller Inc. ............................ 1,110,400 38,064,512
Kennametal Inc. ............................... 1,421,100 87,696,081
a Mettler-Toledo International Inc. (Switzerland) 1,107,400 76,023,010
a,d,f Mirapoint Inc., 144A .......................... 682,128 --
Oshkosh Truck Corp. ........................... 1,439,360 65,073,466
a RTI International Metals Inc. ................. 587,600 36,031,632
a Terex Corp. ................................... 2,098,400 108,613,184
------------
411,501,885
------------
REAL ESTATE DEVELOPMENT 0.3%
Jones Lang LaSalle Inc. ....................... 203,500 18,722,000
------------
RETAIL TRADE 2.3%
Advance Auto Parts Inc. ....................... 1,386,550 48,556,981
Fastenal Co. .................................. 1,277,800 51,418,672
Ross Stores Inc. .............................. 1,449,400 42,655,842
a Tractor Supply Co. ............................ 407,300 19,721,466
------------
162,352,961
------------
Semiannual Report | 71
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
TECHNOLOGY SERVICES 10.5%
a Akamai Technologies Inc. ........................................... 1,628,600 $ 76,316,196
a Alliance Data Systems Corp. ........................................ 1,311,100 79,609,992
a Amdocs Ltd. ........................................................ 3,410,200 132,179,352
a Cognizant Technology Solutions Corp., A ............................ 1,695,300 127,622,184
Global Payments Inc. ............................................... 1,714,700 74,949,537
a Hyperion Solutions Corp. ........................................... 2,535,000 94,809,000
a,b Marchex Inc., B .................................................... 903,400 12,810,212
a NeuStar Inc., A .................................................... 1,859,600 54,337,512
a,b Nuance Communications Inc. ......................................... 4,132,000 47,683,280
a Salesforce.com Inc. ................................................ 596,700 23,283,234
a VeriSign Inc. ...................................................... 1,288,600 26,648,248
--------------
750,248,747
--------------
TRANSPORTATION 3.4%
C.H. Robinson Worldwide Inc. ....................................... 1,275,700 53,247,718
Expeditors International of Washington Inc. ........................ 2,168,400 102,803,844
J.B. Hunt Transport Services Inc. .................................. 4,150,500 89,816,820
--------------
245,868,382
--------------
UTILITIES 1.1%
Constellation Energy Group ......................................... 1,211,900 75,622,560
--------------
TOTAL COMMON STOCKS (COST $5,502,430,242) .......................... 7,140,550,950
--------------
PREFERRED STOCK (COST $561,391) 0.0% e
PRODUCER MANUFACTURING 0.0% e
a,d,f Mirapoint Inc., pfd. ............................................... 301,660 304,677
--------------
CONVERTIBLE PREFERRED STOCKS 0.1%
CONSUMER SERVICES 0.1%
a,d,f Foveon Inc., cvt. pfd., D, 144A .................................... 1,792,573 2,096,055
a,d,f Foveon Inc., cvt. pfd., E, 144A .................................... 2,597,593 4,611,247
--------------
6,707,302
--------------
ELECTRONIC TECHNOLOGY 0.0% e
a,d,f Anda Networks, cvt. pfd., D ........................................ 364,431 162,828
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $21,635,019) .............. 6,870,130
--------------
TOTAL LONG TERM INVESTMENTS (COST $5,524,626,652) .................. 7,147,725,757
--------------
SHORT TERM INVESTMENTS 1.2%
MONEY MARKET FUND (COST $20,661,181 0.3%
g Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% 20,661,181 20,661,181
--------------
72 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL-MID CAP GROWTH FUND PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
h INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.9%
i REPURCHASE AGREEMENTS 0.9%
Banc of America Securities LLC, 5.32%, 11/01/06, (Maturity Value $14,002,069)
Collateralized by U.S. Government Agency Securities, 5.00%, 3/01/34 - 6/01/35 $ 14,000,000 $ 14,000,000
Barclays Capital Inc., 5.32%, 11/01/06, (Maturity Value $15,578,302)
Collateralized by U.S. Government Agency Securities, 3.52% - 8.50%,
12/01/07 - 10/01/46 ......................................................... 15,576,000 15,576,000
Citigroup Global Markets Inc., 5.32%, 11/01/06, (Maturity Value $10,035,483)
Collateralized by U.S. Government Agency Securities, 3.47% - 8.50%,
3/01/08 - 10/01/36 .......................................................... 10,034,000 10,034,000
Deutshe Bank Securities Inc., 5.31%, 11/01/06, (Maturity Value $10,001,475)
Collateralized by U.S. Government Agency Securities, 4.00% - 7.00%,
7/01/10 - 8/01/36 ........................................................... 10,000,000 10,000,000
Morgan Stanley & Co. Inc., 5.32%, 11/01/06, (Maturity Value $14,465,137)
Collateralized by U.S. Government Agency Securities, 2.62% - 8.28%,
12/05/06 - 10/01/46; jU.S. Government Agency Discount Notes,
11/01/06 - 12/27/06 ........................................................ 14,463,000 14,463,000
----------------
TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
(COST $64,073,000) ............................................................. 64,073,000
----------------
TOTAL SHORT TERM INVESTMENTS (COST $84,734,181) ................................ 84,734,181
----------------
TOTAL INVESTMENTS (COST $5,609,360,833) 101.1% ................................. 7,232,459,938
OTHER ASSETS, LESS LIABILITIES (1.1)% .......................................... (80,137,970)
----------------
NET ASSETS 100.0% .............................................................. $ 7,152,321,968
================
See Selected Portfolio Abbreviations on page 74.
a Non-income producing for the twelve months ended October 31, 2006.
b A portion or all of the security is on loan as of October 31, 2006. See
Note 1(e).
c See Note 9 regarding holdings of 5% voting securities.
d See Note 8 regarding restricted securities.
e Rounds to less than 0.1% of net assets.
f Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2006, the aggregate value of these
securities was $7,174,807, representing 0.10% of net assets.
g See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
h See Note 1(e) regarding securities on loan.
i See Note 1(c) regarding repurchase agreements.
j The security is traded on a discount basis with no stated coupon rate.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 73
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
PIPES - Private Investment in Public Equity Security
74 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2006 (unaudited)
--------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
--------------------------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ...................... $ 177,067,237 $ 2,161,987,502 $ 875,550,606 $ 5,180,222,268
Cost - Non-controlled affiliated issuers (Note 9) -- -- -- 344,404,384
Cost - Sweep Money Fund (Note 7) ................. 16,042,090 81,621,216 11,627,136 20,661,181
Cost - Repurchase agreements ..................... -- 26,034,000 -- 64,073,000
--------------------------------------------------------------------------
Total cost of investments ........................ $ 193,109,327 $ 2,269,642,718 $ 887,177,742 $ 5,609,360,833
==========================================================================
Value - Unaffiliated issuers ..................... $ 215,368,942 $ 2,822,982,324 $ 1,080,358,920 $ 6,814,516,147
Value - Non-controlled affiliated issuers (Note 9) -- -- -- 333,209,610
Value - Sweep Money Fund (Note 7) ................ 16,042,090 81,621,216 11,627,136 20,661,181
Value - Repurchase agreements .................... -- 26,034,000 -- 64,073,000
--------------------------------------------------------------------------
Total value of investments a ..................... 231,411,032 2,930,637,540 1,091,986,056 7,232,459,938
--------------------------------------------------------------------------
Receivables:
Investment securities sold ....................... 9,024,926 12,157,310 12,177,838 51,481,276
Capital shares sold .............................. 151,119 2,793,477 1,013,498 5,016,601
Dividends and interest ........................... 43,736 740,210 49,900 461,451
--------------------------------------------------------------------------
Total assets ............................... 240,630,813 2,946,328,537 1,105,227,292 7,289,419,266
--------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .................. 6,369,882 31,070,137 7,730,807 38,083,192
Capital shares redeemed .......................... 865,163 6,014,934 3,483,397 25,452,199
Affiliates ....................................... 235,509 2,240,066 1,079,666 9,253,298
Payable upon return of securities loaned .......... -- 26,034,000 -- 64,073,000
Accrued expenses and other liabilities ............ 16,533 807,666 614,775 235,609
--------------------------------------------------------------------------
Total liabilities .......................... 7,487,087 66,166,803 12,908,645 137,097,298
--------------------------------------------------------------------------
Net assets, at value ..................... $ 233,143,726 $ 2,880,161,734 $ 1,092,318,647 $ 7,152,321,968
==========================================================================
Net assets consist of:
Paid-in capital ................................... $ 353,853,493 $ 2,371,468,619 $ 785,683,966 $ 5,036,731,401
Undistributed net investment income (loss) ........ (765,731) 4,384,916 (4,701,930) (12,205,680)
Net unrealized appreciation (depreciation) ........ 38,301,254 660,994,822 204,808,314 1,623,099,105
Accumulated net realized gain (loss) .............. (158,245,290) (156,686,623) 106,528,297 504,697,142
--------------------------------------------------------------------------
Net assets, at value ..................... $ 233,143,726 $ 2,880,161,734 $ 1,092,318,647 $ 7,152,321,968
==========================================================================
a Including securities loaned ....................... $ -- $ 25,671,021 $ -- $ 62,035,895
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 75
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
--------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
--------------------------------------------------------------------
CLASS A:
Net assets, at value ............................ $ 102,659,218 $2,006,894,810 $ 551,111,377 $5,645,326,685
====================================================================
Shares outstanding .............................. 5,964,117 47,712,546 42,028,690 143,303,591
====================================================================
Net asset value per share a ..................... $ 17.21 $ 42.06 $ 13.11 $ 39.39
====================================================================
Maximum offering price per share (net asset value
per share / 94.25%) ............................ $ 18.26 $ 44.63 $ 13.91 $ 41.79
====================================================================
CLASS B:
Net assets, at value ............................ $ 16,667,006 $ 127,483,685 $ 92,065,530 $ 32,388,797
====================================================================
Shares outstanding .............................. 1,014,253 3,217,564 7,351,838 848,592
====================================================================
Net asset value and maximum offering price
per share a .................................... $ 16.43 $ 39.62 $ 12.52 $ 38.17
====================================================================
CLASS C:
Net assets, at value ............................ $ 27,791,247 $ 366,525,382 $ 131,391,582 $ 644,340,384
====================================================================
Shares outstanding .............................. 1,694,666 9,231,648 10,485,844 17,347,012
====================================================================
Net asset value and maximum offering price
per share a .................................... $ 16.40 $ 39.70 $ 12.53 $ 37.14
====================================================================
CLASS R:
Net assets, at value ............................ $ 6,835,316 $ 83,595,973 $ 5,908,626 $ 107,320,683
====================================================================
Shares outstanding .............................. 401,412 2,010,921 456,045 2,757,056
====================================================================
Net asset value and maximum offering price
per share a ..................................... $ 17.03 $ 41.57 $ 12.96 $ 38.93
====================================================================
ADVISOR CLASS:
Net assets, at value ............................ $ 79,190,939 $ 295,661,884 $ 311,841,532 $ 722,945,419
====================================================================
Shares outstanding .............................. 4,498,205 6,991,947 23,329,568 18,097,477
====================================================================
Net asset value and maximum offering price
per share a .................................... $ 17.61 $ 42.29 $ 13.37 $ 39.95
====================================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
76 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended October 31, 2006 (unaudited)
-----------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
-----------------------------------------------------------------------
Investment income:
Dividends: (net of foreign taxes)
Unaffiliated issuers .................................. $ 318,543 $ 11,743,855 $ 2,330,625 $ 18,640,029
Non-controlled affiliated issuers (Note 9) ............ -- -- -- 290,142
Sweep Money Fund (Note 7) ............................. 412,702 3,723,172 214,835 3,055,723
Interest ............................................... -- 271 416 1,333,807
Income from securities loaned - net .................... -- 144,015 145,662 904,136
Other income (Note 10) ................................. 57,711 323,170 89,572 1,575,773
-----------------------------------------------------------------------
Total investment income ......................... 788,956 15,934,483 2,781,110 25,799,610
-----------------------------------------------------------------------
Expenses:
Management fees (Note 3a) .............................. 519,433 6,200,643 2,803,793 16,577,948
Administrative fees (Note 3b) .......................... 219,756 -- 1,157,561 --
Distribution fees: (Note 3c)
Class A ............................................... 148,392 2,464,790 751,087 7,303,592
Class B ............................................... 85,196 652,868 479,037 164,765
Class C ............................................... 140,629 1,805,475 702,816 3,284,135
Class R ............................................... 13,585 212,529 14,576 252,005
Transfer agent fees (Note 3e) .......................... 353,182 3,088,839 1,349,263 9,661,992
Custodian fees (Note 4) ................................ 2,940 27,848 15,065 80,153
Reports to shareholders ................................ 25,455 277,055 112,196 360,396
Registration and filing fees ........................... 30,013 71,607 47,087 96,068
Professional fees ...................................... 11,856 32,925 24,866 62,713
Trustees' fees and expenses ............................ 912 13,612 7,849 75,511
Other .................................................. 3,404 11,465 18,039 88,453
-----------------------------------------------------------------------
Total expenses .................................. 1,554,753 14,859,656 7,483,235 38,007,731
Expense reductions (Note 4) ..................... (66) (725) (195) (2,441)
-----------------------------------------------------------------------
Net expenses .................................. 1,554,687 14,858,931 7,483,040 38,005,290
-----------------------------------------------------------------------
Net investment income (loss) ................. (765,731) 1,075,552 (4,701,930) (12,205,680)
-----------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................... (6,299,239) 35,775,883 74,355,354 96,773,548
Foreign currency transactions ......................... 9,652 9,924 (72) 25,717
-----------------------------------------------------------------------
Net realized gain (loss) ..................... (6,289,587) 35,785,807 74,355,282 96,799,265
-----------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................... (4,071,145) (67,408,945) (147,592,831) (326,171,876)
Translation of assets and liabilities denominated in
foreign currencies .................................. (686) -- -- --
-----------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) ... (4,071,831) (67,408,945) (147,592,831) (326,171,876)
-----------------------------------------------------------------------
Net realized and unrealized gain (loss) ................. (10,361,418) (31,623,138) (73,237,549) (229,372,611)
-----------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ........................................ $ (11,127,149) $ (30,547,586) $ (77,939,479) $ (241,578,291)
=======================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------
FRANKLIN AGGRESSIVE FRANKLIN FLEX CAP
GROWTH FUND GROWTH FUND
--------------------------------------------------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2006 YEAR ENDED 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006 (UNAUDITED) APRIL 30, 2006
--------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................... $ (765,731) $ (1,884,598) $ 1,075,552 $ 3,321,181
Net realized gain (loss) from investments and
foreign currency transactions ................ (6,289,587) 28,052,906 35,785,807 172,708,459
Net change in unrealized appreciation
(depreciation) on investments and translation
of assets and liabilities denominated in
foreign currencies ........................... (4,071,831) 27,182,678 (67,408,945) 280,571,461
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .............. (11,127,149) 53,350,986 (30,547,586) 456,601,101
--------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ...................................... (4,175,494) 3,841,739 (43,654,936) 231,283,630
Class B ...................................... (1,568,666) (3,069,804) (13,506,680) (17,621,287)
Class C ...................................... (1,370,145) (1,562,557) (16,209,879) 31,480,674
Class R ...................................... 1,965,485 922,892 (6,507,389) 7,059,122
Advisor Class ................................ 43,116,624 4,967,511 87,354,064 115,831,126
--------------------------------------------------------------------
Total capital share transactions ................ 37,967,804 5,099,781 7,475,180 368,033,265
--------------------------------------------------------------------
Redemption fees ................................. 692 1,583 4,579 37,072
--------------------------------------------------------------------
Net increase (decrease) in
net assets ......................... 26,841,347 58,452,350 (23,067,827) 824,671,438
Net assets:
Beginning of period ............................. 206,302,379 147,850,029 2,903,229,561 2,078,558,123
--------------------------------------------------------------------
End of period ................................... $ 233,143,726 $ 206,302,379 $2,880,161,734 $2,903,229,561
====================================================================
Undistributed net investment income (loss)
included in net assets:
End of period .................................. $ (765,731) $ -- $ 4,384,916 $ 3,309,364
====================================================================
78 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
----------------------------------------------------------------------------
FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP
GROWTH FUND II GROWTH FUND
----------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006 (UNAUDITED) APRIL 30, 2006
----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............ $ (4,701,930) $ (9,203,931) $ (12,205,680) $ (4,414,772)
Net realized gain (loss) from investments
and foreign currency transactions ..... 74,355,282 153,433,848 96,799,265 978,462,440
Net change in unrealized appreciation
(depreciation) on investments ......... (147,592,831) 205,294,990 (326,171,876) 1,138,414,709
----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......... (77,939,479) 349,524,907 (241,578,291) 2,112,462,377
----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................... -- -- -- (7,827,908)
Class R ............................... -- -- -- (49,576)
Advisor Class ......................... -- -- -- (2,541,576)
----------------------------------------------------------------------------
Total distributions to shareholders ...... -- -- -- (10,419,060)
----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................... (101,123,463) (270,933,948) (696,265,353) (1,867,554,403)
Class B ............................... (12,261,931) (22,332,447) (3,310,036) (3,374,069)
Class C ............................... (27,567,955) (38,628,324) (60,777,647) (100,224,044)
Class R ............................... (48,718) 562,893 15,544,998 22,534,840
Advisor Class ......................... 3,755,195 15,411,822 (47,536,288) 308,008,942
----------------------------------------------------------------------------
Total capital share transactions ......... (137,246,872) (315,920,004) (792,344,326) (1,640,608,734)
----------------------------------------------------------------------------
Redemption fees .......................... 1,669 2,423 29,331 49,246
----------------------------------------------------------------------------
Net increase (decrease) in
net assets .................. (215,184,682) 33,607,326 (1,033,893,286) 461,483,829
Net assets:
Beginning of period ...................... 1,307,503,329 1,273,896,003 8,186,215,254 7,724,731,425
----------------------------------------------------------------------------
End of period ............................ $ 1,092,318,647 $ 1,307,503,329 $ 7,152,321,968 $ 8,186,215,254
============================================================================
Undistributed net investment income (loss)
included in net assets:
End of period ........................... $ (4,701,930) $ -- $ (12,205,680) $ --
============================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 79
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 (1940 Act) as an open-end investment company, consisting of twelve
separate funds. All funds included in this report (the Funds) are diversified,
except the Franklin Flex Cap Growth Fund. The financial statements of the
remaining funds in the Trust are presented separately. The Funds offer five
classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each
class of shares differs by its initial sales load, contingent deferred sales
charges, distribution fees, voting rights on matters affecting a single class
and its exchange privilege.
The Franklin Small Cap Growth Fund II was closed to new investors effective July
9, 2002.
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's Board of Trustees.
80 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. REPURCHASE AGREEMENTS
Certain funds may enter into repurchase agreements, which are accounted for as a
loan by the fund to the seller, collateralized by securities which are delivered
to the fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the funds, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. Repurchase agreements are
valued at cost. At October 31, 2006, all repurchase agreements held by the funds
had been entered into on that date.
D. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
Semiannual Report | 81
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITIES LENDING
The Funds may loan securities to certain brokers through a securities lending
agent for which they receive cash collateral against the loaned securities in an
amount equal to at least 102% of the market value of the loaned securities.
Collateral is maintained over the life of the loan in an amount not less than
100% of the market value of loaned securities, as determined at the close of
fund business each day; any additional collateral required due to changes in
security values is delivered to the fund on the next business day. The
collateral is invested in short-term instruments as noted in the Statement of
Investments. The fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower. At October 31, 2006, the Franklin
Aggressive Growth Fund and the Franklin Small Cap Growth Fund II had no
securities on loan.
F. INCOME TAXES
No provision has been made for U.S. income taxes because each fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income is
recorded on the ex-dividend date. Distributions to shareholders are recorded on
the ex-dividend date and are determined according to income tax regulations (tax
basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States. 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.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class-level
expenses may result in payment of different per share distributions by class.
82 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Distributions received by the Trust from certain securities may be a return of
capital (ROC). Such distributions reduce the cost basis of the securities, and
any distributions in excess of the cost basis are recognized as capital gains.
H. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
I. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date (30 days or less prior to June 1, 2004 for the
Franklin Small Cap Growth Fund II and the Franklin Small-Mid Cap Growth Fund).
The redemption fee is 2% of the amount redeemed. Such fees are retained by the
Funds and accounted for as an addition to paid-in capital.
J. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2006, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
----------------------------------------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND FLEX CAP GROWTH FUND
----------------------------------------------------------------
CLASS A SHARES: ................. SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
Six months ended October 31, 2006
Shares sold .................... 689,093 $ 11,645,347 4,651,658 $ 186,469,524
Shares redeemed ................ (940,359) (15,820,841) (5,705,639) (230,124,460)
----------------------------------------------------------------
Net increase (decrease) ........ (251,266) $ (4,175,494) (1,053,981) $ (43,654,936)
================================================================
Year ended April 30, 2006
Shares sold .................... 1,938,786 $ 32,103,821 17,172,117 $ 670,049,863
Shares redeemed ................ (1,768,839) (28,262,082) (11,098,789) (438,766,233)
----------------------------------------------------------------
Net increase (decrease) ........ 169,947 $ 3,841,739 6,073,328 $ 231,283,630
================================================================
Semiannual Report | 83
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE GROWTH FUND FLEX CAP GROWTH FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS B SHARES:
Six months ended October 31, 2006
Shares sold .................... 40,307 $ 658,229 52,889 $ 2,025,813
Shares redeemed ................ (139,040) (2,226,895) (409,514) (15,532,493)
-----------------------------------------------------------------
Net increase (decrease) ........ (98,733) $ (1,568,666) (356,625) $ (13,506,680)
=================================================================
Year ended April 30, 2006
Shares sold .................... 100,932 $ 1,636,541 275,686 $ 10,465,446
Shares redeemed ................ (310,393) (4,706,345) (751,776) (28,086,733)
-----------------------------------------------------------------
Net increase (decrease) ........ (209,461) $ (3,069,804) (476,090) $ (17,621,287)
=================================================================
CLASS C SHARES:
Six months ended October 31, 2006
Shares sold .................... 196,872 $ 3,156,042 673,400 $ 25,712,037
Shares redeemed ................ (284,065) (4,526,187) (1,099,777) (41,921,916)
-----------------------------------------------------------------
Net increase (decrease) ........ (87,193) $ (1,370,145) (426,377) $ (16,209,879)
=================================================================
Year ended April 30, 2006
Shares sold .................... 386,316 $ 6,242,267 2,690,646 $ 100,933,769
Shares redeemed ................ (508,287) (7,804,824) (1,852,778) (69,453,095)
-----------------------------------------------------------------
Net increase (decrease) ........ (121,971) $ (1,562,557) 837,868 $ 31,480,674
=================================================================
CLASS R SHARES:
Six months ended October 31, 2006
Shares sold .................... 160,308 $ 2,705,898 215,769 $ 8,591,880
Shares redeemed ................ (44,285) (740,413) (376,347) (15,099,269)
-----------------------------------------------------------------
Net increase (decrease) ........ 116,023 $ 1,965,485 (160,578) $ (6,507,389)
=================================================================
Year ended April 30, 2006
Shares sold .................... 118,991 $ 1,953,202 769,708 $ 29,699,435
Shares redeemed ................ (63,311) (1,030,310) (573,698) (22,640,313)
-----------------------------------------------------------------
Net increase (decrease) ........ 55,680 $ 922,892 196,010 $ 7,059,122
=================================================================
ADVISOR CLASS SHARES:
Six months ended October 31, 2006
Shares sold .................... 2,696,848 $ 45,934,616 2,102,102 $ 88,520,106
Shares redeemed ................ (165,282) (2,817,992) (28,927) (1,166,042)
-----------------------------------------------------------------
Net increase (decrease) ........ 2,531,566 $ 43,116,624 2,073,175 $ 87,354,064
=================================================================
Year ended April 30, 2006
Shares sold .................... 1,942,749 $ 32,580,594 2,970,779 $ 118,604,130
Shares redeemed ................ (1,649,650) (27,613,083) (67,870) (2,773,004)
-----------------------------------------------------------------
Net increase (decrease) ........ 293,099 $ 4,967,511 2,902,909 $ 115,831,126
=================================================================
84 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------------------------------------------------
FRANKLIN FRANKLIN
SMALL CAP GROWTH FUND II SMALL-MID CAP GROWTH FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2006
Shares sold .................... 3,387,293 $ 43,062,051 10,436,455 $ 395,650,564
Shares redeemed ................ (11,224,109) (144,185,514) (28,761,943) (1,091,915,917)
-------------------------------------------------------------------
Net increase (decrease) ........ (7,836,816) $(101,123,463) (18,325,487) $ (696,265,353)
===================================================================
Year ended April 30, 2006
Shares sold .................... 9,784,344 $ 122,342,429 33,346,377 $ 1,232,434,700
Shares issued in reinvestment
of distributions .............. -- -- 179,810 6,881,342
Shares redeemed ................ (31,930,047) (393,276,377) (83,856,206) (3,106,870,445)
-------------------------------------------------------------------
Net increase (decrease) ........ (22,145,703) $(270,933,948) (50,330,019) $(1,867,554,403)
===================================================================
CLASS B SHARES:
Six months ended October 31, 2006
Shares sold .................... 8,316 $ 102,566 18,773 $ 690,388
Shares redeemed ................ (1,021,476) (12,364,497) (109,222) (4,000,424)
-------------------------------------------------------------------
Net increase (decrease) ........ (1,013,160) $ (12,261,931) (90,449) $ (3,310,036)
===================================================================
Year ended April 30, 2006
Shares sold .................... 34,472 $ 422,616 100,910 $ 3,688,056
Shares redeemed ................ (1,905,363) (22,755,063) (197,349) (7,062,125)
-------------------------------------------------------------------
Net increase (decrease) ........ (1,870,891) $ (22,332,447) (96,439) $ (3,374,069)
===================================================================
CLASS C SHARES:
Six months ended October 31, 2006
Shares sold .................... 125,398 $ 1,504,993 511,878 $ 18,346,934
Shares redeemed ................ (2,402,976) (29,072,948) (2,215,754) (79,124,581)
-------------------------------------------------------------------
Net increase (decrease) ........ (2,277,578) $ (27,567,955) (1,703,876) $ (60,777,647)
===================================================================
Year ended April 30, 2006
Shares sold .................... 397,650 $ 4,745,136 1,384,453 $ 48,881,333
Shares redeemed ................ (3,613,785) (43,373,460) (4,281,748) (149,105,377)
-------------------------------------------------------------------
Net increase (decrease) ........ (3,216,135) $ (38,628,324) (2,897,295) $ (100,224,044)
===================================================================
CLASS R SHARES:
Six months ended October 31, 2006
Shares sold .................... 66,095 $ 827,223 816,087 $ 30,829,575
Shares redeemed ................ (70,277) (875,941) (407,870) (15,284,577)
-------------------------------------------------------------------
Net increase (decrease) ........ (4,182) $ (48,718) 408,217 $ 15,544,998
===================================================================
Year ended April 30, 2006
Shares sold .................... 108,115 $ 1,365,015 1,358,151 $ 49,581,778
Shares issued in reinvestment
of distributions .............. -- -- 1,277 48,392
Shares redeemed ................ (64,636) (802,122) (754,871) (27,095,330)
-------------------------------------------------------------------
Net increase (decrease) ........ 43,479 $ 562,893 604,557 $ 22,534,840
===================================================================
Semiannual Report | 85
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------------------------------------------------
FRANKLIN FRANKLIN
SMALL CAP GROWTH FUND II SMALL-MID CAP GROWTH FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
ADVISOR CLASS SHARES:
Six months ended October 31, 2006
Shares sold .................... 2,399,908 $ 31,370,191 3,835,512 $ 150,271,832
Shares redeemed ................ (2,140,826) (27,614,996) (5,146,911) (197,808,120)
-------------------------------------------------------------------
Net increase (decrease) ........ 259,082 $ 3,755,195 (1,311,399) $ (47,536,288)
===================================================================
Year ended April 30, 2006
Shares sold .................... 4,863,208 $ 60,972,247 14,278,979 $ 527,317,204
Shares issued in reinvestment
of distributions .............. -- -- 42,059 1,628,949
Shares redeemed ................ (3,573,788) (45,560,425) (5,871,385) (220,937,211)
-------------------------------------------------------------------
Net increase (decrease) ........ 1,289,420 $ 15,411,822 8,449,653 $ 308,008,942
===================================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ----------------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ----------------------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund pay
an investment management fee to Advisers based on the average daily net assets
of each of the funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
86 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Aggressive Growth Fund pays an investment management fee to
Advisers based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.500% Up to and including $500 million
0.400% Over $500 million, up to and including $1 billion
0.350% Over $1 billion, up to and including $1.5 billion
0.300% Over $1.5 billion, up to and including $6.5 billion
0.275% Over $6.5 billion, up to and including $11.5 billion
0.250% Over $11.5 billion, up to and including $16.5 billion
0.240% Over $16.5 billion, up to and including $19 billion
0.230% Over $19 billion, up to and including $21.5 billion
0.220% In excess of $21.5 billion
The Franklin Small Cap Growth Fund II pays an investment management fee to
Advisers based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.550% Up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin Aggressive Growth Fund and the Franklin Small Cap Growth Fund II
pay an administrative fee to FT Services of 0.20% per year of the average daily
net assets of each of the funds.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund.
The fee is paid by Advisers based on average daily net assets, and is not an
additional expense of the funds.
Semiannual Report | 87
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the
Funds reimburse Distributors for costs incurred in connection with the sale and
distribution of each fund's shares up to a certain percentage per year of its
average daily net assets as follows:
--------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND
--------------------------------------------------
Class A ......... 0.35% 0.25% 0.25%
Under the Class A reimbursement distribution plans, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
Under the Funds' compensation distribution plans, the Funds pay Distributors for
costs incurred in connection with the sale and distribution of each fund's
shares up to a certain percentage per year of their average daily net assets of
each class as follows:
--------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
--------------------------------------------------------------------
Class A ................ -- -- 0.35% --
Class B ................ 1.00% 1.00% 1.00% 1.00%
Class C ................ 1.00% 1.00% 1.00% 1.00%
Class R ................ 0.50% 0.50% 0.50% 0.50%
The Franklin Small Cap Growth Fund II pays Distributors up to 0.35%, for Class
A, when the fund is open to new investors and up to 0.25% when the fund is
closed to new investors.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the period:
---------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
---------------------------------------------------------------------
Sale charges retained net of commissions
paid to unaffiliated broker/dealers ... $31,267 $461,478 $9,321 $188,237
Contingent deferred sales charges
retained .............................. $11,719 $103,121 $58,797 $55,815
88 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by Investor Services:
-----------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
-----------------------------------------------------------------------
Transfer agent fees .. $250,162 $1,729,536 $640,678 $3,944,886
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended October 31, 2006, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2006, the capital loss carryforwards were as
follows:
-----------------------------
FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP
GROWTH FUND GROWTH FUND
-----------------------------
Capital loss carryovers expiring in:
2010 ..................................... $104,367,877 $ 1,323,283
2011 ..................................... 47,112,100 191,041,838
----------------------------
$151,479,977 $192,365,121
============================
For tax purposes, realized currency losses, occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2006, the Franklin Aggressive Growth Fund, the
Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund
deferred realized currency losses of $3,323, $564, and $8,602, respectively.
Semiannual Report | 89
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
At October 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
-----------------------------------
FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP
GROWTH FUND GROWTH FUND
-----------------------------------
Cost of investments ...................... $ 194,665,522 $ 2,270,863,340
===================================
Unrealized appreciation .................. $ 38,480,418 $ 686,513,188
Unrealized depreciation .................. (1,734,908) (26,738,988)
-----------------------------------
Net unrealized appreciation (depreciation) $ 36,745,510 $ 659,774,200
===================================
-----------------------------------
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND II GROWTH FUND
-----------------------------------
Cost of investments ...................... $ 888,918,184 $ 5,610,805,764
===================================
Unrealized appreciation .................. $ 257,651,751 $ 1,776,498,142
Unrealized depreciation .................. (54,583,879) (154,843,968)
-----------------------------------
Net unrealized appreciation (depreciation) $ 203,067,872 $ 1,621,654,174
===================================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatment of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales (excluding short term securities) for the period ended
October 31, 2006, were as follows:
------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
AGGRESSIVE FLEX CAP SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND GROWTH FUND II GROWTH FUND
------------------------------------------------------------------------
Purchases ... $ 247,685,271 $ 939,463,169 $ 357,680,338 $ 2,005,327,071
Sales ....... $ 217,423,919 $ 843,966,750 $ 504,860,434 $ 2,492,783,479
90 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management and
administrative fees paid by the Sweep Money Fund.
8. RESTRICTED SECURITIES
The Funds may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Funds have registration rights for
certain restricted securities held at period end. The issuer generally incurs
all registration costs.
At October 31, 2006, the Funds held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
- -----------------------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- -----------------------------------------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND
374,806 Dilithium Networks Inc., depository receipt, D,
pfd., 144A, PIPES ................................ 7/13/06 $ 873,300 $ 873,298
-----------
TOTAL RESTRICTED SECURITIES (0.37% of Net Assets) ........................... $ 873,298
===========
FRANKLIN FLEX CAP GROWTH FUND
145,772 Anda Networks, cvt. pfd., D ....................... 3/24/00 $ 2,000,000 $ 65,131
2,227,171 Fibrogen Inc., cvt. pfd., E ....................... 5/19/00 9,999,998 14,966,589
772,727 Masimo Corp., cvt. pfd., F ........................ 5/15/00 8,499,997 13,684,995
-----------
TOTAL RESTRICTED SECURITIES (1.00% of Net Assets) ........................... $28,716,715
===========
FRANKLIN SMALL-MID CAP GROWTH FUND
364,431 Anda Networks, cvt. pfd., D ....................... 3/24/00 $ 5,000,000 $ 162,828
1,792,573 Foveon Inc., cvt. pfd., D, 144A ................... 4/08/02 13,999,995 2,096,055
2,597,593 Foveon Inc., cvt. pfd., E, 144A ................... 5/31/05 2,635,024 4,611,247
682,128 Mirapoint Inc., 144A .............................. 9/09/99 4,999,998 --
301,660 Mirapoint Inc., pfd ............................... 7/07/05 561,391 304,677
-----------
TOTAL RESTRICTED SECURITIES (0.10% of Net Assets) ........................... $ 7,174,807
===========
Semiannual Report | 91
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Franklin Flex Cap Growth Fund and the Franklin Small-Mid CapGrowth Fund for the
period ended October 31, 2006 were as shown below.
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER NUMBER
OF SHARES OF SHARES
HELD AT HELD AT
BEGINNING GROSS GROSS END OF VALUE AT
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
SunPower Corp., A ............................... 500,000 50,000 -- 550,000 $ a
==============
TOTAL AFFILIATED SECURITIES (0.00% of Net Assets)
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
Allscripts Healthcare Solutions Inc. ............ 2,169,700 1,090,200 -- 3,259,900 $ 76,901,041
Microsemi Corp. ................................. 3,002,600 2,581,500 -- 5,584,100 109,448,360
Tektronix Inc. .................................. 4,660,300 175,400 -- 4,835,700 146,860,209
-------------
TOTAL AFFILIATED SECURITIES (4.66% of Net Assets) ....................................................... $333,209,610
-------------
- ---------------------------------------------------------------------------------
REALIZED
INVESTMENT CAPITAL
NAME OF ISSUER INCOME GAIN (LOSS)
- ---------------------------------------------------------------------------------
FRANKLIN FLEX CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
SunPower Corp., A ............................... $ -- $ --
============================
TOTAL AFFILIATED SECURITIES (0.00% of Net Assets)
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
Allscripts Healthcare Solutions Inc. ............ $ -- $ --
Microsemi Corp. ................................. -- --
Tektronix Inc. .................................. 290,142 --
----------------------------
TOTAL AFFILIATED SECURITIES (4.66% of Net Assets) $ 290,142 $ --
----------------------------
a As of October 31, 2006, no longer an affiliate.
10. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan was completed in September 2006.
92 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY MATTERS (CONTINUED)
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its/their shareholders whole, as appropriate.
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
Semiannual Report | 93
Franklin Strategic Series
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust'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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q 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
1-800/SEC-0330.
94 | Semiannual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term
Tax-Free Income Fund
Federal Limited-Term
Tax-Free Income Fund
New York Limited-Term
Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/06 Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus .
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing . The prospectus contains this and other
information; please read it carefully before investing .
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed . These calls can be
identified by the presence of a regular beeping tone.
FSS1 S2006 12/06
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
OCTOBER 31, 2006
- --------------------------------------------------------------------------------
Franklin Biotechnology
Discovery Fund
Franklin Global
Communications Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Technology Fund
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER SECTOR
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Economic and Market Overview .............................................. 3
Franklin Biotechnology Discovery Fund ..................................... 5
Franklin Global Communications Fund ....................................... 12
Franklin Global Health Care Fund .......................................... 20
Franklin Natural Resources Fund ........................................... 27
Franklin Technology Fund .................................................. 34
Financial Highlights and Statements of Investments ........................ 42
Financial Statements ...................................................... 73
Notes to Financial Statements ............................................. 82
Shareholder Information ................................................... 97
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Shareholder Letter
Dear Shareholder:
During the six months ended October 31, 2006, the pace of economic growth slowed
as the housing market cooled and imports rose. In light of moderating economic
growth, the Federal Reserve Board (Fed) left interest rates unchanged at its
August, September and October meetings. The Fed's inaction helped boost investor
confidence. The Standard & Poor's 500 Index (S&P 500) returned +6.11%, the Dow
Jones Industrial Average returned +7.47% and the NASDAQ Composite Index had a
return of +3.03% for the six months under review. 1
In the enclosed semiannual report for Franklin Strategic Series, the portfolio
managers discuss market conditions, investment management decisions and Fund
performance during the period under review. You will also find performance data
and financial information. Please remember that all securities markets
fluctuate, as do mutual fund share prices.
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The Dow Jones Industrial Average is price weighted based on the average
market price of 30 blue chip stocks of companies that are generally
industry leaders. The NASDAQ Composite Index measures all NASDAQ domestic
and international based common type stocks listed on The NASDAQ Stock
Market. The index is market value weighted and includes more than 3,000
companies.
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
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Not part of the semiannual report | 1
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
As always, we recommend investors consult their financial advisors and review
their portfolios to design a long-term strategy and portfolio allocation that
meet their individual needs, goals and risk tolerance. We firmly believe that
most people benefit from professional advice, and that advice is invaluable as
investors navigate changing market environments.
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,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
President and Chief Executive Officer - Investment Management
Franklin Strategic Series
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2006. 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.
2 | Not part of the semiannual report
Semiannual Report
Economic and Market Overview
During the six months ended October 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product growth declined to annualized
rates of 2.6% in the second quarter and an estimated 2.2% in the third quarter.
Housing market weakness contributed to the slowdown. Growth was supported
primarily by corporate profits and consumer and government spending. Export
growth picked up some momentum, but a record trade deficit remained. Although
labor costs rose and new job creation slowed to 1% annually, hiring generally
increased and the unemployment rate fell from 4.6% to a five-year low of 4.4%. 1
Elevated energy and other commodity prices were a primary economic concern for
much of the period. Oil prices were volatile and declined from a record high of
$77 per barrel in July to nearly $59 at period-end. Shifting oil prices appeared
to raise the anxiety level among consumers and businesses alike. Consumers
curbed spending on large purchases, such as homes and cars. Home prices fell in
many parts of the country, mortgage rates crept up, and borrowing against home
equity flattened. Lower retail prices for cars, computers and clothing in
September and October signaled that inflationary pressure appeared to be
diminishing somewhat. Inflation was still a concern, however, as the core
Consumer Price Index (CPI) rose 2.7% for the 12 months ended October 31, 2006,
which was higher than the 2.2% 10-year average. 2
The Federal Reserve Board (Fed) raised the federal funds target rate to 5.25% on
June 30. However, since June, the Fed left the rate unchanged, citing a slowing
economy, widespread cooling in the housing market and the lagging effect of
prior tightening. The Fed stated that even with lower oil prices toward
period-end, inflation risks remained.
1. Source: Bureau of Labor Statistics.
2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Semiannual Report | 3
The Fed's inaction helped restore investor confidence, and equity markets
experienced dramatic rallies late in the period. Overall, the blue chip stocks
of the Dow Jones Industrial Average posted a six-month total return of +7.47%,
and the broader Standard & Poor's 500 Index (S&P 500) returned +6.11%, while the
technology-heavy NASDAQ Composite Index had a total return of +3.03%. 3
Utilities, telecommunications and consumer staples performed particularly well.
3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. The S&P 500 consists of 500
stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2006. 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.
4 | Semiannual Report
Franklin Biotechnology Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund
seeks capital appreciation by investing at least 80% of its net assets in
securities of biotechnology companies and discovery research firms located in
the U.S. and other countries.
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PORTFOLIO BREAKDOWN
Franklin Biotechnology Discovery Fund Based on Total Net
Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Biotechnology .............................................. 78.1%
Other Pharmaceuticals ...................................... 12.7%
Medical Specialties ........................................ 4.8%
Short-Term Investments & Other Net Assets .................. 4.4%
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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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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We are pleased to bring you Franklin Biotechnology Discovery Fund's semi-annual
report for the period ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Biotechnology Discovery Fund - Class A delivered a +3.35% cumulative
total return for the six months under review. The Fund outperformed its narrow
benchmark, the NASDAQ Biotechnology Index, which returned +2.66% over the same
period. 1 The Fund underperformed its broad benchmark, the Standard & Poor's 500
Index (S&P 500), which returned +6.11%, but outperformed the NASDAQ Composite
Index, which returned +3.03%
1. Source: Standard & Poor's Micropal. The NASDAQ Biotechnology Index is a
capitalization-weighted index designed to measure the performance of all
NASDAQ stocks in the biotechnology sector. The index was developed with a
base value of 200 as of 11/1/93. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
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 43.
