UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
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FRANKLIN STRATEGIC SERIES
----------------------------
(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
----
Date of reporting period: 4/30/09
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ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC)
APRIL 30, 2009
ANNUAL REPORT
AND SHAREHOLDER LETTER
Franklin Flex Cap Growth Fund
Franklin Focused Core Equity Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
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FRANKLIN STRATEGIC SERIES
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
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)
Not part of the annual report
Contents
SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Economic and Market Overview ............................................. 3
Franklin Flex Cap Growth Fund ............................................ 5
Franklin Focused Core Equity Fund ........................................ 15
Franklin Growth Opportunities Fund ....................................... 25
Franklin Small Cap Growth Fund ........................................... 35
Franklin Small-Mid Cap Growth Fund ....................................... 45
Financial Highlights and Statements of Investments ....................... 55
Financial Statements ..................................................... 94
Notes to Financial Statements ............................................ 103
Report of Independent Registered Public Accounting Firm .................. 122
Tax Designation .......................................................... 123
Board Members and Officers ............................................... 124
Shareholder Information .................................................. 129
Shareholder Letter
Dear Shareholder:
The 12-month period ended April 30, 2009, was an extraordinary and stressful
time for investors and those of us who have worked in financial markets for many
years. During this turbulent period, the U.S. recession deepened, the
unemployment rate surged and consumer spending fell. Most stocks suffered major
losses as investors worried about an uncertain future. With a new president,
Barack Obama, the country and the financial markets were eager to see how
effectively the government could address these problems. Although this
environment is bound to provoke great concern, we think it is important to put
short-term market developments in perspective. Keep in mind that as daunting as
current conditions may be, we have navigated through other periods of high
market volatility, such as the U.S. stock market's severe decline of 1987 and
the bursting of the technology bubble in 2000. We remain committed to our
long-term perspective and disciplined investment philosophy. Therefore, we view
recent declines as potential opportunities to find bargains that we believe may
be well positioned to become eventual winners. Although conditions remain
challenging, our experience gives us ample reason to be optimistic about future
market stabilization and recovery.
Franklin Strategic Series' annual report goes into greater detail about
prevailing conditions during the period under review. In addition, you will find
performance data, financial information and a discussion about investment
management decisions. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual 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.
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Funds, keeping in mind the trust you have
placed in us. 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 current market conditions.
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 APRIL 30, 2009. 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 annual report
Annual Report
Economic and Market Overview
During the 12-month period ended April 30, 2009, the U.S. economy and stock
markets suffered significant declines, but tentative signs of stabilization
emerged near period-end. The government's abrupt conservatorship of Fannie Mae
and Freddie Mac in early September 2008 and the failure of several blue chip
banks and financial institutions roiled equity markets for most of the reporting
period. Despite government interventions and massive emergency funding, the
nation's economic troubles were exacerbated as manufacturing activity weakened
at its fastest pace in nearly 30 years. Although home sales declined for most of
the period, they edged higher near period-end. Jobless claims mounted and the
unemployment rate rose to 8.9% in April 2009.1 Reflecting a broad-based
contraction in consumer spending, falling corporate profits and slowing exports,
economic growth, as measured by gross domestic product (GDP), fell in the third
and fourth quarters of 2008 at annualized rates of 0.5% and 6.3% after
increasing at a 2.8% annualized rate in the second quarter. In 2009's first
quarter, GDP declined at an estimated 5.7% annualized rate.
Oil prices stood at $113 per barrel at the beginning of the period, but
retreated dramatically to $51 by period-end. Many other commodities such as
agricultural products and base metals followed similar trends. Partially as a
result of the steep price corrections, inflation declined significantly during
the period, and April's inflation rate was an annualized -0.7%.(1) Core
inflation, which excludes food and energy costs, rose at a 1.9% annual rate,
which was within the Federal Reserve Board's (Fed's) informal target range of
1.5%-2.0%.(1)
A slowing economy and decelerating inflation prompted policymakers to further
lower interest rates and enact stimulus plans. During the 12 months under
review, the Fed lowered the federal funds target rate to a range of 0% to 0.25%
from 2.00% at the start of the period. The government introduced various new
measures to enhance market liquidity and outlined details of its Public-Private
Investment Program, with an objective of removing devalued real estate-related
assets from banks' balance sheets.
(1.) Source: Bureau of Labor Statistics.
Annual Report | 3
Market volatility was high during the reporting period, but near period-end,
stock markets began to rebound from severely depressed levels. Overall, however,
they declined significantly during the period. For the 12 months under review,
the blue chip stocks of the Dow Jones Industrial Average had a total return of
- -34.19%, the broader Standard & Poor's 500 Index (S&P 500) a -35.31% total
return, and the technology-heavy NASDAQ Composite Index a -28.13% total
return.(2) All sectors lost value, and the financials, industrials and energy
sectors had the largest declines.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30,
2009. 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.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. 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.
4 | Annual 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Flex Cap Growth Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Flex Cap Growth Fund - Class A had a
- -29.08% cumulative total return. The Fund performed better than its narrow
benchmark, the Russell 3000(R) Growth Index, which had a -31.46% total return,
and its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a
- -35.31% total return for the same period.(1) The Fund also performed better than
the -34.35% total return of its peers in the Lipper Multi-Cap Growth Funds
Classification Average.(2) You can find the Fund's long-term performance data in
the Performance Summary beginning on page 8.
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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 12-month period ended 4/30/09, there were 457 funds in this
category. Lipper calculations do not include sales charges or subsidization
by a Fund's manager. The Fund's performance relative to the average may
have differed if these or other factors had been considered. 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.
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.
Annual Report | 5
PORTFOLIO BREAKDOWN
Franklin Flex Cap Growth Fund
Based on Total Net Assets as of 4/30/09
(BAR CHART)
Software & Services* 19.9%
Technology Hardware & Equipment* 14.9%
Pharmaceuticals, Biotechnology & Life Sciences 9.2%
Energy 8.8%
Health Care Equipment & Services 7.7%
Capital Goods 5.8%
Materials 4.4%
Transportation 3.0%
Semiconductors & Semiconductor Equipment* 3.0%
Household & Personal Products 3.0%
Telecommunication Services 2.9%
Food, Beverage & Tobacco 2.7%
Diversified Financials 2.0%
Other 10.0%
Short-Term Investments & Other Net Assets 2.7%
* 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.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
bottom-up investors we focus primarily on finding individual securities that
meet our criteria for growth potential, quality and valuation. We search for
high-quality companies that have identifiable drivers of future earnings growth.
We rely on our team of analysts to help provide in-depth industry expertise and
use both qualitative and quantitative analysis to evaluate companies. Our
analysts identify each company's market opportunity, competitive position,
management and financial strength, business and financial risks, and valuation.
We choose to invest in those companies that, in our opinion, offer the best
trade-off between growth opportunity, business and financial risk, and
valuation.
MANAGER'S DISCUSSION
During the 12 months under review, among the holdings that detracted most from
Fund performance relative to the Russell 3000 Growth Index were Microsemi (sold
by period-end), a semiconductor company; Covance, a drug research, development
and testing laboratory; and Smith International, a U.S.-based provider of
drilling equipment and services to the oil and gas industries.