Semiannual Report | 5
for the six-month period. 2 You can find the Fund's long-term performance data
in the Performance Summary beginning on page 8.
INVESTMENT STRATEGY
The Fund is managed using a bottom-up approach to individual stock selection,
with a focus on fundamental analysis and primary research. We look for
biotechnology, biopharmaceutical and platform technology companies that possess
products with favorable competitive profiles, large market opportunities and
strong intellectual property, supported by thoughtful clinical and market
development strategies. Our assessment of these products is based on extensive
primary research and due diligence and includes, but is not limited to, a
thorough review of medical literature, consultation of community and academic
physicians, and attendance at scientific meetings and symposia. Additionally, we
favor companies with excellent management, strong financial characteristics and
attractive valuations.
MANAGER'S DISCUSSION
During the six months under review, the Fund's biggest absolute contributor to
performance was Celgene. The company posted strong revenues and earnings growth,
largely due to the launch of Revlimid earlier in 2006. In late December 2005,
Revlimid was initially approved by the Food and Drug Administration (FDA) for
the treatment of myodysplastic syndromes. In June 2006, Revlimid was also
approved for treating multiple myeloma, and this approval significantly expanded
the potential market opportunity for the drug. Additionally, Thalomid, one of
Celgene's older drugs, also received approval for treating multiple myeloma.
While Thalomid has been used off-label for myeloma for many years, official FDA
approval allows the company to formally market the drug and should increase
reimbursement rates for Thalomid.
Gilead Sciences was the second-largest contributor on an absolute basis during
the reporting period. In July, the FDA approved Gilead's Atripla, a one-pill,
fixed-dose combination of three drugs, Gilead's Viread and Emtriva, and
Bristol-Myers Squibb's Sustiva. This is the first single-pill HIV drug regimen
and has proven to be an attractive treatment option for patients. Additionally,
Gilead announced the acquisitions of Myogen and Corus Pharma, which
2. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The NASDAQ Composite Index measures all domestic and international common
type stocks listed on The NASDAQ Stock Market. The index is market value
weighted and includes more than 3,000 companies. The indexes are unmanaged
and include reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio.
6 | Semiannual Report
strengthened its new product pipeline through the additions of Myogen's
Ambrisentan and Corus' Cayston.
In addition to being a direct beneficiary of Gilead's strategic initiatives, the
Fund gained from its top-performing stock, Myogen. We believed many investors
did not recognize Myogen's value, and we were satisfied with the immediate
recognition of value through Gilead's takeover.
Neurocrine Biosciences was the largest detractor from absolute Fund performance
during the period. In May, the FDA issued a non-approvable letter for the
modified-release formulation of Indiplon. Subsequently, Neurocrine's Indiplon
development partner, Pfizer, terminated their collaboration agreement. The stock
dropped precipitiously after each of these announcements.
Threshold Pharmaceuticals was the second-largest detractor from absolute Fund
performance. In May, the FDA placed the Phase III trial of TH-070, the company's
most important pipeline compound, on clinical hold due to liver enzyme
abnormalities detected in patients. In July, negative efficacy analysis results
prompted Threshold to discontinue the TH-070 development for benign prostatic
hyperplasia.
Lastly, PDL Biopharma also hindered Fund performance. In May, PDL reported
disappointing first quarter financial results as revenues fell below
expectations. Furthermore, European regulatory authorities requested a sizable
Phase III program for Ularitide, PDL's pipeline compound for acute
decompen-sated heart failure. This mandate would delay the time-to-market for
Ularitide, as well as substantially increase the program's cost.
Thank you for your continued participation in Franklin Biotechnology Discovery
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Evan McCulloch
Evan McCulloch, CFA
Portfolio Manager
Franklin Biotechnology Discovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
TOP 10 EQUITY HOLDINGS
Franklin Biotechnology Discovery Fund
10/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Celgene Corp. 9.6%
BIOTECHNOLOGY, U.S.
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Amgen Inc. 7.1%
BIOTECHNOLOGY, U.S.
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Gilead Sciences Inc. 6.8%
BIOTECHNOLOGY, U.S.
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Genzyme Corp. 6.7%
BIOTECHNOLOGY, U.S.
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MedImmune Inc. 5.5%
BIOTECHNOLOGY, U.S.
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Biogen Idec Inc. 5.0%
BIOTECHNOLOGY, U.S.
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Genentech Inc. 5.0%
BIOTECHNOLOGY, U.S.
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Sepracor Inc. 3.5%
OTHER PHARMACEUTICALS, U.S.
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The Medicines Co. 3.2%
BIOTECHNOLOGY, U.S.
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POZEN Inc. 2.7%
OTHER PHARMACEUTICALS, U.S.
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Semiannual Report | 7
Performance Summary as of 10/31/06
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table does 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.
PRICE INFORMATION
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CLASS A (SYMBOL: FBDIX) CHANGE 10/31/06 4/30/06
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Net Asset Value (NAV) +$1.86 $58.30 $56.44
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PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
AND VALUE OF $10,000 INVESTMENT INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE
WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/15/97)
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Cumulative Total Return 2 +3.35% +7.72% +8.77% +138.86%
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Average Annual Total Return 3 -2.59% +1.53% +0.50% +9.30%
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Value of $10,000 Investment 4 $9,741 $10,153 $10,251 $22,508
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Avg. Ann. Total Return (9/30/06) 5 -10.44% +1.06% +8.40%
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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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
8 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE BIOTECHNOLOGY SECTOR
INVOLVES SPECIAL RISKS SUCH AS PATENT CONSIDERATIONS, PRODUCT LIABILITY,
GOVERNMENT REGULATORY REQUIREMENTS AND REGULATORY APPROVAL FOR NEW DRUGS AND
MEDICAL PRODUCTS. BIOTECHNOLOGY COMPANIES ARE OFTEN SMALL AND/OR RELATIVELY NEW.
SMALLER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGES IN ECONOMIC
CONDITIONS AND HAVE LESS CERTAIN GROWTH PROSPECTS THAN LARGER, MORE ESTABLISHED
COMPANIES AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM. THE FUND MAY ALSO
INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY
AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns 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. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
Semiannual Report | 9
Your Fund's Expenses
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
10 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
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BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
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Actual $1,000 $1,033.50 $6.71
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Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.67
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* Expenses are equal to the annualized expense ratio of 1.31%, multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Semiannual Report | 11
Franklin Global Communications Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Global Communications Fund seeks
total return, which consists of both capital appreciation and current dividend
and interest income, without undue risk, by investing at least 80% of its net
assets in equity securities of companies that are involved in the development,
manufacture or sale of communications services and communications equipment.
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GEOGRAPHIC BREAKDOWN
Franklin Global Communications Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Americas ..................................... 80.6%
Asia ......................................... 11.1%
Europe ....................................... 4.9%
Short-Term Investments & Other Net Assets .... 3.4%
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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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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This semiannual report for Franklin Global Communications Fund covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Global Communications Fund - Class A delivered a +2.01% cumulative
total return for the six months under review. The Fund underperformed its
benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.11% for
the same period. 1 Because the Fund invests in only a few of the index's
sectors, performances of the Fund and the S&P 500 are not directly
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
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 49.
12 | Semiannual Report
comparable. The Fund also underperformed the Lipper Telecommunications Funds
Classification Average's +4.08% return for the same six-month period. 2 You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 16.
INVESTMENT STRATEGY
We use a fundamental, research-driven approach, focusing primarily on individual
securities to choose companies we believe are positioned to grow earnings and
cash flow at a faster pace than is implied by the security's current valuation.
We consider a company's market price relative to our evaluation of its long-term
earnings, asset value and cash flow potential. The quality of the management
team and the company's strategic position within its industry are also major
considerations in our investment process. We also consider investment themes
that we believe may have possible effects on the communications sector and
individual companies.
MANAGER'S DISCUSSION
During the six months under review, the wireless telecommunications industry
provided the greatest contribution to our overall results. We continued to favor
wireless more than wireline as we expected strong growth trends to continue.
Several factors supported the industry's overall trends. For example, wireless
access in less developed countries with low wireless service penetration rates,
or number of users, grew more rapidly than many industry analysts expected. Many
of these markets continued to hold the potential for strong wireless growth.
Relative global economic stability, combined with the rollout of prepaid
wireless plans, also fueled the industry's growth.
The greatest single contributor to Fund performance was Rogers Communications, a
diversified Canadian communications and media company engaged in three primary
lines of business. In Canada, Rogers Wireless is the largest wireless voice and
data communications services provider, Rogers
PORTFOLIO BREAKDOWN
Franklin Global Communications Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Wireless Communications 23.9%
Major Telecommunications 15.4%
Specialty Telecommunications 8.5%
Telecommunications Equipment 7.3%
Broadcasting 6.0%
Internet Software & Services 5.7%
Computer Processing Hardware 5.3%
Recreational Products 5.3%
Computer Communications 4.9%
Semiconductors 2.5%
Cable & Satellite TV 2.0%
Other 9.8%
Short-Term Investments & Other Net Assets 3.4%
2. Source: Lipper Inc. The Lipper Telecommunications Funds Classification
Average is calculated by averaging the total return of all funds within
the Lipper Telecommunications Funds classification in the Lipper Open-End
underlying fund universe for the period indicated. Lipper
Telecommunications Funds are defined as funds that invest at least 65% of
their assets in the equity securities of domestic and foreign companies
engaged in the development, manufacture or sale of telecommunications
services or equipment. For the six months ended 10/31/06, there were 38
funds in this category. Lipper calculations do not include sales charges
or expense subsidization by the Fund's manager. Fund performance relative
to the average may have differed if these or other factors had been
considered. Past performance does not guarantee future results. The
average includes reinvestment of any income or distributions. One cannot
invest directly in the average, nor is the average representative of the
Fund's portfolio.
Semiannual Report | 13
TOP 10 EQUITY HOLDINGS
Franklin Global Communications Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
America Movil SA de CV, L, ADR 7.1%
WIRELESS COMMUNICATIONS, MEXICO
- --------------------------------------------------------------------------------
Rogers Communications Inc., B 5.8%
WIRELESS COMMUNICATIONS, CANADA
- --------------------------------------------------------------------------------
NII Holdings Inc. 5.3%
WIRELESS COMMUNICATIONS, U.S.
- --------------------------------------------------------------------------------
American Tower Corp., A 4.8%
SPECIALTY TELECOMMUNICATIONS, U.S.
- --------------------------------------------------------------------------------
Bharti Airtel Ltd. 4.4%
MAJOR TELECOMMUNICATIONS, INDIA
- --------------------------------------------------------------------------------
Grupo Televisa SA, ADR 4.0%
BROADCASTING, MEXICO
- --------------------------------------------------------------------------------
Telus Corp. 3.6%
MAJOR TELECOMMUNICATIONS, CANADA
- --------------------------------------------------------------------------------
Apple Computer Inc. 3.1%
COMPUTER PROCESSING HARDWARE, U.S.
- --------------------------------------------------------------------------------
SBA Communications Corp. 3.0%
WIRELESS COMMUNICATIONS, U.S.
- --------------------------------------------------------------------------------
Nokia Corp., ADR 2.9%
TELECOMMUNICATIONS EQUIPMENT,
FINLAND
- --------------------------------------------------------------------------------
Cable is the biggest cable television provider, and Rogers Media owns
category-leading media assets with businesses in radio and television
broadcasting.
America Movil, a significant contributor to Fund performance during the period,
is Mexico's dominant wireless service provider and operates wireless service
businesses in Brazil, Argentina, Peru, Colombia, Ecuador, Guatemala and El
Salvador. These countries' markets had relatively low wireless penetration rates
that experienced rapid growth driven by stabilized economies and the
introduction of prepaid wireless plans. Wireless telecommunication is a
cost-effective alternative to wireline in these countries.
American Tower, the largest owner and operator of wireless communication towers
in the U.S., also helped the Fund's performance. We believe the company is well
positioned to benefit from growing demand for wireless services nationwide.
American Tower benefited from increasing network demands driven by additional
subscribers, growing mobile voice usage among current subscribers and new
wireless applications. The company's business model has a high level of
recurring revenue, as well as solid growth prospects and operating leverage.
There were also some detractors from our overall results. In particular, the
semiconductor industry experienced weak performance during the six months under
review. The semiconductor industry faced a seasonal slowdown and excess
inventory, as economic concerns including high gas prices and slowing growth hit
the highly economically sensitive industry.
XM Satellite Radio Holdings, the largest single detractor from Fund performance
during the reporting period, programs and transmits its satellite radio service
to subscribers. The company was impacted by higher costs due to increased
competition during the period. However, we liked XM's subscriber-based business
model, strong growth prospects and large potential market, so we continued to
hold the stock.
Yahoo! is a global Internet media company offering an online guide to the web,
aggregated information content, communication services and commerce. Consistent
with our strategy, we purchased shares based on the company's strong secular
growth and leading position as an Internet gatekeeper. Despite online
advertising becoming mainstream, Yahoo! struggled and detracted from
14 | Semiannual Report
Fund performance as new competitors grew in scale and eroded the company's
market share of advertising dollars. In our analysis of the competitive
landscape, we believed the competition would continue; therefore, we sold the
stock by period-end.
Sprint-Nextel also had a negative impact on Fund performance. The company's
fundamentals deteriorated as the merger of Sprint and Nextel faced some
unexpected operational issues. We sold the stock by period-end.
Thank you for your continued participation in Franklin Global Communications
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Grant Bowers
Grant Bowers
Portfolio Manager
Franklin Global Communications Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
Semiannual Report | 15
Performance Summary as of 10/31/06
FRANKLIN GLOBAL COMMUNICATIONS FUND
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. The performance table does 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.
PRICE INFORMATION
- ----------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRGUX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.22 $11.68 $11.46
- ----------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: N/A) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.18 $11.12 $10.94
- ----------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUTX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.17 $11.13 $10.96
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN
SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.01% +25.14% +50.12% +40.49%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -3.87% +17.89% +7.19% +2.85%
- ----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,613 $11,789 $14,150 $13,245
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +11.74% +6.11% +2.65%
- ----------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +1.55% +24.09% +44.72% -6.06%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -2.45% +20.09% +7.37% -0.79%
- ----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,755 $12,009 $14,272 $9,394
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +13.67% +6.30% -1.35%
- ----------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +1.55% +24.15% +44.57% +30.38%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.55% +23.15% +7.65% +2.69%
- ----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,055 $12,315 $14,457 $13,038
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +16.62% +6.54% +2.49%
- ----------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
16 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED GLOBAL FUND INVOLVES CERTAIN RISKS, INCLUDING
EXPOSURE TO CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTIES. INVESTING IN
DEVELOPING MARKETS INVOLVES HEIGHTENED RISKS RELATED TO THE SAME FACTORS. BY
FOCUSING ON COMMUNICATIONS COMPANIES, THE FUND CARRIES GREATER RISK OF ADVERSE
ECONOMIC, POLITICAL AND REGULATORY DEVELOPMENTS AFFECTING THESE COMPANIES THAN A
MORE BROADLY INVESTED FUND. THE FUND INVESTS IN THE TECHNOLOGY SECTOR, WHICH HAS
BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. SMALLER OR RELATIVELY NEW OR
UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC
CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN LARGER
COMPANIES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
Semiannual Report | 17
Your Fund's Expenses
FRANKLIN GLOBAL COMMUNICATIONS FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
18 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,020.10 $7.23
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.05 $7.22
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,015.50 $11.02
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.27 $11.02
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,015.50 $11.07
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.22 $11.07
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.42%; B: 2.17%; and C: 2.18%), multiplied by the average account value
over the period, multiplied by 184/365 to reflect the one-half year
period.
Semiannual Report | 19
Franklin Global Health Care Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Global Health Care Fund seeks
capital appreciation by investing at least 80% of its net assets in securities
of health care companies located throughout the world.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
GEOGRAPHIC BREAKDOWN
Franklin Global Health Care Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 78.8%
Switzerland 10.5%
Germany 3.3%
U.K 1.1%
Brazil 0.9%
Canada 0.3%
China 0.2%
Short-Term Investments & Other Net Assets 4.9%
This semiannual report for Franklin Global Health Care Fund covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Global Health Care Fund - Class A delivered a +2.15% cumulative total
return for the six months under review. The Fund underperformed its narrow
benchmark, the S&P 500 Health Care Index, which returned +8.65%, and its broad
benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.11% for
the same period.1 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 23.
INVESTMENT STRATEGY
We use a fundamental, research-driven approach, focusing primarily on individual
securities to choose companies we believe are positioned for rapid revenue,
earnings or asset growth. We look for companies with competitive advantages such
as a proprietary technology, economies of scale or captive customers, and strong
management. We use bottom-up analysis to derive an intrinsic value for the
security, which we compare to the market price to help us assess whether there
is potential for meaningful capital appreciation.
1. Source: Standard & Poor's Micropal. The S&P 500 Health Care Index includes
all the companies in the health care industry that are in the S&P 500. The
S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is
proportionate to its market value. The S&P 500 is one of the most widely
used benchmarks of U.S. equity performance. The indexes are unmanaged and
include reinvested dividends. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
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 55.
20 | Semiannual Report
HEALTH CARE SECTOR OVERVIEW
Health care spending growth in the U.S. remained at an elevated level compared
with that of the broader economy. Despite significant budget deficits,
government projections estimated a 7%-9% spending growth rate in the Medicare
and Medicaid programs in 2006. 2 Non-government spending was estimated to
decelerate modestly to a 6%-8% growth rate. 3 This trend was largely driven by
slowing utilization growth, as employers shifted health benefits costs to
employees. Despite some deceleration, the aggregate increase represented one of
the fastest growing economic sectors for 2006. Within the health care sector,
the pharmaceutical industry was negatively impacted by patent expirations and
shifting demand toward generic drugs. The industry, however, did benefit from
some increase in demand for prescriptions. Growth was stronger in the
biotechnology industry through new product launches and broadening use of
existing products. Demand for medical devices, driven by an aging population,
remained steady, though increasing competition and political concerns pressured
growth in some industries. Health care services providers have enjoyed a
generally supportive regulatory and reimbursement environment under the Bush
administration. Higher interest rates, inflation and energy costs have had
little impact on the overall health care sector. Demand for health care products
and services remained comparatively inelastic.
MANAGER'S DISCUSSION
During the six months under review, stock selection in the medical specialties
industry helped the Fund's performance relative to the benchmark S&P 500 Health
Care Index. Our overweighted position in Fisher Scientific International and
underweighted positions in Medtronic (purchased during the period) and Boston
Scientific benefited the Fund. Our underweighting in the managed health care
industry also contributed to relative Fund performance, and specifically, our
underweighted position in UnitedHealth Group benefited the Fund's relative
results as the company faced an options grant scandal.
The Fund remained underweighted in the major pharmaceuticals industry, which,
combined with our stock selection, negatively impacted returns relative to the
benchmark index. Pharmaceutical stocks rose in value largely due to
PORTFOLIO BREAKDOWN
Franklin Global Health Care Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Major Pharmaceuticals 31.7%
Biotechnology 15.2%
Medical Specialties 14.9%
Services to the Health Industry 8.4%
Managed Health Care 7.0%
Hospital & Nursing Management 5.0%
Other Pharmaceuticals 4.0%
Medical & Nursing Services 3.9%
Medical Distributors 2.6%
Other 2.4%
Short-Term Investments & Other Net Assets 4.9%
2. Sources: Centers for Medicare & Medicaid Services, "Brief Summaries of
MEDICARE & MEDICAID, Title XVIII and Title XIX of The Social Security
Act," 11/1/06; Congressional Budget Office, "Monthly Budget Review,"
10/6/06.
3. Sources: Hewitt Associates, "Hewitt Associates Data Reveals Lowest U.S.
Health Care Cost Increases in Eight Years," 10/9/06; Towers Perrin,
"Towers Perrin Survey Shows Employer-Sponsored Health Benefit Costs
Continue to Outpace the CPI," 9/26/06.
Semiannual Report | 21
TOP 10 EQUITY HOLDINGS
Franklin Global Health Care Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Roche Holding AG 6.3%
MAJOR PHARMACEUTICALS, SWITZERLAND
- --------------------------------------------------------------------------------
Johnson & Johnson 4.7%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
WellPoint Inc. 4.4%
MANAGED HEALTH CARE, U.S.
- --------------------------------------------------------------------------------
Schering-Plough Corp. 4.3%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
Novartis AG 4.2%
MAJOR PHARMACEUTICALS, SWITZERLAND
- --------------------------------------------------------------------------------
Wyeth 3.6%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
Merck KGaA 3.3%
MAJOR PHARMACEUTICALS, GERMANY
- --------------------------------------------------------------------------------
Express Scripts Inc. 2.5%
SERVICES TO THE HEALTH INDUSTRY, U.S.
- --------------------------------------------------------------------------------
Pharmaceutical Product Development Inc. 2.3%
SERVICES TO THE HEALTH INDUSTRY, U.S.
- --------------------------------------------------------------------------------
Eli Lilly and Co. 2.2%
MAJOR PHARMACEUTICALS, U.S.
- --------------------------------------------------------------------------------
increased prescription demand among Medicare beneficiaries. In particular, our
underweighted position in Johnson & Johnson and no position in Merck & Co. hurt
relative Fund performance; however, our position in Roche Holding 4 benefited
the Fund.
The Fund's overweighting in and stock selection among services to the health
industry companies hurt the Fund's relative performance during the reporting
period. Following several years of strong performance, many stocks in the
services to the health industry declined in value. Holdings such as nursing home
pharmacy operator Omnicare and contract research organization Pharmaceutical
Product Development detracted from Fund performance. 4
Lastly, stock selection in the biotechnology and specialty pharmaceuticals
industries detracted from the Fund's relative performance. Although Fund
holdings Celgene and Indevus Pharmaceuticals performed well, Keryx
Biopharmaceuticals and Labopharm declined in value and hurt the Fund's absolute
and relative performance. 4
Thank you for your continued participation in Franklin Global Health Care Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Matthew Willey
Matthew Willey, CFA
Portfolio Manager
Franklin Global Health Care Fund
4. These companies are not part of the S&P 500 Health Care Index.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
22 | Semiannual Report
Performance Summary as of 10/31/06
FRANKLIN GLOBAL HEALTH CARE FUND
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. The performance table does 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.
PRICE INFORMATION
- ----------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKGHX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.49 $23.80 $23.31
- ----------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FGHBX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.39 $22.47 $22.08
- ----------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FGIIX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.38 $22.25 $21.87
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN
SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.15% +10.34% +12.15% +67.48%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -3.72% +3.98% +1.11% +4.67%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,628 $10,398 $10,568 $15,785
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +0.51% +0.91% +3.63%
- ------------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +1.77% +9.56% +8.10% +46.08%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -2.23% +5.56% +1.19% +4.96%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,777 $10,556 $10,610 $14,608
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +1.82% +0.98% +4.84%
- ------------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +1.74% +9.55% +8.03% +55.58%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.74% +8.55% +1.56% +4.52%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,074 $10,855 $10,803 $15,558
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +4.83% +1.35% +3.47%
- ------------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 23
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED, GLOBAL FUND CONCENTRATING IN THE HEALTH CARE
SECTOR INVOLVES SPECIAL RISKS SUCH AS EXPOSURE TO CURRENCY FLUCTUATION, AND
INCREASED SUSCEPTIBILITY TO ECONOMIC, POLITICAL AND REGULATORY DEVELOPMENTS
AFFECTING THESE COMPANIES. THE FUND INVESTS IN BIOTECHNOLOGY COMPANIES, WHICH
ARE OFTEN SMALL OR RELATIVELY NEW, AND IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN
ONE OF THE MARKET'S MOST VOLATILE SECTORS. SMALLER-COMPANY STOCKS CAN ALSO
INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND MARKET SHARE, AND
MORE LIMITED PRODUCT LINES, AND CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM.
THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
24 | Semiannual Report
Your Fund's Expenses
FRANKLIN GLOBAL HEALTH CARE FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 25
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,021.50 $ 6.37
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.90 $ 6.36
- --------------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,017.70 $10.17
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.12 $10.16
- --------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,017.40 $10.12
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.17 $10.11
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.25%; B: 2.00%; and C: 1.99%), multiplied by the average account value
over the period, multiplied by 184/365 to reflect the one-half year
period.
26 | Semiannual Report
Franklin Natural Resources Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks
high total return by investing at least 80% of its net assets in equity and debt
securities of companies that own, produce, refine, process, transport or market
natural resources, as well as those that provide related services for natural
resources companies.
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Energy Minerals .......................................... 42.9%
Industrial Services ...................................... 29.3%
Non-Energy Minerals ...................................... 14.6%
Process Industries ....................................... 7.8%
Other .................................................... 3.3%
Short-Term Investments & Other Net Assets ................ 2.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Natural Resources Fund covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Natural Resources Fund - Class A had a -5.68% cumulative total return
for the six months under review. The Fund underperformed its narrow benchmark,
the Goldman Sachs Natural Resources Index, which had a -4.79% total return, and
its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which returned
+6.11% for the same period.1 You can find the Fund's long-term performance data
in the Performance Summary beginning on page 30.
1. Sources: Goldman Sachs; Standard & Poor's Micropal. The Goldman Sachs
Natural Resources Index is a modified capitalization-weighted index that
includes companies involved in extractive industries (mining), energy,
forestry services, producers of pulp and paper, and owners and operators
of timber tracts or plantations. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is
one of the most widely used benchmarks of U.S. equity performance. The
indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
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 61.
Semiannual Report | 27
GEOGRAPHIC BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
North America 85.5%
Europe 6.8%
Latin America 2.7%
Australia & New Zealand 1.5%
Cayman Islands 0.8%
Middle East & Africa 0.6%
Short-Term Investments & Other Net Assets 2.1%
INVESTMENT STRATEGY
We use a fundamental, research-driven approach to identify industries in the
natural resources sector that we believe offer the strongest underlying
attributes including, but not limited to, favorable supply and demand
characteristics, barriers to entry, and pricing power. Within those industries,
we seek to identify individual companies that appear to offer the best total
return potential. The Fund's holdings are typically concentrated in the energy
sector, but also include investments in the metals and mining, chemicals, paper
and forest products, and other related sectors.
MANAGER'S DISCUSSION
Natural resource equities posted mixed results in the six-month period as
commodity price volatility and economic uncertainty led investors away from
cyclical sectors. In a reversal of the previous year's performance, some
energy-related equities such as coal, drilling and refining stocks fell during
the period, while integrated oil stocks posted modest gains despite a
significant oil price decline. Although positive overall, the Fund's non-energy
minerals stocks had mixed performance as the operating environment for metals
and mining companies remained relatively robust, but other industries suffered
from commodity price weakness after reaching historically high levels in May.
The Fund benefited from investments in several metals and mining stocks. Zinc
producer Zinifex, diversified miner Xstrata and uranium producer SXR Uranium One
performed well. Various metals continued to trade at or near record levels
during the period due to robust demand growth and a lack of significant supply
increases, which generally benefited metals-related equities. In addition, the
Fund's investments in uranium-mining stocks received a boost in October when a
mine under construction in Canada flooded, which is likely to result in a
further supply constraint in an already tight market.
During the reporting period, the industrial services sector was the largest
detractor from absolute Fund performance. Within the sector, oilfield services
and equipment stocks had the biggest negative impact, followed by contract
drilling. Although we took steps earlier in the calendar year to reduce
investments in companies that we felt were susceptible to a potential commodity
price downturn, nearly all oilfield services and equipment and contract drilling
stocks declined in value during the summer and early fall of 2006. In fact, the
28 | Semiannual Report
industries represented by the Philadelphia Oil Service Index declined 12.89% on
average during the period under review. 2 Within this group, Fund holdings
Rowan, Halliburton and Helix Energy Solutions Group had the largest negative
impact on performance. We took advantage of the weakness by adding to several
existing positions in the oilfield services and equipment industry during the
period. In spite of negative market sentiment, several of these companies
generally enjoyed a robust operating environment and healthy profit growth.
Conversely, we reduced our weighting in the contract drilling industry through
partial or complete sales of several holdings, as we believed some drillers were
more susceptible than others to a natural gas price decline.
Coal stocks also performed poorly due to concerns related to softening coal
prices and rising production costs. Shares of Peabody Energy and Alpha Natural
Resources were the biggest detractors from Fund performance. Although we added
to select coal holdings on share price weakness, the Fund's industry weighting
declined.
Thank you for your continued participation in Franklin Natural Resources Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Frederick G. Fromm
Frederick G. Fromm, CFA
Portfolio Manager
Franklin Natural Resources Fund
TOP 10 EQUITY HOLDINGS
Franklin Natural Resources Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Helix Energy Solutions Group Inc. 3.5%
INDUSTRIAL SERVICES, U.S.
- --------------------------------------------------------------------------------
Newfield Exploration Co. 3.1%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Exxon Mobil Corp. 3.0%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Devon Energy Corp. 2.9%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
ConocoPhillips 2.9%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Chevron Corp. 2.9%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Occidental Petroleum Corp. 2.8%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
Southwestern Energy Co. 2.7%
ENERGY MINERALS, U.S.
- --------------------------------------------------------------------------------
National-Oilwell Varco Inc. 2.4%
INDUSTRIAL SERVICES, U.S.
- --------------------------------------------------------------------------------
Halliburton Co. 2.2%
INDUSTRIAL SERVICES, U.S.
- --------------------------------------------------------------------------------
2. Source: Philadelphia Stock Exchange. The Philadelphia Oil Service Index is
a price-weighted index composed of companies that provide oil drilling and
production services, oilfield equipment, support services and geophysical
and reservoir services.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
Semiannual Report | 29
Performance Summary as of 10/31/06
FRANKLIN NATURAL RESOURCES FUND
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. The performance table does 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.
PRICE INFORMATION
- ----------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRNRX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$2.05 $33.87 $35.92
- ----------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FNCRX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$2.17 $33.62 $35.79
- ----------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 10/31/06 4/30/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$2.08 $35.49 $37.57
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE
ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 1 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -5.68% +14.89% +145.32% +184.20%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -11.10% +8.26% +18.25% +10.35%
- ----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $8,890 $10,826 $23,119 $26,786
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 -6.27% +18.11% +10.04%
- ----------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR INCEPTION (9/1/05)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -6.04% +14.14% +10.38%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -6.97% +13.14% +8.85%
- ----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,303 $11,314 $11,038
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 -2.17% +3.08%
- ----------------------------------------------------------------------------------------------------------
ADVISOR CLASS 1, 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -5.51% +15.26% +149.84% +206.38%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -5.51% +15.26% +20.10% +11.85%
- ----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,449 $11,526 $24,984 $30,638
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 -0.24% +19.97% +11.52%
- ----------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
30 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE NATURAL RESOURCES SECTOR
INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO INCREASED SUSCEPTIBILITY TO
ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE FUND MAY
ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY
VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. SMALLER-COMPANY
STOCKS CAN ALSO INVOLVE SPECIAL RISKS ASSOCIATED WITH SMALLER REVENUES AND
MARKET SHARE, AND MORE LIMITED PRODUCT LINES, AND CAN BE VOLATILE, ESPECIALLY
OVER THE SHORT TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE
MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS C: These shares have higher annual fees and expenses than Class A
shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns 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. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 1/2/97, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 1/2/97
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +187.55% and +11.34%.
Semiannual Report | 31
Your Fund's Expenses
FRANKLIN NATURAL RESOURCES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
32 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 943.20 $4.80
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.27 $4.99
- -------------------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 939.60 $8.41
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.53 $8.74
- -------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 944.90 $3.48
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.63 $3.62
- -------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.98%; C: 1.72%; and Advisor: 0.71%), multiplied by the average account
value over the period, multiplied by 184/365 to reflect the one-half year
period.
Semiannual Report | 33
Franklin Technology Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Technology Fund seeks capital
appreciation by investing at least 80% of its net assets in equity securities of
companies expected to benefit from the development, advancement and use of
technology.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Technology Fund covers the period ended
October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Technology Fund - Class A had a -7.56% cumulative total return for the
six months under review. The Fund underperformed its broad benchmark, the NASDAQ
Composite Index, which returned +3.03%, and its narrow benchmark, the Merrill
Lynch (ML) 100 Technology Index, which had a -2.25% total return for the same
period. 1 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 37.
INVESTMENT STRATEGY
We use a fundamental, research-driven approach, focusing primarily on individual
securities to choose companies we believe are positioned for rapid revenue,
earnings or asset growth. We look for companies with distinct and sustainable
competitive advantages such as a particular marketing niche, proven technology,
strong management and industry leadership.
1. Source: Standard & Poor's Micropal. The NASDAQ Composite Index measures
all domestic and international common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies. The ML 100 Technology Index is an equal-dollar weighted
index of 100 stocks designed to measure the performance of a cross section
of large, actively traded technology stocks and American Depositary
Receipts. The index was developed with a base value of 200 as of 1/30/98.
The indexes are unmanaged and include reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
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 69.
34 | Semiannual Report
MANAGER'S DISCUSSION
During the six months under review, the top contributor to Fund performance on
an absolute basis, as well as relative to the ML 100 Technology Index, was
Akamai Technologies, a leading global service provider for Internet and network
content delivery. As Internet traffic surged and video content complexity
dramatically increased in recent years, demand for Akamai's services and
applications grew rapidly. Other significant contributors during the reporting
period included FLIR Systems 2, Google and Cisco. FLIR Systems is a leader in
the design and manufacture of thermal imaging systems for commercial and
military applications. Consistent with our investment strategy, we took
advantage of an earlier significant stock weakness during the period and
purchased shares at what we considered an attractive valuation. We sold the
stock by period-end. Google performed well as it continued to dominate the
online search market and expand into other growth areas. Cisco Systems, the
world's biggest networking equipment maker, benefited from its acquisition of
Scientific-Atlanta during the period.
On the other hand, the semiconductor industry hindered absolute and relative
Fund performance during the period. Significant detractors included
Microsemi 2, NetLogic Microsystems 2 and Marvell Technology Group. These
semiconductor stocks suffered declines due to a worse-than-expected seasonal
demand slowdown exacerbated by excess inventory and economic uncertainty. In
line with our strategy, we believe their long-term growth prospects are
favorable and continued to hold the stocks at period-end. Another detractor was
QUALCOMM, the leading designer and supplier of chips based on the code-division
multiple access (CDMA) technology, the most widely used mobile phone technology
in the U.S. The company faced legal disputes on patent infringements from
several telecommunications companies, and partly as the result, the stock fell
during the period.
PORTFOLIO BREAKDOWN
Franklin Technology Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Semiconductors 11.7%
Telecommunications Equipment 11.7%
Packaged Software 10.4%
Internet Software & Services 9.5%
Computer Communications 6.8%
Data Processing Services 5.6%
Electronic Equipment & Instruments 4.2%
Information Technology Services 3.5%
Electronic Production Equipment 3.1%
Computer Peripherals 2.8%
Computer Processing Hardware 2.8%
Specialty Telecommunications 2.4%
Other 14.2%
Short-Term Investment & Other Net Assets 11.3%
2. Not part of the ML 100 Technology Index.
Semiannual Report | 35
TOP 10 EQUITY HOLDINGS
Franklin Technology Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Cisco Systems Inc. 2.6%
COMPUTER COMMUNICATIONS
- --------------------------------------------------------------------------------
American Tower Corp., A 2.4%
SPECIALTY TELECOMMUNICATIONS
- --------------------------------------------------------------------------------
Microchip Technology Inc. 2.3%
SEMICONDUCTORS
- --------------------------------------------------------------------------------
Google Inc., A 2.3%
INTERNET SOFTWARE & SERVICES
- --------------------------------------------------------------------------------
Microsemi Corp. 2.0%
SEMICONDUCTORS
- --------------------------------------------------------------------------------
Cognizant Technology Solutions Corp., A 2.0%
INFORMATION TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
QUALCOMM Inc. 1.9%
TELECOMMUNICATIONS EQUIPMENT
- --------------------------------------------------------------------------------
Harris Corp. 1.9%
TELECOMMUNICATIONS EQUIPMENT
- --------------------------------------------------------------------------------
Apple Computer Inc. 1.8%
COMPUTER PROCESSING HARDWARE
- --------------------------------------------------------------------------------
Tektronix Inc. 1.8%
ELECTRONIC EQUIPMENT & INSTRUMENTS
- --------------------------------------------------------------------------------
Thank you for your continued participation in Franklin Technology Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ J.P. Scandalios
J.P. Scandalios
[PHOTO OMITTED] /s/ Robert R. Dean
Robert R. Dean, CFA
Portfolio Management Team
Franklin Technology Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
36 | Semiannual Report
Performance Summary as of 10/31/06
FRANKLIN TECHNOLOGY FUND
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. The performance table does 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.