From a sector perspective, our stock selection in the information technology
sector was a major detractor from the Fund's relative performance, particularly
holdings such as specialized imaging systems manufacturer FLIR Systems and
graphics card manufacturer NVIDIA (sold by period-end).(3) Within the consumer
discretionary sector, stock selection and underweighting in the hotels,
restaurants and leisure industry hurt relative returns.(4) Stock selection in
the telecommunication services sector also hampered relative results as shares
in wireless telecommunication industry component NII Holdings declined in value.
During a fiscal year marred by financial crises and a broad-based sell-off for
stocks globally, the Fund's small cash position helped performance relative to
the index. Top contributors to relative results by individual security included
pharmaceutical manufacturer Schering-Plough and biotechnology companies
Genentech (not held at period-end) and Gilead Sciences.
(3.) The information technology sector comprises semiconductors and
semiconductor equipment and software and services in the SOI.
(4.) The consumer discretionary sector comprises automobiles and components,
consumer services, media, and retailing in the SOI.
6 | Annual Report
From a sector perspective, industrials was a major positive contributor to
performance relative to the benchmark index, due to our underweighted allocation
and stock selection.(5) Most notably, our holding in air freight and logistics
company C.H. Robinson Worldwide aided the Fund's relative results, as did an
underweighted position and stock selection in the machinery industry.
Additionally, an underweighting and stock selection in the materials sector also
contributed to relative returns. Within materials, our overweighted allocation
and stock selection in the chemicals industry boosted relative performance. In
the energy sector, an underweighted allocation helped relative results.
Thank you for your continued participation in Franklin Flex Cap Growth Fund. We
look forward to serving your future investment needs.
(PHOTO OF CONRAD B. HERRMANN)
/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 APRIL 30, 2009, 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.
(5.) The industrials sector comprises capital goods, commercial and professional
services, and transportation in the SOI.
TOP 10 HOLDINGS
Franklin Flex Cap Growth Fund
4/30/09
% OF TOTAL
COMPANY SECTOR/INDUSTRY NET ASSETS
- ----------------------- ----------
QUALCOMM Inc.
TECHNOLOGY HARDWARE & EQUIPMENT 3.2%
Apple Inc.
TECHNOLOGY HARDWARE & EQUIPMENT 2.8%
Cisco Systems Inc.
TECHNOLOGY HARDWARE & EQUIPMENT 2.8%
Google Inc., A
SOFTWARE & SERVICES 2.6%
Praxair Inc.
MATERIALS 2.5%
MasterCard Inc., A
SOFTWARE & SERVICES 2.3%
American Tower Corp., A
TELECOMMUNICATION SERVICES 2.3%
Gilead Sciences Inc.
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 2.3%
Oracle Corp.
SOFTWARE & SERVICES 2.2%
FLIR Systems Inc.
TECHNOLOGY HARDWARE & EQUIPMENT 2.1%
Annual Report | 7
Performance Summary as of 4/30/09
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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FKCGX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$13.31 $32.46 $45.77
CLASS B (SYMBOL: FKCBX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$12.62 $30.04 $42.66
CLASS C (SYMBOL: FCIIX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$12.66 $30.10 $42.76
CLASS R (SYMBOL: FRCGX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$13.19 $31.91 $45.10
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 4/30/09 4/30/08
- ----------------------------- ------- ------- -------
Net Asset Value (NAV) -$13.33 $32.82 $46.15
8 | Annual 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -29.08% -2.20% +36.39%
Average Annual Total Return(2) -33.15% -1.62% +2.54%
Value of $10,000 Investment(3) $6,685 $9,218 $12,856
Avg. Ann. Total Return (3/31/09)(4) -35.00% -3.99% +1.73%
Total Annual Operating Expenses(5) 0.96%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -29.58% -5.76% +28.41%
Average Annual Total Return(2) -32.40% -1.57% +2.53%
Value of $10,000 Investment(3) $6,760 $9,238 $12,841
Avg. Ann. Total Return (3/31/09)(4) -34.31% -3.96% +1.72%
Total Annual Operating Expenses(5) 1.71%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -29.61% -5.78% +26.51%
Average Annual Total Return(2) -30.31% -1.18% +2.38%
Value of $10,000 Investment(3) $6,969 $9,422 $12,651
Avg. Ann. Total Return (3/31/09)(4) -32.26% -3.58% +1.57%
Total Annual Operating Expenses(5) 1.71%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------- ------ ------ ---------
Cumulative Total Return(1) -29.25% -3.38% +1.87%
Average Annual Total Return(2) -29.25% -0.68% +0.25%
Value of $10,000 Investment(3) $7,075 $9,662 $10,187
Avg. Ann. Total Return (3/31/09)(4) -31.23% -3.09% -1.14%