PRICE INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FTCAX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.43 $5.26 $5.69
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: N/A) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.43 $5.06 $5.49
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FFTCX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.43 $5.04 $5.47
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FTERX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.43 $5.23 $5.66
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRTCX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.43 $5.37 $5.80
- --------------------------------------------------------------------------------
Semiannual Report | 37
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -7.56% +9.81% +20.64% -47.40%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -12.91% +3.54% +2.58% -10.23%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $8,709 $10,354 $11,361 $4,958
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 -1.35% +6.10% -10.76%
- ---------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -7.83% +9.29% +17.13% -49.40%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -11.52% +5.29% +2.86% -9.95%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $8,848 $10,529 $11,513 $5,060
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +0.03% +6.39% -10.49%
- ---------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -7.86% +9.09% +16.94% -49.60%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -8.78% +8.09% +3.18% -10.00%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,122 $10,809 $11,694 $5,040
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +3.04% +6.67% -10.55%
- ---------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -7.60% +9.64% +18.33% -1.88%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -7.60% +9.64% +5.77% -0.39%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,240 $10,964 $11,833 $9,812
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +4.54% +8.59% -1.05%
- ---------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -7.24% +10.25% +22.83% -46.20%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -7.24% +10.25% +4.20% -9.09%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,276 $11,025 $12,283 $5,380
- ---------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +5.04% +7.67% -9.66%
- ---------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
38 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
TECHNOLOGY STOCKS HAVE HISTORICALLY BEEN VOLATILE IN PRICE, ESPECIALLY OVER THE
SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT. BECAUSE THE
FUND IS A NONDIVERSIFIED FUND FOCUSING EXCLUSIVELY ON TECHNOLOGY COMPANIES, IT
CARRIES GREATER RISKS OF ADVERSE ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS
AFFECTING THESE COMPANIES THAN A MORE BROADLY INVESTED FUND. THE FUND'S
INVESTMENTS IN SMALLER-COMPANY STOCKS ALSO INVOLVE SPECIAL RISKS, SUCH AS
RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND SMALL MARKET SHARE. THE
FUND MAY ALSO INVEST UP TO 35% OF ITS ASSETS IN FOREIGN COMPANIES, WHICH MAY BE
AFFECTED BY POLITICAL UNCERTAINTY AND CURRENCY FLUCTUATIONS. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Past expense reductions by the Fund's manager and administrator increased
the Fund's total returns. If the manager and administrator had not taken
this action, the Fund's total returns 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. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
Semiannual Report | 39
Your Fund's Expenses
FRANKLIN TECHNOLOGY FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
40 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ----------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 924.40 $ 8.59
- ----------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.28 $ 9.00
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 921.70 $11.72
- ----------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,013.01 $12.28
- ----------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 921.40 $11.72
- ----------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,013.01 $12.28
- ----------------------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 924.00 $ 9.31
- ----------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.53 $ 9.75
- ----------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 927.60 $ 6.90
- ----------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.05 $ 7.22
- ----------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.77%; B: 2.42%; C: 2.42%; R: 1.92%; and Advisor: 1.42%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Semiannual Report | 41
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 56.44 $ 46.05 $ 53.26 $ 37.26 $ 42.72 $ 57.78
--------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................... (0.30) (0.59) (0.58) (0.55) (0.44) (0.53)
Net realized and unrealized gains (losses) ....... 2.16 10.98 (6.63) 16.55 (5.02) (14.53)
--------------------------------------------------------------------------
Total from investment operations .................. 1.86 10.39 (7.21) 16.00 (5.46) (15.06)
--------------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- -- --
--------------------------------------------------------------------------
Net asset value, end of period .................... $ 58.30 $ 56.44 $ 46.05 $ 53.26 $ 37.26 $ 42.72
==========================================================================
Total return c .................................... 3.35% 22.50% (13.54)% 42.98% (12.80)% (26.06)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $473,095 $510,700 $485,909 $683,439 $510,107 $702,189
Ratios to average net assets:
Expenses ......................................... 1.31% e,f 1.25%e 1.29%e 1.28% 1.57% 1.29%
Net investment income (loss) ..................... (1.12)% f (1.06)% (1.17)% (1.17)% (1.28)% (0.99)%
Portfolio turnover rate ........................... 17.93% 37.38% 34.34% 59.39% 47.36% 53.85%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
42 | The accompanying notes are an integral part of these financial
statements. | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 95.6%
COMMON STOCKS 94.0%
BIOTECHNOLOGY 76.5%
a Advanced Life Sciences Holdings Inc. ............................................... 717,500 $ 2,152,500
a,b Amgen Inc. ......................................................................... 441,400 33,506,674
a Applera Corp. - Celera Genomics Group .............................................. 105,000 1,629,600
a Biogen Idec Inc. ................................................................... 497,122 23,663,007
a Cadence Pharmaceuticals Inc. ....................................................... 116,300 1,116,480
a Cardiome Pharma Corp. (Canada) ..................................................... 157,028 1,807,392
a Celgene Corp. ...................................................................... 848,300 45,333,152
a,b Cephalon Inc. ...................................................................... 66,700 4,681,006
a,b Cotherix Inc. ...................................................................... 478,300 3,587,250
a Critical Therapeutics Inc. ......................................................... 559,180 1,576,888
a Dyax Corp. ......................................................................... 621,600 1,877,232
a Exelixis Inc. ...................................................................... 234,400 2,273,680
a Genentech Inc. ..................................................................... 283,500 23,615,550
a Genzyme Corp. ...................................................................... 467,400 31,554,174
a Gilead Sciences Inc. ............................................................... 470,000 32,383,000
a Human Genome Sciences Inc. ......................................................... 385,800 5,150,430
a,b Indevus Pharmaceuticals Inc. ....................................................... 742,100 5,068,543
a,b InterMune Inc. ..................................................................... 206,400 4,561,440
a Invitrogen Corp. ................................................................... 183,300 10,633,233
a,b Ista Pharmaceuticals Inc. .......................................................... 262,200 1,638,750
a Keryx Biopharmaceuticals Inc. ...................................................... 690,300 9,691,812
a Kosan Biosciences Inc. ............................................................. 872,991 3,430,855
a Medarex Inc. ....................................................................... 265,300 3,427,676
a The Medicines Co. .................................................................. 584,800 15,181,408
a MedImmune Inc. ..................................................................... 811,817 26,010,617
a Myogen Inc. ........................................................................ 86,300 4,513,490
a,b Myriad Genetics Inc. ............................................................... 256,300 6,891,907
a Nuvelo Inc. ........................................................................ 113,716 2,096,923
a,b Onyx Pharmaceuticals Inc. .......................................................... 215,200 4,041,456
a,b OSI Pharmaceuticals Inc. ........................................................... 58,000 2,220,240
a Panacos Pharmaceuticals Inc. ....................................................... 280,400 1,923,544
a PDL BioPharma Inc. ................................................................. 540,400 11,418,652
a,b Telik Inc. ......................................................................... 153,700 2,912,615
a Theravance Inc. .................................................................... 151,400 4,763,044
a,b Titan Pharmaceuticals Inc. ......................................................... 419,600 969,276
a Trimeris Inc. ...................................................................... 411,500 3,135,630
a Vanda Pharmaceuticals Inc. ......................................................... 314,200 4,097,168
a Vertex Pharmaceuticals Inc. ........................................................ 221,300 8,984,780
a Vion Pharmaceuticals Inc. .......................................................... 754,700 1,094,315
a ViroPharma Inc. .................................................................... 514,900 6,863,617
a Xenoport Inc. ...................................................................... 83,800 2,017,066
-------------
361,866,472
-------------
MEDICAL SPECIALTIES 4.8%
a Advanced Magnetics Inc. ............................................................ 147,400 6,117,100
a Cypress Bioscience Inc. ............................................................ 436,300 3,438,044
a Molecular Devices Corp. ............................................................ 197,200 3,971,608
Semiannual Report | 43
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
MEDICAL SPECIALTIES (CONTINUED)
a,b Nektar Therapeutics .................................................................... 192,100 $ 2,772,003
a Penwest Pharmaceuticals Co. ............................................................ 260,400 4,614,288
-------------
22,542,643
-------------
OTHER PHARMACEUTICALS 12.7%
a,b AVANIR Pharmaceuticals, A .............................................................. 207,981 827,764
a Avexa Ltd. (Australia) ................................................................. 7,385,000 1,343,691
a,b Coley Pharmaceutical Group Inc. ........................................................ 306,400 3,532,792
a Endo Pharmaceuticals Holdings Inc. ..................................................... 182,400 5,205,696
a Inspire Pharmaceuticals Inc. ........................................................... 969,523 5,177,253
a Iomai Corp. ............................................................................ 161,000 814,660
a Labopharm Inc. (Canada) ................................................................ 258,200 1,320,387
a Pharmion Corp. ......................................................................... 250,500 6,124,725
a POZEN Inc. ............................................................................. 778,681 12,949,465
a Sepracor Inc. .......................................................................... 320,500 16,589,080
a Somaxon Pharmaceuticals Inc. ........................................................... 151,100 2,196,994
a United Therapeutics Corp. .............................................................. 63,100 3,776,535
a VIVUS Inc. ............................................................................. 58,600 193,965
-------------
60,053,007
-------------
TOTAL COMMON STOCKS (COST $289,864,647) ................................................ 444,462,122
-------------
CONVERTIBLE PREFERRED STOCK (COST $5,065,937) 1.6%
BIOTECHNOLOGY 1.6%
a,c,d Fibrogen Inc., cvt. pfd., E ............................................................ 1,128,271 7,581,981
-------------
TOTAL LONG TERM INVESTMENTS (COST $294,930,584) ........................................ 452,044,103
-------------
SHORT TERM INVESTMENTS 6.4%
MONEY MARKET FUND (COST $15,254,453) 3.2%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ................... 15,254,453 15,254,453
-------------
44 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
f INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 3.2%
g REPURCHASE AGREEMENTS 3.2%
Bank of America LLC, 5.32%, 11/01/06 (Maturity Value $3,000,443)
Collateralized by U.S. Government Agency Securities, 5.00%, 3/01/34 - 7/01/35 ..... $ 3,000,000 $ 3,000,000
Barclays Capital Inc., 5.32%, 11/01/06 (Maturity Value $3,556,525)
Collateralized by U.S. Government Agency Securities, 3.50% - 9.50%,
1/01/07 - 10/01/46 ............................................................... 3,556,000 3,556,000
Citigroup Global Markets Inc., 5.32%, 11/01/06 (Maturity Value $1,067,158)
Collateralized by U.S. Government Agency Securities, 3.466% - 10.00%,
3/01/08 - 9/01/45 ................................................................ 1,067,000 1,067,000
Citigroup Global Markets Inc., 5.30%, 11/01/06 (Maturity Value $2,681,395)
Collateralized by U.S. Government Agency Securities, 8.75% - 10.00%,
12/05/06 - 8/06/38 ............................................................... 2,681,000 2,681,000
J.P. Morgan Securities, 5.33%, 11/01/06 (Maturity Value $940,139)
Collateralized by U.S. Government Agency Securities, 4.00% - 4.75%,
7/13/07 - 10/15/15 ............................................................... 940,000 940,000
Morgan Stanley & Co. Inc., 5.32%, 11/01/06 (Maturity Value $3,748,554)
Collateralized by h U.S. Government Agency Securities, 0.00% - 8.28%,
11/01/06 - 10/01/46 .............................................................. 3,748,000 3,748,000
-------------
TOTAL REPURCHASE AGREEMENTS (COST $14,992,000) ...................................... 14,992,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $30,246,453) ..................................... 30,246,453
-------------
TOTAL INVESTMENTS (COST $325,177,037) 102.0% ........................................ 482,290,556
OTHER ASSETS, LESS LIABILITIES (2.0)% ............................................... (9,195,381)
-------------
NET ASSETS 100.0% ................................................................... $ 473,095,175
=============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2006.
b A portion or all of the security is on loan as of October 31, 2006. See
Note 1(e).
c Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2006, the value of this security was
$7,581,981, representing 1.60% of net assets.
d See Note 8 regarding restricted securities.
e See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield
at period end.
f See Note 1(e) regarding securities on loan.
g See Note 1(c) regarding repurchase agreements.
h A portion of the security is traded on a discount basis with no stated
coupon rate.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 45
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL COMMUNICATIONS FUND
---------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $ 11.46 $ 7.94 $ 7.63 $ 5.92 $ 6.85 $ 10.70
----------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ..................... (0.05) (0.04) -- f -- h -- i (0.01)
Net realized and unrealized gains (losses) ......... 0.27 3.66 0.33 1.71 (0.93) (3.84)
----------------------------------------------------------------------
Total from investment operations .................... 0.22 3.62 0.33 1.71 (0.93) (3.85)
----------------------------------------------------------------------
Less distributions from net investment income ....... -- (0.10) (0.02) -- -- --
----------------------------------------------------------------------
Redemption fees ..................................... -- d -- d -- d -- -- --
----------------------------------------------------------------------
Net asset value, end of period ...................... $ 11.68 $ 11.46 $ 7.94 $ 7.63 $ 5.92 $ 6.85
======================================================================
Total return c ...................................... 2.01% 45.70% 4.32% 28.89% (13.58)% (35.98)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................... $67,960 $69,746 $49,926 $59,702 $53,722 $80,581
Ratios to average net assets:
Expenses ........................................... 1.42% e 1.40% 1.47% g 1.47% 1.67% 1.27%
Net investment income (loss) ....................... (0.89)% e (0.40)% 0.04% (0.03)% (0.05)% (0.13)%
Portfolio turnover rate ............................. 72.01% 149.34% 171.40% 137.83% 94.95% 81.70%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Actual net investment income per share is $0.003.
g Benefit of expense reduction rounds to less than 0.01%.
h Actual net investment loss per share is $(0.002).
i Actual net investment loss per share is $(0.003).
46 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL COMMUNICATIONS FUND
---------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $10.94 $ 7.59 $ 7.33 $ 5.73 $ 6.67 $ 10.50
---------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ....................... (0.08) (0.11) (0.05) (0.05) (0.04) (0.07)
Net realized and unrealized gains (losses) ........... 0.26 3.48 0.31 1.65 (0.90) (3.76)
---------------------------------------------------------------------
Total from investment operations ...................... 0.18 3.37 0.26 1.60 (0.94) (3.83)
---------------------------------------------------------------------
Less distributions from net investment income ......... -- (0.02) -- -- -- --
---------------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- -- --
---------------------------------------------------------------------
Net asset value, end of period ........................ $11.12 $ 10.94 $ 7.59 $ 7.33 $ 5.73 $ 6.67
=====================================================================
Total return c ........................................ 1.55% 44.57% 3.69% 27.75% (14.09)% (36.48)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $3,399 $ 3,517 $ 2,663 $ 3,170 $ 2,690 $ 3,675
Ratios to average net assets:
Expenses ............................................. 2.17% e 2.14% 2.21% f 2.22% 2.36% 2.01%
Net investment income (loss) ......................... (1.64)% e (1.14)% (0.70)% (0.78)% (0.74)% (0.87)%
Portfolio turnover rate ............................... 72.01% 149.34% 171.40% 137.83% 94.95% 81.70%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 47
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL COMMUNICATIONS FUND
--------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $ 10.96 $ 7.60 $ 7.34 $ 5.74 $ 6.69 $ 10.53
---------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........................ (0.09) (0.11) (0.05) (0.05) (0.05) (0.07)
Net realized and unrealized gains (losses) ............ 0.26 3.50 0.31 1.65 (0.90) (3.77)
---------------------------------------------------------------------
Total from investment operations ....................... 0.17 3.39 0.26 1.60 (0.95) (3.84)
---------------------------------------------------------------------
Less distributions from net investment income .......... -- (0.03) -- -- -- --
---------------------------------------------------------------------
Redemption fees ........................................ -- d -- d -- d -- -- --
---------------------------------------------------------------------
Net asset value, end of period ......................... $ 11.13 $ 10.96 $ 7.60 $ 7.34 $ 5.74 $ 6.69
=====================================================================
Total return c ......................................... 1.55% 44.61% 3.54% 27.87% (14.20)% (36.47)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $10,964 $10,287 $ 7,054 $ 8,633 $ 7,377 $10,563
Ratios to average net assets:
Expenses .............................................. 2.18% e 2.15% 2.22% f 2.22% 2.47% 2.01%
Net investment income (loss) .......................... (1.65)% e (1.15)% (0.71)% (0.78)% (0.85)% (0.87)%
Portfolio turnover rate ................................ 72.01% 149.34% 171.40% 137.83% 94.95% 81.70%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.6%
COMMON STOCKS 96.2%
ADVERTISING/MARKETING SERVICES 1.6%
a Focus Media Holding Ltd., ADR .......................................... China 25,000 $ 1,322,250
-------------
BROADCASTING 6.0%
Grupo Televisa SA, ADR ................................................. Mexico 132,800 3,277,504
a XM Satellite Radio Holdings Inc., A .................................... United States 144,900 1,689,534
-------------
4,967,038
-------------
CABLE/SATELLITE TV 2.0%
EchoStar Communications Corp., A ....................................... United States 46,400 1,648,128
-------------
COMMERCIAL PRINTING/FORMS 0.5%
Cenveo Inc. ............................................................ United States 19,800 392,832
-------------
COMPUTER COMMUNICATIONS 4.9%
a Cisco Systems Inc. ..................................................... United States 84,000 2,026,920
Juniper Networks Inc. .................................................. United States 91,000 1,567,020
Neuf Cegetel ........................................................... France 13,700 413,511
-------------
4,007,451
-------------
COMPUTER PROCESSING HARDWARE 5.3%
a Apple Computer Inc. .................................................... United States 31,900 2,586,452
Rackable Systems Inc. .................................................. United States 58,400 1,810,984
-------------
4,397,436
-------------
DATA PROCESSING SERVICES 1.9%
NeuStar Inc., A ........................................................ United States 54,800 1,601,256
-------------
ELECTRONICS/APPLIANCES 1.5%
Harman International Industries Inc. ................................... United States 11,700 1,197,495
-------------
INFORMATION TECHNOLOGY SERVICES 1.9%
Amdocs Ltd. ............................................................ United States 19,700 763,572
Level 3 Communications Inc. ............................................ United States 152,500 806,725
-------------
1,570,297
-------------
INTERNET SOFTWARE/SERVICES 5.7%
Akamai Technologies Inc. ............................................... United States 18,600 871,596
Equinix Inc. ........................................................... United States 18,700 1,279,080
a Google Inc., A ......................................................... United States 2,700 1,286,253
Internap Network Services Corp. ........................................ United States 52,500 865,200
SAVVIS Inc. ............................................................ United States 12,900 401,061
-------------
4,703,190
-------------
MAJOR TELECOMMUNICATIONS 15.4%
Alltel Corp. ........................................................... United States 30,400 1,620,624
BellSouth Corp. ........................................................ United States 18,600 838,860
a Bharti Airtel Ltd. ..................................................... India 309,905 3,657,527
Cable & Wireless PLC ................................................... United Kingdom 443,100 1,238,140
Semiannual Report | 49
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
MAJOR TELECOMMUNICATIONS (CONTINUED)
PT Telekomunikasi Indonesia, B ................................. Indonesia 754,900 $ 697,291
Reliance Communication Ltd. .................................... India 191,900 1,618,889
Telus Corp. .................................................... Canada 51,900 2,976,984
-------------
12,648,315
-------------
MEDIA CONGLOMERATES 1.5%
The Walt Disney Co. ............................................ United States 40,130 1,262,490
-------------
MOVIES/ENTERTAINMENT 0.9%
a Outdoor Channel Holdings Inc. .................................. United States 52,300 731,154
-------------
RECREATIONAL PRODUCTS 5.3%
Activision Inc. ................................................ United States 55,200 851,184
Nintendo Co. Ltd. .............................................. Japan 8,800 1,799,650
a Scientific Games Corp., A ...................................... United States 62,000 1,737,860
-------------
4,388,694
-------------
SEMICONDUCTORS 2.5%
PMC-Sierra Inc. ................................................ United States 119,800 794,274
RF Micro Devices Inc. .......................................... United States 60,500 441,650
a Silicon Laboratories Inc. ...................................... United States 12,100 394,823
Trident Microsystems Inc. ...................................... United States 18,300 386,862
-------------
2,017,609
-------------
SPECIALTY TELECOMMUNICATIONS 8.5%
a American Tower Corp., A ........................................ United States 109,635 3,949,053
a Crown Castle International Corp. ............................... United States 39,438 1,327,089
Global Crossing Ltd. ........................................... United States 38,200 938,956
Time Warner Telecom Inc., A .................................... United States 37,900 755,726
-------------
6,970,824
-------------
TELECOMMUNICATIONS EQUIPMENT 6.9%
Atheros Communications ......................................... United States 18,900 410,697
a Comverse Technology Inc. ....................................... United States 36,800 801,136
Harris Corp. ................................................... United States 18,800 800,880
Nokia Corp., ADR ............................................... Finland 121,000 2,405,480
Powerwave Technologies Inc. .................................... United States 62,500 406,875
QUALCOMM Inc. .................................................. United States 11,300 411,207
SiRF Technology Holdings Inc. .................................. United States 16,800 472,416
-------------
5,708,691
-------------
WIRELESS COMMUNICATIONS 23.9%
America Movil SA de CV, L, ADR ................................. Mexico 135,500 5,808,885
Dobson Communications Corp. .................................... United States 176,900 1,372,744
a Leap Wireless International Inc. ............................... United States 11,800 654,428
a Motient Corp. .................................................. United States 18,600 206,460
a NII Holdings Inc. .............................................. United States 67,500 4,389,525
50 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL COMMUNICATIONS FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
WIRELESS COMMUNICATIONS (CONTINUED)
Rogers Communications Inc., B .............................................. Canada 79,200 $ 4,740,922
a SBA Communications Corp. ................................................... United States 94,000 2,510,740
-------------
19,683,704
-------------
TOTAL COMMON STOCKS (COST $54,875,221) ..................................... 79,218,854
-------------
PREFERRED STOCKS (COST $289,500) 0.4%
TELECOMMUNICATIONS EQUIPMENT 0.4%
a,b,c Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES .......... United States 124,248 289,498
-------------
TOTAL LONG TERM INVESTMENTS (COST $55,164,721) ............................. 79,508,352
-------------
SHORT TERM INVESTMENTS (COST $550) 0.0% d
MONEY MARKET FUND 0.0% d
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ....... United States 550 550
-------------
TOTAL INVESTMENTS (COST $55,165,271) 96.6% ................................. 79,508,902
OTHER ASSETS, LESS LIABILITIES 3.4% ........................................ 2,814,177
-------------
NET ASSETS 100.0% .......................................................... $ 82,323,079
=============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 8 regarding restricted securities.
c Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2006, the value of this security was
$289,498, representing 0.35% of net assets.
d Rounds to less than 0.1% of net assets.
e See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield
at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 51
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL HEALTH CARE FUND
---------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 23.31 $ 20.36 $ 19.86 $ 15.53 $ 20.80 $ 23.29
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ....................... (0.05) 0.12 (0.08) (0.10) (0.09) (0.15)
Net realized and unrealized gains (losses) ........... 0.54 2.83 0.58 4.43 (4.62) (2.30)
-----------------------------------------------------------------------
Total from investment operations ...................... 0.49 2.95 0.50 4.33 (4.71) (2.45)
-----------------------------------------------------------------------
Less distributions from net realized gains ............ -- -- -- -- (0.56) (0.04)
-----------------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- -- --
-----------------------------------------------------------------------
Net asset value, end of period ........................ $ 23.80 $ 23.31 $ 20.36 $ 19.86 $ 15.53 $ 20.80
=======================================================================
Total return c ........................................ 2.15% 14.44% 2.52% 27.88% (22.56)% (10.53)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $104,382 $106,293 $86,934 $91,314 $73,991 $110,062
Ratios to average net assets:
Expenses ............................................. 1.25% e,f 1.26%e 1.32% e 1.36% 1.44% 1.22%
Net investment income (loss) ......................... (0.41)% f 0.55% (0.42)% (0.52)% (0.54)% (0.65)%
Portfolio turnover rate ............................... 14.46% 39.75% 77.50% 82.63% 137.37% 120.47%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
52 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL HEALTH CARE FUND
-------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 22.08 $ 19.44 $ 19.10 $ 15.04 $ 20.33 $ 22.93
----------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ....................... (0.12) (0.04) (0.22) (0.23) (0.20) (0.31)
Net realized and unrealized gains (losses) ........... 0.51 2.68 0.56 4.29 (4.53) (2.25)
----------------------------------------------------------------------
Total from investment operations ...................... 0.39 2.64 0.34 4.06 (4.73) (2.56)
----------------------------------------------------------------------
Less distributions from net realized gains ............ -- -- -- -- (0.56) (0.04)
----------------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- -- --
----------------------------------------------------------------------
Net asset value, end of period ........................ $ 22.47 $ 22.08 $ 19.44 $ 19.10 $ 15.04 $ 20.33
======================================================================
Total return c ........................................ 1.77% 13.58% 1.78% 26.91% (23.10)% (11.22)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $ 11,828 $14,233 $12,060 $13,054 $ 8,892 $13,021
Ratios to average net assets:
Expenses ............................................. 2.00% e,f 2.00% e 2.06% e 2.11% 2.18% 1.97%
Net investment income (loss) ......................... (1.16)% f (0.19)% (1.16)% (1.27)% (1.28)% (1.40)%
Portfolio turnover rate ............................... 14.46% 39.75% 77.50% 82.63% 137.37% 120.47%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 53
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GLOBAL HEALTH CARE FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 21.87 $ 19.24 $ 18.92 $ 14.90 $ 20.15 $ 22.72
--------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................... (0.12) (0.04) (0.22) (0.22) (0.20) (0.30)
Net realized and unrealized gains (losses) ........ 0.50 2.67 0.54 4.24 (4.49) (2.23)
--------------------------------------------------------------------------
Total from investment operations ................... 0.38 2.63 0.32 4.02 (4.69) (2.53)
--------------------------------------------------------------------------
Less distributions from net realized gains ......... -- -- -- -- (0.56) (0.04)
--------------------------------------------------------------------------
Redemption fees .................................... -- d -- d -- d -- -- --
--------------------------------------------------------------------------
Net asset value, end of period ..................... $ 22.25 $ 21.87 $ 19.24 $ 18.92 $ 14.90 $ 20.15
==========================================================================
Total return c ..................................... 1.74% 13.67% 1.69% 26.98% (23.16)% (11.19)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $26,239 $29,083 $22,021 $23,850 $18,700 $28,538
Ratios to average net assets:
Expenses .......................................... 1.99% e,f 2.01% e 2.07% e 2.11% 2.19% 1.96%
Net investment income (loss) ...................... (1.15)% f (0.20)% (1.17)% (1.27)% (1.29)% (1.39)%
Portfolio turnover rate ............................ 14.46% 39.75% 77.50% 82.63% 137.37% 120.47%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
54 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 95.1%
COMMON STOCKS 93.4%
BIOTECHNOLOGY 15.2%
a Amgen Inc. ........................................................ United States 40,200 $ 3,051,582
a Angiotech Pharmaceuticals Inc. .................................... United States 50,900 483,550
a Biogen Idec Inc. .................................................. United States 23,800 1,132,880
a Celgene Corp. ..................................................... United States 46,000 2,458,240
a Cephalon Inc. ..................................................... United States 18,400 1,291,312
a Charles River Laboratories International Inc. ..................... United States 15,800 678,136
a Genzyme Corp. ..................................................... United States 23,900 1,613,489
a Indevus Pharmaceuticals Inc. ...................................... United States 236,100 1,612,563
a Invitrogen Corp. .................................................. United States 22,100 1,282,021
a Keryx Biopharmaceuticals Inc. ..................................... United States 108,800 1,527,552
a The Medicines Co. ................................................. United States 48,500 1,259,060
a Myriad Genetics Inc. .............................................. United States 55,700 1,497,773
a PDL BioPharma Inc. ................................................ United States 38,600 815,618
a Telik Inc. ........................................................ United States 53,400 1,011,930
a Trimeris Inc. ..................................................... United States 65,900 502,158
a Vanda Pharmaceuticals Inc. ........................................ United States 36,500 475,960
a ViroPharma Inc. ................................................... United States 71,500 953,095
-------------
21,646,919
-------------
DRUG STORE CHAINS 0.9%
CVS Corp. ......................................................... United States 40,300 1,264,614
-------------
ELECTRICAL PRODUCTS 0.6%
a Greatbatch Inc. ................................................... United States 36,900 829,881
-------------
GENERIC PHARMACEUTICALS 0.3%
a Impax Laboratories Inc. ........................................... United States 68,600 480,200
-------------
HOSPITAL/NURSING MANAGEMENT 5.0%
Brookdale Senior Living Inc. ...................................... United States 21,100 1,015,332
a Community Health Systems Inc. ..................................... United States 82,900 2,690,105
a Genesis HealthCare Corp. .......................................... United States 17,150 830,575
a LifePoint Hospitals Inc. .......................................... United States 56,900 2,019,950
a United Surgical Partners International Inc. ....................... United States 21,000 521,220
-------------
7,077,182
-------------
INTERNET RETAIL 0.6%
a eHealth Inc. ...................................................... United States 38,500 851,620
-------------
MAJOR PHARMACEUTICALS 31.7%
Abbott Laboratories ............................................... United States 35,600 1,691,356
Eli Lilly and Co. ................................................. United States 56,100 3,142,161
Johnson & Johnson ................................................. United States 99,700 6,719,780
Merck KGaA ........................................................ Germany 44,400 4,683,404
Novartis AG ....................................................... Switzerland 99,300 6,024,953
Pfizer Inc. ....................................................... United States 100,360 2,674,594
Roche Holding AG .................................................. Switzerland 50,900 8,904,994
Schering-Plough Corp. ............................................. United States 279,100 6,179,274
Wyeth ............................................................. United States 100,900 5,148,927
-------------
45,169,443
-------------
Semiannual Report | 55
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
MANAGED HEALTH CARE 7.0%
a Molina Healthcare Inc. ......................................... United States 15,300 $ 600,219
a Sierra Health Services Inc. .................................... United States 37,400 1,280,576
UnitedHealth Group Inc. ........................................ United States 36,030 1,757,543
a WellPoint Inc. ................................................. United States 82,300 6,281,136
-------------
9,919,474
-------------
MEDICAL DISTRIBUTORS 2.6%
Cardinal Health Inc. ........................................... United States 21,600 1,413,720
a Henry Schein Inc. .............................................. United States 28,300 1,406,227
a MWI Veterinary Supply Inc. ..................................... United States 26,900 901,419
-------------
3,721,366
-------------
MEDICAL SPECIALTIES 13.2%
a Adams Respiratory Therapeutics Inc. ............................ United States 23,300 1,004,230
Baxter International Inc. ...................................... United States 35,200 1,618,144
Beckman Coulter Inc. ........................................... United States 24,500 1,410,465
a Cytyc Corp. .................................................... United States 34,700 916,774
DENTSPLY International Inc. .................................... United States 45,300 1,416,984
a Digene Corp. ................................................... United States 44,100 2,047,563
a Fisher Scientific International Inc. ........................... United States 34,884 2,986,768
Hillenbrand Industries Inc. .................................... United States 21,400 1,255,752
a IntraLase Corp. ................................................ United States 27,400 538,684
Medtronic Inc. ................................................. United States 13,800 671,784
Mentor Corp. ................................................... United States 16,900 790,920
a Mindray Medical International Ltd., ADR ........................ China 18,200 329,420
a Molecular Devices Corp. ........................................ United States 45,600 918,384
a Northstar Neuroscience Inc. .................................... United States 46,200 693,924
a Waters Corp. ................................................... United States 27,300 1,359,540
a Zimmer Holdings Inc. ........................................... United States 10,800 777,708
-------------
18,737,044
-------------
MEDICAL/NURSING SERVICES 3.9%
a Amedisys Inc. .................................................. United States 17,800 722,146
a DaVita Inc. .................................................... United States 38,700 2,152,881
a,b Diagnosticos da America, ADR, 144A ............................. Brazil 21,400 1,258,354
a Healthways Inc. ................................................ United States 16,100 681,835
a Nighthawk Radiology Holdings Inc. .............................. United States 35,100 714,285
-------------
5,529,501
-------------
OTHER PHARMACEUTICALS 4.0%
Allergan Inc. .................................................. United States 9,990 1,153,845
a Coley Pharmaceutical Group Inc. ................................ United States 64,600 744,838
a Endo Pharmaceuticals Holdings Inc. ............................. United States 23,800 679,252
a Labopharm Inc. ................................................. Canada 83,700 428,026
a POZEN Inc. ..................................................... United States 71,100 1,182,393
Shire PLC, ADR ................................................. United Kingdom 28,800 1,579,680
-------------
5,768,034
-------------
56 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
SERVICES TO THE HEALTH INDUSTRY 8.4%
a Allscripts Healthcare Solutions Inc. ....................................... United States 47,300 $ 1,115,807
a Emageon Inc. ............................................................... United States 44,900 716,155
a Express Scripts Inc. ....................................................... United States 55,700 3,549,204
a Medco Health Solutions Inc. ................................................ United States 18,952 1,013,932
Omnicare Inc. .............................................................. United States 56,000 2,121,280
Pharmaceutical Product Development Inc. .................................... United States 102,300 3,237,795
a WebMD Health Corp., A ...................................................... United States 6,500 236,990
-------------
11,991,163
-------------
TOTAL COMMON STOCKS (COST $103,760,512) .................................... 132,986,441
-------------
CONVERTIBLE PREFERRED STOCK (COST $1,500,004) 1.7%
MEDICAL SPECIALTIES 1.7%
c,d Masimo Corp., cvt. pfd., F ................................................. United States 136,364 2,415,006
-------------
TOTAL LONG TERM INVESTMENTS (COST $105,260,516) ............................ 135,401,447
-------------
SHORT TERM INVESTMENTS (COST $7,171,669) 5.0%
MONEY MARKET FUND 5.0%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ....... United States 7,171,669 7,171,669
-------------
TOTAL INVESTMENTS (COST $112,432,185) 100.1% ............................... 142,573,116
OTHER ASSETS, LESS LIABILITIES (0.1)% ...................................... (124,209)
-------------
NET ASSETS 100.0% .......................................................... $ 142,448,907
=============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2006,
the value of this security was $1,258,354, representing 0.88% of net
assets.
c See Note 8 regarding restricted securities.
d Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2006, the value of this security was
$2,415,006, representing 1.70% of net assets.
e See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield
at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN NATURAL RESOURCES FUND
---------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $ 35.92 $ 24.32 $ 18.80 $ 13.60 $ 16.96 $ 19.36
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........................ 0.08 0.13 0.04 (0.04) 0.01 0.04
Net realized and unrealized gains (losses) ............ (2.13) 12.64 5.48 5.26 (3.33) (2.08)
-----------------------------------------------------------------------
Total from investment operations ....................... (2.05) 12.77 5.52 5.22 (3.32) (2.04)
-----------------------------------------------------------------------
Less distributions from:
Net investment income ................................. -- (0.09) -- (0.02) (0.04) (0.08)
Net realized gains .................................... -- (1.08) -- -- -- (0.28)
-----------------------------------------------------------------------
Total distributions .................................... -- (1.17) -- (0.02) (0.04) (0.36)
-----------------------------------------------------------------------
Redemption fees ........................................ -- d -- d -- d -- -- --
-----------------------------------------------------------------------
Net asset value, end of period ......................... $ 33.87 $ 35.92 $ 24.32 $ 18.80 $ 13.60 $ 16.96
=======================================================================
Total return c ......................................... (5.68)% 53.11% 29.36% 38.36% (19.62)% (10.12)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $392,743 $440,475 $211,327 $102,725 $39,515 $58,085
Ratios to average net assets:
Expenses before waiver and payments by affiliates ..... 0.98% e 1.02% 1.08% 1.27% 1.34% 1.31%
Expenses net of waiver and payments by affiliates ..... 0.98% e,f 1.02% f 1.08% f 1.27% 1.34% 1.21%
Net investment income (loss) .......................... 0.47% e 0.44% 0.17% (0.24)% 0.04% 0.30%
Portfolio turnover rate ................................ 29.50% 56.08% 29.89% 59.53% 44.97% 100.37%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
58 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUNDPERIOD ENDED
------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 g
------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................ $ 35.79 $ 31.56
--------------------------------
Income from investment operations a:
Net investment income (loss) b ................................. (0.05) (0.01)
Net realized and unrealized gains (losses) ..................... (2.12) 5.39
--------------------------------
Total from investment operations ................................ (2.17) 5.38
--------------------------------
Less distributions from:
Net investment income .......................................... -- (0.07)
Net realized gains ............................................. -- (1.08)
--------------------------------
Total distributions ............................................. -- (1.15)
--------------------------------
Redemption fees ................................................. -- d -- d
--------------------------------
Net asset value, end of period .................................. $ 33.62 $ 35.79
================================
Total return c .................................................. (6.04)% 17.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................... $ 25,263 $ 18,485
Ratios to average net assets:
Expenses ....................................................... 1.72% e,f 1.67% e,f
Net investment income (loss) ................................... (0.27)% f (0.21)% f
Portfolio turnover rate ......................................... 29.50% 56.08%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g For the period September 1, 2005 (effective date) to April 30, 2006.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 59
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
-----------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $ 37.57 $ 25.35 $ 19.53 $ 14.11 $ 17.57 $ 19.99
------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................... 0.13 0.25 0.13 0.02 0.05 0.10
Net realized and unrealized gains (losses) ............ (2.21) 13.18 5.69 5.45 (3.41) (2.14)
------------------------------------------------------------------
Total from investment operations ....................... (2.08) 13.43 5.82 5.47 (3.36) (2.04)
------------------------------------------------------------------
Less distributions from:
Net investment income ................................. -- (0.13) -- (0.05) (0.10) (0.10)
Net realized gains .................................... -- (1.08) -- -- -- (0.28)
------------------------------------------------------------------
Total distributions .................................... -- (1.21) -- (0.05) (0.10) (0.38)
------------------------------------------------------------------
Redemption fees ........................................ -- d -- d -- d -- -- --
------------------------------------------------------------------
Net asset value, end of period ......................... $ 35.49 $ 37.57 $ 25.35 $ 19.53 $ 14.11 $ 17.57
==================================================================
Total return c ......................................... (5.51)% 53.55% 29.80% 38.83% (19.18)% (9.87)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $41,475 $43,874 $33,048 $11,185 $ 460 $13,683
Ratios to average net assets:
Expenses before waiver and payments by affiliates ..... 0.71% e 0.69% 0.73% 0.92% 1.03% 0.96%
Expenses net of waiver and payments by affiliates ..... 0.71% e,f 0.69% f 0.73% f 0.92% 1.03% 0.86%
Net investment income ................................. 0.74% e 0.77% 0.52% 0.11% 0.35% 0.63%
Portfolio turnover rate ................................ 29.50% 56.08% 29.89% 59.53% 44.97% 100.37%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
60 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.9%
COMMON STOCKS AND WARRANTS 96.0%
ELECTRONIC TECHNOLOGY 0.3%
a SunPower Corp., A ............................................. United States 40,000 $ 1,346,000
------------
ENERGY MINERALS 42.5%
a,b Addax Petroleum Corp., 144A ................................... Canada 150,000 3,451,824
a Alpha Natural Resources Inc. .................................. United States 200,000 3,182,000
a Bill Barrett Corp. ............................................ United States 115,000 3,280,950
BP PLC, ADR ................................................... United Kingdom 130,000 8,723,000
Chesapeake Energy Corp. ....................................... United States 117,000 3,795,480
Chevron Corp. ................................................. United States 195,003 13,104,202
ConocoPhillips ................................................ United States 218,070 13,136,537
a Denbury Resources Inc. ........................................ United States 120,000 3,448,800
Devon Energy Corp. ............................................ United States 199,000 13,301,160
a,b Energy Coal Resources, 144A ................................... United States 199,375 2,552,000
Exxon Mobil Corp. ............................................. United States 190,000 13,569,800
a Forest Oil Corp. .............................................. United States 140,000 4,569,600
Foundation Coal Holdings Inc. ................................. United States 126,000 4,625,460
a Geomet Inc. ................................................... United States 270,000 3,032,100
Marathon Oil Corp. ............................................ United States 76,000 6,566,400
a Mariner Energy Inc. ........................................... United States 223,023 4,420,316
Murphy Oil Corp. .............................................. United States 95,000 4,480,200
a Newfield Exploration Co. ...................................... United States 347,000 14,154,130
Noble Energy Inc. ............................................. United States 155,000 7,537,650
b NovaTek OAO, GDR, 144A ........................................ Russia 10,000 583,500
Occidental Petroleum Corp. .................................... United States 278,000 13,049,320
a Parallel Petroleum Corp. ...................................... United States 245,000 4,961,250
Peabody Energy Corp. .......................................... United States 240,000 10,072,800
Petroleo Brasileiro SA, ADR ................................... Brazil 43,000 3,816,680
a Southwestern Energy Co. ....................................... United States 355,000 12,630,900
Talisman Energy Inc. .......................................... Canada 280,000 4,622,800
Total SA, B, ADR .............................................. France 121,000 8,244,940
Venture Production PLC ........................................ United Kingdom 100,000 1,519,204
XTO Energy Inc. ............................................... United States 103,000 4,805,980
------------
195,238,983
------------
INDUSTRIAL SERVICES 29.3%
Baker Hughes Inc. ............................................. United States 62,000 4,281,100
a Bronco Drilling Co. Inc. ...................................... United States 90,000 1,533,600
a Dresser-Rand Group Inc. ....................................... United States 110,000 2,385,900
a Dril-Quip Inc. ................................................ United States 132,000 5,198,160
ENSCO International Inc. ...................................... United States 74,000 3,623,780
a Flotek Industries Inc. ........................................ United States 250,000 4,950,000
a FMC Technologies Inc. ......................................... United States 152,000 9,188,400
a Global Industries Ltd. ........................................ United States 210,000 3,486,000
GlobalSantaFe Corp. ........................................... Cayman Islands 72,000 3,736,800
a Grant Prideco Inc. ............................................ United States 85,000 3,210,450
Halliburton Co. ............................................... United States 315,000 10,190,250
a Helix Energy Solutions Group Inc. ............................. United States 500,000 16,150,000
a Hornbeck Offshore Services Inc. ............................... United States 98,000 3,536,820
a Nabors Industries Ltd. ........................................ Bermuda 201,000 6,206,880
Semiannual Report | 61
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND WARRANTS (CONTINUED)
INDUSTRIAL SERVICES (CONTINUED)
a National-Oilwell Varco Inc. ................................... United States 184,000 $ 11,113,600
Noble Corp. ................................................... United States 51,000 3,575,100
a Oil States International Inc. ................................. United States 100,000 2,904,000
a PHI Inc. ...................................................... United States 80,000 2,536,800
a Pioneer Drilling Co. .......................................... United States 160,000 2,100,800
Rowan Cos. Inc. ............................................... United States 140,000 4,673,200
Schlumberger Ltd. ............................................. United States 50,000 3,154,000
Smith International Inc. ...................................... United States 164,000 6,474,720
a Superior Energy Services Inc. ................................. United States 250,000 7,825,000
Technip SA, ADR ............................................... France 41,000 2,482,550
a Transocean Inc. ............................................... United States 70,000 5,077,800
a Warrior Energy Services Corp. ................................. United States 50,100 1,422,339
a Weatherford International Ltd. ................................ Bermuda 88,000 3,615,040
------------
134,633,089
------------
NON-ENERGY MINERALS 13.1%
a African Copper PLC ............................................ United Kingdom 1,746,100 2,100,080
Alcan Inc. .................................................... Canada 50,000 2,355,500
Alcoa Inc. .................................................... United States 125,000 3,613,750
Anglo American PLC, ADR ....................................... South Africa 75,000 1,701,000
AngloGold Ashanti Ltd., ADR ................................... South Africa 20,000 851,400
Barrick Gold Corp. ............................................ Canada 309,006 9,579,186
a Centerra Gold Inc. ............................................ Canada 106,000 1,052,965
a,b Centerra Gold Inc., 144A ...................................... Canada 133,200 1,323,159
Freeport-McMoRan Copper & Gold Inc., B ........................ United States 35,000 2,116,800
a Gammon Lake Resources Inc. .................................... Canada 195,000 2,562,475
a Jinshan Gold Mines Inc. ....................................... Canada 150,000 164,373
a,c Jinshan Gold Mines Inc., wts., 6/20/07 ........................ Canada 435,000 205,399
a,b Jinshan Gold Mines Inc., 144A ................................. Canada 870,000 953,361
Newcrest Mining Ltd. .......................................... Australia 150,000 2,769,879
a Northern Orion Resources Inc. ................................. Canada 500,000 2,260,000
a Rio Narcea Gold Mines Ltd. .................................... Canada 800,000 2,259,343
Southern Copper Corp. ......................................... United States 50,000 2,569,000
a,b SXR Uranium One Inc., 144A .................................... Canada 600,000 6,761,994
a UrAsia Energy Ltd. ............................................ Canada 332,400 903,221
a,b UrAsia Energy Ltd., 144A ...................................... Canada 1,700,000 4,619,359
Xstrata PLC ................................................... Switzerland 126,666 5,411,760
Zinifex Ltd. .................................................. Australia 350,000 4,110,880
------------
60,244,884
------------
PROCESS INDUSTRIES 7.8%
a Aventine Renewable Energy Holdings Inc. ....................... United States 45,700 1,124,220
Bunge Ltd. .................................................... United States 100,000 6,411,000
Cabot Corp. ................................................... United States 83,000 3,282,650
The Dow Chemical Co. .......................................... United States 110,000 4,486,900
a Headwaters Inc. ............................................... United States 110,000 2,722,500
Minerals Technologies Inc. .................................... United States 40,000 2,206,400
a,d Solutia Inc. .................................................. United States 137,000 56,170
62 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND WARRANTS (CONTINUED)
PROCESS INDUSTRIES (CONTINUED)
Sunoco Inc. .............................................................. United States 89,000 $ 5,885,570
Valero Energy Corp. ...................................................... United States 138,000 7,221,540
Western Refining Inc. .................................................... United States 106,000 2,497,360
------------
35,894,310
------------
PRODUCER MANUFACTURING 1.2%
Dynamic Materials Corp. .................................................. United States 40,000 1,289,600
a Terex Corp. .............................................................. United States 75,000 3,882,000
------------
5,171,600
------------
TRANSPORTATION 1.8%
Aries Maritime Transport Ltd. ............................................ Bermuda 356,200 3,736,538
Arlington Tankers Ltd. ................................................... Bermuda 101,000 2,436,120
Double Hull Tankers Inc. ................................................. Jersey Islands 150,000 2,112,000
------------
8,284,658
------------
TOTAL COMMON STOCKS AND WARRANTS (COST $323,567,740) ..................... 440,813,524
------------
PREFERRED STOCKS 1.9%
ENERGY MINERALS 0.4%
Petroleo Brasileiro SA, ADR, pfd ......................................... Brazil 20,000 1,619,200
------------
NON-ENERGY MINERALS 1.5%
Companhia Vale do Rio Doce, ADR, pfd., A ................................. Brazil 334,000 7,254,480
------------
TOTAL PREFERRED STOCKS (COST $5,876,743) ................................. 8,873,680
------------
TOTAL LONG TERM INVESTMENTS (COST $329,444,483) .......................... 449,687,204
------------
SHORT TERM INVESTMENTS (COST $8,267,456) 1.8%
MONEY MARKET FUND 1.8%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ..... United States 8,267,456 8,267,456
------------
TOTAL INVESTMENTS (COST $337,711,939) 99.7% .............................. 457,954,660
OTHER ASSETS, LESS LIABILITIES 0.3% ...................................... 1,527,037
------------
NET ASSETS 100.0% ........................................................ $459,481,697
============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2006,
the aggregate value of these securities was $20,245,197, representing
4.41% of net assets.
c See Note 8 regarding restricted securities.
d See Note 9 regarding other considerations.
e See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN TECHNOLOGY FUND
-----------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................... $ 5.69 $ 4.34 $ 4.25 $ 3.19 $ 4.37 $ 6.41
-------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ......................... (0.02) (0.06) (0.05) (0.05) (0.05) (0.05)
Net realized and unrealized gains (losses) ............. (0.41) 1.41 0.14 1.11 (1.13) (1.99)
-------------------------------------------------------------------
Total from investment operations ........................ (0.43) 1.35 0.09 1.06 (1.18) (2.04)
-------------------------------------------------------------------
Redemption fees ......................................... -- d -- d -- d -- -- --
-------------------------------------------------------------------
Net asset value, end of period .......................... $ 5.26 $ 5.69 $ 4.34 $ 4.25 $ 3.19 $ 4.37
===================================================================
Total return c .......................................... (7.56)% 31.11% 2.12% 33.23% (27.00)% (31.72)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....................... $29,514 $33,681 $27,626 $28,636 $20,018 $26,246
Ratios to average net assets:
Expenses before waiver and payments by affiliates ...... 1.77% e 1.74% 1.73% 1.72% 2.01% 1.69%
Expenses net of waiver and payments by affiliates ...... 1.77% e,f 1.74% f 1.73% f 1.72% 2.01% 1.66%
Net investment income (loss) ........................... (0.90)% e (1.27)% (1.02)% (1.48)% (1.81)% (1.01)%
Portfolio turnover rate ................................. 78.51% 96.23% 68.39% 141.34% 182.71% 141.03%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
-------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $ 5.49 $ 4.21 $ 4.15 $ 3.14 $ 4.32 $ 6.37
-------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........................ (0.04) (0.09) (0.08) (0.17) (0.15) (0.08)
Net realized and unrealized gains (losses) ............ (0.39) 1.37 0.14 1.18 (1.03) (1.97)
-------------------------------------------------------------------
Total from investment operations ....................... (0.43) 1.28 0.06 1.01 (1.18) (2.05)
-------------------------------------------------------------------
Redemption fees ........................................ -- d -- d -- d -- -- --
-------------------------------------------------------------------
Net asset value, end of period ......................... $ 5.06 $ 5.49 $ 4.21 $ 4.15 $ 3.14 $ 4.32
===================================================================
Total return c ......................................... (7.83)% 30.40% 1.45% 32.17% (27.31)% (32.18)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $3,598 $4,385 $4,221 $ 4,788 $ 2,922 $ 4,189
Ratios to average net assets:
Expenses before waiver and payments by affiliates ..... 2.42% e 2.37% 2.40% 2.35% 2.66% 2.33%
Expenses net of waiver and payments by affiliates ..... 2.42% e,f 2.37% f 2.40% f 2.35% 2.66% 2.30%
Net investment income (loss) .......................... (1.55)% e (1.90)% (1.69)% (2.11)% (2.46)% (1.62)%
Portfolio turnover rate ................................ 78.51% 96.23% 68.39% 141.34% 182.71% 141.03%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
-----------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................... $ 5.47 $ 4.20 $ 4.14 $ 3.13 $ 4.30 $ 6.36
------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .......................... (0.04) (0.09) (0.08) (0.14) (0.12) (0.08)
Net realized and unrealized gains (losses) .............. (0.39) 1.36 0.14 1.15 (1.05) (1.98)
------------------------------------------------------------------
Total from investment operations ......................... (0.43) 1.27 0.06 1.01 (1.17) (2.06)
------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- -- --
------------------------------------------------------------------
Net asset value, end of period ........................... $ 5.04 $ 5.47 $ 4.20 $ 4.14 $ 3.13 $ 4.30
==================================================================
Total return c ........................................... (7.86)% 30.24% 1.45% 32.27% (27.21)% (32.39)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................ $8,539 $9,621 $8,502 $10,949 $ 8,545 $10,169
Ratios to average net assets:
Expenses before waiver and payments by affiliates ....... 2.42% e 2.38% 2.42% 2.37% 2.66% 2.32%
Expenses net of waiver and payments by affiliates ....... 2.42% e,f 2.38% f 2.42% f 2.37% 2.66% 2.29%
Net investment income (loss) ............................ (1.55)% e (1.91)% (1.71)% (2.13)% (2.46)% (1.64)%
Portfolio turnover rate .................................. 78.51% 96.23% 68.39% 141.34% 182.71% 141.03%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 5.66 $ 4.32 $ 4.24 $ 3.19 $ 4.36 $ 5.33
-------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ...................... (0.03) (0.07) (0.05) (0.06) (0.06) (0.03)
Net realized and unrealized gains (losses) .......... (0.40) 1.41 0.13 1.11 (1.11) (0.94)
-------------------------------------------------------------------
Total from investment operations ..................... (0.43) 1.34 0.08 1.05 (1.17) (0.97)
-------------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- -- --
-------------------------------------------------------------------
Net asset value, end of period ....................... $ 5.23 $ 5.66 $ 4.32 $ 4.24 $ 3.19 $ 4.36
===================================================================
Total return c ....................................... (7.60)% 31.02% 1.89% 33.33% (27.06)% (18.20)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $4,219 $3,797 $2,701 $ 1,582 $ 380 $ 18
Ratios to average net assets:
Expenses before waiver and payments by affiliates ... 1.92% e 1.89% 1.92% 1.87% 2.17% 1.73% e
Expenses net of waiver and payments by affiliates ... 1.92% e,f 1.89% f 1.92% f 1.87% 2.17% 1.70% e
Net investment income (loss) ........................ (1.05)% e (1.42)% (1.21)% (1.63)% (1.97)% (1.83)% e
Portfolio turnover rate .............................. 78.51% 96.23% 68.39% 141.34% 182.71% 141.03%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 2, 2002 (effective date) to April 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TECHNOLOGY FUND
-----------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................... $ 5.80 $ 4.41 $ 4.31 $ 3.22 $ 4.39 $ 6.43
------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .......................... (0.01) (0.05) (0.03) (0.05) (0.01) (0.04)
Net realized and unrealized gains (losses) .............. (0.42) 1.44 0.13 1.14 (1.16) (2.00)
------------------------------------------------------------------
Total from investment operations ......................... (0.43) 1.39 0.10 1.09 (1.17) (2.04)
------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- -- --
------------------------------------------------------------------
Net asset value, end of period ........................... $ 5.37 $ 5.80 $ 4.41 $ 4.31 $ 3.22 $ 4.39
==================================================================
Total return c ........................................... (7.24)% 31.52% 2.32% 33.85% (26.65)% (31.62)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................ $2,617 $3,111 $2,374 $ 2,444 $10,438 $10,668
Ratios to average net assets:
Expenses before waiver and payments by affiliates ....... 1.42% e 1.39% 1.42% 1.37% 1.67% 1.34%
Expenses net of waiver and payments by affiliates ....... 1.42% e,f 1.39% f 1.42% f 1.37% 1.67% 1.31%
Net investment income (loss) ............................ (0.55)% e (0.92)% (0.71)% (1.13)% (1.47)% (0.67)%
Portfolio turnover rate .................................. 78.51% 96.23% 68.39% 141.34% 182.71% 141.03%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction is less than 0.01%.
68 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 88.7%
ADVERTISING/MARKETING SERVICES 0.7%
a aQuantive Inc. ......................................................... United States 11,900 $ 323,442
------------
BIOTECHNOLOGY 1.2%
a Celgene Corp. .......................................................... United States 11,300 603,872
------------
BROADCASTING 0.9%
a XM Satellite Radio Holdings Inc., A .................................... United States 38,100 444,246
------------
COMPUTER COMMUNICATIONS 6.8%
a Cisco Systems Inc. ..................................................... United States 52,000 1,254,760
a Ixia ................................................................... United States 66,400 607,560
a Juniper Networks Inc. .................................................. United States 46,700 804,174
a QLogic Corp. ........................................................... United States 31,500 648,270
------------
3,314,764
------------
COMPUTER PERIPHERALS 2.8%
a Network Appliance Inc. ................................................. United States 21,900 799,350
a Seagate Technology ..................................................... United States 25,800 582,564
------------
1,381,914
------------
COMPUTER PROCESSING HARDWARE 2.8%
a Apple Computer Inc. .................................................... United States 10,900 883,772
a Rackable Systems Inc. .................................................. United States 15,300 474,453
------------
1,358,225
------------
DATA PROCESSING SERVICES 5.6%
First Data Corp. ....................................................... United States 29,900 725,075
Global Payments Inc. ................................................... United States 12,300 537,633
a NeuStar Inc., A ........................................................ United States 21,500 628,230
Paychex Inc. ........................................................... United States 21,100 833,028
------------
2,723,966
------------
ELECTRONIC COMPONENTS 1.7%
a MEMC Electronic Materials Inc. ......................................... United States 12,400 440,200
a SanDisk Corp. .......................................................... United States 7,800 375,180
------------
815,380
------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 4.2%
a Agilent Technologies Inc. .............................................. United States 22,500 801,000
Rockwell Automation Inc. ............................................... United States 6,200 384,400
Tektronix Inc. ......................................................... United States 28,300 859,471
------------
2,044,871
------------
ELECTRONIC PRODUCTION EQUIPMENT 3.1%
a ASML Holding NV, N.Y. shs .............................................. Netherlands 23,800 543,592
a FormFactor Inc. ........................................................ United States 8,500 324,530
KLA-Tencor Corp. ....................................................... United States 13,200 649,044
------------
1,517,166
------------
Semiannual Report | 69
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL CONGLOMERATES 1.2%
3M Co. ........................................................... United States 7,600 $ 599,184
------------
INFORMATION TECHNOLOGY SERVICES 3.5%
a Amdocs Ltd. ...................................................... United States 19,500 755,820
a Cognizant Technology Solutions Corp., A .......................... United States 12,600 948,528
------------
1,704,348
------------
INTERNET SOFTWARE/SERVICES 9.5%
a Akamai Technologies Inc. ......................................... United States 7,800 365,508
a Equinix Inc. ..................................................... United States 9,600 656,640
a Google Inc., A ................................................... United States 2,300 1,095,697
a Internap Network Services Corp. .................................. United States 32,100 529,008
a Marchex Inc., B .................................................. United States 23,600 334,648
a VeriSign Inc. .................................................... United States 41,100 849,948
a WebEx Communications Inc. ........................................ United States 13,450 517,153
a Yahoo! Inc. ...................................................... United States 9,380 247,069
------------
4,595,671
------------
MAJOR PHARMACEUTICALS 1.5%
Roche Holding AG ................................................. Switzerland 4,100 717,298
------------
MAJOR TELECOMMUNICATIONS 0.9%
a Bharti Airtel Ltd. ............................................... India 35,000 413,073
------------
MEDICAL SPECIALTIES 0.5%
a Intuitive Surgical Inc. .......................................... United States 2,600 257,868
------------
MISCELLANEOUS COMMERCIAL SERVICES 0.6%
a SAIC Inc. ........................................................ United States 13,400 268,000
------------
MISCELLANEOUS MANUFACTURING 0.8%
a Mettler-Toledo International Inc. ................................ Switzerland 5,300 363,845
------------
OILFIELD SERVICES/EQUIPMENT 1.0%
a FMC Technologies Inc. ............................................ United States 8,000 483,600
------------
PACKAGED SOFTWARE 10.4%
Adobe Systems Inc. ............................................... United States 21,000 803,250
a ANSYS Inc. ....................................................... United States 10,800 496,800
Autodesk Inc. .................................................... United States 13,600 499,800
a Cognos Inc. ...................................................... Canada 9,800 357,504
Microsoft Corp. .................................................. United States 21,200 608,652
a NAVTEQ ........................................................... United States 6,700 222,440
a Nuance Communications Inc. ....................................... United States 63,200 729,328
a Oracle Corp. ..................................................... United States 25,700 474,679
a Salesforce.com Inc. .............................................. United States 8,500 331,670
SAP AG, ADR ...................................................... Germany 10,300 511,292
------------
5,035,415
------------
70 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TECHNOLOGY FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
RECREATIONAL PRODUCTS 1.6%
a Activision Inc. ......................................................... United States 34,666 $ 534,550
Nintendo Co. Ltd. ....................................................... Japan 1,100 224,956
------------
759,506
------------
SEMICONDUCTORS 11.7%
a Broadcom Corp., A ....................................................... United States 20,000 605,400
a Hittite Microwave Corp. ................................................. United States 3,300 113,157
a Marvell Technology Group Ltd. ........................................... Bermuda 41,100 751,308
Microchip Technology Inc. ............................................... United States 34,300 1,129,499
a Microsemi Corp. ......................................................... United States 50,300 985,880
National Semiconductor Corp. ............................................ United States 25,100 609,679
a Netlogic Microsystems Inc. .............................................. United States 19,000 376,770
a NVIDIA Corp. ............................................................ United States 11,400 397,518
a Silicon Laboratories Inc. ............................................... United States 21,800 711,334
------------
5,680,545
------------
SPECIALTY TELECOMMUNICATIONS 2.4%
a American Tower Corp., A ................................................. United States 32,600 1,174,252
------------
TELECOMMUNICATIONS EQUIPMENT 11.7%
a Atheros Communications .................................................. United States 16,900 367,237
a Comverse Technology Inc. ................................................ United States 27,600 600,852
a Corning Inc. ............................................................ United States 33,600 686,448
Garmin Ltd. ............................................................. Cayman Islands 10,000 534,100
Harris Corp. ............................................................ United States 21,700 924,420
Nokia Corp., ADR ........................................................ Finland 35,700 709,716
a Optium Corp. ............................................................ United States 3,900 78,975
QUALCOMM Inc. ........................................................... United States 25,600 931,584
a Research In Motion Ltd. ................................................. Canada 4,500 528,660
a SiRF Technology Holdings Inc. ........................................... United States 10,500 295,260
------------
5,657,252
------------
WIRELESS COMMUNICATIONS 1.6%
a NII Holdings Inc. ....................................................... United States 12,300 799,869
------------
TOTAL COMMON STOCKS (COST $35,401,312) .................................. 43,037,572
------------
SHORT TERM INVESTMENT (COST $5,464,919) 11.3%
MONEY MARKET FUND 11.3%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% .... United States 5,464,919 5,464,919
------------
TOTAL INVESTMENTS (COST $40,866,231) 100.0% ............................. 48,502,491
OTHER ASSETS, LESS LIABILITIES (0.0%) c ................................. (16,112)
------------
NET ASSETS 100.0% ....................................................... $ 48,486,379
============
See Selected Portfolio Abbreviations on page 72.
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is annualized seven-day yield at
period end.
c Amount rounds to less than 0.1% of net assets.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
GDR - Global Depository Receipt
PIPES - Private Investment in Public Equity Securities
72 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2006 (unaudited)
-----------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH
DISCOVERY FUND FUND CARE FUND
-----------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................. $ 294,930,584 $ 55,164,721 $ 105,260,516
Cost - Sweep Money Fund (Note 7) ............................ 15,254,453 550 7,171,669
Cost - Repurchase agreements ................................ 14,992,000 -- --
-----------------------------------------------------------
Total cost of investments ................................... $ 325,177,037 $ 55,165,271 $ 112,432,185
===========================================================
Value - Unaffiliated issuers ................................ $ 452,044,103 $ 79,508,352 $ 135,401,447
Value - Sweep Money Fund (Note 7) ........................... 15,254,453 550 7,171,669
Value - Repurchase agreements ............................... 14,992,000 -- --
-----------------------------------------------------------
Total value of investments a ................................ 482,290,556 79,508,902 142,573,116
Cash ......................................................... 1,500,000 -- --
Foreign currency, at value (cost $1,454,784) ................. -- 1,454,991 --
Receivables:
Investment securities sold .................................. 5,742,630 2,865,344 345,793
Capital shares sold ......................................... 318,154 1,079,570 119,410
Dividends ................................................... 31,083 5,394 74,459
Cash on deposit with broker for securities sold short ........ 419,850 -- --
-----------------------------------------------------------
Total assets .......................................... 490,302,273 84,914,201 143,112,778
-----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............................. -- 1,829,684 --
Capital shares redeemed ..................................... 1,587,644 202,297 430,704
Affiliates .................................................. 615,267 116,591 183,404
Funds advanced by custodian .................................. -- 289,187 --
Deferred tax ................................................. -- 131,769 --
Payable upon return of securities loaned ..................... 14,992,000 -- --
Accrued expenses and other liabilities ....................... 12,187 21,594 49,763
-----------------------------------------------------------
Total liabilities ..................................... 17,207,098 2,591,122 663,871
-----------------------------------------------------------
Net assets, at value ............................... $ 473,095,175 $ 82,323,079 $ 142,448,907
===========================================================
Net assets consist of:
Paid-in capital .............................................. $ 702,331,824 $ 174,883,089 $ 129,239,106
Undistributed net investment income (loss) ................... (2,805,383) (593,621) 52,282
Net unrealized appreciation (depreciation) ................... 157,113,721 24,212,126 30,143,182
Accumulated net realized gain (loss) ......................... (383,544,987) (116,178,515) (16,985,663)
-----------------------------------------------------------
Net assets, at value ............................... $ 473,095,175 $ 82,323,079 $ 142,448,907
===========================================================
a The Franklin Biotechnology Discovery Fund includes $13,425,359 of
securities loaned.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 73
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
-----------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN GLOBAL
BIOTECHNOLOGY COMMUNICATIONS HEALTH CARE
DISCOVERY FUND FUND FUND
-----------------------------------------------------
CLASS A:
Net assets, at value ........................................................ $473,095,175 $67,960,057 $104,382,259
===================================================
Shares outstanding .......................................................... 8,115,433 5,816,666 4,385,043
===================================================
Net asset value per share a ................................................. $ 58.30 $ 11.68 $ 23.80
===================================================
Maximum offering price per share (net asset value per share / 94.25%) ....... $ 61.86 $ 12.39 $ 25.25
===================================================
CLASS B:
Net assets, at value ........................................................ -- $ 3,398,975 $ 11,827,703
===================================================
Shares outstanding .......................................................... -- 305,692 526,390
===================================================
Net asset value and maximum offering price per share a ...................... -- $ 11.12 $ 22.47
===================================================
CLASS C:
===================================================
Net assets, at value ........................................................ -- $10,964,047 $ 26,238,945
===================================================
Shares outstanding .......................................................... -- 985,227 1,179,395
===================================================
Net asset value and maximum offering price per share a ...................... -- $ 11.13 $ 22.25
===================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
74 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
-----------------------------------
FRANKLIN
FRANKLIN NATURAL TECHNOLOGY
RESOURCES FUND FUND
-----------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................... $329,444,483 $ 35,401,312
Cost - Sweep Money Fund (Note 7) ...................................... 8,267,456 5,464,919
--------------------------------
Total cost of investments ............................................. $337,711,939 $ 40,866,231
================================
Value - Unaffiliated issuers .......................................... $449,687,204 $ 43,037,572
Value - Sweep Money Fund (Note 7) ..................................... 8,267,456 5,464,919
--------------------------------
Total value of investments ............................................ 457,954,660 48,502,491
Receivables:
Investment securities sold ............................................ 4,886,270 690,848
Capital shares sold ................................................... 973,721 82,011
Dividends ............................................................. 399,380 3,685
--------------------------------
Total assets .................................................... 464,214,031 49,279,035
--------------------------------
Liabilities:
Payables:
Investment securities purchased ....................................... 3,646,653 589,017
Capital shares redeemed ............................................... 752,200 102,447
Affiliates ............................................................ 316,254 72,689
Deferred tax .......................................................... -- 7,695
Accrued expenses and other liabilities ................................. 17,227 20,808
--------------------------------
Total liabilities ............................................... 4,732,334 792,656
--------------------------------
Net assets, at value ......................................... $459,481,697 $ 48,486,379
================================
Net assets consist of:
Paid-in capital ........................................................ $313,803,252 $ 91,256,705
Undistributed net investment income (loss) ............................. 2,821,096 (277,007)
Net unrealized appreciation (depreciation) ............................. 120,249,221 7,628,565
Accumulated net realized gain (loss) ................................... 22,608,128 (50,121,884)
--------------------------------
Net assets, at value ......................................... $459,481,697 $ 48,486,379
================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 75
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
---------------------------------
FRANKLIN
FRANKLIN NATURAL TECHNOLOGY
RESOURCES FUND FUND
---------------------------------
CLASS A:
Net assets, at value ............................................................... $392,743,286 $29,513,587
===============================
Shares outstanding ................................................................. 11,594,474 5,607,839
===============================
Net asset value per share a ........................................................ $ 33.87 $ 5.26
===============================
Maximum offering price per share (net asset value per share / 94.25%) .............. $ 35.94 $ 5.58
===============================
CLASS B:
Net assets, at value ............................................................... -- $ 3,598,345
===============================
Shares outstanding ................................................................. -- 711,732
===============================
Net asset value and maximum offering price per share a ............................. -- $ 5.06
===============================
CLASS C:
Net assets, at value ............................................................... $ 25,262,930 $ 8,538,646
===============================
Shares outstanding ................................................................. 751,469 1,695,135
===============================
Net asset value and maximum offering price per share a ............................. $ 33.62 $ 5.04
===============================
CLASS R:
Net assets, at value ............................................................... -- $ 4,218,688
===============================
Shares outstanding ................................................................. -- 806,795
===============================
Net asset value and maximum offering price per share a ............................. -- $ 5.23
===============================
ADVISOR CLASS:
Net assets, at value ............................................................... $ 41,475,481 $ 2,617,113
===============================
Shares outstanding ................................................................. 1,168,748 486,924
===============================
Net asset value and maximum offering price per share a ............................. $ 35.49 $ 5.37
===============================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
76 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended October 31, 2006 (unaudited)
-----------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN GLOBAL GLOBAL
BIOTECHNOLOGY COMMUNICATIONS HEALTH CARE
DISCOVERY FUND FUND FUND
-----------------------------------------------
Investment income:
Dividends (net of foreign taxes) a
Unaffiliated issuers ....................................................... $ -- $ 145,497 $ 386,203
Sweep Money Fund (Note 7) .................................................. 296,140 19,701 171,835
Interest .................................................................... 13,838 732 --
Income from securities loaned-net ........................................... 82,764 -- --
Other income (Note 10) ...................................................... 42,406 39,873 43,760
----------------------------------------------
Total investment income .............................................. 435,148 205,803 601,798
----------------------------------------------
Expenses:
Management fees (Note 3a) ................................................... 1,136,845 238,406 405,363
Administrative fees (Note 3b) ............................................... 324,750 -- --
Distribution fees (Note 3c)
Class A .................................................................... 573,936 77,656 128,496
Class B .................................................................... -- 16,137 62,517
Class C .................................................................... -- 49,034 132,347
Transfer agent fees (Note 3e) ............................................... 844,923 151,684 244,701
Custodian fees (Note 4) ..................................................... 8,834 11,455 3,813
Reports to shareholders ..................................................... 85,140 16,953 20,495
Registration and filing fees ................................................ 13,702 17,966 20,282
Professional fees ........................................................... 13,438 15,846 13,334
Trustees' fees and expenses ................................................. 2,407 503 719
Other ....................................................................... 6,372 1,491 3,402
----------------------------------------------
Total expenses ....................................................... 3,010,347 597,131 1,035,469
Expense reductions (Note 4) .......................................... (816) -- (100)
----------------------------------------------
Net expenses ...................................................... 3,009,531 597,131 1,035,369
----------------------------------------------
Net investment income (loss) ................................... (2,574,383) (391,328) (433,571)
----------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................ 4,636,652 1,556,552 1,364,515
Foreign currency transactions .............................................. 21,038 8,474 (4,319)
----------------------------------------------
Net realized gain (loss) ............................................. 4,657,690 1,565,026 1,360,196
----------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................ 9,860,679 64,863 1,599,136
Translation of assets and liabilities denominated in foreign currencies .... (297) (12,263) 967
Change in deferred taxes on unrealized appreciation ......................... -- (105,058) --
----------------------------------------------
Net change in unrealized appreciation (depreciation) ................. 9,860,382 (52,458) 1,600,103
----------------------------------------------
Net realized and unrealized gain (loss) ...................................... 14,518,072 1,512,568 2,960,299
----------------------------------------------
Net increase (decrease) in net assets resulting from operations .............. $ 11,943,689 $ 1,121,240 $ 2,526,728
==============================================
a Foreign taxes withheld on dividends .......................................... $ -- $ 7,929 $ 7,242
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended October 31, 2006 (unaudited)
-----------------------------------
FRANKLIN
FRANKLIN NATURAL TECHNOLOGY
RESOURCES FUND FUND
-----------------------------------
Investment income:
Dividends (net of foreign taxes) a
Unaffiliated issuers .............................................................. $ 3,005,921 $ 53,093
Sweep Money Fund (Note 7) ......................................................... 377,946 130,138
Other income (Note 10) ............................................................ 101,765 25,686
---------------------------------
Total investment income ..................................................... 3,485,632 208,917
---------------------------------
Expenses:
Management fees (Note 3a) .......................................................... 1,190,356 122,408
Administrative fees (Note 3b) ...................................................... -- 47,961
Distribution fees (Note 3c)
Class A ........................................................................... 559,282 51,585
Class B ........................................................................... -- 18,486
Class C ........................................................................... 116,220 42,270
Class R ........................................................................... -- 10,533
Transfer agent fees (Note 3e) ...................................................... 368,148 123,144
Custodian fees (Note 4) ............................................................ 6,374 596
Reports to shareholders ............................................................ 61,502 8,524
Registration and filing fees ....................................................... 52,224 26,924
Professional fees .................................................................. 13,175 9,486
Trustees' fees and expenses ........................................................ 2,577 250
Other .............................................................................. 3,306 1,592
---------------------------------
Total expenses .............................................................. 2,373,164 463,759
Expense reductions (Note 4) ................................................. (1,234) (66)
---------------------------------
Net expenses ............................................................. 2,371,930 463,693
---------------------------------
Net investment income (loss) .......................................... 1,113,702 (254,776)
---------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ....................................................................... 8,179,938 1,513,421
Foreign currency transactions ..................................................... (39,723) 6,759
---------------------------------
Net realized gain (loss) .................................................... 8,140,215 1,520,180
---------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ....................................................................... (42,466,067) (5,603,999)
Translation of assets and liabilities denominated in foreign currencies ........... 3,813 (53)
Change in deferred taxes on unrealized appreciation ................................ -- (7,695)
---------------------------------
Net change in unrealized appreciation (depreciation) ........................ (42,462,254) (5,611,747)
---------------------------------
Net realized and unrealized gain (loss) ............................................. (34,322,039) (4,091,567)
---------------------------------
Net increase (decrease) in net assets resulting from operations ..................... $(33,208,337) $(4,346,343)
=================================
a Foreign taxes withheld on dividends ................................................. $ 27,328 $ 1,159
78 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL
DISCOVERY FUND COMMUNICATIONS FUND
----------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006 (UNAUDITED) APRIL 30, 2006
----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................... $ (2,574,383) $ (5,737,540) $ (391,328) $ (364,265)
Net realized gain (loss) from investments and
foreign currency transactions ........................ 4,657,690 51,643,280 1,565,026 7,282,444
Net change in unrealized appreciation
(depreciation) on investments and translation
of assets and liabilities denominated in
foreign currencies, and deferred taxes ............... 9,860,382 61,210,280 (52,458) 18,965,308
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ...................... 11,943,689 107,116,020 1,121,240 25,883,487
--------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .............................................. -- -- -- (603,089)
Class B .............................................. -- -- -- (6,206)
Class C .............................................. -- -- -- (23,791)
--------------------------------------------------------------------
Total distributions to shareholders ..................... -- -- -- (633,086)
--------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .............................................. (49,549,079) (82,326,743) (2,711,396) (1,344,182)
Class B .............................................. -- -- (150,833) (225,750)
Class C .............................................. -- -- 513,579 226,244
--------------------------------------------------------------------
Total capital share transactions ........................ (49,549,079) (82,326,743) (2,348,650) (1,343,688)
--------------------------------------------------------------------
Redemption fees ......................................... 539 2,234 218 609
--------------------------------------------------------------------
Net increase (decrease) in net assets ............ (37,604,851) 24,791,511 (1,227,192) 23,907,322
Net assets:
Beginning of period ..................................... 510,700,026 485,908,515 83,550,271 59,642,949
--------------------------------------------------------------------
End of period ........................................... $ 473,095,175 $ 510,700,026 $ 82,323,079 $ 83,550,271
====================================================================
Undistributed net investment income (loss)
included in net assets:
End of period ............................................ $ (2,805,383) $ (231,000) $ (593,621) $ (202,293)
====================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 79
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
---------------------------------------------------------------------
FRANKLIN FRANKLIN
GLOBAL HEALTH CARE FUND NATURAL RESOURCES FUND
---------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006 (UNAUDITED) APRIL 30, 2006
---------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................... $ (433,571) $ 470,799 $ 1,113,702 $ 1,688,261
Net realized gain (loss) from investments and
foreign currency transactions ........................ 1,360,196 4,093,056 8,140,215 25,576,260
Net change in unrealized appreciation
(depreciation) on investments and translation
of assets and liabilities denominated in
foreign currencies ................................... 1,600,103 13,184,589 (42,462,254) 117,592,588
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ...................... 2,526,728 17,748,444 (33,208,337) 144,857,109
--------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .............................................. -- -- -- (1,014,621)
Class C .............................................. -- -- -- (10,636)
Advisor Class ........................................ -- -- -- (145,018)
Net realized gains:
Class A .............................................. -- -- -- (11,206,808)
Class C .............................................. -- -- -- (159,473)
Advisor Class ........................................ -- -- -- (1,183,962)
--------------------------------------------------------------------
Total distributions to shareholders ..................... -- -- -- (13,720,518)
--------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .............................................. (3,939,862) 6,477,633 (18,442,887) 114,080,599
Class B .............................................. (2,550,612) 489,481 -- --
Class C .............................................. (3,196,221) 3,870,125 8,200,659 17,261,414
Advisor Class ........................................ -- -- 95,356 (4,032,264)
--------------------------------------------------------------------
Total capital share transactions ........................ (9,686,695) 10,837,239 (10,146,872) 127,309,749
--------------------------------------------------------------------
Redemption fees ......................................... 711 8,024 2,254 13,158
--------------------------------------------------------------------
Net increase (decrease) in net assets ........... (7,159,256) 28,593,707 (43,352,955) 258,459,498
Net assets:
Beginning of period ..................................... 149,608,163 121,014,456 502,834,652 244,375,154
--------------------------------------------------------------------
End of period ........................................... $ 142,448,907 $149,608,163 $ 459,481,697 $ 502,834,652
====================================================================
Undistributed net investment income included in
net assets:
End of period ........................................... $ 52,282 $ 485,853 $ 2,821,096 $ 1,707,394
====================================================================
80 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
---------------------------------
FRANKLIN TECHNOLOGY FUND
---------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................................................................. $ (254,776) $ (707,298)
Net realized gain (loss) from investments and foreign currency transactions .................. 1,520,180 4,577,084
Net change in unrealized appreciation (depreciation) on investments, translation of assets
and liabilities denominated in foreign currencies, and deferred taxes ...................... (5,611,747) 9,249,020
------------------------------
Net increase (decrease) in net assets resulting from operations ........................ (4,346,343) 13,118,806
------------------------------
Capital share transactions: (Note 2)
Class A ...................................................................................... (1,544,348) (1,988,606)
Class B ...................................................................................... (429,113) (992,602)
Class C ...................................................................................... (321,106) (1,243,188)
Class R ...................................................................................... 802,322 281,663
Advisor Class ................................................................................ (269,488) (8,833)
------------------------------
Total capital share transactions .............................................................. (1,761,733) (3,951,566)
------------------------------
Redemption fees ............................................................................... 337 2,803
------------------------------
Net increase (decrease) in net assets .................................................. (6,107,739) 9,170,043
Net assets:
Beginning of period ........................................................................... 54,594,118 45,424,075
------------------------------
End of period ................................................................................. $ 48,486,379 $ 54,594,118
==============================
Undistributed net investment income (loss) included in net assets:
End of period ................................................................................. $ (277,007) $ (22,231)
==============================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 81
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 (1940 Act) as an open-end investment company, consisting of twelve
separate funds. All funds included in this report (the Funds) are
non-diversified. The financial statements of the remaining funds in the Trust
are presented separately. The classes of shares offered within each of the Funds
are indicated below. Each class of shares differs by its initial sales load,
contingent deferred sales charges, distribution fees, voting rights on matters
affecting a single class and its exchange privilege.
- ----------------------------------------------------------------------------------------------------------------------
CLASS A, CLASS C CLASS A, CLASS B, CLASS C,
CLASS A CLASS A, CLASS B & CLASS C & ADVISOR CLASS CLASS R & ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------------
Franklin Biotechnology Franklin Global Franklin Natural Franklin Technology Fund
Discovery Fund Communications Fund Resources Fund
Franklin Global Health Care Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds
82 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
for each specific market proxy to assist in determining if an event has
occurred. If such an event occurs, the securities may be valued using fair value
procedures, which may include the use of independent pricing services. All
security valuation procedures are approved by the Trust's Board of Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. REPURCHASE AGREEMENTS
Certain funds may enter into repurchase agreements, which are accounted for as a
loan by the fund to the seller, collateralized by securities which are delivered
to the fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. Repurchase agreements are
valued at cost. At October 31, 2006, all repurchase agreements held by the
Franklin Biotechnology Discovery Fund had been entered into on that date.
D. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statements of Operations.
Semiannual Report | 83
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS (CONTINUED)
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. SECURITIES LENDING
The Franklin Biotechnology Discovery Fund loans securities to certain brokers
through a securities lending agent for which they receive cash and securities
collateral against the loaned securities in an amount equal to at least 102% of
the market value of the loaned securities. The cash collateral is invested in
short-term instruments as noted in the Statements of Investments. The securities
received as collateral are held in a segregated account with the fund's
custodian on the fund's behalf. The fund receives interest income from the
investment of cash collateral and interest income from the securities held as
collateral, adjusted by lender fees and broker rebates. At October 31, 2006, the
market value of securities on loan was $13,425,359, for which the fund's
custodian held cash collateral valued at $14,992,000. The fund bears the risk of
loss with respect to the investment of the cash collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower.
F. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because each fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Funds may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Funds invest.
The Funds may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Funds record an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Funds are notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
84 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
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.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class-level
expenses may result in payment of different per share distributions by class.
H. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
I. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Funds and accounted for as an addition to paid-in
capital.
J. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
Semiannual Report | 85
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2006, there were an unlimited number of shares authorized ($0.01
par value).
-------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY FRANKLIN GLOBAL
DISCOVERY FUND COMMUNICATIONS FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2006
Shares sold ........................................... 383,262 $ 20,361,523 669,594 $ 7,379,633
Shares redeemed ....................................... (1,316,125) (69,910,602) (940,299) (10,091,029)
-------------------------------------------------------------------
Net increase (decrease) ............................... (932,863) $ (49,549,079) (270,705) $ (2,711,396)
===================================================================
Year ended April 30, 2006
Shares sold ........................................... 1,177,206 $ 65,909,529 1,483,554 $ 15,118,283
Shares issued in reinvestment
of distributions ..................................... -- -- 53,533 546,573
Shares redeemed ....................................... (2,681,270) (148,236,272) (1,734,623) (17,009,038)
-------------------------------------------------------------------
Net increase (decrease) ............................... (1,504,064) $ (82,326,743) (197,536) $ (1,344,182)
===================================================================
CLASS B SHARES:
Six months ended October 31, 2006
Shares sold ................................................................................... 18,780 $ 195,653
Shares redeemed ............................................................................... (34,463) (346,486)
-----------------------------
Net increase (decrease) ....................................................................... (15,683) $ (150,833)
=============================
Year ended April 30, 2006
Shares sold ................................................................................... 51,571 $ 502,749
Shares issued in reinvestment of distributions ................................................ 585 5,726
Shares redeemed ............................................................................... (81,664) (734,225)
-----------------------------
Net increase (decrease) ....................................................................... (29,508) $ (225,750)
=============================
CLASS C SHARES:
Six months ended October 31, 2006
Shares sold ................................................................................... 173,781 $ 1,808,743
Shares redeemed ............................................................................... (127,550) (1,295,164)
-----------------------------
Net increase (decrease) ....................................................................... 46,231 $ 513,579
=============================
Year ended April 30, 2006
Shares sold ................................................................................... 273,629 $ 2,698,171
Shares issued in reinvestment
of distributions ............................................................................. 2,038 19,969
Shares redeemed ............................................................................... (264,564) (2,491,896)
-----------------------------
Net increase (decrease) ....................................................................... 11,103 $ 226,244
=============================
86 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------------
FRANKLIN GLOBAL FRANKLIN NATURAL
HEALTH CARE FUND RESOURCES FUND
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS A SHARES:
Six months ended October 31, 2006
Shares sold ............................... 369,075 $ 8,507,091 2,318,944 $ 78,752,767
Shares redeemed ........................... (544,441) (12,446,953) (2,988,818) (97,195,654)
-----------------------------------------------------------------
Net increase (decrease) ................... (175,366) $ (3,939,862) (669,874) $ (18,442,887)
=================================================================
Year ended April 30, 2006
Shares sold ............................... 1,236,290 $ 27,592,166 6,896,919 $ 215,798,546
Shares issued in reinvestment of
distributions ............................ -- -- 344,872 11,025,537
Shares redeemed ........................... (946,189) (21,114,533) (3,665,312) (112,743,484)
-----------------------------------------------------------------
Net increase (decrease) ................... 290,101 $ 6,477,633 3,576,479 $ 114,080,599
=================================================================
CLASS B SHARES:
Six months ended October 31, 2006
Shares sold ............................... 12,412 $ 268,366
Shares redeemed ........................... (130,517) (2,818,978)
--------------------------
Net increase (decrease) ................... (118,105) $ (2,550,612)
==========================
Year ended April 30, 2006
Shares sold ............................... 166,960 $ 3,540,947
Shares redeemed ........................... (142,949) (3,051,466)
--------------------------
Net increase (decrease) ................... 24,011 $ 489,481
==========================
CLASS C SHARES:
Six months ended October 31, 2006
Shares sold ............................... 93,552 $ 2,020,169 365,980 $ 12,382,534
Shares redeemed ........................... (244,049) (5,216,390) (131,042) (4,181,875)
-----------------------------------------------------------------
Net increase (decrease) ................... (150,497) $ (3,196,221) 234,938 $ 8,200,659
=================================================================
Year ended April 30, 2006 a
Shares sold ............................... 452,213 $ 9,463,203 555,050 $ 18,514,003
Shares issued in reinvestment of
distributions ............................ -- -- 5,227 166,857
Shares redeemed ........................... (266,592) (5,593,078) (43,746) (1,419,446)
-----------------------------------------------------------------
Net increase (decrease) ................... 185,621 $ 3,870,125 516,531 $ 17,261,414
=================================================================
ADVISOR CLASS SHARES:
Six months ended October 31, 2006
Shares sold ................................................................... 49,913 $ 1,775,808
Shares redeemed ............................................................... (48,859) (1,680,452)
------------------------------
Net increase (decrease) ....................................................... 1,054 $ 95,356
==============================
a For the period September 1, 2005 (effective date) to April 30, 2006 for
the Franklin Natural Resources Fund.