Total Annual Operating Expenses(5) 1.21%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------ -------
Cumulative Total Return(1) -28.88% -1.04% +38.00%
Average Annual Total Return(2) -28.88% -0.21% +3.27%
Value of $10,000 Investment(3) $7,112 $9,896 $13,800
Avg. Ann. Total Return (3/31/09)(4) -30.86% -2.62% +2.45%
Total Annual Operating Expenses(5) 0.71%
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 (800) 342-5236.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -33.15%
5-Year -1.62%
10-Year +2.54%
CLASS A (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN FLEX
CAP GROWTH RUSSELL 3000
DATE FUND - CLASS A S&P 500 Index Growth Index
- ------------- --------------- ------------- --------------
5/1/1999 $ 9,427 $10,000 $10,000
5/31/1999 $ 9,397 $ 9,764 $ 9,717
6/30/1999 $10,349 $10,306 $10,384
7/30/1999 $10,448 $ 9,984 $10,055
8/31/1999 $10,866 $ 9,935 $10,180
9/30/1999 $11,082 $ 9,662 $ 9,994
10/29/1999 $12,452 $10,274 $10,714
11/30/1999 $14,240 $10,482 $11,328
12/31/1999 $17,329 $11,100 $12,562
1/31/2000 $17,343 $10,542 $12,007
2/29/2000 $21,838 $10,343 $12,757
3/31/2000 $20,633 $11,354 $13,479
4/28/2000 $18,373 $11,013 $12,785
5/31/2000 $17,167 $10,787 $12,109
6/30/2000 $19,732 $11,053 $13,070
7/31/2000 $19,208 $10,880 $12,485
8/31/2000 $22,018 $11,556 $13,627
9/29/2000 $21,333 $10,946 $12,379
10/31/2000 $19,475 $10,899 $11,764
11/30/2000 $15,321 $10,040 $10,003
12/29/2000 $16,108 $10,089 $ 9,746
1/31/2001 $16,393 $10,447 $10,428
2/28/2001 $13,359 $ 9,495 $ 8,681
3/30/2001 $11,923 $ 8,893 $ 7,748
4/30/2001 $13,258 $ 9,584 $ 8,726
5/31/2001 $13,262 $ 9,648 $ 8,622
6/29/2001 $13,180 $ 9,414 $ 8,455
7/31/2001 $12,686 $ 9,321 $ 8,208
8/31/2001 $12,043 $ 8,737 $ 7,547
9/28/2001 $10,377 $ 8,032 $ 6,763
10/31/2001 $11,093 $ 8,185 $ 7,136
11/30/2001 $12,133 $ 8,813 $ 7,816
12/31/2001 $12,367 $ 8,890 $ 7,833
1/31/2002 $12,102 $ 8,760 $ 7,685
2/28/2002 $11,638 $ 8,591 $ 7,355
3/29/2002 $12,534 $ 8,915 $ 7,634
4/30/2002 $11,954 $ 8,374 $ 7,043
5/31/2002 $11,689 $ 8,312 $ 6,855
6/28/2002 $10,747 $ 7,720 $ 6,224
7/31/2002 $ 9,633 $ 7,118 $ 5,840
8/30/2002 $ 9,583 $ 7,165 $ 5,856
9/30/2002 $ 8,862 $ 6,386 $ 5,260
10/31/2002 $ 9,345 $ 6,949 $ 5,729
11/29/2002 $ 9,921 $ 7,358 $ 6,056
12/31/2002 $ 9,283 $ 6,925 $ 5,637
1/31/2003 $ 9,298 $ 6,744 $ 5,499
2/28/2003 $ 9,252 $ 6,643 $ 5,466
3/31/2003 $ 9,333 $ 6,707 $ 5,567
4/30/2003 $ 9,952 $ 7,260 $ 5,986
5/30/2003 $10,700 $ 7,642 $ 6,309
6/30/2003 $10,766 $ 7,740 $ 6,398
7/31/2003 $11,206 $ 7,876 $ 6,579
8/29/2003 $11,751 $ 8,030 $ 6,757
9/30/2003 $11,405 $ 7,944 $ 6,677
10/31/2003 $12,398 $ 8,394 $ 7,067
11/28/2003 $12,791 $ 8,468 $ 7,153
12/31/2003 $13,040 $ 8,912 $ 7,383
1/30/2004 $13,247 $ 9,075 $ 7,552
2/27/2004 $13,359 $ 9,202 $ 7,595
3/31/2004 $13,418 $ 9,063 $ 7,468
4/30/2004 $13,145 $ 8,920 $ 7,359
5/31/2004 $13,539 $ 9,043 $ 7,496
6/30/2004 $13,776 $ 9,219 $ 7,602
7/30/2004 $12,943 $ 8,914 $ 7,151
8/31/2004 $12,873 $ 8,950 $ 7,106
9/30/2004 $13,313 $ 9,047 $ 7,199
10/29/2004 $13,620 $ 9,185 $ 7,317
11/30/2004 $14,197 $ 9,556 $ 7,599
12/31/2004 $14,730 $ 9,882 $ 7,895
1/31/2005 $14,193 $ 9,641 $ 7,623
2/28/2005 $14,450 $ 9,844 $ 7,707
3/31/2005 $14,115 $ 9,669 $ 7,553
4/29/2005 $13,729 $ 9,486 $ 7,381
5/31/2005 $14,407 $ 9,788 $ 7,751
6/30/2005 $14,306 $ 9,802 $ 7,746
7/29/2005 $14,948 $10,166 $ 8,139
8/31/2005 $14,839 $10,073 $ 8,033
9/30/2005 $14,999 $10,155 $ 8,072
10/31/2005 $14,765 $ 9,986 $ 7,975
11/30/2005 $15,622 $10,363 $ 8,328
12/30/2005 $15,645 $10,367 $ 8,303
1/31/2006 $16,424 $10,642 $ 8,506
2/28/2006 $16,443 $10,670 $ 8,489
3/31/2006 $16,607 $10,803 $ 8,641
4/28/2006 $16,529 $10,948 $ 8,628
5/31/2006 $15,559 $10,633 $ 8,305
6/30/2006 $15,746 $10,648 $ 8,276
7/31/2006 $15,415 $10,713 $ 8,095
8/31/2006 $15,684 $10,968 $ 8,346
9/29/2006 $15,992 $11,251 $ 8,561
10/31/2006 $16,377 $11,617 $ 8,883
11/30/2006 $16,763 $11,838 $ 9,062
12/29/2006 $16,546 $12,004 $ 9,088
1/31/2007 $17,069 $12,186 $ 9,316
2/28/2007 $16,761 $11,948 $ 9,153
3/30/2007 $16,909 $12,081 $ 9,206
4/30/2007 $17,603 $12,616 $ 9,623
5/31/2007 $18,157 $13,057 $ 9,977
6/29/2007 $18,069 $12,840 $ 9,836
7/31/2007 $17,948 $12,442 $ 9,652
8/31/2007 $18,529 $12,628 $ 9,813
9/28/2007 $19,703 $13,100 $10,214
10/31/2007 $20,261 $13,309 $10,571
11/30/2007 $19,333 $12,752 $10,153
12/31/2007 $19,198 $12,664 $10,124
1/31/2008 $17,308 $11,904 $ 9,323
2/29/2008 $16,781 $11,518 $ 9,127
3/31/2008 $16,841 $11,468 $ 9,072
4/30/2008 $18,128 $12,026 $ 9,547
5/30/2008 $18,904 $12,182 $ 9,912
6/30/2008 $17,554 $11,155 $ 9,209
7/31/2008 $17,467 $11,061 $ 9,062
8/29/2008 $17,732 $11,221 $ 9,169
9/30/2008 $15,744 $10,221 $ 8,110
10/31/2008 $13,177 $ 8,505 $ 6,656
11/28/2008 $12,211 $ 7,895 $ 6,106
12/31/2008 $12,235 $ 7,979 $ 6,232
1/30/2009 $11,573 $ 7,306 $ 5,919
2/27/2009 $10,702 $ 6,528 $ 5,462
3/31/2009 $11,613 $ 7,100 $ 5,949