Semiannual Report | 87
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------
FRANKLIN NATURAL
RESOURCES FUND
---------------------------
SHARES AMOUNT
---------------------------
ADVISOR CLASS SHARES: (CONTINUED)
Year ended April 30, 2006
Shares sold ......................................................................... 109,819 $ 3,611,705
Shares issued in reinvestment of
distributions ...................................................................... 37,636 1,257,038
Shares redeemed ..................................................................... (283,616) (8,901,007)
---------------------------
Net increase (decrease) ............................................................. (136,161) $ (4,032,264)
===========================
---------------------------
FRANKLIN
TECHNOLOGY FUND
---------------------------
SHARES AMOUNT
---------------------------
CLASS A SHARES:
Six months ended October 31, 2006
Shares sold ......................................................................... 853,911 $ 4,354,199
Shares redeemed ..................................................................... (1,162,600) (5,898,547)
---------------------------
Net increase (decrease) ............................................................. (308,689) $ (1,544,348)
===========================
Year ended April 30, 2006
Shares sold ......................................................................... 1,700,982 $ 8,667,503
Shares redeemed ..................................................................... (2,143,833) (10,656,109)
---------------------------
Net increase (decrease) ............................................................. (442,851) $ (1,988,606)
===========================
CLASS B SHARES:
Six months ended October 31, 2006
Shares sold ......................................................................... 25,081 $ 119,980
Shares redeemed ..................................................................... (112,737) (549,093)
---------------------------
Net increase (decrease) ............................................................. (87,656) $ (429,113)
===========================
Year ended April 30, 2006
Shares sold ......................................................................... 47,431 $ 235,459
Shares redeemed ..................................................................... (250,237) (1,228,061)
---------------------------
Net increase (decrease) ............................................................. (202,806) $ (992,602)
===========================
CLASS C SHARES:
Six months ended October 31, 2006
Shares sold ......................................................................... 184,425 $ 893,411
Shares redeemed ..................................................................... (249,072) (1,214,517)
---------------------------
Net increase (decrease) ............................................................. (64,647) $ (321,106)
===========================
Year ended April 30, 2006
Shares sold ......................................................................... 315,915 $ 1,548,628
Shares redeemed ..................................................................... (580,938) (2,791,816)
---------------------------
Net increase (decrease) ............................................................. (265,023) $ (1,243,188)
===========================
88 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------
FRANKLIN
TECHNOLOGY FUND
------------------------------
SHARES AMOUNT
------------------------------
CLASS R SHARES:
Six months ended October 31, 2006
Shares sold .................................................................. 305,848 $ 1,665,006
Shares redeemed .............................................................. (169,978) (862,684)
------------------------------
Net increase (decrease) ...................................................... 135,870 $ 802,322
==============================
Year ended April 30, 2006
Shares sold .................................................................. 312,364 $ 1,598,426
Shares redeemed .............................................................. (266,105) (1,316,763)
------------------------------
Net increase (decrease) ...................................................... 46,259 $ 281,663
==============================
ADVISOR CLASS SHARES:
Six months ended October 31, 2006
Shares sold .................................................................. 23,755 $ 122,698
Shares redeemed .............................................................. (72,931) (392,186)
------------------------------
Net increase (decrease) ...................................................... (49,176) $ (269,488)
==============================
Year ended April 30, 2006
Shares sold .................................................................. 62,308 $ 321,074
Shares redeemed .............................................................. (64,035) (329,907)
------------------------------
Net increase (decrease) ...................................................... (1,727) $ (8,833)
==============================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
All Funds, except Franklin Technology Fund, pay an investment management fee to
Advisers based on the average daily net assets of each of the Funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
Semiannual Report | 89
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Franklin Technology Fund pays an investment management fee to Advisers based
on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.550% Up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin Biotechnology Discovery Fund pays an administrative fee to FT
Services based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
The Franklin Technology Fund pays an administrative fee to FT Services of 0.20%
per year of the average daily net assets of the fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Global Communications Fund, the Franklin Global Health Care Fund
and the Franklin Natural Resources Fund. The fee is paid by Advisers based on
average daily net assets of each of the Funds, and is not an additional expense
of the Funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the
Funds reimburse Distributors for costs incurred in connection with the sale and
distribution of each fund's shares up to a certain percentage per year of its
average daily net assets as follows:
-------------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
-------------------------------------------------------------------------------------
Class A ......... 0.35% 0.25% 0.25% 0.35% 0.35%
90 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Under the Class A reimbursement distribution plans, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
The Franklin Biotechnology Discovery Fund reimburses Distributors up to 0.35%
when the fund is open to new investors and up to 0.25% when the fund is closed
to new investors. This fund was reopened to new investors September 1, 2001, and
will remain open until net assets reach $2 billion.
Under the Funds' compensation distribution plans, the Funds pay Distributors for
costs incurred in connection with the sale and distribution of each fund's
shares up to a certain percentage per year of their average daily net assets of
each class as follows:
-----------------------------------------------------------------
FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
FUND CARE FUND RESOURCES FUND FUND
-----------------------------------------------------------------
Class B ...................... 1.00% 1.00% -- 1.00%
Class C ...................... 1.00% 1.00% 1.00% 1.00%
Class R ...................... -- -- -- 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the period:
------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH
DISCOVERY FUND FUND CARE FUND
------------------------------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ................................. $ 43,091 $14,586 $26,994
Contingent deferred sales charges retained ..................... $ 509 $ 2,478 $ 7,851
---------------------------------
FRANKLIN FRANKLIN
NATURAL TECHNOLOGY
RESOURCES FUND FUND
---------------------------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ................................. $266,268 $ 7,566
Contingent deferred sales charges retained ..................... $ 26,950 $ 4,004
Semiannual Report | 91
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEE
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by Investor Services:
-----------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
-----------------------------------------------------------------------------------
Transfer agent fees .............. 512,944 $100,376 $170,349 $ 272,519 $85,015
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended October 31, 2006, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2006, the capital loss carryforwards were as
follows:
-------------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
-------------------------------------------------------------------------------------
Capital loss carryforwards
expiring in:
2010 ................... $ 70,295,650 $ 64,950,261 $ -- $ -- $22,874,077
2011 ................... 238,490,545 52,123,016 2,726,270 -- 28,445,452
2012 ................... 72,400,540 -- 15,108,743 -- --
------------------------------------------------------------------------------------
$381,186,735 $117,073,277 $17,835,013 $ -- $51,319,529
====================================================================================
For tax purposes, realized currency losses occurring subsequent to October 31
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2006, the Franklin Biotechnology Discovery Fund, the
Franklin Global Communications Fund and the Franklin Natural Resources Fund
deferred realized currency losses of $18,221, $54,368 and $38,346, respectively.
92 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
At October 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
------------------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
------------------------------------------------------------------------------------------
Cost of investments ......... $327,606,666 $55,957,767 $112,943,031 $340,992,328 $41,365,075
=========================================================================================
Unrealized
appreciation ............... $177,434,828 $25,254,432 $ 32,805,488 $122,270,206 $ 8,301,399
Unrealized
depreciation ............... (22,750,938) (1,703,297) (3,175,403) (5,307,874) (1,163,983)
-----------------------------------------------------------------------------------------
Net unrealized
appreciation
(depreciation) ............. $154,683,890 $23,551,135 $ 29,630,085 $116,962,332 $ 7,137,416
=========================================================================================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
passive foreign investment company shares.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2006, were as follows:
--------------------------------------------------------------------------------------
FRANKLIN FRANKLIN GLOBAL FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY COMMUNICATIONS GLOBAL HEALTH NATURAL TECHNOLOGY
DISCOVERY FUND FUND CARE FUND RESOURCES FUND FUND
--------------------------------------------------------------------------------------
Purchases ................. $ 81,438,321 $55,189,992 $19,505,681 $139,702,590 $33,744,009
Sales ..................... $150,570,441 $59,513,646 $19,581,568 $140,929,466 $35,724,994
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management and
administrative fees paid by the Sweep Money Fund.
Semiannual Report | 93
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. RESTRICTED SECURITIES
The Funds may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Funds have registration rights for
certain restricted securities held at period end. The issuer generally incurs
all registration costs.
At October 31, 2006, the Funds held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
- ------------------------------------------------------------------------------------------------------------------------
SHARES/ ACQUISITION
WARRANTS ISSUER DATE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
1,128,271 Fibrogen Inc., cvt. pfd., E ..................... 5/19/00 $5,065,937 $7,581,981
==========
TOTAL RESTRICTED SECURITIES (1.60% of Net Assets)
FRANKLIN GLOBAL COMMUNICATIONS FUND
124,248 Dilithium Networks Inc., depositary receipt, D,
pfd., 144A, PIPES .............................. 7/13/06 $ 289,500 $ 289,498
==========
TOTAL RESTRICTED SECURITIES (0.35% of Net Assets)
FRANKLIN GLOBAL HEALTH CARE FUND
136,364 Masimo Corp., cvt. pfd., F ...................... 5/15/00 $1,500,004 $2,415,006
==========
TOTAL RESTRICTED SECURITIES (1.70% of Net Assets)
FRANKLIN NATURAL RESOURCES FUND
435,000 Jinshan Gold Mines Inc., wts., 6/20/07 .......... 1/26/06 $ -- $ 205,399
==========
TOTAL RESTRICTED SECURITIES (0.04% of Net Assets)
9. OTHER CONSIDERATIONS
Directors or employees of Advisers, as the Franklin Natural Resources Fund's
Investment Manager, may serve as members of various bondholders' steering
committees, on credit committees, or may represent the Funds in certain
corporate restructuring negotiations. At October 31, 2006, such individuals
serve in one or more of these capacities for Solutia Inc. As a result of this
involvement, such individuals may be in possession of certain material
non-public information. If the Funds' Investment Manager, while in possession of
such information, seeks to buy or sell any of these securities, it will comply
with all applicable federal securities laws.
94 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan were completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution: The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
Semiannual Report | 95
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY MATTERS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
uncertainty in tax positions taken or expected to be taken in a tax return. FIN
48 provides guidance on the measurement, recognition, classification and
disclosure of tax positions, along with accounting for the related interest and
penalties. FIN 48 is effective for fiscal years beginning after December 15,
2006, and is to be applied to all open tax years as of the date of
effectiveness. The Fund is currently evaluating the impact, if any, of applying
the various provisions of FIN 48.
In September 2006, FASB Statement No. 157, "Fair Value Measurement" ("SFAS
157"), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
96 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust'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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q 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
1-800/SEC-0330.
Semiannual Report | 97
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/06 Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632 -2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FSS2 S2006 12/06
OCTOBER 31, 2006
A series of Franklin Strategic Series
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FRANKLIN TEMPLETON
INVESTMENTS
Franklin . Templeton . Mutual Series
FRANKLIN TEMPLETON INVESTMENTS
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager structure combines the specialized
expertise of three world-class investment management groups--Franklin, Templeton
and Mutual Series.
SPECIALIZED EXPERTISE
Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that underlie
its success.
FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, with
offices in over 25 countries, Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among what it believes
are undervalued stocks, as well as arbitrage situations and distressed
securities.
TRUE DIVERSIFICATION
Because our management groups work independently and adhere to different
investment approaches, Franklin, Templeton and Mutual Series funds typically
have distinct portfolios. That's why our funds can be used to build truly
diversified allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST
At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable, accurate and personal service that has helped us become one of the
most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
[GRAPHIC OMITTED] [FOUNTAIN PIC]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ................ 1
SEMIANNUAL REPORT
Franklin Blue Chip Fund ........... 3
Performance Summary ............... 7
Your Fund's Expenses .............. 10
Financial Highlights and
Statement of Investments .......... 12
Financial Statements .............. 19
Notes to Financial Statements ..... 23
Shareholder Information ........... 31
- --------------------------------------------------------------------------------
Semiannual Report
Franklin Blue Chip Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Blue Chip Fund seeks long-term
capital appreciation by investing substantially in equity securities of blue
chip companies located in the U.S. For purposes of the Fund's investments, blue
chip companies are well-established companies with strong financial records
relative to other companies in their respective industries.
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This semiannual report for Franklin Blue Chip Fund covers the period ended
October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Blue Chip Fund - Class A posted a +2.74% cumulative total return for
the six months under review. The Fund underperformed its broad and narrow
benchmarks, the Standard & Poor's 500 Index (S&P 500) and S&P 100 Index, which
posted total returns of +6.11% and +7.50% for the same period. 1 You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 7.
ECONOMIC AND MARKET OVERVIEW
During the six months ended October 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product growth slowed to annualized
rates of 2.6% in the second quarter and an estimated 2.2% in the third quarter.
Housing market weakness contributed to the slowdown. Growth was supported
primarily by corporate profits and consumer and government spending. Export
growth picked up some momentum, but a record trade deficit remained. Although
labor costs rose and new job creation slowed to 1% annually, hiring generally
increased and the unemployment rate fell from 4.6% to a five-year low of 4.4%. 2
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance. The S&P 100 is
market capitalization weighted and measures performance of 100 large-cap
companies in the S&P 500. The indexes are unmanaged and include reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
2. Source: Bureau of Labor Statistics.
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 16.
Semiannual Report | 3
Elevated energy and other commodity prices were a primary economic concern for
much of the period. Oil prices were volatile and declined from a record high of
$77 per barrel in July to nearly $59 at period-end. Shifting oil prices appeared
to raise the anxiety level among consumers and businesses alike. Consumers
curbed spending on large purchases, such as homes and cars. Home prices fell in
many parts of the country, mortgage rates crept up, and borrowing against home
equity flattened. Lower retail prices for cars, computers and clothing in
September and October signaled that inflationary pressure appeared to be
diminishing somewhat. Inflation was still a concern, however, as the core
Consumer Price Index (CPI) rose 2.7% for the 12 months ended October 31, 2006,
which was higher than the 2.2% 10-year average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate to 5.25% on
June 30. Since June, the Fed left the rate unchanged, citing a slowing economy,
widespread cooling in the housing market and the lagging effect of prior
tightening. The Fed stated that even with lower oil prices toward period-end,
inflation risks remained.
The Fed's inaction helped restore investor confidence, and equity markets
experienced dramatic rallies late in the period. Overall, the blue chip stocks
of the Dow Jones Industrial Average posted a six-month total return of +7.47%,
and the broader S&P 500 returned +6.11%, while the technology-heavy NASDAQ
Composite Index had a total return of +3.03%. 4 Utilities, telecommunications
and consumer staples performed particularly well.
INVESTMENT STRATEGY
Our investment process begins with company-specific research to identify the
best investment opportunities for long-term growth. We examine high-quality
companies and focus on those we believe have a sustainable competitive
advantage, a strong financial record and a market capitalization of more than $1
billion. Our team of equity analysts looks for businesses with strong brands,
experienced management teams, substantial research and development budgets,
large and growing market shares, solid balance sheets, consistent earnings
growth and sustainable competitive advantages. Finally, we assess industries and
sectors that we believe offer attractive secular trends or favorable risk-reward
profiles before determining final investment weightings or decisions.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price
weighted based on the average market price of 30 blue chip stocks of companies
that are generally industry leaders. See footnote 1 for a description of the S&P
500. The NASDAQ Composite Index measures all NASDAQ domestic and international
based common type stocks listed on The NASDAQ Stock Market. The index is market
value weighted and includes more than 3,000 companies.
4 | Semiannual Report
MANAGER'S DISCUSSION
For the six months under review, the Fund's performance relative to the S&P 500
benefited from our stock selection in the process industries sector and an
underweighted allocation to the industrial services sector. The top three
contributors to the Fund's absolute performance were integrated oil company
Exxon Mobil, electric utility Entergy, and diversified health care product
provider Johnson & Johnson.
Within the process industries sector, shares of agricultural and food product
producer and distributor Bunge5 rose in value as the company experienced
earnings strength in its agribusiness, improved fertilizer sales and, more
recently, increased demand for its biofuels (renewable fuel produced from oil
seed crops). Fund performance was also helped by our holding in The Scotts
Miracle-Gro Co. 5, the world's largest maker and marketer of horticultural and
turf products. Scotts reported solid earnings and achieved some initial success
in integrating its acquisition of Smith & Hawken, an upscale garden products
retailer.
Consistent with our investment strategy, we did not invest in several industries
in the industrial services sector, including environmental services, oilfield
services and equipment, and engineering and construction due largely to
continuing stock valuation concerns. Our decision not to own stocks from these
poorly performing areas contributed positively to the Fund's relative
performance.
Within the commercial services sector, Fund performance was helped by our
position in Moody's, the holding company for Moody's Investors Service, which
publishes credit ratings and other financial information on some 200,000
commercial and government entities in about 100 countries. Moody's, whose share
price previously tumbled due to concerns about slowing revenue growth, rebounded
during the reporting period.
The Fund's relative performance was hindered by investment decisions in the
energy minerals, finance and technology services sectors. Three holdings that
most negatively impacted our results were wireless communications technology
provider QUALCOMM, national homebuilder D.R. Horton, and coal producer Peabody
Energy.
Within energy minerals, in addition to Peabody Energy, our position in
integrated oil company BP hindered Fund performance. As oil and gas prices
pulled back from record highs during the latter half of the reporting period,
stock prices for energy producers and distributors such as Peabody and BP also
retreated.
5. Not part of the S&P 500.
PORTFOLIO BREAKDOWN
BASED ON TOTAL NET ASSETS AS OF 10/31/06
[GRAPHIC OMITTED]
Finance 20.2%
Electronic Technology* 13.6%
Health Technology* 11.2%
Producer Manufacturing 9.8%
Energy Minerals 9.3%
Process Industries 4.6%
Consumer Services 4.4%
Retail Trade 4.1%
Technology Services* 4.0%
Transportation 3.1%
Consumer Non-Durables 2.5%
Utilities 2.2%
Other 10.3%
Short-Term Investments &
Other Net Assets 0.7%
*Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
Semiannual Report | 3
Within finance, two of the factors that detracted most from the Fund's results
relative to the S&P 500 were an overweighting in credit card issuer Capital One
Financial and a lack of investment in real estate investment trusts (REITs),
most of which performed well during the six months under review despite slowing
housing and real estate markets. Capital One's stock price declined due to a
worsening credit environment and losses in the U.K., as well as investor
concerns over the company's announced arrangement to buy regional bank holding
company North Fork Bancorp in the northeastern U.S.
Within technology services, Fund performance was dampened by our investment in
online information portal Yahoo!, which was unable to launch its new paid-search
algorithm in a timely manner. We sold our position by period-end. Our lack of
investment in database and enterprise software giant Oracle, which picked up
market share over the period, also negatively affected the Fund's return versus
the benchmark index.
We continued to maintain our disciplined investment strategy of building a
broadly diversified portfolio of blue chip companies -- companies that are
currently market leaders in their industries or companies that we believe have
the potential to become market leaders in their industries.
Thank you for your continued participation in Franklin Blue Chip Fund. We look
forward to serving your future investment needs.
[GRAPHIC OMITTED]
ALYSSA RIEDER PIC
/S/ ALYSSA C. RIEDER
Alyssa C. Rieder, CFA
Portfolio Manager
Franklin Blue Chip Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
TOP 10 HOLDINGS
10/31/06
- -----------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -----------------------------------
Citigroup Inc. 3.3%
FINANCE
- -----------------------------------
Bank of America Corp. 2.9%
FINANCE
- -----------------------------------
Exxon Mobil Corp. 2.8%
ENERGY MINERALS
- -----------------------------------
Johnson & Johnson 2.8%
HEALTH TECHNOLOGY
- -----------------------------------
Wal-Mart Stores Inc. 2.6%
RETAIL TRADE
- -----------------------------------
Pfizer Inc. 2.6%
HEALTH TECHNOLOGY
- -----------------------------------
Mettler-Toledo International Inc.
(Switzerland) 2.4%
PRODUCER MANUFACTURING
- -----------------------------------
Bunge Ltd. 2.4%
PROCESS INDUSTRIES
- -----------------------------------
3M Co. 2.4%
PRODUCER MANUFACTURING
- -----------------------------------
Wells Fargo & Co. 2.4%
FINANCE
- -----------------------------------
6 | Semiannual Report
Performance Summary as of 10/31/06
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. The performance table does 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.
PRICE INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKBCX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.43 $16.11 $15.68
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FKBBX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.36 $15.52 $15.16
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FBCCX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.36 $15.57 $15.21
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FBCRX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.41 $16.01 $15.60
- --------------------------------------------------------------------------------
Semiannual Report | 7
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE
FOR REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.74% +10.78% +30.84% +73.72%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -3.19% +4.44% +4.28% +5.06%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,681 $10,444 $12,330 $16,380
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +0.29% +3.94% +4.73%
- ---------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.37% +9.97% +26.45% -2.22%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.63% +5.97% +4.47% -0.33%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,837 $10,597 $12,445 $9,778
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +1.67% +4.13% -0.79%
- ---------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.37% +10.04% +26.47% -1.88%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +1.37% +9.04% +4.81% -0.28%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,137 $10,904 $12,647 $9,812
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +4.67% +4.48% -0.74%
- ---------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/2/02)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.63% +10.51% +25.69% +17.10%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +2.63% +10.51% +7.92% +3.32%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,263 $11,051 $12,569 $11,710
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +6.18% +8.50% +2.71%
- ---------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
8 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE DRAMATICALLY OVER THE SHORT TERM AS A RESULT OF
FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A
WHOLE. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN
ONE OF THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described in
the prospectus. These shares have higher annual fees and expenses
than Class A shares.
1. The Fund's manager and administrator have agreed in advance to waive a
portion of their fees and to make certain payments to reduce expenses. If the
manager and administrator had not taken this action, the Fund's total returns
would have been lower. The manager and administrator may end this agreement at
any time, upon notice to the Fund's Board of Trustees.
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. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
Semiannual Report | 9
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6X$7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
10 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.40 $5.26
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.01 $5.24
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.70 $8.93
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.38 $8.89
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.70 $8.93
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.38 $8.89
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.30 $6.38
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36
- ----------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class, net of
expense waivers, (A: 1.03%; B: 1.75%; C: 1.75%; and R: 1.25%), multiplied by
the average account value over the period, multiplied by 184/365 to reflect the
one-half year period.
Semiannual Report | 11
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN BLUE CHIP FUND
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $15.68 $13.95 $13.63 $11.17 $13.05 $14.80
----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... 0.06 0.12 0.07 (0.02) (0.02) -- d
Net realized and unrealized gains (losses) ... 0.37 1.73 0.26 2.48 (1.86) (1.75)
----------------------------------------------------------------
Total from investment operations ...................... 0.43 1.85 0.33 2.46 (1.88) (1.75)
----------------------------------------------------------------
Less distributions from net investment income ......... -- (0.12) (0.01) -- -- --
----------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- -- --
----------------------------------------------------------------
Net asset value, end of period ........................ $16.11 $15.68 $13.95 $13.63 $11.17 $13.05
----------------------------------------------------------------
Total return c ........................................ 2.74% 13.31% 2.41% 22.02% (14.41)% (11.82)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $157,044 $160,511 $156,246 $181,987 $137,174 $146,365
Ratios to average net assets:
Expenses before waiver and payments
by affiliates ..................................... 1.39% e 1.34% 1.38% 1.41% 1.51% 1.44%
Expenses net of waiver and payments
by affiliates ..................................... 1.03% e,f 0.99% f 1.22% f 1.41% 1.51% 1.38%
Net investment income (loss) ........................ 0.74% e 0.79% 0.48% (0.12)% (0.20)% 0.02%
Portfolio turnover rate ............................... 17.12% 28.80% 28.42% 55.81% 48.47% 54.85%
<FN>
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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
</FN>
12 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BLUE CHIP FUND
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $15.16 $13.49 $13.26 $10.94 $12.87 $14.69
----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... -- d 0.01 (0.03) (0.10) (0.09) (0.09)
Net realized and unrealized gains (losses) ... 0.36 1.67 0.26 2.42 (1.84) (1.73)
----------------------------------------------------------------
Total from investment operations ...................... 0.36 1.68 0.23 2.32 (1.93) (1.82)
----------------------------------------------------------------
Less distributions from net investment income ......... -- (0.01) -- -- -- --
----------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- -- --
----------------------------------------------------------------
Net asset value, end of period ........................ $15.52 $15.16 $13.49 $13.26 $10.94 $12.87
----------------------------------------------------------------
Total return c ........................................ 2.37% 12.44% 1.73% 21.21% (15.00)% (12.39)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $19,399 $20,688 $23,116 $24,211 $15,182 $13,979
Ratios to average net assets:
Expenses before waiver and payments
by affiliates .................................... 2.11% e 2.09% 2.07% 2.10% 2.15% 2.09%
Expenses net of waiver and payments
by affiliates .................................... 1.75% e,f 1.74% f 1.91% f 2.10% 2.15% 2.03%
Net investment income (loss) ....................... 0.02% e 0.04% (0.21)% (0.81)% (0.84)% (0.67)%
Portfolio turnover rate ............................... 17.12% 28.80% 28.42% 55.81% 48.47% 54.85%
<FN>
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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
</FN>
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 13
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BLUE CHIP FUND
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $15.21 $13.53 $13.30 $10.98 $12.91 $14.74
----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... -- d 0.01 (0.03) (0.10) (0.09) (0.09)
Net realized and unrealized gains (losses) ... 0.36 1.68 0.26 2.42 (1.84) (1.74)
----------------------------------------------------------------
Total from investment operations ...................... 0.36 1.69 0.23 2.32 (1.93) (1.83)
----------------------------------------------------------------
Less distributions from net investment income ......... -- (0.01) -- -- -- --
----------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- -- --
----------------------------------------------------------------
Net asset value, end of period ........................ $15.57 $15.21 $13.53 $13.30 $10.98 $12.91
----------------------------------------------------------------
Total return c ........................................ 2.37% 12.50% 1.73% 21.13% (14.95)% (12.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $32,316 $33,687 $34,799 $39,348 $27,270 $27,685
Ratios to average net assets:
Expenses before waiver and payments
by affiliates .............................. 2.11% e 2.09% 2.08% 2.10% 2.16% 2.09%
Expenses net of waiver and payments
by affiliates .............................. 1.75% e,f 1.74% f 1.92% f 2.10% 2.16% 2.03%
Net investment income (loss) ................. 0.02% e 0.04% (0.22)% (0.81)% (0.85)% (0.68)%
Portfolio turnover rate ............................... 17.12% 28.80% 28.42% 55.81% 48.47% 54.85%
<FN>
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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
</FN>
14 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BLUE CHIP FUND
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $15.60 $13.88 $13.58 $11.15 $13.04 $13.75
----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b 0.04 0.08 0.04 (0.04) (0.04) (0.04)
Net realized and unrealized gains (losses) 0.37 1.73 0.26 2.47 (1.85) (0.67)
----------------------------------------------------------------
Total from investment operations 0.41 1.81 0.30 2.43 (1.89) (0.71)
----------------------------------------------------------------
Less distributions from net investment income -- (0.09) -- -- -- --
----------------------------------------------------------------
Redemption fees -- d -- d -- d -- -- --
----------------------------------------------------------------
Net asset value, end of period $16.01 $15.60 $13.88 $13.58 $11.15 $13.04
----------------------------------------------------------------
Total return c 2.63% 13.03% 2.21% 21.79% (14.49)% (5.16)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $5,332 $5,798 $5,990 $6,130 $2,749 $209
Ratios to average net assets:
Expenses before waiver and payments
by affiliates 1.61% e 1.60% 1.58% 1.60% 1.66% 1.56% e
Expenses net of waiver and payments
by affiliates 1.25% e,f 1.25% f 1.42% f 1.60% 1.66% 1.56% e
Net investment income (loss) 0.52% e 0.53% 0.28% (0.31)% (0.35)% (0.84)% e
Portfolio turnover rate 17.12% 28.80% 28.42% 55.81% 48.47% 54.85%
<FN>
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 repurchase of the Fund shares in relation to income earned and/or
fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales
charges, if applicable, and is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to April 30, 2002.
</FN>
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 15
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
COMMON STOCKS 99.3%
COMMERCIAL SERVICES 1.2%
Moody's Corp. ............................................. United States 39,000 $ 2,585,700
--------------
COMMUNICATIONS 1.9%
a American Tower Corp., A ................................. United States 115,000 4,142,300
--------------
CONSUMER DURABLES 1.5%
D.R. Horton Inc. .......................................... United States 140,000 3,280,200
--------------
CONSUMER NON-DURABLES 2.5%
Altria Group Inc. ......................................... United States 38,000 3,090,540
The Procter & Gamble Co. .................................. United States 35,000 2,218,650
--------------
5,309,190
--------------
CONSUMER SERVICES 4.4%
Carnival Corp. ............................................ United States 65,000 3,173,300
International Game Technology ............................. United States 50,000 2,125,500
The Walt Disney Co. ....................................... United States 130,000 4,089,800
--------------
9,388,600
--------------
DISTRIBUTION SERVICES 1.4%
Cardinal Health Inc. ...................................... United States 45,000 2,945,250
--------------
ELECTRONIC TECHNOLOGY 13.6%
a Altera Corp. ............................................ United States 60,000 1,106,400
a Apple Computer Inc. ..................................... United States 20,000 1,621,600
Applied Materials Inc. .................................... United States 90,000 1,565,100
The Boeing Co. ............................................ United States 30,000 2,395,800
a Cisco Systems Inc. ...................................... United States 195,000 4,705,350
Hewlett-Packard Co. ....................................... United States 40,000 1,549,600
Intel Corp. ............................................... United States 160,000 3,414,400
KLA-Tencor Corp. .......................................... United States 35,000 1,720,950
Linear Technology Corp. ................................... United States 45,000 1,400,400
a Logitech International SA ............................... Switzerland 140,000 3,679,029
a Network Appliance Inc. .................................. United States 40,000 1,460,000
Nokia Corp., ADR .......................................... Finland 65,000 1,292,200
QUALCOMM Inc. ............................................. United States 90,000 3,275,100
--------------
29,185,929
--------------
ENERGY MINERALS 9.3%
BP PLC, ADR ............................................... United Kingdom 60,000 4,026,000
ConocoPhillips ............................................ United States 35,000 2,108,400
Devon Energy Corp. ........................................ United States 60,000 4,010,400
Exxon Mobil Corp. ......................................... United States 85,000 6,070,700
Peabody Energy Corp. ...................................... United States 90,000 3,777,300
--------------
19,992,800
--------------
FINANCE 20.2%
AFLAC Inc. ................................................ United States 90,000 4,042,800
American International Group Inc. ......................... United States 35,000 2,350,950
Bank of America Corp. ..................................... United States 115,000 6,195,050
Capital One Financial Corp. ............................... United States 45,000 3,569,850
Citigroup Inc. ............................................ United States 140,000 7,022,400
16 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
COMMON STOCKS (CONTINUED)
FINANCE (CONTINUED)
Fifth Third Bancorp ....................................... United States 95,000 $ 3,785,750
Freddie Mac ............................................... United States 30,000 2,069,700
The Goldman Sachs Group Inc. .............................. United States 10,000 1,897,900
a,b Industrial and Commercial Bank of China, 144A ......... China 3,223,200 1,442,259
Merrill Lynch & Co. Inc. .................................. United States 30,000 2,622,600
SLM Corp. ................................................. United States 65,000 3,164,200
Wells Fargo & Co. ......................................... United States 140,000 5,080,600
--------------
43,244,059
--------------
HEALTH SERVICES 1.9%
a Express Scripts Inc. .................................... United States 65,000 4,141,800
--------------
HEALTH TECHNOLOGY 11.2%
a Boston Scientific Corp. ................................. United States 80,000 1,272,800
a Celgene Corp. ........................................... United States 50,000 2,672,000
Johnson & Johnson ......................................... United States 90,000 6,066,000
Medtronic Inc. ............................................ United States 60,000 2,920,800
Pfizer Inc. ............................................... United States 205,000 5,463,250
Roche Holding AG, ADR ..................................... Switzerland 35,000 3,061,639
Schering-Plough Corp. ..................................... United States 110,000 2,435,400
--------------
23,891,889
--------------
INDUSTRIAL SERVICES 1.2%
GlobalSantaFe Corp. ....................................... Cayman Islands 50,000 2,595,000
--------------
NON-ENERGY MINERALS 1.2%
Alcoa Inc. ................................................ United States 90,000 2,601,900
--------------
PROCESS INDUSTRIES 4.6%
Bunge Ltd. ................................................ United States 80,000 5,128,800
The Scotts Miracle-Gro Co., A ............................. United States 95,000 4,698,700
--------------
9,827,500
--------------
PRODUCER MANAUFACTURING 9.8%
3M Co. .................................................... United States 65,000 5,124,600
General Electric Co. ...................................... United States 85,000 2,984,350
Johnson Controls Inc. ..................................... United States 45,000 3,669,300
a Mettler-Toledo International Inc. ....................... Switzerland 75,000 5,148,750
United Technologies Corp. ................................. United States 60,000 3,943,200
--------------
20,870,200
--------------
RETAIL TRADE 4.1%
The Home Depot Inc. ....................................... United States 80,000 2,986,400
Wal-Mart Stores Inc. ...................................... United States 115,000 5,667,200
--------------
8,653,600
--------------
TECHNOLOGY SERVICES 4.0%
International Business Machines Corp. ..................... United States 20,000 1,846,600
Microsoft Corp. ........................................... United States 160,000 4,593,600
Paychex Inc. .............................................. United States 55,000 2,171,400
--------------
8,611,600
--------------
Semiannual Report | 17
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND COUNTRY SHARES VALUE
COMMON STOCKS (CONTINUED)
TRANSPORTATION 3.1%
FedEx Corp. ............................................... United States 40,000 $ 4,581,600
Southwest Airlines Co. .................................... United States 130,000 1,953,900
--------------
6,535,500
--------------
UTILITIES 2.2%
Entergy Corp. ............................................. United States 55,000 4,720,650
--------------
TOTAL COMMON STOCKS (COST $174,478,696) 212,523,667
--------------
SHORT TERM INVESTMENT (COST $1,995,207) 0.9%
MONEY MARKET FUND 0.9%
c Franklin Institutional Fiduciary Trust Money Market
Portfolio, 4.96% .......................................... United States 1,995,207 1,995,207
--------------
TOTAL INVESTMENTS (COST $176,473,903) 100.2% .............. 214,518,874
OTHER ASSETS, LESS LIABILITIES (0.2)% ..................... (427,916)
--------------
NET ASSETS 100.0% ......................................... $214,090,958
--------------
SELECTED PORTFOLIO ABBREVIATION:
ADR - American Depository Receipt
<FN>
a Non-income producing for the twelve months ended October 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Fund's Board of Trustees. At October 31, 2006, the value of this security
was $1,442,259, representing 0.67% of net assets.
c See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
</FN>
18 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2006 (unaudited)
FRANKLIN
BLUE CHIP
FUND
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................................................... $174,478,696
Cost - Sweep Money Fund (Note 7) ............................................................... 1,995,207
----------------
Total cost of investments ...................................................................... $176,473,903
----------------
Value - Unaffiliated issuers ................................................................... $212,523,667
Value - Sweep Money Fund (Note 7) .............................................................. 1,995,207
----------------
Total value of investments ..................................................................... 214,518,874
Receivables:
Capital shares sold ............................................................................ 78,601
Dividends ...................................................................................... 71,650
----------------
Total assets ............................................................................... 214,669,125
----------------
Liabilities:
Payables:
Capital shares redeemed ........................................................................ 316,702
Affiliates ..................................................................................... 191,833
Unaffiliated transfer agent fees ............................................................... 58,323
Accrued expenses and other liabilities .......................................................... 11,309
----------------
Total liabilities .......................................................................... 578,167
----------------
Net assets, at value ...................................................................... $214,090,958
----------------
Net assets consist of:
Paid-in capital ................................................................................. $188,366,474
Undistributed net investment income ............................................................. 1,134,014
Net unrealized appreciation (depreciation) ...................................................... 38,044,971
Accumulated net realized gain (loss) ............................................................ (13,454,501)
----------------
Net assets, at value ...................................................................... $214,090,958
----------------
CLASS A:
Net assets, at value ............................................................................ $157,043,527
----------------
Shares outstanding .............................................................................. 9,746,938
----------------
Net asset value per sharea ...................................................................... $16.11
----------------
Maximum offering price per share (net asset value per share/94.25%) ............................. $17.09
----------------
CLASS B:
Net assets, at value ............................................................................ $19,399,437
----------------
Shares outstanding .............................................................................. 1,249,812
----------------
Net asset value and maximum offering price per share a .......................................... $15.52
----------------
<FN>
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
</FN>
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 19
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
FRANKLIN
BLUE CHIP
FUND
CLASS C:
Net assets, at value ............................................................................ $ 32,316,390
----------------
Shares outstanding .............................................................................. 2,075,785
----------------
Net asset value and maximum offering price per share a .......................................... $15.57
----------------
CLASS R:
Net assets, at value ............................................................................ $ 5,331,604
----------------
Shares outstanding .............................................................................. 332,965
----------------
Net asset value and maximum offering price per sharea ........................................... $16.01
----------------
<FN>
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
</FN>
20 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2006 (unaudited)
FRANKLIN
BLUE CHIP
FUND
Investment income:
Dividends:
Unaffiliated issuers ............................................................................. $1,690,883
Sweep Money Fund (Note 7) ........................................................................ 94,203
Other income (Note 8) ............................................................................. 77,465
--------------
Total investment income ...................................................................... 1,862,551
--------------
Expenses:
Management fees (Note 3a) ......................................................................... 784,887
Distribution fees: (Note 3c)
Class A .......................................................................................... 212,140
Class B .......................................................................................... 97,895
Class C .......................................................................................... 159,634
Class R .......................................................................................... 13,679
Transfer agent fees (Note 3e) ..................................................................... 302,904
Custodian fees (Note 4) ........................................................................... 2,204
Reports to shareholders ........................................................................... 34,330
Registration and filing fees ...................................................................... 25,514
Professional fees ................................................................................. 14,996
Trustees' fees and expenses ....................................................................... 1,387
Other ............................................................................................. 2,616
--------------
Total expenses ............................................................................... 1,652,186
Expense reductions (Note 4) .................................................................. (2)
Expenses waived/paid by affiliates (Note 3f) ................................................. (380,783)
--------------
Net expenses ................................................................................ 1,271,401
--------------
Net investment income ...................................................................... 591,150
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................................................... 3,604,978
Foreign currency transactions .................................................................... (297)
--------------
Net realized gain (loss) ................................................................... 3,604,681
--------------
Net change in unrealized appreciation (depreciation) on investments ............................... 1,120,397
--------------
Net realized and unrealized gain (loss) ............................................................ 4,725,078
--------------
Net increase (decrease) in net assets resulting from operations .................................... $5,316,228
--------------
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 21
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN BLUE CHIP FUND
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006
--------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................... $ 591,150 $ 1,298,038
Net realized gain (loss) from investments and foreign currency transactions .............. 3,604,681 7,443,007
Net change in unrealized appreciation (depreciation) on investments ...................... 1,120,397 18,516,245
--------------------------------------
Net increase (decrease) in net assets resulting from operations ...................... 5,316,228 27,257,290
--------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................................................................. -- (1,312,245)
Class B ................................................................................. -- (11,077)
Class C ................................................................................. -- (25,204)
Class R ................................................................................. -- (33,784)
--------------------------------------
Total distributions to shareholders ....................................................... -- (1,382,310)
--------------------------------------
Capital share transactions: (Note 2)
Class A ................................................................................. (7,532,776) (14,275,936)
Class B ................................................................................. (1,724,861) (5,036,167)
Class C ................................................................................. (2,052,771) (5,128,553)
Class R ................................................................................. (600,319) (903,728)
--------------------------------------
Total capital share transactions .......................................................... (11,910,727) (25,344,384)
--------------------------------------
Redemption fees ........................................................................... 1,063 2,525
--------------------------------------
Net increase (decrease) in net assets ................................................ (6,593,436) 533,121
Net assets:
Beginning of period ....................................................................... 220,684,394 220,151,273
--------------------------------------
End of period ............................................................................. $214,090,958 $220,684,394
--------------------------------------
Undistributed net investment income included in net assets:
End of period ............................................................................. $ 1,134,014 $ 542,864
--------------------------------------
22 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FRANKLIN BLUE CHIP FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 (1940 Act) as an open-end investment company, consisting of twelve
separate funds. The Franklin Blue Chip Fund (the Fund) included in this report
is diversified. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers four classes of shares: Class A, Class B,
Class C, and Class R. Each class of shares differs by its initial sales load,
contingent deferred sales charges, distribution fees, voting rights on matters
affecting a single class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's Board of Trustees.
Semiannual Report | 23
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
D. 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. Dividend income is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
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.
24 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class-level
expenses may result in payment of different per share distributions by class.
E. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
F. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
Semiannual Report | 25
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2006, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2006 APRIL 30, 2006
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
CLASS A SHARES:
Shares sold ...................... 780,281 $ 11,868,469 2,559,316 $ 38,554,615
Shares issued in reinvestment
of distributions ................ -- -- 79,194 1,217,204
Shares redeemed .................. (1,270,311) (19,401,245) (3,602,812) (54,047,755)
---------------------------------------------------------
Net increase (decrease) .......... (490,030) $ (7,532,776) (964,302) $(14,275,936)
---------------------------------------------------------
CLASS B SHARES:
Shares sold ...................... 48,893 $ 699,161 73,711 $ 1,053,084
Shares issued in reinvestment
of distributions ................ -- -- 689 10,268
Shares redeemed .................. (163,672) (2,424,022) (423,994) (6,099,519)
---------------------------------------------------------
Net increase (decrease) .......... (114,779) $ (1,724,861) (349,594) $ (5,036,167)
---------------------------------------------------------
CLASS C SHARES:
Shares sold ...................... 152,694 $ 2,252,621 416,720 $ 6,105,773
Shares issued in reinvestment
of distributions ................ -- -- 1,536 22,943
Shares redeemed .................. (292,221) (4,305,392) (775,521) (11,257,269)
---------------------------------------------------------
Net increase (decrease) .......... (139,527) $ (2,052,771) (357,265) $ (5,128,553)
---------------------------------------------------------
CLASS R SHARES:
Shares sold ...................... 37,482 $ 570,807 80,566 $ 1,203,731
Shares issued in reinvestment
of distributions ................ -- -- 2,208 33,784
Shares redeemed .................. (76,146) (1,171,126) (142,734) (2,141,243)
---------------------------------------------------------
Net increase (decrease) .......... (38,664) $ (600,319) (59,960) $ (903,728)
---------------------------------------------------------
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
26 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
0.750% Up to and including $500 million
0.625% Over $500 million, up to and including $1 billion
0.500% In excess of $1 billion
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A
reimbursement distribution plan, the Fund reimburses Distributors up to 0.35%
per year of Class A's average daily net assets for costs incurred in connection
with the sale and distribution of the Fund's shares. Under the Class A
reimbursement distribution plan, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Fund's shares
up to a certain percentage per year of its average daily net assets of each
class as follows:
Class B ................................................... 1.00%
Class C ................................................... 1.00%
Class R ................................................... 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the period:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ................................................. $29,894
Contingent deferred sales charges retained ...................... $15,978
Semiannual Report | 27
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $302,904, of which $211,602 was retained by
Investor Services.