4/30/2009 $12,856 $ 7,779 $ 6,544
Total Returns 28.56% -22.21% -34.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09
- ------- -------
1-Year -32.40%
5-Year -1.57%
10-Year +2.53%
CLASS B (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN FLEX
CAP GROWTH FUND RUSSELL 3000
DATE - CLASS B S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,965 $ 9,764 $ 9,717
6/30/1999 $10,965 $10,306 $10,384
7/31/1999 $11,058 $ 9,984 $10,055
8/31/1999 $11,498 $ 9,935 $10,180
9/30/1999 $11,716 $ 9,662 $ 9,994
10/31/1999 $13,158 $10,274 $10,714
11/30/1999 $15,035 $10,482 $11,328
12/31/1999 $18,284 $11,100 $12,562
1/31/2000 $18,284 $10,542 $12,007
2/29/2000 $23,008 $10,343 $12,757
3/31/2000 $21,723 $11,354 $13,479
4/30/2000 $19,335 $11,013 $12,785
5/31/2000 $18,054 $10,787 $12,109
6/30/2000 $20,737 $11,053 $13,070
7/31/2000 $20,177 $10,880 $12,485
8/31/2000 $23,113 $11,556 $13,627
9/30/2000 $22,377 $10,946 $12,379
10/31/2000 $20,414 $10,899 $11,764
11/30/2000 $16,048 $10,040 $10,003
12/31/2000 $16,865 $10,089 $ 9,746
1/31/2001 $17,151 $10,447 $10,428
2/28/2001 $13,973 $ 9,495 $ 8,681
3/31/2001 $12,460 $ 8,893 $ 7,748
4/30/2001 $13,853 $ 9,584 $ 8,726
5/31/2001 $13,844 $ 9,648 $ 8,622
6/30/2001 $13,749 $ 9,414 $ 8,455
7/31/2001 $13,227 $ 9,321 $ 8,208
8/31/2001 $12,551 $ 8,737 $ 7,547
9/30/2001 $10,803 $ 8,032 $ 6,763
10/31/2001 $11,540 $ 8,185 $ 7,136
11/30/2001 $12,618 $ 8,813 $ 7,816
12/31/2001 $12,854 $ 8,890 $ 7,833
1/31/2002 $12,572 $ 8,760 $ 7,685
2/28/2002 $12,083 $ 8,591 $ 7,355
3/31/2002 $13,003 $ 8,915 $ 7,634
4/30/2002 $12,394 $ 8,374 $ 7,043
5/31/2002 $12,112 $ 8,312 $ 6,855
6/30/2002 $11,130 $ 7,720 $ 6,224
7/31/2002 $ 9,970 $ 7,118 $ 5,840
8/31/2002 $ 9,912 $ 7,165 $ 5,856
9/30/2002 $ 9,162 $ 6,386 $ 5,260
10/31/2002 $ 9,651 $ 6,949 $ 5,729
11/30/2002 $10,243 $ 7,358 $ 6,056
12/31/2002 $ 9,576 $ 6,925 $ 5,637
1/31/2003 $ 9,585 $ 6,744 $ 5,499
2/28/2003 $ 9,531 $ 6,643 $ 5,466
3/31/2003 $ 9,609 $ 6,707 $ 5,567
4/30/2003 $10,243 $ 7,260 $ 5,986
5/31/2003 $11,002 $ 7,642 $ 6,309
6/30/2003 $11,068 $ 7,740 $ 6,398
7/31/2003 $11,511 $ 7,876 $ 6,579
8/31/2003 $12,063 $ 8,030 $ 6,757
9/30/2003 $11,698 $ 7,944 $ 6,677
10/31/2003 $12,709 $ 8,394 $ 7,067
11/30/2003 $13,103 $ 8,468 $ 7,153
12/31/2003 $13,351 $ 8,912 $ 7,383
1/31/2004 $13,558 $ 9,075 $ 7,552
2/29/2004 $13,662 $ 9,202 $ 7,595
3/31/2004 $13,716 $ 9,063 $ 7,468
4/30/2004 $13,426 $ 8,920 $ 7,359
5/31/2004 $13,819 $ 9,043 $ 7,496
6/30/2004 $14,056 $ 9,219 $ 7,602
7/31/2004 $13,194 $ 8,914 $ 7,151
8/31/2004 $13,115 $ 8,950 $ 7,106
9/30/2004 $13,558 $ 9,047 $ 7,199
10/31/2004 $13,861 $ 9,185 $ 7,317
11/30/2004 $14,437 $ 9,556 $ 7,599
12/31/2004 $14,971 $ 9,882 $ 7,895
1/31/2005 $14,416 $ 9,641 $ 7,623
2/28/2005 $14,669 $ 9,844 $ 7,707
3/31/2005 $14,321 $ 9,669 $ 7,553
4/30/2005 $13,919 $ 9,486 $ 7,381
5/31/2005 $14,594 $ 9,788 $ 7,751
6/30/2005 $14,487 $ 9,802 $ 7,746
7/31/2005 $15,125 $10,166 $ 8,139
8/31/2005 $15,009 $10,073 $ 8,033
9/30/2005 $15,162 $10,155 $ 8,072
10/31/2005 $14,913 $ 9,986 $ 7,975
11/30/2005 $15,771 $10,363 $ 8,328
12/31/2005 $15,779 $10,367 $ 8,303
1/31/2006 $16,554 $10,642 $ 8,506
2/28/2006 $16,567 $10,670 $ 8,489
3/31/2006 $16,720 $10,803 $ 8,641
4/30/2006 $16,633 $10,948 $ 8,628
5/31/2006 $15,647 $10,633 $ 8,305
6/30/2006 $15,825 $10,648 $ 8,276
7/31/2006 $15,481 $10,713 $ 8,095
8/31/2006 $15,742 $10,968 $ 8,346
9/30/2006 $16,041 $11,251 $ 8,561
10/31/2006 $16,418 $11,617 $ 8,883
11/30/2006 $16,791 $11,838 $ 9,062
12/31/2006 $16,567 $12,004 $ 9,088
1/31/2007 $17,081 $12,186 $ 9,316
2/28/2007 $16,762 $11,948 $ 9,153
3/31/2007 $16,898 $12,081 $ 9,206
4/30/2007 $17,582 $12,616 $ 9,623
5/31/2007 $18,136 $13,057 $ 9,977
6/29/2007 $18,049 $12,840 $ 9,836
7/31/2007 $17,928 $12,442 $ 9,652
8/31/2007 $18,509 $12,628 $ 9,813
9/28/2007 $19,682 $13,100 $10,214
10/31/2007 $20,239 $13,309 $10,571
11/30/2007 $19,312 $12,752 $10,153
12/31/2007 $19,177 $12,664 $10,124
1/31/2008 $17,290 $11,904 $ 9,323
2/29/2008 $16,764 $11,518 $ 9,127
3/31/2008 $16,823 $11,468 $ 9,072
4/30/2008 $18,108 $12,026 $ 9,547
5/30/2008 $18,883 $12,182 $ 9,912
6/30/2008 $17,535 $11,155 $ 9,209
7/31/2008 $17,447 $11,061 $ 9,062
8/29/2008 $17,713 $11,221 $ 9,169
9/30/2008 $15,727 $10,221 $ 8,110
10/31/2008 $13,164 $ 8,505 $ 6,656
11/28/2008 $12,199 $ 7,895 $ 6,106
12/31/2008 $12,222 $ 7,979 $ 6,232
1/30/2009 $11,561 $ 7,306 $ 5,919
2/27/2009 $10,690 $ 6,528 $ 5,462
3/31/2009 $11,600 $ 7,100 $ 5,949
4/30/2009 $12,841 $ 7,779 $ 6,544
Total Returns 28.41% -22.21% -34.56%
10 | Annual Report
Performance Summary (CONTINUED)
CLASS C (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN FLEX
CAP GROWTH RUSSELL 3000
DATE FUND - CLASS C S&P 500 INDEX GROWTH INDEX
- ------------ --------------- ------------- ------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,961 $ 9,764 $ 9,717
6/30/1999 $10,963 $10,306 $10,384
7/31/1999 $11,061 $ 9,984 $10,055
8/31/1999 $11,498 $ 9,935 $10,180
9/30/1999 $11,717 $ 9,662 $ 9,994
10/31/1999 $13,162 $10,274 $10,714
11/30/1999 $15,040 $10,482 $11,328
12/31/1999 $18,292 $11,100 $12,562
1/31/2000 $18,296 $10,542 $12,007
2/29/2000 $23,024 $10,343 $12,757
3/31/2000 $21,739 $11,354 $13,479
4/30/2000 $19,346 $11,013 $12,785
5/31/2000 $18,065 $10,787 $12,109
6/30/2000 $20,748 $11,053 $13,070
7/31/2000 $20,186 $10,880 $12,485
8/31/2000 $23,122 $11,556 $13,627
9/30/2000 $22,388 $10,946 $12,379
10/31/2000 $20,424 $10,899 $11,764
11/30/2000 $16,055 $10,040 $10,003
12/31/2000 $16,876 $10,089 $ 9,746
1/31/2001 $17,157 $10,447 $10,428
2/28/2001 $13,977 $ 9,495 $ 8,681
3/31/2001 $12,464 $ 8,893 $ 7,748
4/30/2001 $13,853 $ 9,584 $ 8,726
5/31/2001 $13,849 $ 9,648 $ 8,622
6/30/2001 $13,750 $ 9,414 $ 8,455
7/31/2001 $13,225 $ 9,321 $ 8,208
8/31/2001 $12,551 $ 8,737 $ 7,547
9/30/2001 $10,805 $ 8,032 $ 6,763
10/31/2001 $11,542 $ 8,185 $ 7,136
11/30/2001 $12,621 $ 8,813 $ 7,816
12/31/2001 $12,852 $ 8,890 $ 7,833
1/31/2002 $12,571 $ 8,760 $ 7,685
2/28/2002 $12,083 $ 8,591 $ 7,355
3/31/2002 $13,005 $ 8,915 $ 7,634
4/30/2002 $12,393 $ 8,374 $ 7,043
5/31/2002 $12,112 $ 8,312 $ 6,855
6/30/2002 $11,132 $ 7,720 $ 6,224
7/31/2002 $ 9,970 $ 7,118 $ 5,840
8/31/2002 $ 9,912 $ 7,165 $ 5,856
9/30/2002 $ 9,164 $ 6,386 $ 5,260
10/31/2002 $ 9,652 $ 6,949 $ 5,729
11/30/2002 $10,243 $ 7,358 $ 6,056
12/31/2002 $ 9,577 $ 6,925 $ 5,637
1/31/2003 $ 9,586 $ 6,744 $ 5,499
2/28/2003 $ 9,532 $ 6,643 $ 5,466
3/31/2003 $ 9,610 $ 6,707 $ 5,567
4/30/2003 $10,243 $ 7,260 $ 5,986
5/31/2003 $11,004 $ 7,642 $ 6,309
6/30/2003 $11,066 $ 7,740 $ 6,398
7/31/2003 $11,508 $ 7,876 $ 6,579
8/31/2003 $12,063 $ 8,030 $ 6,757
9/30/2003 $11,699 $ 7,944 $ 6,677
10/31/2003 $12,708 $ 8,394 $ 7,067
11/30/2003 $13,105 $ 8,468 $ 7,153
12/31/2003 $13,353 $ 8,912 $ 7,383
1/31/2004 $13,555 $ 9,075 $ 7,552
2/29/2004 $13,663 $ 9,202 $ 7,595
3/31/2004 $13,717 $ 9,063 $ 7,468
4/30/2004 $13,427 $ 8,920 $ 7,359
5/31/2004 $13,820 $ 9,043 $ 7,496
6/30/2004 $14,056 $ 9,219 $ 7,602
7/31/2004 $13,196 $ 8,914 $ 7,151
8/31/2004 $13,113 $ 8,950 $ 7,106
9/30/2004 $13,555 $ 9,047 $ 7,199
10/31/2004 $13,861 $ 9,185 $ 7,317
11/30/2004 $14,436 $ 9,556 $ 7,599
12/31/2004 $14,970 $ 9,882 $ 7,895
1/31/2005 $14,416 $ 9,641 $ 7,623
2/28/2005 $14,668 $ 9,844 $ 7,707
3/31/2005 $14,320 $ 9,669 $ 7,553
4/30/2005 $13,919 $ 9,486 $ 7,381
5/31/2005 $14,593 $ 9,788 $ 7,751
6/30/2005 $14,486 $ 9,802 $ 7,746
7/31/2005 $15,123 $10,166 $ 8,139
8/31/2005 $15,007 $10,073 $ 8,033
9/30/2005 $15,160 $10,155 $ 8,072
10/31/2005 $14,912 $ 9,986 $ 7,975
11/30/2005 $15,768 $10,363 $ 8,328
12/31/2005 $15,780 $10,367 $ 8,303
1/31/2006 $16,553 $10,642 $ 8,506
2/28/2006 $16,570 $10,670 $ 8,489
3/31/2006 $16,719 $10,803 $ 8,641
4/30/2006 $16,632 $10,948 $ 8,628
5/31/2006 $15,644 $10,633 $ 8,305
6/30/2006 $15,826 $10,648 $ 8,276
7/31/2006 $15,482 $10,713 $ 8,095
8/31/2006 $15,739 $10,968 $ 8,346
9/30/2006 $16,041 $11,251 $ 8,561
10/31/2006 $16,417 $11,617 $ 8,883
11/30/2006 $16,793 $11,838 $ 9,062
12/31/2006 $16,566 $12,004 $ 9,088
1/31/2007 $17,079 $12,186 $ 9,316
2/28/2007 $16,760 $11,948 $ 9,153
3/31/2007 $16,901 $12,081 $ 9,206
4/30/2007 $17,583 $12,616 $ 9,623
5/31/2007 $18,125 $13,057 $ 9,977
6/29/2007 $18,026 $12,840 $ 9,836
7/31/2007 $17,893 $12,442 $ 9,652
8/31/2007 $18,460 $12,628 $ 9,813
9/28/2007 $19,618 $13,100 $10,214
10/31/2007 $20,164 $13,309 $10,571
11/30/2007 $19,225 $12,752 $10,153
12/31/2007 $19,082 $12,664 $10,124
1/31/2008 $17,190 $11,904 $ 9,323
2/29/2008 $16,656 $11,518 $ 9,127
3/31/2008 $16,707 $11,468 $ 9,072
4/30/2008 $17,972 $12,026 $ 9,547
5/30/2008 $18,728 $12,182 $ 9,912
6/30/2008 $17,384 $11,155 $ 9,209
7/31/2008 $17,287 $11,061 $ 9,062
8/29/2008 $17,531 $11,221 $ 9,169
9/30/2008 $15,559 $10,221 $ 8,110
10/31/2008 $13,017 $ 8,505 $ 6,656
11/28/2008 $12,054 $ 7,895 $ 6,106
12/31/2008 $12,071 $ 7,979 $ 6,232
1/30/2009 $11,407 $ 7,306 $ 5,919
2/27/2009 $10,541 $ 6,528 $ 5,462
3/31/2009 $11,432 $ 7,100 $ 5,949
4/30/2009 $12,651 $ 7,779 $ 6,544
Total Returns 26.51% -22.21% -34.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -30.31%
5-Year -1.18%
10-Year +2.38%
CLASS R (1/1/02-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN FLEX
CAP GROWTH RUSSELL 3000
DATE FUND - CLASS R S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,758 $ 9,854 $ 9,811
2/28/2002 $ 9,384 $ 9,664 $ 9,389
3/29/2002 $10,103 $10,027 $ 9,746
4/30/2002 $ 9,632 $ 9,420 $ 8,991
5/31/2002 $ 9,415 $ 9,350 $ 8,750
6/28/2002 $ 8,659 $ 8,684 $ 7,946
7/31/2002 $ 7,760 $ 8,007 $ 7,455
8/30/2002 $ 7,719 $ 8,060 $ 7,476
9/30/2002 $ 7,139 $ 7,184 $ 6,715
10/31/2002 $ 7,525 $ 7,816 $ 7,313
11/29/2002 $ 7,987 $ 8,276 $ 7,730
12/31/2002 $ 7,471 $ 7,790 $ 7,196
1/31/2003 $ 7,481 $ 7,586 $ 7,021
2/28/2003 $ 7,443 $ 7,472 $ 6,978