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
Advisers agreed in advance to voluntarily waive a portion of management fees.
Total expenses waived by Advisers are not subject to reimbursement by the Fund
subsequent to the Fund's fiscal year end.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended October 31, 2006, 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, if any. At April 30, 2006, the Fund had tax basis capital losses of
$14,428,047 expiring on April 30, 2011.
At October 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ................................ $179,092,770
--------------
Unrealized appreciation ............................ $ 45,162,752
Unrealized depreciation ............................ (9,736,648)
--------------
Net unrealized appreciation (depreciation) ......... $ 35,426,104
--------------
Net investment income differs for financial statement and tax purposes primarily
due to differing treatment of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
28 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2006, aggregated $35,660,965 and $44,342,684,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management and administrative
fees paid by the Sweep Money Fund.
8. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan was completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with
Semiannual Report | 29
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN BLUE CHIP FUND
8. REGULATORY MATTERS (CONTINUED)
respect to the market timing Plan of Distribution. The SEC anticipates that
Notice of the Plan will be published on or after November 15, 2006. After
publication and comment, the proposed Distribution Plan will be submitted to the
SEC for approval. When the SEC approves the proposed Distribution Plan, with
modifications as appropriate, distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
30 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN BLUE CHIP FUND
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust'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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q 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
1-800/SEC-0330.
Semiannual Report | 31
This page intentionally left blank.
LITERATURE REQUEST
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products
Trust 9
1.The fund is closed to new investors. Existing shareholders can continue adding
to their accounts.
2.The fund is only open to existing shareholders and select retirement plans.
3.The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4.An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6.For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7.Portfolio of insured municipal securities.
8.These funds are available in two or more variations, in cluding long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9.The funds of the Franklin Templeton Variable Insurance Products Trust are gen
erally available only through insurance company variable contracts.
09/06 Not part of the semiannual report
[GRAPHIC OMITTED] [FRANKLIN TEMPLETON LOGO]
FRANKLIN TEMPLETON
INVESTMENTS
One Franklin Parkway
San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com. See
inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN BLUE CHIP FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
483 S2006 12/06
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
OCTOBER 31, 2006
- --------------------------------------------------------------------------------
A series of Franklin Strategic Series
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND SHAREHOLDER LETTER INCOME
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN
STRATEGIC INCOME FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global fund.
Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why our
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Franklin Strategic Income Fund ............................................ 3
Performance Summary ....................................................... 9
Your Fund's Expenses ...................................................... 12
Financial Highlights and Statement of Investments ......................... 14
Financial Statements ...................................................... 34
Notes to Financial Statements ............................................. 38
Shareholder Information ................................................... 51
- --------------------------------------------------------------------------------
Semiannual Report
Franklin Strategic Income Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Strategic Income Fund seeks a
high level of current income, with capital appreciation over the long term as a
secondary objective. The Fund uses an active asset allocation process and
invests at least 65% of its assets in U.S. and foreign debt securities, which
include all varieties of fixed and floating rate income securities, including
bonds, mortgage securities and other asset-backed securities, and convertible
securities.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Strategic Income Fund covers the period
ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Strategic Income Fund - Class A posted a +3.72% cumulative total return
for the six months under review. The Fund underperformed its benchmark, the
Lehman Brothers (LB) U.S. Aggregate Index, which had a +4.60% total return for
the same period. 1 During the same period, the Fund outperformed its peers as
measured by the Lipper Multi-Sector Income Funds Classification Average's +3.62%
total return. 2 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 9.
1. Source: Lehman Brothers Inc. The LB U.S. Aggregate Index represents
securities that are SEC-registered, taxable and dollar denominated. The
index covers the U.S. investment grade fixed-rate bond market, with index
components for government and corporate securities, mortgage pass-through
securities and asset-backed securities. All issues included must have at
least one year to final maturity and must be rated investment grade (Baa3
or better) by Moody's Investors Service. They must also be dollar
denominated and nonconvertible. Total return includes price
appreciation/depreciation and income as a percentage of the original
investment. The index is rebalanced monthly by market capitalization. The
index is unmanaged and includes reinvestment of any income or
distributions. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
2. Source: Lipper Inc. The Lipper Multi-Sector Income Funds Classification
Average is calculated by averaging the total returns of all funds within
the Lipper Multi-Sector Income Funds classification in the Lipper Open-End
underlying funds universe. Lipper Multi-Sector Income Funds are defined as
funds that seek current income by allocating assets among different fixed
income securities sectors (not primarily in one sector except for
defensive purposes), including U.S. and foreign governments, with a
significant portion rated below investment grade. For the six-month period
ended 10/31/06, there were 122 funds in this category. Lipper calculations
do not include sales charges or expense subsidization by a fund's manager.
The Lipper average includes reinvestment of any income or distributions.
Fund performance relative to the average may have differed if these or
other factors had been considered. Past performance does not guarantee
future results. One cannot invest directly in a Lipper average, nor is the
average representative of the Fund's portfolio.
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 19.
Semiannual Report | 3
ECONOMIC AND MARKET OVERVIEW
The U.S. economy continued to grow during the period under review, although the
pace in the second and third quarters of 2006 slowed from the first quarter's
5.6% annualized rate. Overall, several factors contributed to real growth.
During most of the reporting period, labor markets improved, indicated by
non-farm payroll data and the unemployment rate. Rising personal income also
helped support consumer spending increases. However, the economy experienced
rising inflation pressures, largely due to high energy prices and increasing
labor costs. In addition, productivity growth slowed and the housing market
cooled.
Oil prices reached a historical high during the reporting period, but moved
lower by period-end. Core inflation, which excludes food and energy costs,
remained contained but nonetheless began to experience some upward pressure. For
example, while October's headline Consumer Price Index (CPI) reported a 12-month
rise of 1.3%, core CPI increased 2.7%. 3 Oil prices fell in the latter part of
the reporting period, partly due to ample supply and easing demand. Many retail
goods prices also declined. Lower prices, in conjunction with relatively stable
inflation, contributed to declining interest rates.
Several times during the period the Federal Reserve Board (Fed) acknowledged the
economy's strength as well as the potential inflationary pressure from high
energy prices. The Fed raised the federal funds target rate to 5.25%, and then
has kept the rate steady since June. The Fed indicated its future decisions
would be highly dependent on forthcoming economic data. The 10-year Treasury
note yield rose from 5.07% at the beginning of the period to a high of 5.25% on
June 28 and then fell to 4.61% on October 31, 2006. The decline reflected some
concerns about the slowing housing market and its potential effect on the
economy.
Outside the U.S., economic growth remained strong for the period under review
and demonstrated resilience to higher commodity prices, including oil, and the
normalization of global interest rates. Regionally, growth was generally robust
in Asia and strengthened in Europe.
Asia's growth was accompanied by increasing domestic demand in some countries.
The region's trade surpluses outside of China narrowed, as oil prices and
stronger domestic demand contributed to rising imports. Although Asia's interest
rate policy tightened, the most notable shift in monetary policy was in Japan.
During the period, the country ended its policy of quantitative easing and a
zero percent interest rate, adopted in 2001 to combat entrenched deflation and
weak domestic growth prospects. Stronger domestic demand, driven
3. Source: Bureau of Labor Statistics.
4 | Semiannual Report
by investment, and prospects for sustainable positive inflation led the Bank of
Japan to increase interest rates 25 basis points (equal to 0.25 percentage
point) in July 2006.
Driven by exports and investment, Europe's growth rates during the six-month
period notably improved and were generally above trend. Euro-zone growth reached
2.7% in second quarter 2006 compared with the same quarter of 2005. 4 The
European Central Bank raised interest rates to 3.25% during the reporting
period. Although unemployment rates remained high in some of the larger
economies such as Germany and France, they exhibited gradual improvement.
Similar trends, sometimes amplified, could be found throughout non-euro European
countries such as Poland, Norway and Sweden. Although these three countries
experienced a low inflation/strong growth environment, tighter labor markets and
rising resource utilization indicated building pressure on resources. Norway's
and Sweden's central banks also raised interest rates during the period.
INVESTMENT STRATEGY
The Fund uses an active asset allocation strategy, investing across the fixed
income market in sectors including high yield and investment grade corporate
bonds, international developed and emerging market bonds, U.S. government and
agency securities, mortgage- and other asset-backed securities, corporate bank
loans, convertible securities and preferred stocks. In addition to our bottom-up
fundamental analysis of market sectors, industries and issuers, we evaluate
country risk, business cycles, yield curves, and values between and within
markets as part of our portfolio construction process.
MANAGER'S DISCUSSION
With the Fed on hold throughout the latter half of the reporting period, the
resulting decline in intermediate- and long-term interest rates generally drove
the domestic fixed income markets to healthy returns and supported the Fund's
gains. Although the Fund outperformed its peer group, as measured by the Lipper
Multi-Sector Income Funds Classification Average's return, it lagged the
performance of the benchmark LB U.S. Aggregate Index, partly due to the index's
greater sensitivity to U.S. interest rates.
Within the more credit-sensitive sectors of the fixed income market, high yield
corporate fundamentals remained supportive, aided by positive corporate earnings
growth, healthy balance sheet liquidity, and default rates that remained near
4. Source: Eurostat.
Semiannual Report | 5
DIVIDEND DISTRIBUTIONS*
5/1/06-10/31/06
- -------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- -------------------------------------------------------------------------------------------
May 5.00 cents 4.65 cents 4.65 cents 4.78 cents 5.21 cents
- -------------------------------------------------------------------------------------------
June 5.00 cents 4.66 cents 4.68 cents 4.80 cents 5.21 cents
- -------------------------------------------------------------------------------------------
July 5.00 cents 4.66 cents 4.68 cents 4.80 cents 5.20 cents
- -------------------------------------------------------------------------------------------
August 5.00 cents 4.66 cents 4.68 cents 4.80 cents 5.21 cents
- -------------------------------------------------------------------------------------------
September 5.00 cents 4.67 cents 4.67 cents 4.80 cents 5.21 cents
- -------------------------------------------------------------------------------------------
October 5.00 cents 4.67 cents 4.67 cents 4.80 cents 5.21 cents
- -------------------------------------------------------------------------------------------
TOTAL 30.00 CENTS 27.97 CENTS 28.03 CENTS 28.78 CENTS 31.25 CENTS
- -------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
historical lows. Corporate yield spreads over Treasuries did widen somewhat
during the period, from 3.3 to 3.6 percentage points above Treasuries. However,
the high yield sector, with its yield advantage, was still able to perform in
line with the broader fixed income market as measured by the Credit Suisse (CS)
High Yield Index's +4.66% total return versus the LB U.S. Aggregate Index's
+4.60% gain for the six months ended October 31, 2006. 5 Although high yield
bonds continued to represent the Fund's largest sector weighting at period-end,
with valuations historically tight, we modestly reduced the portfolio's exposure
to this sector during the period.
The leveraged corporate bank loan sector also benefited from the positive
corporate fundamental trends. In addition, given a slightly inverted yield curve
(intermediate- and long-term Treasury yields were less than short-term yields),
we believed the current income and return potential from corporate loans had
become more compelling because income from these floating-rate instruments is
based on short-term interest rates. Consequently, we increased the portfolio's
exposure to this sector during the period.
The U.S. dollar-based emerging market sovereign debt sector experienced a brief
period of weakness in May and rallied through period-end. As a result,
valuations ended the reporting period near their historically tightest yield
spread levels relative to Treasuries. Although fundamentals remained positive
for many emerging market sovereign issuers, we continued to reduce the
portfolio's exposure to this sector given what we considered to be full
valuations.
5. Sources: Credit Suisse; Lehman Brothers Inc. The CS High Yield Index is
designed to mirror the investable universe of the U.S. dollar-denominated
high yield debt market. See footnote 1 for a description of the LB U.S.
Aggregate Index.
6 | Semiannual Report
PORTFOLIO BREAKDOWN
Based on Total Net Assets
- --------------------------------------------------------------------------------
10/31/06 4/30/06
- --------------------------------------------------------------------------------
High Yield Corporate Bonds & Preferred Stocks 29.7% 30.1%
- --------------------------------------------------------------------------------
Other International Bonds (non-$US) 13.8% 13.8%
- --------------------------------------------------------------------------------
Mortgages & Other Asset-Backed Bonds 13.5% 14.3%
- --------------------------------------------------------------------------------
Floating Rate Bank Loans 10.8% 9.4%
- --------------------------------------------------------------------------------
U.S. Government & Agency Bonds 9.1% 8.2%
- --------------------------------------------------------------------------------
International Developed Country Bonds (non-$US) 9.1% 9.4%
- --------------------------------------------------------------------------------
Emerging Market Bonds ($US) 4.6% 5.9%
- --------------------------------------------------------------------------------
Investment Grade Corporate Bonds 4.3% 4.9%
- --------------------------------------------------------------------------------
Convertible Securities 1.5% 1.0%
- --------------------------------------------------------------------------------
Common Stocks & Warrants 0.0%* 0.0%*
- --------------------------------------------------------------------------------
Short-Term Investments & Other Net Assets 3.6% 3.0%
- --------------------------------------------------------------------------------
* Rounds to less than 0.1% of net assets.
We maintained exposure in non-U.S. dollar fixed income securities, given our
continued view that the record U.S. current account deficit will serve to dampen
performance of the U.S. dollar relative to certain foreign currencies. Moreover,
although the Fed appeared to be keeping short-term interest rates steady at
period-end, many other countries held more of a tightening bias for their
short-term rates. This may help further support those foreign currencies as
foreign and U.S. interest rate differentials narrow. During the period, we
initiated positions in Japanese yen-denominated bonds, given our view that the
yen may benefit from the trends noted above and considering the currency's
weakness since the beginning of 2005.
In the more U.S. interest-rate sensitive sectors of the Fund, we added portfolio
exposure to mortgages during the period as valuations appeared attractive based
upon our internal analytical models. However, as mortgage spreads and
longer-term interest rates declined toward period-end, we pared back some of
this exposure.
Semiannual Report | 7
Thank you for your continued participation in Franklin Strategic Income Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
[PHOTO OMITTED] /s/ Eric G. Takaha
Eric G. Takaha, CFA
Portfolio Management Team
Franklin Strategic Income Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
8 | Semiannual Report
Performance Summary as of 10/31/06
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. The performance table does 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.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRSTX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $10.27 $10.20
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/06-10/31/06)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3000
- --------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FKSBX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $10.30 $10.24
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/06-10/31/06)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.2797
- --------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FSGCX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $10.27 $10.20
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/06-10/31/06)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.2803
- --------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FKSRX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $10.25 $10.18
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/06-10/31/06)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.2878
- --------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 10/31/06 4/30/06
- --------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $10.27 $10.21
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (5/1/06-10/31/06)
- --------------------------------------------------------------------------------------------------
Dividend Income $0.3125
- --------------------------------------------------------------------------------------------------
Semiannual Report | 9
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS
R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.72% +8.10% +54.80% +99.12%
- -------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -0.67% +3.48% +8.19% +6.66%
- -------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +1.52% +8.57% +6.63%
- -------------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.59%
- -------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.90%
- -------------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.40% +7.64% +51.74% +62.93%
- -------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -0.60% +3.64% +8.41% +6.43%
- -------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +1.55% +8.81% +6.35%
- -------------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.44%
- -------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.73%
- -------------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/98)
- -------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.52% +7.68% +51.79% +63.30%
- -------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +2.52% +6.68% +8.70% +5.94%
- -------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +4.58% +9.08% +5.84%
- -------------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.46%
- -------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.72%
- -------------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- -------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.60% +7.85% +22.83% +49.23%
- -------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.60% +7.85% +7.09% +8.65%
- -------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +5.75% +6.91% +8.52%
- -------------------------------------------------------------------------------------------------------------------
Distribution Rate 5 5.62%
- -------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.88%
- -------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 7 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.74% +8.37% +56.72% +102.67%
- -------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.74% +8.37% +9.40% +7.32%
- -------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +6.26% +9.80% +7.29%
- -------------------------------------------------------------------------------------------------------------------
Distribution Rate 5 6.09%
- -------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.38%
- -------------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
10 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
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. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH
CERTAIN LOWER-RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING-RATE LOAN
SECURITIES AND HIGH-YIELD CORPORATE BONDS TEND TO BE RATED BELOW INVESTMENT
GRADE. INVESTING IN HIGHER-YIELDING, LOWER-RATED SECURITIES INVOLVES GREATER
RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT MAY BE
HEIGHTENED IN A SLOWING ECONOMY. SECURITIES WITH FLOATING INTEREST RATES
GENERALLY ARE LESS SENSITIVE TO INTEREST RATE CHANGES, BUT MAY DECLINE IN VALUE
IF THEIR INTEREST RATES DO NOT RISE AS MUCH AS INTEREST RATES IN GENERAL. THE
RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL
UNCERTAINTY. THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT MAY
INVEST A GREATER PORTION OF ITS ASSETS IN THE SECURITIES OF ONE ISSUER THAN A
DIVERSIFIED FUND. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. Without these reductions, the Fund's total returns 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. Six-month return has not been
annualized.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (NAV for Classes B, C, R
and Advisor) per share on 10/31/06.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/06.
7. Effective 9/1/99, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 8/12/99, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 8/11/99, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 9/1/99
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +72.69% and +7.86%.
Semiannual Report | 11
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
12 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- -------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,037.20 $4.47
- -------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.41 $4.43
- -------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,034.00 $6.46
- -------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.45 $6.41
- -------------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,035.20 $6.41
- -------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.36
- -------------------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,036.00 $5.70
- -------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.19 $5.66
- -------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,037.40 $3.18
- -------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.67 $3.16
- -------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.88%; B: 1.28%; C: 1.27%; R: 1.13%; and Advisor: 0.63%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Semiannual Report | 13
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 10.20 $ 10.24 $ 10.09 $ 9.65 $ 9.36 $ 9.58
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ......................... 0.27 0.51 0.53 0.56 0.65 0.75
Net realized and unrealized gains (losses) ...... 0.10 0.05 0.27 0.54 0.35 (0.20)
-----------------------------------------------------------------------------
Total from investment operations ................. 0.37 0.56 0.80 1.10 1.00 0.55
-----------------------------------------------------------------------------
Less distributions from net investment income .... (0.30) (0.60) (0.65) (0.66) (0.71) (0.77)
-----------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- -- --
-----------------------------------------------------------------------------
Net asset value, end of period ................... $ 10.27 $ 10.20 $ 10.24 $ 10.09 $ 9.65 $ 9.36
=============================================================================
Total return c ................................... 3.72% 5.69% 8.10% 11.69% 11.60% 6.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $1,182,315 $998,182 $696,198 $446,282 $336,607 $261,446
Ratios to average net assets:
Expenses before waiver and payments
by affiliates .................................. 0.88% f 0.91% 0.92% 0.92% 0.96% 0.95%
Expenses net of waiver and payments
by affiliates .................................. 0.88% f,g 0.91% g 0.91% g 0.92% g 0.88% 0.84%
Net investment income ........................... 5.23% f 5.05% 5.18% 5.53% 7.30% 8.03%
Portfolio turnover rate .......................... 17.86% 34.10% 48.57% 66.57% 67.65% 50.64%
Portfolio turnover rate excluding mortgage
dollar rolls d .................................. 17.86% 33.59% 39.91% 52.35% 53.25% 49.88%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d See Note 1(e) regarding mortgage dollar rolls.
e Amount rounds to less than $0.01 per share.
f Annualized.
g Benefit of expense reduction rounds to less than 0.01%.
14 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 10.24 $ 10.27 $ 10.12 $ 9.67 $ 9.38 $ 9.61
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ......................... 0.25 0.47 0.49 0.52 0.61 0.72
Net realized and unrealized gains (losses) ...... 0.09 0.06 0.27 0.55 0.35 (0.21)
---------------------------------------------------------------------------
Total from investment operations ................. 0.34 0.53 0.76 1.07 0.96 0.51
---------------------------------------------------------------------------
Less distributions from net investment income .... (0.28) (0.56) (0.61) (0.62) (0.67) (0.74)
---------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- -- --
---------------------------------------------------------------------------
Net asset value, end of period ................... $ 10.30 $ 10.24 $ 10.27 $ 10.12 $ 9.67 $ 9.38
===========================================================================
Total return c ................................... 3.40% 5.34% 7.65% 11.33% 11.14% 5.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $104,582 $104,477 $110,502 $ 91,974 $ 61,254 $ 40,821
Ratios to average net assets:
Expenses before waiver and payments
by affiliates .................................. 1.28% f 1.31% 1.32% 1.32% 1.36% 1.35%
Expenses net of waiver and payments
by affiliates .................................. 1.28% f,g 1.31% g 1.31% g 1.32% g 1.28% 1.24%
Net investment income ........................... 4.83% f 4.65% 4.78% 5.13% 6.90% 7.65%
Portfolio turnover rate .......................... 17.86% 34.10% 48.57% 66.57% 67.65% 50.64%
Portfolio turnover rate excluding mortgage
dollar rolls d .................................. 17.86% 33.59% 39.91% 52.35% 53.25% 49.88%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d See Note 1(e) regarding mortgage dollar rolls.
e Amount rounds to less than $0.01 per share.
f Annualized.
g Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 15
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 10.20 $ 10.24 $ 10.09 $ 9.64 $ 9.36 $ 9.58
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ......................... 0.25 0.47 0.49 0.52 0.61 0.72
Net realized and unrealized gains (losses) ...... 0.10 0.05 0.27 0.55 0.34 (0.20)
---------------------------------------------------------------------------
Total from investment operations ................. 0.35 0.52 0.76 1.07 0.95 0.52
---------------------------------------------------------------------------
Less distributions from net investment income .... (0.28) (0.56) (0.61) (0.62) (0.67) (0.74)
---------------------------------------------------------------------------
Redemption fees .................................. -- e -- e -- e -- -- --
---------------------------------------------------------------------------
Net asset value, end of period ................... $ 10.27 $ 10.20 $ 10.24 $ 10.09 $ 9.64 $ 9.36
===========================================================================
Total return c ................................... 3.52% 5.27% 7.67% 11.36% 11.18% 5.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $336,450 $294,412 $213,741 $151,823 $ 86,153 $ 58,851
Ratios to average net assets:
Expenses before waiver and payments
by affiliates .................................. 1.27% f 1.31% 1.32% 1.32% 1.36% 1.35%
Expenses net of waiver and payments by
affiliates ..................................... 1.27% f,g 1.31% g 1.31% g 1.32% g 1.28% 1.24%
Net investment income ........................... 4.84% f 4.65% 4.78% 5.13% 6.90% 7.64%
Portfolio turnover rate .......................... 17.86% 34.10% 48.57% 66.57% 67.65% 50.64%
Portfolio turnover rate excluding mortgage
dollar rolls d .................................. 17.86% 33.59% 39.91% 52.35% 53.25% 49.88%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d See Note 1(e) regarding mortgage dollar rolls.
e Amount rounds to less than $0.01 per share.
f Annualized.
g Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 h
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 10.18 $ 10.22 $ 10.07 $ 9.63 $ 9.34 $ 9.39
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.25 0.49 0.51 0.53 0.63 0.28
Net realized and unrealized gains (losses) ....... 0.11 0.05 0.26 0.55 0.35 (0.09)
----------------------------------------------------------------------
Total from investment operations .................. 0.36 0.54 0.77 1.08 0.98 0.19
----------------------------------------------------------------------
Less distributions from net investment income ..... (0.29) (0.58) (0.62) (0.64) (0.69) (0.24)
----------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- -- --
----------------------------------------------------------------------
Net asset value, end of period .................... $ 10.25 $ 10.18 $ 10.22 $ 10.07 $ 9.63 $ 9.34
======================================================================
Total return c .................................... 3.60% 5.44% 7.86% 11.45% 11.35% 2.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $44,512 $32,971 $17,859 $ 7,324 $ 1,558 $ 1,239
Ratios to average net assets:
Expenses before waiver and payments
by affiliates ................................... 1.13% f 1.16% 1.17% 1.17% 1.21% 1.20% f
Expenses net of waiver and payments
by affiliates ................................... 1.13% f,g 1.16% g 1.16% g 1.17% g 1.13% 1.09% f
Net investment income ............................ 4.98% f 4.80% 4.93% 5.28% 7.05% 9.18% f
Portfolio turnover rate ........................... 17.86% 34.10% 48.57% 66.57% 67.65% 50.64%
Portfolio turnover rate excluding mortgage
dollar rolls d ................................... 17.86% 33.59% 39.91% 52.35% 53.25% 49.88%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d See Note 1(e) regarding mortgage dollar rolls.
e Amount rounds to less than $0.01 per share.
f Annualized.
g Benefit of expense reduction rounds to less than 0.01%.
h For the period January 1, 2002 (effective date) to April 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 17
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
--------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 10.21 $ 10.24 $ 10.09 $ 9.65 $ 9.36 $ 9.59
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......................... 0.28 0.54 0.56 0.58 0.69 0.78
Net realized and unrealized gains (losses) ....... 0.09 0.06 0.26 0.54 0.33 (0.21)
----------------------------------------------------------------------
Total from investment operations .................. 0.37 0.60 0.82 1.12 1.02 0.57
----------------------------------------------------------------------
Less distributions from net investment income ..... (0.31) (0.63) (0.67) (0.68) (0.73) (0.80)
----------------------------------------------------------------------
Redemption fees ................................... -- e -- e -- e -- -- --
----------------------------------------------------------------------
Net asset value, end of period .................... $ 10.27 $ 10.21 $ 10.24 $ 10.09 $ 9.65 $ 9.36
======================================================================
Total return c .................................... 3.74% 6.05% 8.37% 11.97% 11.87% 6.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $52,339 $57,367 $60,489 $39,784 $34,224 $31,493
Ratios to average net assets:
Expenses before waiver and payments by
affiliates ...................................... 0.63% f 0.66% 0.67% 0.67% 0.71% 0.70%
Expenses net of waiver and payments by
affiliates ...................................... 0.63% f,g 0.66% g 0.66% g 0.67% g 0.63% 0.59%
Net investment income ............................ 5.48% f 5.30% 5.43% 5.78% 7.55% 8.29%
Portfolio turnover rate ........................... 17.86% 34.10% 48.57% 66.57% 67.65% 50.64%
Portfolio turnover rate excluding mortgage
dollar rolls d ................................... 17.86% 33.59% 39.91% 52.35% 53.25% 49.88%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d See Note 1(e) regarding mortgage dollar rolls.
e Amount rounds to less than $0.01 per share.
f Annualized.
g Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 93.1%
COMMON STOCKS 0.0%a
PRODUCER MANUFACTURING 0.0%a
b,c Cambridge Industries Liquidating Trust Interest .................... United States 516,372 $ 568
b,c VS Holdings Inc. ................................................... United States 64,666 --
--------------
TOTAL COMMON STOCKS (COST $64,666) 568
--------------
CONVERTIBLE PREFERRED STOCKS 0.8%
ENERGY MINERALS 0.2%
Chesapeake Energy Corp., 6.25%, cvt. pfd. .......................... United States 12,900 3,522,255
--------------
FINANCE 0.1%
Fannie Mae, 5.375%, cvt. pfd. ...................................... United States 29 2,809,371
--------------
HEALTH TECHNOLOGY 0.3%
Schering-Plough Corp., 6.00%, cvt. pfd. ............................ United States 91,000 5,010,460
--------------
PROCESS INDUSTRIES 0.2%
Huntsman Corp., 5.00%, cvt. pfd. ................................... United States 82,000 3,157,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $14,886,033) .............. 14,499,086
--------------
--------------------
PRINCIPAL AMOUNT d
--------------------
e,f SENIOR FLOATING RATE INTERESTS 10.8%
COMMERCIAL SERVICES 0.8%
Affiliated Computer Services Inc.,
Additional Term Loan, 7.39% - 7.40%, 3/20/13 .................... United States 4,119,675 4,125,443
Term Loan B, 7.389%, 3/20/13 .................................... United States 607,410 608,260
g Dealer Computer Services Inc. (Reynolds & Reynolds), First Lien
Term Loan, 9.75%, 10/26/12 ........................................ United States 3,635,000 3,658,773
R.H. Donnelley Inc.,
Term Loan A-4, 6.60% - 6.63%, 12/31/09 .......................... United States 196,288 195,754
Term Loan D-2, 6.85% - 6.90%, 6/30/11 ........................... United States 5,158,754 5,147,972
--------------
13,736,202
--------------
COMMUNICATIONS 0.7%
Alaska Communications Systems Holdings Inc.,
2006-1 Incremental Facility Loan, 7.117%, 2/01/12 ............... United States 265,000 264,615
Incremental Term Loan, 7.117%, 2/01/12 .......................... United States 146,800 146,524
Term Loan, 7.117%, 2/01/12 ...................................... United States 5,568,200 5,557,732
Windstream Corp., Term Loan B, 7.12%, 7/17/13 ...................... United States 5,408,738 5,436,539
--------------
11,405,410
--------------
CONSUMER DURABLES 0.8%
Eastman Kodak Co.,
Term Loan B1, 7.57% - 7.649%, 10/18/12 .......................... United States 3,503,878 3,516,527
Term Loan B2 (Delayed Draw), 7.57% - 7.655%, 10/18/12 ........... United States 1,413,494 1,418,795
Jarden Corp., Term Loan B2, 7.117%, 1/24/12 ........................ United States 4,938,211 4,940,038
Stile Acquisition Corp. (Masonite), Canadian Term Loan,
7.367% - 7.38%, 4/05/13 ........................................... Canada 2,443,219 2,407,499
Stile U.S. Acquisition Corp. (Masonite), U.S. Term Loan,
7.367% - 7.38%, 4/05/13 ........................................... United States 2,447,381 2,411,600
--------------
14,694,459
--------------
Semiannual Report | 19
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
e,f SENIOR FLOATING RATE INTERESTS (CONTINUED)
CONSUMER NON-DURABLES 0.6%
CBRL Group (Cracker Barrel), Term Loan B1, 6.83% - 6.97%,
4/27/13 United States 1,877,138 $ 1,877,081
Constellation Brands Inc., Term Loan B, 6.875% - 6.938%,
6/05/13 United States 4,178,333 4,193,334
Reynolds American Inc., Term Loan B, 7.25% - 7.313%,
5/31/12 United States 4,298,160 4,316,341
--------------
10,386,756
--------------
CONSUMER SERVICES 2.3%
CSC Holdings Inc. (Cablevision), Incremental Term Loan,
7.073% - 7.218%, 3/29/13 United States 4,427,750 4,425,093
Hertz Corp.,
Credit Link, 5.39%, 12/21/12 United States 484,444 486,726
Term Loan B, 7.60% - 7.73%, 12/21/12 United States 3,848,979 3,867,108
g Insight Midwest Holdings LLC,
Delayed Draw Term Loan, 9.50%, 4/02/14 United States 1,185,000 1,194,895
Term Loan B, 9.50%, 4/02/14 United States 3,555,000 3,584,684
MCC Iowa,
Term Loan D-1, 6.752% - 7.37%, 1/31/15 United States 1,200,000 1,199,076
Term Loan D-2 (Delayed Draw), 7.38%, 1/31/15 United States 1,532,000 1,530,820
Mediacom LLC, Term Loan C, 7.002% - 7.37%, 1/31/15 United States 1,784,732 1,784,464
Mission Broadcasting Inc., Term Loan B, 7.117%, 10/01/12 United States 1,989,066 1,984,153
Nexstar Broadcasting Inc., Term Loan B, 7.117%, 10/01/12 United States 1,885,165 1,880,508
Penn National Gaming Inc., Term Loan B, 7.02% - 7.25%,
10/03/12 United States 5,223,957 5,247,204
Regal Cinemas Corp., Term Loan B, 7.117%, 11/10/10 United States 4,580,872 4,583,896
UPC Financing Partnership,
Term Loan J2, 7.64%, 3/31/13 Netherlands 2,315,000 2,323,589
Term Loan K2, 7.64%, 12/31/13 Netherlands 2,315,000 2,323,589
VML US Finance LLC (Venetian Macau), Term Loan B, 8.12%,
5/26/13 United States 4,076,667 4,098,477
--------------
40,514,282
--------------
ELECTRONIC TECHNOLOGY 0.2%
g Advanced Micro Devices Inc., Term Loan B, 9.50%, 12/31/13 United States 3,400,000 3,414,348
--------------
ENERGY MINERALS 0.5%
Citgo Petroleum Corp., Term Loan B, 6.681%, 11/15/12 United States 4,484,471 4,494,246
Niska Gas Storage Canada ULC (C/R Gas),
Asset Sale Term Loan, 7.14%, 5/13/11 Canada 541,818 541,401
Canadian Term Loan, 7.14% - 7.171%, 5/12/13 Canada 2,965,777 2,962,693
Niska Gas Storage U.S. LLC (C/R Gas), U.S. Term Loan,
7.14% - 7.171%, 5/12/13 United States 566,065 564,893
--------------
8,563,233
--------------
FINANCE 1.2%
Ameritrade Holding Corp., Term Loan B, 6.82%, 12/31/12 United States 4,504,234 4,505,901
Avis Budget Car Rental LLC, Term Loan, 6.63%, 4/19/12 United States 5,321,714 5,321,555
20 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
e,f SENIOR FLOATING RATE INTERESTS (CONTINUED)
FINANCE (CONTINUED)
Fidelity National Information Services Inc., Term Loan B, 7.07%,
3/08/13 ........................................................... United States 6,017,964 $ 6,038,545
Nasdaq Stock Market Inc.,
Term Loan B, 7.07% - 7.117%, 4/18/12 ............................ United States 3,305,075 3,303,389
Term Loan C (Delayed Draw), 7.03% - 7.16%, 4/18/12 .............. United States 1,944,948 1,943,956
--------------
21,113,346
--------------
HEALTH SERVICES 0.5%
Fresenius Medical Care Holdings Inc., Term Loan B,
6.742% - 6.775%, 3/31/13 .......................................... United States 4,398,199 4,369,655
LifePoint Hospitals Inc., Term Loan B, 6.945%, 4/15/12 ............. United States 4,802,217 4,785,889
--------------
9,155,544
--------------
INDUSTRIAL SERVICES 0.3%
Allied Waste North America Inc.,
Credit Link, 5.323%, 1/15/12 .................................... United States 1,251,322 1,250,596
Term Loan B, 7.07% - 7.21%, 1/15/12 ............................. United States 3,153,761 3,151,932
--------------
4,402,528
--------------
PROCESS INDUSTRIES 1.4%
Georgia-Pacific Corp.,
Second Lien Term Loan, 8.39%, 12/23/13 .......................... United States 675,000 682,756
Term Loan B, 7.367% - 7.39%, 12/20/12 ........................... United States 4,020,993 4,046,044
Hexion Specialty Chemicals BV, Term Loan C-2, 7.37%,
5/03/13 ........................................................... Netherlands 1,006,013 993,247
Hexion Specialty Chemicals Inc., Term Loan C-1, 7.375%,
5/03/13 ........................................................... United States 4,631,130 4,572,361
Ineos U.S. Finance LLC,
Term Loan B2, 7.611% - 7.615%, 12/16/13 ......................... United States 1,979,200 1,995,390
Term Loan C2, 8.111% - 8.115%, 12/23/14 ......................... United States 1,979,200 1,995,469
g Lyondell Chemical Co., Term Loan, 7.11%, 8/16/13 ................... United States 5,126,629 5,156,004
Nalco Co., Term Loan B, 7.07% - 7.30%, 11/04/10 .................... United States 4,058,884 4,075,281
--------------
23,516,552
--------------
PRODUCER MANUFACTURING 0.1%
g Dresser Inc., Term Loan B, 10.00%, 10/31/13 ........................ United States 2,400,000 2,400,000
--------------
REAL ESTATE INVESTMENT TRUSTS 0.5%
Capital Automotive REIT, Term Loan B, 7.08%, 12/10/10 .............. United States 4,986,492 4,987,789
Lion Gables Realty LP, Term Loan B, 7.07%, 9/28/07 ................. United States 35,299 35,311
Macerich Co., Term Loan B, 6.875%, 4/23/10 ......................... United States 3,363,000 3,349,649
--------------
8,372,749
--------------
RETAIL TRADE 0.3%
The William Carter Co., Term Loan B, 6.85% - 6.876%,
7/14/12 ........................................................... United States 4,691,661 4,682,418
--------------
TECHNOLOGY SERVICES 0.3%
SunGard Data Systems Inc., Term Loan, 7.999%, 2/11/13 .............. United States 4,535,617 4,577,164
--------------
Semiannual Report | 21
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
e,f SENIOR FLOATING RATE INTERESTS (CONTINUED)
TRANSPORTATION 0.1%
Laidlaw International Inc., Term Loan B, 7.117%, 6/28/12 ........... United States 872,813 $ 875,510
Laidlaw Transit Inc., Term Loan B, 7.117%, 6/28/12 ................. Canada 290,273 291,169
--------------
1,166,679
--------------
UTILITIES 0.2%
Astoria Generating Co. Acquisitions LLC,
L/C Term Loan, 7.32%, 2/23/11 ................................... United States 154,865 155,633
Term Loan B, 7.39%, 2/23/13 ..................................... United States 785,848 791,239
NRG Energy Inc.,
Credit Link, 7.367%, 2/01/13 .................................... United States 569,800 573,384
Term Loan B, 7.367%, 2/01/13 .................................... United States 2,486,704 2,502,321
--------------
4,022,577
--------------
TOTAL SENIOR FLOATING RATE INTERESTS (COST $187,724,780) 186,124,247
--------------
CORPORATE BONDS 34.0%
COMMERCIAL SERVICES 1.8%
Dex Media East LLC, senior sub. note, B, 12.125%, 11/15/12 ......... United States 1,321,000 1,476,218
Dex Media West LLC, senior sub. note, 9.875%, 8/15/13 .............. United States 4,000,000 4,365,000
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 ............... United States 5,500,000 5,830,000
JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to
5/17/07, 10.67% thereafter, 5/15/13 ............................... United States 1,800,000 1,633,500
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ......... United States 3,500,000 3,591,875
Lamar Media Corp., senior sub. note,
7.25%, 1/01/13 .................................................. United States 5,000,000 5,050,000
h 144A, 6.625%, 8/15/15 ........................................... United States 1,000,000 967,500
R.H. Donnelley Corp., senior note, 8.875%, 1/15/16 ................. United States 1,400,000 1,450,750
United Rentals North America Inc., senior sub. note, 7.75%,
11/15/13 .......................................................... United States 6,000,000 6,015,000
--------------
30,379,843
--------------
COMMUNICATIONS 3.7%
Dobson Cellular Systems Inc., senior secured note, 9.875%,
11/01/12 .......................................................... United States 5,500,000 5,967,500
Embarq Corp., senior note, 7.082%, 6/01/16 ......................... United States 6,500,000 6,662,344
Inmarsat Finance II PLC, senior note, zero cpn. to 11/15/08,
10.375% thereafter, 11/15/12 ...................................... United Kingdom 5,000,000 4,500,000
Intelsat Bermuda Ltd., senior note, 8.25%, 1/15/13 ................. Bermuda 6,500,000 6,654,375
Millicom International Cellular SA, senior note, 10.00%,
12/01/13 .......................................................... Luxembourg 5,500,000 5,946,875
Qwest Communications International Inc., senior note, 7.50%,
2/15/14 ........................................................... United States 6,000,000 6,150,000
Rogers Wireless Inc., senior secured note, 7.25%, 12/15/12 ......... Canada 5,000,000 5,275,000
Telecom Italia Capital, senior note, 4.95%, 9/30/14 ................ Italy 5,000,000 4,646,700
Verizon New York Inc., senior deb.,
7.375%, 4/01/32 ................................................. United States 1,000,000 1,048,439
A, 6.875%, 4/01/12 .............................................. United States 5,000,000 5,224,330
22 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
COMMUNICATIONS (CONTINUED)
h Wind Acquisition Finance SA, senior note, 144A, 10.75%,
12/01/15 ........................................................... Italy 5,000,000 $ 5,581,250
h Windstream Corp., senior note, 144A, 8.625%, 8/01/16 ................. United States 5,200,000 5,635,500
--------------
63,292,313
--------------
CONSUMER DURABLES 2.1%
Beazer Homes USA Inc., senior note, 8.125%, 6/15/16 .................. United States 6,500,000 6,646,250
Ford Motor Credit Co.,
5.625%, 10/01/08 .................................................. United States 6,000,000 5,771,400
senior note, 9.875%, 8/10/11 ...................................... United States 2,000,000 2,068,582
General Motors Acceptance Corp.,
7.25%, 3/02/11 .................................................... United States 4,500,000 4,589,122
6.875%, 8/28/12 ................................................... United States 4,000,000 4,015,488
General Motors Corp., senior deb., 8.25%, 7/15/23 .................... United States 2,000,000 1,785,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ................. United States 2,800,000 2,842,000
KB Home, senior note,
6.25%, 6/15/15 .................................................... United States 3,400,000 3,210,270
7.25%, 6/15/18 .................................................... United States 2,600,000 2,571,153
William Lyon Homes Inc., senior note, 7.625%, 12/15/12 ............... United States 2,800,000 2,338,000
--------------
35,837,265
--------------
CONSUMER NON-DURABLES 1.8%
Dole Foods Co., senior note, 7.25%, 6/15/10 .......................... United States 1,200,000 1,125,000
h Reynolds American Inc., senior secured note, 144A, 7.625%,
6/01/16 ............................................................. United States 6,500,000 6,934,051
h SABMiller PLC, 144A, 6.20%, 7/01/11 .................................. South Africa 5,000,000 5,140,735
Smithfield Foods Inc., senior note,
7.00%, 8/01/11 .................................................... United States 3,300,000 3,345,375
7.75%, 5/15/13 .................................................... United States 2,700,000 2,801,250
Spectrum Brands Inc., senior sub. note, 7.375%, 2/01/15 .............. United States 6,000,000 4,890,000
Tyson Foods Inc., senior note,
8.25%, 10/01/11 ................................................... United States 5,000,000 5,387,860
6.85%, 4/01/16 .................................................... United States 1,000,000 1,033,666
--------------
30,657,937
--------------
CONSUMER SERVICES 6.7%
AMC Entertainment Inc., senior sub. note, 9.875%, 2/01/12 ............ United States 5,500,000 5,713,125
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ............ United States 2,500,000 2,440,625
CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 ................. Canada 5,500,000 5,589,375
CCH I Holdings LLC, senior note, 9.92%, 4/01/14 ...................... United States 750,000 605,625
CCH I LLC, senior secured note, 11.00%, 10/01/15 ..................... United States 750,000 726,563
CCH II LLC, senior note, 10.25%, 9/15/10 ............................. United States 5,500,000 5,706,250
Clear Channel Communications Inc., senior note, 5.75%,
1/15/13 ............................................................. United States 6,500,000 5,800,028
Comcast Corp., 5.65%, 6/15/35 ........................................ United States 6,500,000 5,986,766
CSC Holdings Inc., senior deb., 7.625%, 7/15/18 ...................... United States 2,500,000 2,475,000
Semiannual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
DIRECTV Holdings LLC, senior note,
8.375%, 3/15/13 ................................................. United States 2,000,000 $ 2,085,000
6.375%, 6/15/15 ................................................. United States 1,000,000 962,500
EchoStar DBS Corp., senior note, 6.375%, 10/01/11 .................. United States 5,500,000 5,458,750