3/31/2003 $ 7,506 $ 7,545 $ 7,107
4/30/2003 $ 8,005 $ 8,166 $ 7,641
5/30/2003 $ 8,602 $ 8,596 $ 8,053
6/30/2003 $ 8,655 $ 8,706 $ 8,167
7/31/2003 $ 9,007 $ 8,859 $ 8,399
8/29/2003 $ 9,444 $ 9,032 $ 8,625
9/30/2003 $ 9,165 $ 8,936 $ 8,524
10/31/2003 $ 9,955 $ 9,442 $ 9,021
11/28/2003 $10,273 $ 9,525 $ 9,131
12/31/2003 $10,470 $10,024 $ 9,425
1/30/2004 $10,634 $10,208 $ 9,641
2/27/2004 $10,722 $10,350 $ 9,696
3/31/2004 $10,765 $10,194 $ 9,533
4/30/2004 $10,543 $10,034 $ 9,394
5/31/2004 $10,857 $10,172 $ 9,570
6/30/2004 $11,046 $10,370 $ 9,704
7/30/2004 $10,376 $10,026 $ 9,129
8/31/2004 $10,317 $10,067 $ 9,072
9/30/2004 $10,669 $10,176 $ 9,191
10/29/2004 $10,913 $10,332 $ 9,341
11/30/2004 $11,369 $10,750 $ 9,701
12/31/2004 $11,796 $11,115 $10,078
1/31/2005 $11,363 $10,844 $ 9,732
2/28/2005 $11,566 $11,073 $ 9,838
3/31/2005 $11,296 $10,877 $ 9,642
4/29/2005 $10,986 $10,670 $ 9,422
5/31/2005 $11,522 $11,010 $ 9,895
6/30/2005 $11,441 $11,025 $ 9,888
7/29/2005 $11,952 $11,435 $10,390
8/31/2005 $11,865 $11,331 $10,255
9/30/2005 $11,990 $11,423 $10,305
10/31/2005 $11,799 $11,232 $10,180
11/30/2005 $12,484 $11,657 $10,631
12/30/2005 $12,496 $11,661 $10,599
1/31/2006 $13,114 $11,970 $10,858
2/28/2006 $13,130 $12,003 $10,837
3/31/2006 $13,256 $12,152 $11,031
4/28/2006 $13,190 $12,315 $11,014
5/31/2006 $12,414 $11,961 $10,603
6/30/2006 $12,562 $11,977 $10,565
7/31/2006 $12,295 $12,051 $10,334
8/31/2006 $12,506 $12,338 $10,654
9/29/2006 $12,747 $12,655 $10,929
10/31/2006 $13,056 $13,068 $11,339
11/30/2006 $13,357 $13,316 $11,568
12/29/2006 $13,182 $13,503 $11,602
1/31/2007 $13,597 $13,707 $11,893
2/28/2007 $13,349 $13,439 $11,685
3/30/2007 $13,466 $13,590 $11,752
4/30/2007 $14,015 $14,192 $12,285
5/31/2007 $14,455 $14,687 $12,736
6/29/2007 $14,378 $14,443 $12,556
7/31/2007 $14,280 $13,995 $12,322
8/31/2007 $14,739 $14,205 $12,527
9/28/2007 $15,670 $14,736 $13,039
10/31/2007 $16,113 $14,970 $13,494
11/30/2007 $15,372 $14,345 $12,961
12/31/2007 $15,259 $14,245 $12,924
1/31/2008 $13,753 $13,391 $11,902
2/29/2008 $13,334 $12,956 $11,652
3/31/2008 $13,379 $12,900 $11,581
4/30/2008 $14,397 $13,528 $12,188
5/30/2008 $15,011 $13,703 $12,654
6/30/2008 $13,937 $12,548 $11,755
7/31/2008 $13,864 $12,442 $11,568
8/29/2008 $14,068 $12,622 $11,705
9/30/2008 $12,491 $11,498 $10,352
10/31/2008 $10,455 $ 9,567 $ 8,496
11/28/2008 $ 9,685 $ 8,880 $ 7,795
12/31/2008 $ 9,701 $ 8,975 $ 7,956
1/30/2009 $ 9,172 $ 8,218 $ 7,556
2/27/2009 $ 8,482 $ 7,343 $ 6,973
3/31/2009 $ 9,200 $ 7,986 $ 7,595
4/30/2009 $10,187 $ 8,751 $ 8,353
Total Returns 1.87% -12.49% -16.47%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09
- ------- -------
1-Year -29.25%
5-Year -0.68%
Since Inception (1/1/02) +0.25%
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 4/30/09
- ---------------- -------
1-Year -28.88%
5-Year -0.21%
10-Year +3.27%
ADVISOR CLASS (5/1/99-4/30/09)(6)
(PERFORMANCE GRAPH)
FRANKLIN FLEX
CAP GROWTH FUND RUSSELL 3000
DATE - ADVISOR CLASS S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,969 $ 9,764 $ 9,717
6/30/1999 $10,979 $10,306 $10,384
7/31/1999 $11,084 $ 9,984 $10,055
8/31/1999 $11,527 $ 9,935 $10,180
9/30/1999 $11,756 $ 9,662 $9,994
10/31/1999 $13,210 $10,274 $10,714
11/30/1999 $15,106 $10,482 $11,328
12/31/1999 $18,383 $11,100 $12,562
1/31/2000 $18,398 $10,542 $12,007
2/29/2000 $23,167 $10,343 $12,757
3/31/2000 $21,888 $11,354 $13,479
4/30/2000 $19,490 $11,013 $12,785
5/31/2000 $18,212 $10,787 $12,109
6/30/2000 $20,932 $11,053 $13,070
7/31/2000 $20,376 $10,880 $12,485
8/31/2000 $23,357 $11,556 $13,627
9/30/2000 $22,630 $10,946 $12,379
10/31/2000 $20,660 $10,899 $11,764
11/30/2000 $16,253 $10,040 $10,003
12/31/2000 $17,088 $10,089 $ 9,746
1/31/2001 $17,390 $10,447 $10,428
2/28/2001 $14,172 $ 9,495 $ 8,681
3/31/2001 $12,648 $ 8,893 $ 7,748
4/30/2001 $14,065 $ 9,584 $ 8,726
5/31/2001 $14,069 $ 9,648 $ 8,622
6/30/2001 $13,982 $ 9,414 $ 8,455
7/31/2001 $13,457 $ 9,321 $ 8,208
8/31/2001 $12,776 $ 8,737 $ 7,547
9/30/2001 $11,008 $ 8,032 $ 6,763
10/31/2001 $11,768 $ 8,185 $ 7,136
11/30/2001 $12,871 $ 8,813 $ 7,816
12/31/2001 $13,119 $ 8,890 $ 7,833
1/31/2002 $12,838 $ 8,760 $ 7,685
2/28/2002 $12,346 $ 8,591 $ 7,355
3/31/2002 $13,296 $ 8,915 $ 7,634
4/30/2002 $12,681 $ 8,374 $ 7,043
5/31/2002 $12,400 $ 8,312 $ 6,855
6/30/2002 $11,400 $ 7,720 $ 6,224
7/31/2002 $10,219 $ 7,118 $ 5,840
8/31/2002 $10,165 $ 7,165 $ 5,856
9/30/2002 $ 9,401 $ 6,386 $ 5,260
10/31/2002 $ 9,913 $ 6,949 $ 5,729
11/30/2002 $10,525 $ 7,358 $ 6,056
12/31/2002 $ 9,847 $ 6,925 $ 5,637
1/31/2003 $ 9,864 $ 6,744 $ 5,499
2/28/2003 $ 9,814 $ 6,643 $ 5,466
3/31/2003 $ 9,901 $ 6,707 $ 5,567
4/30/2003 $10,558 $ 7,260 $ 5,986
5/31/2003 $11,351 $ 7,642 $ 6,309
6/30/2003 $11,421 $ 7,740 $ 6,398
7/31/2003 $11,888 $ 7,876 $ 6,579
8/31/2003 $12,466 $ 8,030 $ 6,757
9/30/2003 $12,099 $ 7,944 $ 6,677
10/31/2003 $13,152 $ 8,394 $ 7,067