Harrah's Operating Co. Inc., 6.50%, 6/01/16 ........................ United States 6,500,000 5,730,881
Liberty Media Corp., senior note, 5.70%, 5/15/13 ................... United States 5,500,000 5,208,280
h Lighthouse International Co. SA, senior note, 144A, 8.00%,
4/30/14 ........................................................... Italy 4,500,000 EUR 6,260,007
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ............. United States 5,500,000 5,245,625
MGM MIRAGE Inc., senior note, 6.625%, 7/15/15 ...................... United States 8,000,000 7,610,000
News America Inc., 5.30%, 12/15/14 ................................. United States 6,000,000 5,927,262
Pinnacle Entertainment Inc., senior sub. note,
8.25%, 3/15/12 .................................................. United States 300,000 306,000
8.75%, 10/01/13 ................................................. United States 4,000,000 4,230,000
Quebecor Media Inc., senior note, 7.75%, 3/15/16 ................... Canada 3,500,000 3,552,500
Radio One Inc., senior sub. note, 6.375%, 2/15/13 .................. United States 5,000,000 4,675,000
h Rainbow National Services LLC, senior sub. deb., 144A, 10.375%,
9/01/14 ........................................................... United States 4,500,000 5,028,750
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 .......... United States 6,500,000 6,502,905
Station Casinos Inc.,
senior note, 6.00%, 4/01/12 ..................................... United States 1,200,000 1,150,500
senior sub. note, 6.50%, 2/01/14 ................................ United States 1,000,000 917,500
senior sub. note, 6.875%, 3/01/16 ............................... United States 3,800,000 3,505,500
Viacom Inc., senior note, 6.25%, 4/30/16 ........................... United States 6,000,000 6,019,956
--------------
115,420,273
--------------
ELECTRONIC TECHNOLOGY 1.6%
DRS Technologies Inc., senior sub. note, 7.625%, 2/01/18 ........... United States 5,000,000 5,137,500
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ................................................. United States 5,500,000 5,348,750
6.375%, 10/15/15 ................................................ United States 500,000 495,000
h NXP BV, 144A, 7.875%, 10/15/14 ..................................... Netherlands 6,300,000 6,426,000
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 .................................................. United States 4,300,000 4,063,500
8.125%, 3/01/16 ................................................. United States 700,000 692,125
Solectron Global Finance Ltd., senior sub. note, 8.00%,
3/15/16 .......................................................... United States 5,000,000 5,056,250
--------------
27,219,125
--------------
ENERGY MINERALS 1.9%
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ................................................. United States 1,500,000 1,561,875
6.625%, 1/15/16 ................................................. United States 500,000 491,875
6.25%, 1/15/18 .................................................. United States 6,000,000 5,715,000
h Mariner Energy Inc., senior note, 144A, 7.50%, 4/15/13 ............. United States 5,000,000 4,825,000
Massey Energy Co., senior note, 6.875%, 12/15/13 ................... United States 5,000,000 4,712,500
24 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY MINERALS (CONTINUED)
Peabody Energy Corp., senior note,
7.375%, 11/01/16 .................................................. United States 1,700,000 $ 1,776,500
B, 6.875%, 3/15/13 ................................................ United States 3,000,000 3,060,000
Plains Exploration & Production Co., senior note, 7.125%,
6/15/14 ............................................................. United States 5,000,000 5,387,500
Pogo Producing Co., senior sub. note,
6.875%, 10/01/17 .................................................. United States 4,800,000 4,596,000
h 144A, 7.875%, 5/01/13 ............................................. United States 700,000 715,750
--------------
32,842,000
--------------
FINANCE 0.3%
h Landsbanki Islands HF, 144A, 6.10%, 8/25/11 .......................... Iceland 5,000,000 5,105,155
--------------
HEALTH SERVICES 1.9%
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ........................ United States 6,000,000 6,000,000
Fresenius Medical Care Capital Trust II, 7.875%, 2/01/08 ............. Germany 5,500,000 5,610,000
HCA Inc., senior note,
8.75%, 9/01/10 .................................................... United States 3,500,000 3,543,750
7.875%, 2/01/11 ................................................... United States 500,000 482,500
6.50%, 2/15/16 .................................................... United States 2,000,000 1,595,000
Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ................ United States 6,000,000 5,310,000
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%,
10/01/14 ............................................................ United States 5,000,000 4,862,500
WellPoint Inc., 5.25%, 1/15/16 ....................................... United States 5,000,000 4,933,300
--------------
32,337,050
--------------
INDUSTRIAL SERVICES 1.6%
Allied Waste North America Inc., senior secured note,
6.50%, 11/15/10 ................................................... United States 2,900,000 2,878,250
B, 5.75%, 2/15/11 ................................................. United States 2,100,000 2,031,750
Copano Energy LLC, senior note, 8.125%, 3/01/16 ...................... United States 4,000,000 4,090,000
El Paso Corp., senior note, 7.875%, 6/15/12 .......................... United States 3,500,000 3,666,250
El Paso Natural Gas Co., senior note, A, 7.625%, 8/01/10 ............. United States 4,500,000 4,668,750
Hanover Compressor Co., senior note, 7.50%, 4/15/13 .................. United States 1,500,000 1,511,250
Hanover Equipment Trust 01, senior secured note, B, 8.75%,
9/01/11 ............................................................. United States 3,500,000 3,657,500
Markwest Energy Partners, senior note, 6.875%, 11/01/14 .............. United States 5,000,000 4,725,000
--------------
27,228,750
--------------
NON-ENERGY MINERALS 0.3%
h Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ...................... Canada 6,500,000 6,240,000
--------------
PROCESS INDUSTRIES 4.2%
Abitibi-Consolidated Co. of Canada, senior note, 8.375%,
4/01/15 ............................................................. Canada 6,000,000 5,257,500
h Basell AF SCA, senior note, 144A, 8.375%, 8/15/15 .................... Germany 5,000,000 5,100,000
BCP Crystal Holdings Corp., senior sub. note, 9.625%, 6/15/14 ........ United States 6,000,000 6,615,000
Buckeye Technologies Inc., senior sub. note, 8.00%, 10/15/10 ......... United States 4,300,000 4,224,750
Bunge Ltd. Finance Corp., senior note, 5.10%, 7/15/15 ................ United States 6,000,000 5,660,796
Semiannual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
PROCESS INDUSTRIES (CONTINUED)
Crown Americas Inc., senior note, 7.75%, 11/15/15 .................. United States 6,000,000 $ 6,187,500
Graphic Packaging International Corp., senior note, 8.50%,
8/15/11 .......................................................... United States 5,000,000 5,162,500
g,h Huntsman International LLC, senior note, 144A, 7.875%,
11/15/14 .......................................................... United States 1,500,000 1,500,000
JSG Funding PLC, senior sub. note, 7.75%, 4/01/15 .................. Ireland 5,000,000 4,737,500
Lyondell Chemical Co., senior note, 8.00%, 9/15/14 ................. United States 3,800,000 3,904,500
Nalco Co., senior sub. note, 8.875%, 11/15/13 ...................... United States 6,500,000 6,873,750
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 .......................................................... United States 6,000,000 5,790,000
Rhodia SA, senior note, 10.25%, 6/01/10 ............................ France 5,000,000 5,687,500
h Verso Paper Holdings LLC, senior secured note, 144A, 9.125%,
8/01/14 ........................................................... United States 5,000,000 5,100,000
--------------
71,801,296
--------------
PRODUCER MANUFACTURING 1.5%
Case New Holland Inc., senior note, 9.25%, 8/01/11 ................. United States 6,000,000 6,397,500
Commercial Vehicle Group Inc., senior note, 8.00%, 7/01/13 ......... United States 5,000,000 4,875,000
h Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ................... United Kingdom 2,956,000 3,236,820
Milacron Escrow Corp., senior secured note, 11.50%, 5/15/11 ........ United States 800,000 775,000
Nortek Inc., senior sub. note, 8.50%, 9/01/14 ...................... United States 6,000,000 5,760,000
h RBS Global & Rexnord Corp., senior note, 144A, 9.50%,
8/01/14 ........................................................... United States 5,000,000 5,200,000
--------------
26,244,320
--------------
REAL ESTATE DEVELOPMENT 0.6%
EOP Operating LP, 4.75%, 3/15/14 ................................... United States 6,000,000 5,720,274
Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ......... United States 5,000,000 5,100,000
--------------
10,820,274
--------------
REAL ESTATE INVESTMENT TRUSTS 0.4%
g,h Host Hotels & Resorts LP, senior note, 144A, 6.875%,
11/01/14 .......................................................... United States 600,000 605,250
Host Marriott LP, senior note,
K, 7.125%, 11/01/13 ............................................. United States 4,000,000 4,065,000
M, 7.00%, 8/15/12 ............................................... United States 2,000,000 2,030,000
--------------
6,700,250
--------------
RETAIL TRADE 0.7%
GSC Holdings Corp., senior note, 8.00%, 10/01/12 ................... United States 5,000,000 5,212,500
h Michaels Stores Inc., senior note, 144A, 10.00%, 11/01/14 .......... United States 5,700,000 5,735,625
Rite Aid Corp., senior note, 9.25%, 6/01/13 ........................ United States 1,800,000 1,768,500
--------------
12,716,625
--------------
TECHNOLOGY SERVICES 0.7%
Oracle Corp., 5.25%, 1/15/16 ....................................... United States 6,000,000 5,928,498
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 .................................... United States 3,000,000 3,127,500
senior sub note, 10.25%, 8/15/15 ................................ United States 3,500,000 3,683,750
--------------
12,739,748
--------------
26 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
UTILITIES 2.2%
h Allegheny Energy Supply, 144A, 8.25%, 4/15/12 ........................ United States 4,000,000 $ 4,370,000
Aquila Inc., senior note, 9.95%, 2/01/11 ............................. United States 4,500,000 4,980,532
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ................... United States 6,000,000 6,195,000
Midwest Generation LLC, senior secured note, 8.75%, 5/01/34 .......... United States 4,500,000 4,888,125
Mirant North America LLC, senior note, 7.375%, 12/31/13 .............. United States 4,700,000 4,776,375
NRG Energy Inc., senior note,
7.25%, 2/01/14 .................................................... United States 500,000 506,875
7.375%, 2/01/16 ................................................... United States 6,000,000 6,082,500
TXU Corp., senior note, P, 5.55%, 11/15/14 ........................... United States 6,000,000 5,746,626
--------------
37,546,033
--------------
TOTAL CORPORATE BONDS (COST $580,521,879) 585,128,257
--------------
CONVERTIBLE BONDS 0.6%
CONSUMER SERVICES 0.3%
Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 .................... United States 3,500,000 4,473,770
--------------
ELECTRONIC TECHNOLOGY 0.3%
Fairchild Semiconductor Corp., cvt., 5.00%, 11/01/08 ................. United States 2,000,000 1,992,500
Intel Corp., cvt., sub. deb., 2.95%, 12/15/35 ........................ United States 4,500,000 4,096,264
--------------
TOTAL CONVERTIBLE BONDS (COST $9,448,268) ............................ 10,562,534
--------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES 1.4%
FINANCE 1.4%
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ...................................... United States 725,000 718,705
2005-11, AF4, 5.21%, 3/25/34 ...................................... United States 2,800,000 2,757,834
GE Capital Commercial Mortgage Corp., 2003-CI, A4, 4.819%,
1/10/38 ............................................................ United States 1,827,831 1,791,211
JPMorgan Chase Commercial Mortgage Securities Corp.,
f 2004-CB9, A4, 5.378%, 6/12/41 ..................................... United States 8,871,306 9,019,376
2004-LN2, A2, 5.115%, 7/15/41 ..................................... United States 807,292 798,615
h Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 ............. United States 82,665 82,332
f Morgan Stanley Capital I, 2004-IQ7, A4, 5.431%, 6/15/38 .............. United States 7,000,000 7,084,718
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%,
4/25/32 ............................................................. United States 670,021 657,594
Residential Funding Mortgage Securities II, 2005-HI1, A4, 4.70%,
8/25/34 ............................................................. United States 1,400,000 1,384,420
--------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $24,938,261) ...................... 24,294,805
--------------
MORTGAGE-BACKED SECURITIES 12.1%
f FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.0% a
FHLMC, 4.687%, 1/01/33 ............................................... United States 776,511 777,045
--------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 4.5%
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ........................ United States 7,799,463 7,547,260
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 9/01/19 ........................ United States 8,277,471 8,161,155
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 ......................... United States 1,528,058 1,532,892
FHLMC Gold 15 Year, 6.50%, 4/01/11 ................................... United States 1,125 1,147
Semiannual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE (CONTINUED)
FHLMC Gold 15 Year, 7.00%, 1/01/09 - 9/01/11 ......................... United States 2,018 $ 2,063
FHLMC Gold 30 Year, 5.00%, 3/01/34 - 8/01/35 ......................... United States 12,250,583 11,855,082
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/36 ......................... United States 17,459,987 17,285,569
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/36 ......................... United States 24,815,549 25,000,785
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 5/01/36 ........................ United States 5,227,220 5,335,431
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 ......................... United States 322,818 333,836
FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 ......................... United States 62,127 64,719
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ........................ United States 1,490 1,571
FHLMC Gold 30 Year, 9.00%, 12/01/24 .................................. United States 621 673
--------------
77,122,183
--------------
f FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 0.2%
FNMA, 4.512%, 4/01/20 ................................................ United States 537,040 525,365
FNMA, 4.604%, 12/01/34 ............................................... United States 2,683,651 2,641,683
--------------
3,167,048
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 6.5%
FNMA 15 Year, 4.50%, 3/01/20 ......................................... United States 1,755,066 1,698,712
FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ............................... United States 2,404,807 2,374,917
FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 ............................... United States 8,708,112 8,722,335
FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 .............................. United States 352,095 358,001
FNMA 15 Year, 6.50%, 2/01/09 - 6/01/13 ............................... United States 37,450 38,228
FNMA 15 Year, 7.50%, 10/01/07 - 12/01/28 ............................. United States 29,061 30,149
FNMA 30 Year, 5.00%, 4/01/34 - 10/01/35 .............................. United States 3,070,188 2,969,452
FNMA 30 Year, 5.50%, 9/01/33 - 1/01/36 ............................... United States 44,928,757 44,454,192
FNMA 30 Year, 6.00%, 6/01/34 - 10/01/36 .............................. United States 49,060,938 49,401,357
FNMA 30 Year, 6.50%, 1/01/24 - 8/01/32 ............................... United States 2,112,027 2,166,373
FNMA 30 Year, 7.00%, 1/01/26 - 7/01/32 ............................... United States 395,599 409,742
FNMA 30 Year, 7.50%, 10/01/29 ........................................ United States 52,380 54,718
FNMA 30 Year, 8.00%, 1/01/25 - 1/01/27 ............................... United States 26,817 28,399
FNMA 30 Year, 8.50%, 7/01/25 ......................................... United States 770 827
FNMA 30 Year, 9.00%, 5/01/25 ......................................... United States 1,687 1,837
--------------
112,709,239
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.9%
GNMA I SF 15 Year, 7.00%, 7/15/08 .................................... United States 52,246 52,717
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 .......................... United States 1,811,004 1,768,186
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 .......................... United States 5,492,567 5,475,944
GNMA I SF 30 Year, 6.00%, 8/15/36 .................................... United States 1,002,471 1,016,647
GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 .......................... United States 468,666 482,914
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 ......................... United States 57,755 59,817
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 .......................... United States 29,770 31,115
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 .......................... United States 24,804 26,300
GNMA I SF 30 Year, 8.50%, 8/15/24 .................................... United States 197 213
GNMA I SF 30 Year, 9.00%, 1/15/25 .................................... United States 929 1,007
GNMA I SF 30 Year, 9.50%, 6/15/25 .................................... United States 746 823
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ........................ United States 2,463,727 2,393,128
GNMA II SF 30 Year, 5.50%, 6/20/34 ................................... United States 1,351,182 1,342,632
28 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE
(CONTINUED)
GNMA II SF 30 Year, 6.00%, 11/20/34 ............................... United States 1,267,211 $ 1,282,167
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ..................... United States 579,507 595,343
GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 ...................... United States 293,818 304,422
--------------
14,833,375
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $209,912,358) 208,608,890
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES 9.1%
GOVERNMENT BONDS 9.1%
FHLMC,
4.375%, 7/17/15 ................................................ United States 4,300,000 4,131,741
4.875%, 11/15/13 ............................................... United States 500,000 498,517
6.00%, 6/15/11 ................................................. United States 4,900,000 5,130,271
FNMA,
1.75%, 3/26/08 ................................................. United States 700,000,000 JPY 6,080,954
2.125%, 10/09/07 ............................................... United States 1,660,000,000 JPY 14,407,506
3.00%, 8/15/07 ................................................. United States 2,500,000 2,458,172
3.25%, 1/15/08 ................................................. United States 2,100,000 2,056,608
4.25%, 5/15/09 ................................................. United States 400,000 394,645
4.375%, 3/15/13 ................................................ United States 2,600,000 2,525,435
4.375%, 10/15/15 ............................................... United States 1,900,000 1,837,097
5.00%, 4/15/15 ................................................. United States 600,000 604,944
5.00%, 3/15/16 ................................................. United States 5,000,000 5,027,165
5.25%, 1/15/09 ................................................. United States 7,100,000 7,156,118
5.375%, 11/15/11 ............................................... United States 1,700,000 1,740,489
5.50%, 3/15/11 ................................................. United States 300,000 307,522
6.625%, 11/15/10 ............................................... United States 1,850,000 1,968,742
U.S. Treasury Bond,
6.25%, 8/15/23 ................................................. United States 4,600,000 5,354,690
6.88%, 8/15/25 ................................................. United States 9,450,000 11,839,083
7.125%, 2/15/23 ................................................ United States 10,200,000 12,842,443
U.S. Treasury Note,
3.00%, 12/31/06 ................................................ United States 2,000,000 1,992,892
3.00%, 11/15/07 ................................................ United States 5,500,000 5,396,880
3.00%, 2/15/08 ................................................. United States 3,500,000 3,422,209
3.125%, 5/15/07 ................................................ United States 4,500,000 4,455,355
3.375%, 10/15/09 ............................................... United States 500,000 483,359
3.50%, 12/15/09 ................................................ United States 4,500,000 4,358,146
4.00%, 9/30/07 ................................................. United States 6,100,000 6,050,444
4.00%, 4/15/10 ................................................. United States 1,100,000 1,079,934
4.00%, 11/15/12 ................................................ United States 1,850,000 1,795,584
4.125%, 8/15/10 ................................................ United States 2,900,000 2,855,708
4.25%, 8/15/13 ................................................. United States 1,000,000 980,938
4.25%, 11/15/14 ................................................ United States 700,000 684,004
4.375%, 8/15/12 ................................................ United States 2,600,000 2,577,149
5.00%, 8/15/11 ................................................. United States 2,100,000 2,143,149
5.625%, 5/15/08 ................................................ United States 3,000,000 3,039,378
Semiannual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
GOVERNMENT BONDS (CONTINUED)
i Index Linked, 2.00%, 1/15/16 ................................. United States 12,813,750 $ 12,452,364
i Index Linked, 2.50%, 7/15/16 ................................. United States 4,035,280 4,094,550
i Index Linked, 3.00%, 7/15/12 ................................. United States 11,768,536 12,134,926
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $157,842,515) ............................................ 156,359,111
--------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 24.3%
f European Investment Bank, senior note, FRN, 0.205%,
9/21/11 ........................................................ Supranational j 155,000,000 JPY 1,326,147
f,k Government of Argentina, FRN, 5.589%, 8/03/12 ................... Argentina 46,378,000 32,769,771
Government of Brazil, 8.00%, 1/15/18 ............................ Brazil 7,450,000 8,249,013
Government of Canada,
3.25%, 12/01/06 .............................................. Canada 26,830,000 CAD 23,883,469
5.25%, 6/01/12 ............................................... Canada 250,000 CAD 237,082
6.00%, 6/01/11 ............................................... Canada 593,000 CAD 573,709
Government of Indonesia,
10.00%, 7/15/17 .............................................. Indonesia 10,200,000,000 IDR 1,088,531
11.00%, 10/15/14 ............................................. Indonesia 4,500,000,000 IDR 510,101
12.80%, 6/15/21 .............................................. Indonesia 40,130,000,000 IDR 5,092,373
13.15%, 3/15/10 .............................................. Indonesia 7,125,000,000 IDR 860,852
13.15%, 1/15/12 .............................................. Indonesia 17,300,000,000 IDR 2,125,051
14.25%, 6/15/13 .............................................. Indonesia 63,035,000,000 IDR 8,219,506
14.275%, 12/15/13 ............................................ Indonesia 28,415,000,000 IDR 3,733,558
l Government of Iraq, Reg S, 5.80%, 1/15/28 ....................... Iraq 18,350,000 12,386,250
Government of Malaysia,
3.135%, 12/17/07 ............................................. Malaysia 1,925,000 MYR 524,571
4.032%, 9/15/09 .............................................. Malaysia 5,080,000 MYR 1,404,136
4.305%, 2/27/09 .............................................. Malaysia 53,510,000 MYR 14,846,282
6.90%, 3/15/07 ............................................... Malaysia 1,900,000 MYR 526,653
8.60%, 12/01/07 .............................................. Malaysia 16,010,000 MYR 4,612,101
Government of Mexico, 10.00%, 12/05/24 .......................... Mexico 112,500,000 MXN 12,329,985
Government of New Zealand, 6.50%, 4/15/13 ....................... New Zealand 7,590,000 NZD 5,237,944
Government of Norway, 6.75%, 1/15/07 ............................ Norway 143,600,000 NOK 22,107,695
Government of Peru,
7.84%, 8/12/20 ............................................... Peru 4,340,000 PEN 1,480,938
Series 7, 8.60%, 8/12/17 ..................................... Peru 28,805,000 PEN 10,288,435
Government of the Philippines,
7.75%, 1/14/31 ............................................... Philippines 4,300,000 4,719,250
8.875%, 3/17/15 .............................................. Philippines 6,400,000 7,447,680
9.00%, 2/15/13 ............................................... Philippines 10,430,000 11,942,350
9.875%, 3/16/10 .............................................. Philippines 1,500,000 1,681,500
Government of Poland,
5.75%, 9/23/22 ............................................... Poland 14,000,000 PLN 4,807,273
6.00%, 5/24/09 ............................................... Poland 44,600,000 PLN 15,135,608
6.25%, 10/24/15 .............................................. Poland 17,100,000 PLN 6,070,664
8.50%, 11/12/06 .............................................. Poland 3,500,000 PLN 1,156,714
8.50%, 5/12/07 ............................................... Poland 7,900,000 PLN 2,662,721
30 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Singapore,
1.75%, 2/01/07 ................................................. Singapore 8,300,000 SGD $ 5,314,367
2.625%, 10/01/07 ............................................... Singapore 1,900,000 SGD 1,215,209
4.00%, 3/01/07 ................................................. Singapore 24,900,000 SGD 16,031,352
Government of Slovakia,
4.80%, 4/14/09 ................................................. Slovak Republic 63,500,000 SKK 2,244,174
4.90%, 2/11/14 ................................................. Slovak Republic 12,900,000 SKK 466,789
5.30%, 5/12/19 ................................................. Slovak Republic 91,900,000 SKK 3,512,964
7.50%, 3/13/12 ................................................. Slovak Republic 96,000,000 SKK 3,863,150
m Strip, 1/14/07 ................................................. Slovak Republic 301,600,000 SKK 10,510,215
Government of Sweden,
5.00%, 1/28/09 ................................................. Sweden 45,000,000 SEK 6,431,776
5.50%, 10/08/12 ................................................ Sweden 24,960,000 SEK 3,795,924
8.00%, 8/15/07 ................................................. Sweden 128,000,000 SEK 18,374,579
Government of Thailand,
4.125%, 2/12/08 ................................................ Thailand 51,000,000 THB 1,376,235
8.00%, 12/08/06 ................................................ Thailand 244,700,000 THB 6,688,245
8.50%, 12/08/08 ................................................ Thailand 41,000,000 THB 1,196,101
Inter-American Development Bank, 9.00%, 1/04/07 ................... Supranational j 453,000,000 ISK 6,629,962
Korea Treasury Note,
3.75%, 9/10/07 ................................................. South Korea 11,590,000,000 KRW 12,207,674
4.25%, 9/10/08 ................................................. South Korea 6,150,000,000 KRW 6,475,547
4.50%, 9/09/08 ................................................. South Korea 2,675,000,000 KRW 2,828,547
4.75%, 3/12/08 ................................................. South Korea 15,130,000,000 KRW 16,058,032
KfW Bankengruppe,
f FRN, 0.201%, 8/08/11 ........................................... Germany 3,440,000,000 JPY 29,432,477
senior note, E, 8.25%, 9/20/07 ................................. Germany 420,000,000 ISK 5,963,119
New South Wales Treasury Corp.,
6.00%, 5/01/12 ................................................. Australia 640,000 AUD 491,415
8.00%, 3/01/08 ................................................. Australia 4,910,000 AUD 3,883,491
Nota Do Tesouro Nacional, 9.762%,
1/01/12 ........................................................ Brazil 26,000 n BRL 10,582,569
1/01/14 ........................................................ Brazil 5,200 n BRL 2,032,352
Queensland Treasury Corp., 6.00%,
7/14/09 ........................................................ Australia 3,120,000 AUD 2,407,642
8/14/13 ........................................................ Australia 3,530,000 AUD 2,737,079
10/14/15 ....................................................... Australia 3,665,000 AUD 2,843,344
Swedish Treasury Bill, 12/19/07 ................................... Sweden 11,555,000 SEK 1,542,575
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $390,153,527) ............................................. 417,174,818
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,575,492,287) ................. 1,602,752,316
--------------
SHORT TERM INVESTMENTS 6.2%
FOREIGN GOVERNMENT SECURITIES 3.3%
m Canada Treasury Bills, 5/17/07 - 11/30/06 ......................... Canada 16,345,000 CAD 14,304,795
m Egypt Treasury Bills, 11/21/06 - 7/24/07 .......................... Egypt 92,525,000 EGP 15,499,323
Semiannual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT d VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT SECURITIES (CONTINUED)
m Norwegian Treasury Bills, 12/20/06 - 9/19/07 ...................... Norway 27,425,000 NOK $ 4,118,092
m Thailand Treasury Bills, 4/05/07 - 10/04/07 ....................... Thailand 833,505,000 THB 21,893,954
--------------
TOTAL FOREIGN GOVERNMENT SECURITIES (COST $55,230,829) ............ 55,816,164
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $1,630,723,116) ........................................... 1,658,568,480
--------------
MONEY MARKET FUND (COST $50,396,057) 2.9%
o Franklin Institutional Fiduciary Trust Money Market Portfolio,
4.96% ............................................................ United States 50,396,057 50,396,057
--------------
TOTAL INVESTMENTS (COST $1,681,119,173) 99.3% ..................... 1,708,964,537
NET UNREALIZED GAIN ON FORWARD EXCHANGE
CONTRACTS 0.0% a ................................................. 331,731
OTHER ASSETS, LESS LIABILITIES 0.6% ............................... 10,901,023
--------------
NET ASSETS 100.0% ................................................. $1,720,197,291
==============
CURRENCY ABBREVIATIONS
AUD - Australian Dollar
BRL - Brazil Real
CAD - Canadian Dollar
EGP - Egyptian Pounds
EUR - Euro
IDR - Indonesian Rupiah
ISK - Iceland Krona
JPY - Japanese Yen
KRW - South Korean Won
MXN - Mexican Peso
MYR - Malaysian Ringgit
NOK - Norwegian Krone
NZD - New Zealand Dollar
PEN - Peruvian Nuevo Sol
PLN - Polish Zloty
SEK - Swedish Krona
SGD - Singapore Dollar
SKK - Slovak Koruna
THB - Thai Baht
SELECTED PORTFOLIO ABBREVIATIONS
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
REIT - Real Estate Investment Trust
SF - Single Family
32 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
a Rounds to less than 0.1% of net assets.
b See Note 10 regarding restricted securities.
c Non-income producing for the twelve months ended October 31, 2006.
d The principal amount is stated in U.S. dollars unless otherwise indicated.
e See Note 1(f) regarding senior floating rate interests.
f The coupon rate shown represents the rate at period end.
g See Note 1(c) regarding securities purchased on a when-issued or delayed
delivery basis.
h Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2006,
the aggregate value of these securities was $89,789,725, representing
5.22% of net assets.
i Principal amount of security is adjusted for inflation. See Note 1(h).
j A supranational organization is an entity formed by two or more central
governments through international treaties.
k The principal amount is stated in original face, and scheduled paydowns
are reflected in the market price on ex-date.
l Security was purchased pursuant to Regulation S under the Securities Act
of 1933, which exempts from registration securities offered and sold
outside of the United States. Such a security 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. These securities have been deemed liquid under guidelines
approved by the Trust's Board of Trustees. At October 31, 2006, the value
of this security was $12,386,250, representing 0.72% of net assets.
m The security is traded on a discount basis with no stated coupon rate.
n Principal is stated in 1,000 Real Units.
o See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 33
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2006 (unaudited)
--------------
FRANKLIN
STRATEGIC
INCOME FUND
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................ $1,630,723,116
Cost - Sweep Money Fund (Note 7) ........................... 50,396,057
--------------
Total cost of investments .................................. $1,681,119,173
==============
Value - Unaffiliated issuers ............................... $1,658,568,480
Value - Sweep Money Fund (Note 7) .......................... 50,396,057
--------------
Total value of investments ................................. 1,708,964,537
Cash ........................................................ 82,719
Foreign currency at value (cost $3,517,880) ................. 3,629,913
Receivables:
Investment securities sold ................................. 1,356
Capital shares sold ........................................ 9,787,305
Dividends and interest ..................................... 23,735,972
Unrealized gain on forward exchange contracts (Note 8) ...... 420,463
--------------
Total assets ......................................... 1,746,622,265
--------------
Liabilities:
Payables:
Investment securities purchased ............................ 21,158,708
Capital shares redeemed .................................... 3,721,962
Affiliates ................................................. 1,274,851
Unrealized loss on forward exchange contracts (Note 8) ...... 88,732
Unrealized loss on unfunded loan commitments (Note 11) ...... 7,787
Accrued expenses and other liabilities ...................... 172,934
--------------
Total liabilities .................................... 26,424,974
--------------
Net assets, at value ............................... $1,720,197,291
==============
Net assets consist of:
Paid-in capital ............................................. $1,714,645,155
Distributions in excess of net investment income ............ (11,203,320)
Net unrealized appreciation (depreciation) .................. 28,399,912
Accumulated net realized gain (loss) ........................ (11,644,456)
--------------
Net assets, at value ............................... $1,720,197,291
==============
34 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006 (unaudited)
--------------
FRANKLIN
STRATEGIC
INCOME FUND
--------------
CLASS A:
Net assets, at value ........................................................ $1,182,314,836
==============
Shares outstanding .......................................................... 115,149,616
==============
Net asset value per share a ................................................. $ 10.27
==============
Maximum offering price per share (net asset value per share / 95.75%) ....... $ 10.73
==============
CLASS B:
Net assets, at value ........................................................ $ 104,581,572
==============
Shares outstanding .......................................................... 10,149,081
==============
Net asset value and maximum offering price per share a ...................... $ 10.30
==============
CLASS C:
Net assets, at value ........................................................ $ 336,449,934
==============
Shares outstanding .......................................................... 32,773,061
==============
Net asset value and maximum offering price per share a ...................... $ 10.27
==============
CLASS R:
Net assets, at value ........................................................ $ 44,511,847
==============
Shares outstanding .......................................................... 4,344,407
==============
Net asset value and maximum offering price per share a ...................... $ 10.25
==============
ADVISOR CLASS:
Net assets, at value ........................................................ $ 52,339,102
==============
Shares outstanding .......................................................... 5,094,463
==============
Net asset value and maximum offering price per share a ...................... $ 10.27
==============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 35
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2006 (unaudited)
-----------
FRANKLIN
STRATEGIC
INCOME FUND
-----------
Investment income:
Dividends:
Unaffiliated issuers ........................................................ $ 313,792
Sweep Money Fund (Note 7) ................................................... 981,318
Interest ..................................................................... 47,383,943
-----------
Total investment income ............................................... 48,679,053
-----------
Expenses:
Management fees (Note 3a) .................................................... 3,633,810
Distribution fees: (Note 3c)
Class A ..................................................................... 1,349,277
Class B ..................................................................... 337,871
Class C ..................................................................... 999,748
Class R ..................................................................... 98,038
Transfer agent fees (Note 3e) ................................................ 973,026
Custodian fees (Note 4) ...................................................... 257,281
Reports to shareholders ...................................................... 75,524
Registration and filing fees ................................................. 62,199
Professional fees ............................................................ 23,254
Trustees' fees and expenses .................................................. 8,947
Other ........................................................................ 20,180
-----------
Total expenses ........................................................ 7,839,155
Expense reductions (Note 4) ........................................... (13,444)
-----------
Net expenses ........................................................ 7,825,711
-----------
Net investment income .............................................. 40,853,342
-----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................. 4,472,637
Foreign currency transactions ............................................... 4,894,023
-----------
Net realized gain (loss) ........................................... 9,366,660
-----------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. 7,923,242
Translation of assets and liabilities denominated in foreign currencies ..... 34,185
-----------
Net change in unrealized appreciation (depreciation) ............... 7,957,427
-----------
Net realized and unrealized gain (loss) ....................................... 17,324,087
-----------
Net increase (decrease) in net assets resulting from operations ............... $58,177,429
===========
36 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------
FRANKLIN STRATEGIC INCOME FUND
----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................................... $ 40,853,342 $ 64,707,487
Net realized gain (loss) from investments and foreign currency transactions ............... 9,366,660 15,467,690
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ................................ 7,957,427 (8,505,216)
---------------------------------
Net increase (decrease) in net assets resulting from operations ..................... 58,177,429 71,669,961
---------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................................................................. (31,324,279) (49,931,881)
Class B ................................................................................. (2,842,193) (5,947,111)
Class C ................................................................................. (8,449,311) (14,235,453)
Class R ................................................................................. (1,076,967) (1,407,186)
Advisor Class ........................................................................... (1,827,389) (3,649,308)
---------------------------------
Total distributions to shareholders ........................................................ (45,520,139) (75,170,939)
---------------------------------
Capital share transactions: (Note 2)
Class A ................................................................................. 175,217,921 303,892,635
Class B ................................................................................. (541,407) (5,682,820)
Class C ................................................................................. 39,646,177 81,393,484
Class R ................................................................................. 11,174,888 15,156,955
Advisor Class ........................................................................... (5,370,900) (2,656,075)
---------------------------------
Total capital share transactions ........................................................... 220,126,679 392,104,179
---------------------------------
Redemption fees ............................................................................ 4,288 17,122
---------------------------------
Net increase (decrease) in net assets ............................................... 232,788,257 388,620,323
Net assets:
Beginning of period ........................................................................ 1,487,409,034 1,098,788,711
---------------------------------
End of period .............................................................................. $1,720,197,291 $1,487,409,034
=================================
Distribution in excess of net investment income included in net assets:
End of period .............................................................................. $ (11,203,320) $ (6,536,523)
=================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 37
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of twelve separate
funds. The Franklin Strategic Income Fund (the Fund) included in this report is
non-diversified. The financial statements of the remaining funds in the Trust
are presented separately. The Fund offers five classes of shares: Class A, Class
B, Class C, Class R, and Advisor Class. Each class of shares differs by its
initial sales load, contingent deferred sales charges, distribution fees, voting
rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities, government securities, mortgage pass-through
securities, other mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities generally trade in the over-the-counter
market rather than on a securities exchange. The Trust may utilize independent
pricing services, quotations from bond dealers, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Senior secured corporate loans with floating or variable interest rates
generally trade in the over-the-counter market rather than on a securities
exchange. The Trust may utilize independent pricing services, quotations from
loan dealers and other financial institutions, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond characteristics such as dealer quotes,
issuer type, coupon, maturity, weighted average maturity, interest rate spreads
and yield curves, cash flow and credit risk/quality analysis to determine
current value.
38 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitor price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange trades funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's Board of Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Semiannual Report | 39
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION (CONTINUED)
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY
The Fund may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention of holding the
securities, it may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
D. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates. These contracts are valued daily by the
Fund and the unrealized gains or losses on the contracts, as measured by the
difference between the contractual forward foreign exchange rates and the
forward rates at the reporting date, are included in the Statement of Assets and
Liabilities. Realized and unrealized gains and losses on these contracts are
included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
40 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. MORTGAGE DOLLAR ROLLS
The Fund enters into mortgage dollar rolls, typically on a TBA basis. Dollar
rolls are agreements between the Fund and a financial institution to
simultaneously sell and repurchase a mortgage-backed security at a future date.
Gains or losses are realized at the time of the sale and the difference between
the repurchase price and sale price is recorded as an unrealized gain to the
Fund. The risks of mortgage dollar roll transactions include the potential
inability of the counter-party to fulfill its obligations.
F. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily
marketable, but may be subject to some restrictions on resale.
G. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
H. 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. Facility fees are recognized as income over the expected term of the
loan. Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recognized as soon as the Fund is notified
of the ex-dividend date.
Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
Semiannual Report | 41
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class-level
expenses may result in payment of different per share distributions by class.
Inflation-indexed bonds provide an inflation hedge through periodic increases in
the security's interest accruals and principal redemption value, by amounts
corresponding to the current rate of inflation. Any such adjustments, including
adjustments to principal redemption value, are recorded as interest income.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
J. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
42 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2006, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
---------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2006 APRIL 30, 2006
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
CLASS A SHARES:
Shares sold ......................... 26,212,052 $ 265,010,933 49,260,155 $ 502,029,313
Shares issued in reinvestment
of distributions ................... 2,199,283 22,191,775 3,385,695 34,430,660
Shares redeemed ..................... (11,081,753) (111,984,787) (22,842,053) (232,567,338)
---------------------------------------------------------------
Net increase (decrease) ............. 17,329,582 $ 175,217,921 29,803,797 $ 303,892,635
===============================================================
CLASS B SHARES:
Shares sold ......................... 704,349 $ 7,155,491 1,145,646 $ 11,711,043
Shares issued in reinvestment
of distributions ................... 180,232 1,825,413 368,488 3,762,119
Shares redeemed ..................... (938,243) (9,522,311) (2,072,052) (21,155,982)
---------------------------------------------------------------
Net increase (decrease) ............. (53,662) $ (541,407) (557,918) $ (5,682,820)
===============================================================
CLASS C SHARES:
Shares sold ......................... 6,436,555 $ 65,110,484 12,758,406 $ 130,069,349
Shares issued in reinvestment
of distributions ................... 532,114 5,370,027 887,398 9,026,079
Shares redeemed ..................... (3,050,915) (30,834,334) (5,673,281) (57,701,944)
---------------------------------------------------------------
Net increase (decrease) ............. 3,917,754 $ 39,646,177 7,972,523 $ 81,393,484
===============================================================
CLASS R SHARES:
Shares sold ......................... 1,465,943 $ 14,798,302 1,863,760 $ 18,953,676
Shares issued in reinvestment
of distributions ................... 103,318 1,040,588 133,195 1,351,786
Shares redeemed ..................... (462,514) (4,664,002) (507,256) (5,148,507)
---------------------------------------------------------------
Net increase (decrease) ............. 1,106,747 $ 11,174,888 1,489,699 $ 15,156,955
===============================================================
ADVISOR CLASS SHARES:
Shares sold ......................... 941,443 $ 9,550,677 2,178,207 $ 22,212,820
Shares issued in reinvestment
of distributions ................... 156,895 1,583,298 321,103 3,270,147
Shares redeemed ..................... (1,622,785) (16,504,875) (2,787,024) (28,139,042)
---------------------------------------------------------------
Net increase (decrease) ............. (524,447) $ (5,370,900) (287,714) $ (2,656,075)
===============================================================
Semiannual Report | 43
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10.0 billion
0.440% Over $10.0 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15.0 billion
0.400% Over $15.0 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20.0 billion
0.360% Over $20.0 billion, up to and including $35.0 billion
0.355% Over $35.0 billion, up to and including $50.0 billion
0.350% In excess of $50.0 billion
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
C. DISTRIBUTION FEES
The Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors up to 0.25% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plan, costs
exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
44 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Funds' shares
up to a certain percentage per year of its average daily net assets of each
class as follows:
Class B ............................................................ 0.65%
Class C ............................................................ 0.65%
Class R ............................................................ 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the period:
Sales charges retained net of commissions paid to unaffiliated
broker dealer .................................................. $515,071
Contingent deferred sales charges retained ...................... $115,206
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $973,026, of which $627,325 was retained by
Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended October 31, 2006, 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, if any. At April 30, 2006, the Fund had tax basis capital losses of
$20,786,927 expiring on April 30, 2011.