11/30/2003 $13,569 $ 8,468 $ 7,153
12/31/2003 $13,833 $ 8,912 $ 7,383
1/31/2004 $14,052 $ 9,075 $ 7,552
2/29/2004 $14,172 $ 9,202 $ 7,595
3/31/2004 $14,234 $ 9,063 $ 7,468
4/30/2004 $13,945 $ 8,920 $ 7,359
5/31/2004 $14,362 $ 9,043 $ 7,496
6/30/2004 $14,614 $ 9,219 $ 7,602
7/31/2004 $13,730 $ 8,914 $ 7,151
8/31/2004 $13,656 $ 8,950 $ 7,106
9/30/2004 $14,127 $ 9,047 $ 7,199
10/31/2004 $14,457 $ 9,185 $ 7,317
11/30/2004 $15,068 $ 9,556 $ 7,599
12/31/2004 $15,638 $ 9,882 $ 7,895
1/31/2005 $15,073 $ 9,641 $ 7,623
2/28/2005 $15,349 $ 9,844 $ 7,707
3/31/2005 $14,994 $ 9,669 $ 7,553
4/30/2005 $14,589 $ 9,486 $ 7,381
5/31/2005 $15,308 $ 9,788 $ 7,751
6/30/2005 $15,209 $ 9,802 $ 7,746
7/31/2005 $15,890 $10,166 $ 8,139
8/31/2005 $15,783 $10,073 $ 8,033
9/30/2005 $15,957 $10,155 $ 8,072
10/31/2005 $15,709 $ 9,986 $ 7,975
11/30/2005 $16,626 $10,363 $ 8,328
12/31/2005 $16,650 $10,367 $ 8,303
1/31/2006 $17,481 $10,642 $ 8,506
2/28/2006 $17,510 $10,670 $ 8,489
3/31/2006 $17,683 $10,803 $ 8,641
4/30/2006 $17,605 $10,948 $ 8,628
5/31/2006 $16,576 $10,633 $ 8,305
6/30/2006 $16,778 $10,648 $ 8,276
7/31/2006 $16,432 $10,713 $ 8,095
8/31/2006 $16,717 $10,968 $ 8,346
9/30/2006 $17,051 $11,251 $ 8,561
10/31/2006 $17,468 $11,617 $ 8,883
11/30/2006 $17,877 $11,838 $ 9,062
12/31/2006 $17,654 $12,004 $ 9,088
1/31/2007 $18,213 $12,186 $ 9,316
2/28/2007 $17,890 $11,948 $ 9,153
3/31/2007 $18,052 $12,081 $ 9,206
4/30/2007 $18,797 $12,616 $ 9,623
5/31/2007 $19,393 $13,057 $ 9,977
6/29/2007 $19,300 $12,840 $ 9,836
7/31/2007 $19,179 $12,442 $ 9,652
8/31/2007 $19,801 $12,628 $ 9,813
9/28/2007 $21,060 $13,100 $10,214
10/31/2007 $21,660 $13,309 $10,571
11/30/2007 $20,675 $12,752 $10,153
12/31/2007 $20,535 $12,664 $10,124
1/31/2008 $18,517 $11,904 $ 9,323
2/29/2008 $17,958 $11,518 $ 9,127
3/31/2008 $18,025 $11,468 $ 9,072
4/30/2008 $19,404 $12,026 $ 9,547
5/30/2008 $20,241 $12,182 $ 9,912
6/30/2008 $18,799 $11,155 $ 9,209
7/31/2008 $18,711 $11,061 $ 9,062
8/29/2008 $18,996 $11,221 $ 9,169
9/30/2008 $16,873 $10,221 $ 8,110
10/31/2008 $14,128 $ 8,505 $ 6,656
11/28/2008 $13,093 $ 7,895 $ 6,106
12/31/2008 $13,123 $ 7,979 $ 6,232
1/30/2009 $12,412 $ 7,306 $ 5,919
2/27/2009 $11,483 $ 6,528 $ 5,462
3/31/2009 $12,462 $ 7,100 $ 5,949
4/30/2009 $13,800 $ 7,779 $ 6,544
Total Returns 38.00% -22.21% -34.56%
ENDNOTES
INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATIONS IN THE VALUE OF THEIR
INVESTMENTS, AS SMALL AND MIDSIZED COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY
OVER THE SHORT TERM. SMALLER, MIDSIZED AND RELATIVELY NEW 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. 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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) 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 +0.17% and +0.04%.
(7.) Source: (C) 2009 Morningstar. 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
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.
12 | Annual Report
Your Fund's Expenses
FRANKLIN FLEX CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
Annual Report | 13
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.
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.
EXPENSES PAID
DURING
BEGINNING ACCOUNT ENDING ACCOUNT PERIOD*
VALUE 11/1/08 VALUE 4/30/09 11/1/08-4/30/09
----------------- -------------- ---------------
CLASS A
Actual $1,000 $ 975.70 $5.24
Hypothetical (5% return before expenses) $1,000 $1,019.49 $5.36
CLASS B
Actual $1,000 $ 972.20 $8.85
Hypothetical (5% return before expenses) $1,000 $1,015.82 $9.05
CLASS C
Actual $1,000 $ 971.90 $8.85
Hypothetical (5% return before expenses) $1,000 $1,015.82 $9.05
CLASS R
Actual $1,000 $ 974.40 $6.46
Hypothetical (5% return before expenses) $1,000 $1,018.25 $6.61
ADVISOR CLASS
Actual $1,000 $ 976.80 $4.02
Hypothetical (5% return before expenses) $1,000 $1,020.73 $4.11
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.07%; B: 1.81%; C: 1.81%; R: 1.32%; and
Advisor: 0.82%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
14 | Annual Report
Franklin Focused Core Equity Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Focused Core Equity Fund seeks
capital appreciation by investing at least 80% of its net assets in equity
securities. The Fund will invest primarily in equity securities of large
capitalization companies, which are similar in size to those in the Standard &
Poor's 500 Index (S&P 500).(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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Focused Core Equity Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Focused Core Equity Fund - Class A had
a -26.07% cumulative total return. The Fund performed better than its benchmark,
the S&P 500, which had a -35.31% total return for the same period.(2) You can
find more of the Fund's performance data in the Performance Summary beginning on
page 18.