At October 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ................................. $1,689,221,087
==============
Unrealized appreciation ............................. $ 41,378,790
Unrealized depreciation ............................. (21,635,340)
--------------
Net unrealized appreciation (depreciation) .......... $ 19,743,450
==============
Semiannual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
5. INCOME TAXES (CONTINUED)
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, mortgage dollar
rolls, paydown losses, bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, mortgage dollar rolls, pay-down losses, bond discounts and
premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2006, aggregated $466,860,293 and $265,296,914,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management and administrative
fees paid by the Sweep Money Fund.
8. FORWARD EXCHANGE CONTRACTS
At October 31, 2006, the Fund had the following forward exchange contracts
outstanding:
- -------------------------------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT a DATE GAIN (LOSS)
- -------------------------------------------------------------------------------------------------------------------------
98,750,000 Iceland Krona .......................................... 1,330,683 6/20/07 $ 54,248
148,125,000 Iceland Krona .......................................... 2,004,398 6/21/07 72,570
148,125,000 Iceland Krona .......................................... 1,988,255 6/27/07 86,134
--------
$212,952
========
- -------------------------------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT a DATE GAIN (LOSS)
- -------------------------------------------------------------------------------------------------------------------------
1,892,579 New Zealand Dollar ..................................... 54,000,000 THB 12/06/06 $207,511
--------
Unrealized gain on forward exchange contracts .............................................. $420,463
========
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
46 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT a DATE GAIN (LOSS)
- -------------------------------------------------------------------------------------------------------------------------
3,360,678,150 Korean Won ............................................. 5,358,224 NZD 12/06/06 $(11,572)
4,562,436,157 Chilean Peso ........................................... 95,141,931 MXN 9/12/07 (42,443)
1,698,885,602 Chilean Peso ........................................... 35,638,464 MXN 9/14/07 (34,717)
--------
Unrealized loss on forward exchange contracts .............................................. (88,732)
--------
Net unrealized gain (loss) on forward exchange contracts ................................. $331,731
========
a In U.S. Dollar unless otherwise indicated.
CURRENCY ABBREVIATIONS:
NZD - New Zealand Dollar
MXN - Mexican Peso
THB - Thai Baht
9. CREDIT RISK
The Fund has 49.30% of its portfolio invested in below investment grade and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions or resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund has registration rights for certain
restricted securities held at the period end. The issuer generally incurs all
registration costs.
At October 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Trust's Board of Trustees as reflecting fair value,
as follows:
- --------------------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- --------------------------------------------------------------------------------------------------------------
516,372 Cambridge Industries Liquidating Trust Interest ......... 1/09/02 $ -- $ 568
64,666 VS Holdings Inc. ........................................ 12/06/01 64,666 --
---------
TOTAL RESTRICTED SECURITIES (0.00% a of Net Assets) ................................ $ 568
=========
a Rounds to less than 0.01% of net assets.
Semiannual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
11. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At October 31, 2006, unfunded commitments were as follows:
- -------------------------------------------------------------------------
UNFUNDED
BORROWER COMMITMENTS
- -------------------------------------------------------------------------
CBRL Group (Cracker Barrel), Delay Draw ................... $ 262,448
Niska Gas Storage U.S. LLC, Delay Draw .................... 379,273
VML US Finance LLC (Venetian Macau), Delay Draw ........... 1,693,333
----------
$2,335,054
==========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized gain or loss is included in the Statement of
Assets and Liabilities and Statement of Operations.
12. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
The Fund did not participate in the CAGO Settlement.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order and disbursement of the settlement
monies to the designated
48 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
12. REGULATORY MATTERS (CONTINUED)
funds in accordance with the terms and conditions of the SEC's order and the
plan was completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or their shareholders whole, as appropriate.
13. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FINA 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Trust are currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
Semiannual Report | 49
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
13. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
50 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN STRATEGIC INCOME FUND
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust'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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q 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
1-800/SEC-0330.
Semiannual Report | 51
This page intentionally left blank.
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products
Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/06
Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
Franklin Strategic Income Fund
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
194 S2006 12/06
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
OCTOBER 31, 2006
- --------------------------------------------------------------------------------
A series of Franklin Strategic Series
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND SHAREHOLDER LETTER BLEND
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN
U.S. LONG-SHORT FUND
Eligible shareholders
can sign up for
eDelivery at
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See inside for
details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global fund.
Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why our
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER .......................................................... 1
SEMIANNUAL REPORT
Franklin U.S. Long-Short Fund ............................................... 3
Performance Summary ......................................................... 8
Your Fund's Expenses ........................................................ 9
Financial Highlights and Statement of Investments ........................... 11
Financial Statements ........................................................ 17
Notes to Financial Statements ............................................... 20
Shareholder Information ..................................................... 30
- --------------------------------------------------------------------------------
Semiannual Report
Franklin U.S. Long-Short Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Long-Short Fund seeks
long-term capital appreciation in both up and down (bull and bear) markets, with
less volatility than the overall stock market. Under normal market conditions,
the Fund has primarily both long and short positions in equity securities,
primarily common stocks. At least 80% of the Fund's net assets will normally be
invested in U.S. investments.
This semiannual report for Franklin U.S. Long-Short Fund covers the period ended
October 31, 2006.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
Franklin U.S. Long-Short Fund - Class A had a -2.46% cumulative total return for
the six months under review. The Fund underperformed its benchmark, the Standard
& Poor's 500 Index (S&P 500), which posted a +6.11% cumulative total return for
the same period. 1 Although we underperformed the index, in addition to return,
we also seek less volatility and correlation relative to the overall market. For
the period under review, the Fund had 90% of the volatility of the S&P 500, as
measured by standard deviation of daily returns, and a relative correlation of
86%. Since the Fund's inception, its relative volatility and correlation to the
benchmark were 71% and 33%. You can find the Fund's long-term performance data
in the Performance Summary on page 8.
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest in an index, nor is an index representative of the Fund's
portfolio.
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 12.
Semiannual Report | 3
ECONOMIC AND MARKET OVERVIEW
During the six months ended October 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product growth slowed to annualized
rates of 2.6% in the second quarter and an estimated 2.2% in the third quarter.
Housing market weakness contributed to the slowdown. Growth was supported
primarily by corporate profits and consumer and government spending. Export
growth picked up some momentum, but a record trade deficit remained. Although
labor costs rose and new job creation slowed to 1% annually, hiring generally
increased and the unemployment rate fell from 4.6% to a five-year low of 4.4%. 2
Elevated energy and other commodity prices were a primary economic concern for
much of the period. Oil prices were volatile and declined from a record high of
$77 per barrel in July to nearly $59 at period-end. Shifting oil prices appeared
to raise the anxiety level among consumers and businesses alike. Consumers
curbed spending on large purchases, such as homes and cars. Home prices fell in
many parts of the country, mortgage rates crept up, and borrowing against home
equity flattened. Lower retail prices for cars, computers and clothing in
September and October signaled that inflationary pressure appeared to be
diminishing somewhat. Inflation was still a concern, however, as the core
Consumer Price Index (CPI) rose 2.7% for the 12 months ended October 31, 2006,
which was higher than the 2.2% 10-year average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate to 5.25% on
June 30. However, since June, the Fed left the rate unchanged, citing a slowing
economy, widespread cooling in the housing market and the lagging effect of
prior tightening. The Fed stated that even with lower oil prices toward
period-end, inflation risks remained.
The Fed's inaction helped restore investor confidence, and equity markets
experienced dramatic rallies late in the period. Overall, the blue chip stocks
of the Dow Jones Industrial Average posted a six-month total return of +7.47%,
and the broader S&P 500 returned +6.11%, while the technology-heavy NASDAQ
Composite Index had a total return of +3.03%. 4 Utilities, telecommunications
and consumer staples performed particularly well.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
4 | Semiannual Report
EQUITY EXPOSURE
10/31/06
- --------------------------------------------------------------------------------
% OF TOTAL NET ASSETS # OF POSITIONS
- --------------------------------------------------------------------------------
Long Equity Securities 67.0% 63
- --------------------------------------------------------------------------------
Short Equity Securities -37.5% 38
- --------------------------------------------------------------------------------
NET EQUITY EXPOSURE 29.5% (LONG)
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
We select the Fund's long and short positions on a stock-by-stock basis,
searching for securities with favorable risk and return profiles. For long
positions, we look for growth- and value-oriented stocks of companies with
strong fundamentals or valuable assets that we believe are underappreciated by
the market. For short positions, we use primarily fundamental, accounting and
event-driven strategies. Additionally, we use technical analysis as a risk
control measure. The Fund pursues additional goals of reduced volatility and
correlation relative to the overall market.
MANAGER'S DISCUSSION
On October 31, 2006, the Fund's exposure was 67.0% long and 37.5% short,
resulting in a 29.5% net long exposure, down from 44.5% net long exposure on
April 30, 2006.
The consumer non-durables, finance and process industries sectors contributed to
Fund performance during the period. Within consumer non-durables, positions in
apparel and footwear, beverages and food helped performance. The two best
contributors in consumer non-durables were our long positions in Crocs and
Phillips-Van Heusen (PVH). Crocs enjoyed amazing success with its distinctive
footwear products, and management's supply chain expertise enabled the company
to satisfy the strong demand. PVH likewise benefited from solid demand for its
Calvin Klein apparel. Within finance, positions in lenders boosted performance,
offset by losses in regional banks. The sector's top two contributors were our
long position in CapitalSource and our short position in Nelnet. CapitalSource
continued to benefit from the growing economy as a lender to small- and
medium-size businesses. Nelnet suffered from steep pricing pressure due to
industry regulatory changes. During the period, we sold our positions in Nelnet,
Countrywide Financial, CBOT Holdings, Republic Bancorp and Sky Financial Group.
Within process industries, our positions in agricultural commodities and
specialty chemicals supported performance, offset by losses in industrial
specialties. The gradual energy price decline during the
TOP 10 LONG HOLDINGS
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Kohl's Corp. 2.0%
RETAIL TRADE
- --------------------------------------------------------------------------------
Harris Corp. 2.0%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
J.B. Hunt Transport Services Inc. 2.0%
TRANSPORTATION
- --------------------------------------------------------------------------------
Target Corp. 1.9%
RETAIL TRADE
- --------------------------------------------------------------------------------
Bunge Ltd. 1.9%
PROCESS INDUSTRIES
- --------------------------------------------------------------------------------
Phillips-Van Heusen Corp. 1.9%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
FormFactor Inc. 1.8%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Carnival Corp. 1.7%
CONSUMER SERVICES
- --------------------------------------------------------------------------------
Zumiez Inc. 1.6%
RETAIL TRADE
- --------------------------------------------------------------------------------
Republic Airways Holdings Inc. 1.5%
TRANSPORTATION
- --------------------------------------------------------------------------------
Semiannual Report | 5
PORTFOLIO BREAKDOWN
10/31/06
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Long Positions 67.0%
- --------------------------------------------------------------------------------
Short Positions -37.5%
- --------------------------------------------------------------------------------
Short-Term Investments 65.5%
- --------------------------------------------------------------------------------
Other Assets, less Liabilities 5.0%
- --------------------------------------------------------------------------------
SECTOR/INDUSTRY BREAKDOWN
Based on Total Net Assets as of 10/31/06
- --------------------------------------------------------------------------------
NET EQUITY
LONG % SHORT % EXPOSURE %
- --------------------------------------------------------------------------------
Electronic Technology 12.6% -2.8% 9.8%
- --------------------------------------------------------------------------------
Consumer Non-Durables 7.4% -2.4% 5.0%
- --------------------------------------------------------------------------------
Process Industries 4.0% -0.4% 3.6%
- --------------------------------------------------------------------------------
Consumer Durables 3.3% -0.6% 2.7%
- --------------------------------------------------------------------------------
Industrial Services 2.3% 0.0% 2.3%
- --------------------------------------------------------------------------------
Energy Minerals 4.2% -2.0% 2.2%
- --------------------------------------------------------------------------------
Health Technology 3.4% -1.5% 1.9%
- --------------------------------------------------------------------------------
Retail Trade 10.3% -8.6% 1.7%
- --------------------------------------------------------------------------------
Transportation 4.9% -3.2% 1.7%
- --------------------------------------------------------------------------------
Consumer Services 3.2% -1.7% 1.5%
- --------------------------------------------------------------------------------
Finance 5.9% -4.6% 1.3%
- --------------------------------------------------------------------------------
Technology Services 2.7% -1.5% 1.2%
- --------------------------------------------------------------------------------
Utilities 1.2% 0.0% 1.2%
- --------------------------------------------------------------------------------
Distribution Services 0.0% -0.4% -0.4%
- --------------------------------------------------------------------------------
Miscellaneous 0.0% -3.0% -3.0%
- --------------------------------------------------------------------------------
Producer Manufacturing 1.6% -4.8% -3.2%
- --------------------------------------------------------------------------------
TOTAL 67.0% -37.5% 29.5%
- --------------------------------------------------------------------------------
period reduced the cost of goods, resulting in better profitability. The
sector's top two contributors were Bunge and Ashland, which benefited from lower
energy prices.
Hindering Fund performance during the reporting period were several positions in
electronic technology, industrial services and producer manufacturing. Within
electronic technology, positions in semiconductors and telecommunications
equipment were major detractors from performance due to general sector weakness
during the period. Within industrial services, our long position in oil services
hurt performance. This group is very sensitive to changes in energy prices and
thus experienced a decline during the period when energy prices dropped. We
reduced our weighting in the sector by selling our position in Noble. Within
producer manufacturing, our positions in industrial machinery and trucks
hindered performance.
6 | Semiannual Report
Thank you for your continued participation in Franklin U.S. Long-Short Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Daniel Hennessy
Daniel Hennessy, CFA
Portfolio Manager
[PHOTO OMITTED] /s/ Gary K. Ko
Gary K. Ko, CFA
Assistant Portfolio Manager
Franklin U.S. Long-Short Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, 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.
Semiannual Report | 7
Performance Summary as of 10/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table does 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.
PRICE INFORMATION
- ------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FUSLX) CHANGE 10/31/06 4/30/06
- ------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.41 $16.24 $16.65
- ------------------------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
AND VALUE OF $10,000 INVESTMENT INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE
WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/28/99) 1
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -2.46% +0.50% -6.03% +101.86%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -8.09% -5.25% -2.40% +9.04%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $9,191 $9,475 $8,855 $19,022
- ------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 -8.03% -2.38% +8.75%
- ------------------------------------------------------------------------------------------------------------
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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
ENDNOTES
ALTHOUGH THE FUND INTENDS TO REDUCE RISK BY HAVING BOTH LONG AND SHORT
POSITIONS, IT IS POSSIBLE THE FUND'S LONG POSITIONS WILL DECLINE IN VALUE AT THE
SAME TIME THE VALUE OF STOCKS SOLD SHORT INCREASES, THEREBY INCREASING THE
POTENTIAL FOR LOSS. ALSO, THE FUND MAY NOT ALWAYS BE ABLE TO CLOSE OUT A SHORT
POSITION AT A PARTICULAR TIME OR AT AN ACCEPTABLE PRICE. HISTORICALLY,
INVESTMENTS IN SMALL-CAP STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN LARGER-CAP
STOCKS, ESPECIALLY OVER THE SHORT TERM. IN ADDITION, INVESTING IN FOREIGN
SECURITIES INVOLVES SPECIAL RISKS, INCLUDING POLITICAL UNCERTAINTY AND CURRENCY
FLUCTUATIONS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
1. Fund inception date was 5/28/99. Fund shares were first offered to the
public on 5/1/00.
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. Six-month return has not been
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
8 | Semiannual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 9
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $ 975.40 $9.31
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.78 $9.50
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 1.87%, multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
10 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. LONG-SHORT FUND
--------------------------------------------------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED APRIL 30,
(UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 16.65 $ 15.50 $ 15.54 $ 15.73 $ 16.29 $ 21.09
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .............. 0.17 0.18 0.04 (0.14) (0.07) 0.25
Net realized and unrealized gains (losses) .. (0.58) 1.12 (0.08) (0.05) -- e (2.52)
--------------------------------------------------------------------------------
Total from investment operations .............. (0.41) 1.30 (0.04) (0.19) (0.07) (2.27)
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... -- (0.15) -- -- (0.49) (0.27)
Net realized gains .......................... -- -- -- -- -- (2.26)
--------------------------------------------------------------------------------
Total distributions ........................... -- (0.15) -- -- (0.49) (2.53)
--------------------------------------------------------------------------------
Redemption fees ............................... -- e -- e -- e -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 16.24 $ 16.65 $ 15.50 $ 15.54 $ 15.73 $ 16.29
================================================================================
Total return c ................................ (2.46)% 8.36% (0.26)% (1.21)% (0.48)% (11.53)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $33,591 $47,603 $68,718 $112,096 $144,582 $146,044
Ratios to average net assets:*
Expenses before waiver and payments
by affiliates d ........................... 1.87% f 1.82% 1.80% 2.23% 2.45% 2.01%
Expenses net of waiver and payments
by affiliates d ........................... 1.87% f,g 1.82% g 1.75% g 2.23% g 2.45% 2.01%
Net investment income (loss) ................ 2.11% f 1.10% 0.23% (0.89)% (0.42)% 1.32%
Portfolio turnover rate ....................... 52.82% 220.50% 218.52% 346.01% 258.22% 327.27%
Portfolio turnover rate excluding short sales . 28.41% 116.45% 105.31% 217.47% 184.90% 146.05%
*Ratios to average net assets, excluding
dividend expense on securities sold short:
Expenses before waiver and payments
by affiliates ............................. 1.50% f 1.46% 1.32% 1.71% 1.84% 1.60%
Expenses net of waiver and payments
by affiliates ............................. 1.50% f,g 1.46% g 1.27% g 1.71% g 1.84% 1.60%
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 repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Annualized.
g Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 11
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 67.0%
CONSUMER DURABLES 3.3%
a,b Activision Inc. .......................................................... United States 23,221 $ 358,068
b Harman International Industries Inc. ..................................... United States 4,107 420,351
a,b Scientific Games Corp., A ................................................ United States 11,836 331,763
------------
1,110,182
------------
CONSUMER NON-DURABLES 7.4%
a,b Crocs Inc. ............................................................... United States 11,451 453,689
b PepsiCo Inc. ............................................................. United States 5,440 345,114
b Phillips-Van Heusen Corp. ................................................ United States 13,729 628,239
VF Corp. ................................................................. United States 6,349 482,587
a,b The Warnaco Group Inc. ................................................... United States 13,223 280,856
b Wm. Wrigley Jr. Co. ...................................................... United States 4,307 223,749
Wm. Wrigley Jr. Co., B ................................................... United States 1,076 55,737
------------
2,469,971
------------
CONSUMER SERVICES 3.2%
b Carnival Corp. ........................................................... United States 11,436 558,306
b Hilton Hotels Corp. ...................................................... United States 17,520 506,678
------------
1,064,984
------------
ELECTRONIC TECHNOLOGY 12.6%
a,b Arris Group Inc. ......................................................... United States 24,696 330,926
Embraer-Empresa Brasileira de Aeronautica SA, ADR ........................ Brazil 11,982 498,811
a,b FormFactor Inc. .......................................................... United States 15,800 603,244
b Harris Corp. ............................................................. United States 15,878 676,403
a Marvell Technology Group Ltd. ............................................ Bermuda 16,821 307,488
a Microsemi Corp. .......................................................... United States 17,162 336,375
b Nokia Corp., ADR ......................................................... Finland 14,350 285,278
a,b SunPower Corp., A ........................................................ United States 7,873 264,927
a,b Taser International Inc. ................................................. United States 45,346 422,171
a,b ViaSat Inc. .............................................................. United States 18,917 513,407
------------
4,239,030
------------
ENERGY MINERALS 4.2%
b Chesapeake Energy Corp. .................................................. United States 11,905 386,198
a,b Newfield Exploration Co. ................................................. United States 10,941 446,283
Peabody Energy Corp. ..................................................... United States 5,862 246,028
b Total SA, B, ADR ......................................................... France 4,646 316,579
------------
1,395,088
------------
FINANCE 5.9%
b CapitalSource Inc. ....................................................... United States 13,899 385,558
a,b Eurobancshares Inc. ...................................................... United States 39,927 378,109
a,b Franklin Bank Corp. ...................................................... United States 21,252 429,503
b IBERIABANK Corp. ......................................................... United States 4,243 249,658
a,c Industrial and Commercial Bank of China, 144A ............................ China 507,200 226,953
b R&G Financial Corp., B ................................................... United States 40,356 310,741
------------
1,980,522
------------
12 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
HEALTH TECHNOLOGY 3.4%
a Cephalon Inc. ............................................................ United States 1,348 $ 94,603
a,b Charles River Laboratories International Inc. ............................ United States 4,114 176,573
a The Medicines Co. ........................................................ United States 3,043 78,996
a Penwest Pharmaceuticals Co. .............................................. United States 2,536 44,938
a POZEN Inc. ............................................................... United States 5,342 88,837
Roche Holding AG ......................................................... Switzerland 1,255 219,563
b Schering-Plough Corp. .................................................... United States 20,597 456,018
------------
1,159,528
------------
INDUSTRIAL SERVICES 2.3%
a Helix Energy Solutions Group Inc. ........................................ United States 13,159 425,035
b Rowan Cos. Inc. .......................................................... United States 10,794 360,304
------------
785,339
------------
PROCESS INDUSTRIES 4.0%
b Ashland Inc. ............................................................. United States 5,669 335,038
b Bunge Ltd. ............................................................... United States 9,851 631,548
a,b Headwaters Inc. .......................................................... United States 7,463 184,709
b Lyondell Chemical Co. .................................................... United States 6,935 178,021
------------
1,329,316
------------
PRODUCER MANUFACTURING 1.6%
b 3M Co. ................................................................... United States 4,671 368,262
b Federal Signal Corp. ..................................................... United States 10,678 162,946
------------
531,208
------------
RETAIL TRADE 10.3%
b Advance Auto Parts Inc. .................................................. United States 11,116 389,282
b Best Buy Co. Inc. ........................................................ United States 6,080 335,920
b Christopher & Banks Corp. ................................................ United States 11,092 299,373
b Dollar General Corp. ..................................................... United States 7,081 99,346
a,b Kohl's Corp. ............................................................. United States 9,611 678,537
b Target Corp. ............................................................. United States 11,015 651,868
b Wal-Mart Stores Inc. ..................................................... United States 9,988 492,209
a,b Zumiez Inc. .............................................................. United States 15,902 522,540
------------
3,469,075
------------
TECHNOLOGY SERVICES 2.7%
Paychex Inc. ............................................................. United States 8,450 333,606
a,b Quest Software Inc. ...................................................... United States 26,346 388,076
a,b,d VeriSign Inc. ............................................................ United States 8,376 173,216
------------
894,898
------------
TRANSPORTATION 4.9%
b FedEx Corp. .............................................................. United States 4,108 470,530
b J.B. Hunt Transport Services Inc. ........................................ United States 31,054 672,009
a,b Republic Airways Holdings Inc. ........................................... United States 29,065 519,391
------------
1,661,930
------------
Semiannual Report | 13
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
UTILITIES 1.2%
b FirstEnergy Corp. ........................................................ United States 4,868 $ 286,482
Public Service Enterprise Group Inc. ..................................... United States 1,893 115,568
------------
402,050
------------
TOTAL COMMON STOCKS (COST $19,750,753) ................................... 22,493,121
------------
SHORT TERM INVESTMENTS 65.5%
MONEY MARKET FUND (COST $8,419,824) 25.0%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ..... United States 8,419,824 8,419,824
------------
-------------
PRINCIPAL
AMOUNT
-------------
REPURCHASE AGREEMENT (COST $13,593,892) 40.5%
f Joint Repurchase Agreement, 5.264%, 11/01/06
(Maturity Value $13,595,879) ............................................. United States $ 13,593,892 13,593,892
ABN AMRO Bank, N.V., New York Branch (Maturity Value $1,279,916)
Banc of America Securities LLC (Maturity Value $1,279,916)
Barclays Capital Inc. (Maturity Value $1,279,916)
Bear, Stearns & Co. Inc. (Maturity Value $1,023,906)
BNP Paribas Securities Corp. (Maturity Value $1,279,916)
Deutsche Bank Securities Inc. (Maturity Value $1,279,916)
Greenwich Capital Markets Inc. (Maturity Value $1,279,916)
Lehman Brothers Inc. (Maturity Value $1,052,729)
Merrill Lynch Government Securities Inc. (Maturity Value $1,279,916)
Morgan Stanley & Co. Inc. (Maturity Value $1,279,916)
UBS Securities LLC (Maturity Value $1,279,916)
Collateralized by U.S. Government Agency Securities, 2.625% - 7.25%,
11/03/06 -7/18/11; g U.S. Treasury Bills, 3/15/07; and
U.S. Treasury Notes, 3.375% - 6.125%, 3/15/07 - 2/15/29
------------
TOTAL INVESTMENTS (COST $41,764,469) 132.5% .............................. 44,506,837
OPTIONS WRITTEN 0.0% h ................................................... (1,900)
SECURITIES SOLD SHORT (37.5)% ............................................ (12,586,426)
OTHER ASSETS, LESS LIABILITIES 5.0% ...................................... 1,672,267
------------
NET ASSETS 100.0% ........................................................ $ 33,590,778
============
-------------
CONTRACTS
-------------
i OPTIONS WRITTEN (PREMIUMS RECEIVED $128,060) 0.0% h
CALL OPTIONS 0.0% h
TECHNOLOGY SERVICES 0.0% h
VeriSign Inc., Jan. 35 Calls, 1/20/07 .................................... United States 380 1,900
------------
-------------
SHARES
-------------
j SECURITIES SOLD SHORT 37.5%
CONSUMER DURABLES 0.6%
Arctic Cat Inc. .......................................................... United States 10,916 195,506
------------
14 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
j SECURITIES SOLD SHORT (CONTINUED)
CONSUMER NON-DURABLES 2.4%
Adidas AG ................................................................ Germany 6,878 $ 344,451
Kellwood Co. ............................................................. United States 14,925 456,705
------------
801,156
------------
CONSUMER SERVICES 1.7%
Darden Restaurants Inc. .................................................. United States 8,133 340,773
Royal Caribbean Cruises Ltd. ............................................. United States 5,415 219,308
------------
560,081
------------
DISTRIBUTION SERVICES 0.4%
Tech Data Corp. .......................................................... United States 3,128 123,087
------------
DIVERSIFIED FINANCIAL SERVICES 2.4%
Energy Select Sector SPDR Fund ........................................... United States 9,366 521,967
iShares Nasdaq Biotechnology Index Fund .................................. United States 3,672 292,658
------------
814,625
------------
ELECTRONIC TECHNOLOGY 3.4%
Avici Systems Inc. ....................................................... United States 66,913 461,031
LSI Logic Corp. .......................................................... United States 12,967 130,318
Novellus Systems Inc. .................................................... United States 12,893 356,491
Semiconductor HOLDRs Trust ............................................... United States 5,926 201,484
Vitesse Semiconductor Corp. .............................................. United States 196 229
------------
1,149,553
------------
ENERGY MINERALS 2.0%
Repsol YPF SA, ADR ....................................................... Spain 8,778 293,624
Whiting Petroleum Corp. .................................................. United States 8,140 363,125
------------
656,749
------------
FINANCE 4.6%
First Republic Bank ...................................................... United States 8,974 349,448
Glacier Bancorp Inc. ..................................................... United States 13,524 472,258
Old Second Bancorp Inc. .................................................. United States 11,922 360,521
Raymond James Financial Inc. ............................................. United States 11,670 371,806
------------
1,554,033
------------
HEALTH TECHNOLOGY 1.5%
DJO Inc. ................................................................. United States 12,328 495,955
------------
PROCESS INDUSTRIES 0.4%
PPG Industries Inc. ...................................................... United States 2,220 151,848
------------
PRODUCER MANUFACTURING 4.8%
American Axle & Manufacturing Holdings Inc. .............................. United States 9,816 184,050
Evergreen Solar Inc. ..................................................... United States 10,759 93,603
Robbins & Myers Inc. ..................................................... United States 14,457 556,450
Superior Industries International Inc. ................................... United States 20,318 343,374
Valmont Industries Inc. .................................................. United States 8,036 448,409
------------
1,625,886
------------
Semiannual Report | 15
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. LONG-SHORT FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
j SECURITIES SOLD SHORT (CONTINUED)
RETAIL TRADE 8.6%
Big Lots Inc. ............................................................ United States 25,251 $ 532,291
BJ's Wholesale Club Inc. ................................................. United States 8,436 241,691
Cabela's Inc., A ......................................................... United States 13,472 317,939
Charlotte Russe Holdings Inc. ............................................ United States 6,620 183,043
Dillard's Inc., A ........................................................ United States 23,111 697,259
Fred's Inc. .............................................................. United States 9,419 123,201
FTD Group Inc. ........................................................... United States 21,058 335,875
Longs Drug Stores Corp. .................................................. United States 10,888 468,620
------------
2,899,919
------------
TECHNOLOGY SERVICES 1.5%
Napster Inc. ............................................................. United States 103,134 488,855
------------
TRANSPORTATION 3.2%
Covenant Transport Inc., A ............................................... United States 26,587 332,072
Kansas City Southern ..................................................... United States 13,649 387,495
SAIA Inc. ................................................................ United States 13,045 349,606
------------
1,069,173
------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $11,711,396) ....................... $ 12,586,426
============
SELECTED PORTFOLIO ABBREVIATIONS:
ADR - American Depository Receipt
HOLDRS - Holding Company Depository Receipts
SPDR - S&P Depository Receipt
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 1(f) regarding securities segregated with broker for securities
sold short.
c Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2006,
the value of this security was $226,953, representing 0.68% of net assets.
d A portion or all of the security is held in connection with open option
contracts.
e See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
f See Note 1(c) regarding joint repurchase agreement.
g The security is traded on a discount basis with no stated coupon rate.
h Rounds to less than 0.1% of net assets.
i See Note 1(e) regarding written options.
j See Note 1(f) regarding securities sold short.
16 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2006 (unaudited)
---------------
FRANKLIN
U.S. LONG-SHORT
FUND
---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................... $ 19,750,753
Cost - Sweep Money Fund (Note 7) ...................................... 8,419,824
Cost - Repurchase agreements .......................................... 13,593,892
---------------
Total cost of investments ............................................. $ 41,764,469
===============
Value - Unaffiliated issuers (includes securities segregated with
broker for securities sold short in the amount of $20,421,591) ....... $ 22,493,121
Value - Sweep Money Fund (Note 7) ..................................... 8,419,824
Value - Repurchase agreements ......................................... 13,593,892
---------------
Total value of investments ............................................ 44,506,837
Cash ................................................................... 24,458
Receivables:
Investment securities sold ............................................ 1,713,715
Capital shares sold ................................................... 111,086
Dividends ............................................................. 1,707
Cash on deposit with brokers for securities sold short ................. 866,042
---------------
Total assets ...................................................... 47,223,845
---------------
Liabilities:
Payables:
Investment securities purchased ....................................... 796,921
Capital shares redeemed ............................................... 153,591
Affiliates ............................................................ 35,309
Options written, at value (premiums received $128,060) ................. 1,900
Securities sold short, at value (proceeds $11,711,396) ................. 12,586,426
Accrued expenses and other liabilities.................................. 58,920
---------------
Total liabilities ................................................. 13,633,067
---------------
Net assets, at value ............................................. $ 33,590,778
===============
Net assets consist of:
Paid-in capital ........................................................ $ 93,473,672
Undistributed net investment income .................................... 768,733
Net unrealized appreciation (depreciation) ............................. 1,993,878
Accumulated net realized gain (loss) ................................... (62,645,505)
---------------
Net assets, at value ............................................. $ 33,590,778
===============
CLASS A:
Net assets, at value ................................................... $ 33,590,778
===============
Shares outstanding ..................................................... 2,068,459
===============
Net asset value per share a ............................................ $ 16.24
===============
Maximum offering price per share (net asset value per share / 94.25%) .. $ 17.23
===============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 17
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2006 (unaudited)
---------------
FRANKLIN
U.S. LONG-SHORT
FUND
---------------
Investment income:
Dividends:
Unaffiliated issuers ..................................................... $ 227,162
Sweep Money Fund (Note 7) ................................................ 236,320
Interest .................................................................. 258,236
Other income (Note 8) ..................................................... 50,681
---------------
Total investment income .............................................. 772,399
---------------
Expenses:
Management fees (Note 3a) ................................................. 80,283
Administrative fees (Note 3b) ............................................. 38,914
Distribution fees (Note 3c) ............................................... 47,727
Transfer agent fees (Note 3e) ............................................. 68,047
Custodian fees (Note 4) ................................................... 757
Reports to shareholders ................................................... 17,999
Registration and filing fees .............................................. 9,049
Professional fees ......................................................... 24,679
Trustees' fees and expenses ............................................... 541
Dividends for securities sold short ....................................... 71,593
Other ..................................................................... 3,080
---------------
Total expenses ....................................................... 362,669
Expense reductions (Note 4) .......................................... (367)
---------------
Net expenses ........................................................ 362,302
---------------
Net investment income .............................................. 410,097
---------------
Realized and unrealized losses:
Net realized gain (loss) from:
Investments .............................................................. 430,239
Foreign currency transactions ............................................ 3,529
Securities sold short .................................................... 88,852
---------------
Net realized gain (loss) ........................................... 522,620
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. (2,389,378)
Translation of assets and liabilities denominated in foreign currencies .. 151
---------------
Net change in unrealized appreciation (depreciation) ............... (2,389,227)
---------------
Net realized and unrealized gain (loss) .................................... (1,866,607)
---------------
Net increase (decrease) in net assets resulting from operations ............ $ (1,456,510)
===============
18 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
FRANKLIN U.S. LONG-SHORT FUND
-----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2006 YEAR ENDED
(UNAUDITED) APRIL 30, 2006
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................... $ 410,097 $ 654,492
Net realized gain (loss) from investments, securities sold short,
and foreign currency transactions ........................................ 522,620 (178,870)
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies .. (2,389,227) 4,550,047
-----------------------------------
Net increase (decrease) in net assets resulting from operations ....... (1,456,510) 5,025,669
-----------------------------------
Distributions to shareholders from net investment income ................... -- (500,084)
Capital share transactions (Note 2) ........................................ (12,555,816) (25,640,187)
Redemption fees ............................................................ 14 13
-----------------------------------
Net increase (decrease) in net assets ................................. (14,012,312) (21,114,589)
Net assets:
Beginning of period ........................................................ 47,603,090 68,717,679
-----------------------------------
End of period .............................................................. $ 33,590,778 $ 47,603,090
===================================
Undistributed net investment income included in net assets:
End of period .............................................................. $ 768,733 $ 358,636
===================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 19
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FRANKLIN U.S. LONG-SHORT FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 (1940 Act) as an open-end investment company, consisting of twelve
separate funds. The Franklin U.S. Long-Short Fund (the Fund) included in this
report is diversified. The financial statements of the remaining funds in the
Trust are presented separately. The Fund offers one classes of shares: Class A.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Trust's Board of
Trustees.
20 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. JOINT REPURCHASE AGREEMENT
The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account with other funds managed by the
investment manager or an affiliate of the investment manager and is used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the funds based on their pro-rata
interest. A repurchase agreement is accounted for as a loan by the Fund to the
seller, collateralized by securities which are delivered to the Fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the Funds, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. Repurchase agreements are valued at cost.
At October 31, 2006, all repurchase agreements held by the Fund had been entered
into on that date.
D. FOREIGN CURRENCY CONTRACTS
The Fund may enter into forward exchange contracts to hedge against fluctuations
in foreign exchange rates. A forward exchange contract is an agreement between
two parties to exchange different currencies at an agreed upon forward exchange
rate at a future date. These contracts are valued daily by the Fund and the
unrealized gains or losses on the contracts, as measured by
Semiannual Report | 21
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS (CONTINUED)
the difference between the contractual forward foreign exchange rates and the
forward rates at the reporting date, are included in the Statement of Assets and
Liabilities. Realized and unrealized gains and losses on these contracts are
included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
22 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
H. 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. Dividend income and
dividends declared on securities sold short, are recorded on the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
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.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
J. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date . The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital. There were no redemption fees for the period.
Semiannual Report | 23
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2006, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
-------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2006 APRIL 30, 2006
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
Shares sold ......................... 198,126 $ 3,161,401 448,427 $ 7,322,226
Shares issued in reinvestment
of distributions ................... -- -- 25,327 419,660
Shares redeemed...................... (987,877) (15,717,217) (2,048,112) (33,382,073)
-------------------------------------------------------
Net increase (decrease) ............. (789,751) $ (12,555,816) (1,574,358) $ (25,640,187)
=======================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Alternative Strategies, LLC
Alternative Strategies) Investment manager
Franklin Templeton Investor Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
24 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays Advisers an investment management fee comprised of a "base fee"
and a "performance adjustment". The base fee is calculated at the beginning of
each month using an annual rate of 1.50% of the prior month's average daily net
assets. The performance adjustment is calculated at the beginning of each month
based on how much the Fund's total return exceeded or lagged its benchmark, the
Standard & Poors 500 Composite Stock Price Index, (the "Fund performance
differential"), over the preceding twelve-month period (the performance period).
A performance adjustment is applicable if the Fund performance differential
exceeds 2.00%, either upwards (an increase to the base fee) or downwards (a
decrease to the base fee). The performance adjustment rate is equal to 0.01% for
each additional 0.05% that the Fund performance differential exceeds 2.00%. The
performance adjustment amount is determined by multiplying the performance
adjustment rate by the average daily net assets of the performance period. The
performance adjustment rate may not exceed 1.00% annualized, either upwards or
downwards. At the end of each month, an annualized investment management fee
ratio is calculated (total investment management fees divided by fiscal year to
date average daily net assets). In accordance with the Investment Management
Agreement, the investment management fee ratio may not exceed 2.50% or fall
below 0.50% for the fiscal year. For the period, the total annualized management
fee rate, including the performance adjustment, and fee reduction on assets
invested in the Franklin Institutional Fiduciary Trust Money Market Portfolio
(see Note 7) was 0.41% of the average daily net assets of the Fund.
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
average daily net assets of the Fund.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's Class A
reimbursement distribution plan, the Fund reimburses Distributors up to 0.35%
per year of Class A's average daily net assets for costs incurred in connection
with the sale and distribution of the Fund's shares. Under the Class A
reimbursement distribution plan, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
Semiannual Report | 25
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the period:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers .............................................. $ 7,412
Contingent deferred sales charges retained .................... $ --
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $68,047, of which $39,346 was retained by
Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended October 31, 2006, 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, if any. At April 30, 2006, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2010 .................................................. $ 6,588,893
2011 .................................................. 40,708,375
2012 .................................................. 5,254,173
2014 .................................................. 10,524,239
------------
$ 63,075,680
============
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2006, the Fund deferred realized currency losses of
$1,775.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and certain
dividends on securities sold short.
26 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
5. INCOME TAXES (CONTINUED)
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and certain dividend payments on securities sold short.
At October 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), for income tax purposes were as follows:
Cost of investments ..................................... $ 41,792,369
============
Unrealized appreciation ................................. $ 3,754,842
Unrealized depreciation ................................. (1,040,374)
------------
Net unrealized appreciation (depreciation) .............. $ 2,714,468
============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments and securities sold short (excluding short
term securities) for the period ended October 31, 2006, aggregated $15,124,131
and $24,549,135, respectively.
Transactions in options written during the period ended October 31, 2006, were
as follows:
--------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------------------
Options outstanding at April 30, 2006 ............ 380 $128,060
Options written .................................. -- --
Options expired .................................. -- --
Options exercised ................................ -- --
Options closed ................................... -- --
--------------------
Options outstanding at October 31, 2006 .......... 380 $128,060
====================
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management and administrative
fees paid by the Sweep Money Fund.
8. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund
Semiannual Report | 27
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
8. REGULATORY MATTERS (CONTINUED)
shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively,
the "Company"), entered into settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan was completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears
28 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN U.S. LONG-SHORT FUND
8. REGULATORY MATTERS (CONTINUED)
responsibility for any unlawful or inappropriate conduct that caused losses to
the Fund, it is committed to making the Fund or its shareholders whole, as
appropriate.
9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
Semiannual Report | 29
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN U.S. LONG-SHORT FUND
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust'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 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q 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
1-800/SEC-0330.
30 | Semiannual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate
Fund Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/06 Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN U.S. LONG-SHORT FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
404 S2006 12/06
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 12(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 Frank W. T. LaHaye and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 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 significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
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 SERIES
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 27, 2006
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/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 27, 2006
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date December 27, 2006