INVESTMENT STRATEGY
We are research-driven, fundamental investors. As bottom-up investors focusing
primarily on individual securities, we seek to invest in financially strong
companies with favorable growth potential and sustainable competitive advantages
and that present, in our opinion, the most compelling trade-off between growth
potential, valuation and risk. We rely on a team of analysts to help provide
in-depth industry expertise and use both qualitative and quantitative analysis
to
(1.) 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.
(2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. See footnote 1 for a description of the S&P 500. 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 67.
Annual Report | 15
evaluate companies. We will generally seek to maintain a portfolio of securities
representing approximately 30-40 companies, and we will apply a long-term
perspective through market and business cycles.
PORTFOLIO BREAKDOWN
Franklin Focused Core Equity Fund
Based on Total Net Assets as of 4/30/09
(BAR CHART)
Health Care 17.6%
Industrials 15.6%
Information Technology 14.1%
Financials 10.8%
Consumer Staples 10.1%
Energy 9.9%
Consumer Discretionary 8.3%
Materials 3.8%
Telecommunication Services 3.0%
Short-Term Investments & Other Net Assets 6.8%
MANAGER'S DISCUSSION
For the 12 months under review, significant detractors from the Fund's absolute
performance included Petroplus Holdings, which specializes in oil refining,
storage and marketing; NII Holdings, a wireless telecommunications provider; and
Legg Mason, an asset management company.
In a difficult environment for equities, most sectors declined in value.
Financials and energy holdings particularly weighed on Fund performance during
the period. In the financials sector, the aforementioned Legg Mason and real
estate investment trusts CapitalSource and iStar Financial were significant
detractors. Credit card companies Discover Financial Services and American
Express (sold by period-end) also hurt the Fund's returns. Within the energy
sector, the aforementioned Petroplus and oil and gas company Marathon Oil
detracted from performance.
On a more positive note, the health care sector benefited Fund performance.
Health care holdings Genentech (not held at period-end), a biotechnology
company, and Mylan and Schering-Plough, pharmaceutical manufacturers,
appreciated in value. Some holdings in the consumer staples sector also
contributed to Fund returns such as beverage manufacturer Hansen Natural and
food and staples retailer CVS Caremark.
16 | Annual Report
Thank you for your participation in Franklin Focused Core Equity Fund. We look
forward to serving your future investment needs.
(PHOTO OF STEVEN KORNFELD)
/s/ Steven Kornfeld
Steven Kornfeld, CFA
(PHOTO OF EDWARD PERKS)
/s/ Edward Perks
Edward Perks, CFA
Portfolio Management Team
Franklin Focused Core Equity Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2009, 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 Focused Core Equity Fund
4/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Berkshire Hathaway Inc., B
FINANCIALS 5.0%
Petroplus Holdings AG (Switzerland)
ENERGY 4.9%
Roche Holding AG (Switzerland)
HEALTH CARE 4.7%
Schering-Plough Corp.
HEALTH CARE 4.7%
CVS Caremark Corp.
CONSUMER STAPLES 4.6%
MasterCard Inc., A
INFORMATION TECHNOLOGY 4.3%
Precision Castparts Corp.
INDUSTRIALS 4.2%
Marathon Oil Corp.
ENERGY 4.1%
Merck & Co. Inc.
HEALTH CARE 3.9%
Corn Products International Inc.
CONSUMER STAPLES 3.8%
Annual Report | 17
Performance Summary as of 4/30/09
FRANKLIN FOCUSED CORE EQUITY 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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 4/30/09 4/30/08
- --------------------- ------ ------- -------
Net Asset Value (NAV) -$2.42 $6.27 $8.69
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.0989
Short-Term Capital Gain $0.0217
Long-Term Capital Gain $0.0002
TOTAL $0.1208
CLASS C (SYMBOL: N/A) CHANGE 4/30/09 4/30/08
- --------------------- ------ ------- -------
Net Asset Value (NAV) -$2.43 $6.24 $8.67
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.0829
Short-Term Capital Gain $0.0217
Long-Term Capital Gain $0.0002
TOTAL $0.1048
CLASS R (SYMBOL: N/A) CHANGE 4/30/09 4/30/08
- --------------------- ------ ------- -------
Net Asset Value (NAV) -$2.41 $6.27 $8.68
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.0827
Short-Term Capital Gain $0.0217
Long-Term Capital Gain $0.0002
TOTAL $0.1046
ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/09 4/30/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) -$2.42 $6.28 $8.70
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.1129
Short-Term Capital Gain $0.0217
Long-Term Capital Gain $0.0002
TOTAL $0.1348
18 | Annual Report
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 C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
INCEPTION
CLASS A 1-YEAR (12/13/07)
- ------- ------- ----------
Cumulative Total Return(2) -26.07% -35.83%
Average Annual Total Return(3) -30.33% -30.52%
Value of $10,000 Investment(4) $ 6,967 $ 6,048
Avg. Ann. Total Return (3/31/09)(5) -35.77% -39.40%
Total Annual Operating Expenses(6)
Without Waiver 5.53%
With Waiver 1.25%
INCEPTION
CLASS C 1-YEAR (12/13/07)
- ------- ------- ----------
Cumulative Total Return(2) -26.56% -36.33%
Average Annual Total Return(3) -27.28% -27.89%
Value of $10,000 Investment(4) $ 7,272 $ 6,367
Avg. Ann. Total Return (3/31/09)(5) -32.89% -36.99%
Total Annual Operating Expenses(6)
Without Waiver 6.16%
With Waiver 1.88%
INCEPTION
CLASS R 1-YEAR (12/13/07)
- ------- ------- ----------
Cumulative Total Return(2) -26.30% -36.03%
Average Annual Total Return(3) -26.30% -27.64%
Value of $10,000 Investment(4) $ 7,370 $ 6,397
Avg. Ann. Total Return (3/31/09)(5) -32.03% -36.72%
Total Annual Operating Expenses(6)
Without Waiver 5.70%
With Waiver 1.42%
INCEPTION
ADVISOR CLASS 1-YEAR (12/13/07)
- ------------- ------- ----------
Cumulative Total Return(2) -25.93% -35.56%
Average Annual Total Return(3) -25.93% -27.26%
Value of $10,000 Investment(4) $ 7,407 $ 6,444
Avg. Ann. Total Return (3/31/09)(5) -31.60% -36.35%
Total Annual Operating Expenses(6)
Without Waiver 5.20%
With Waiver 0.92%
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 (800) 342-5236.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT COMMON EXPENSES (I.E., A COMBINATION OF
INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT
EXCLUDING RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF
THE FUND DO NOT EXCEED 0.89% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS,
INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND
LIQUIDATIONS) UNTIL 8/31/09.
Annual Report | 19
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged index includes reinvestment of
any income or distributions. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -30.33%
Since Inception (12/13/07) -30.52%
CLASS A (12/13/07-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN
FOCUSED CORE
EQUITY FUND - S&P 500
DATE CLASS A INDEX
- ------------- ------------- -------
12/13/2007 $ 9,425 $10,000
12/31/2007 $ 9,529 $ 9,960
1/31/2008 $ 8,775 $ 9,362
2/29/2008 $ 8,247 $ 9,058
3/31/2008 $ 7,653 $ 9,019
4/30/2008 $ 8,181 $ 9,458
5/31/2008 $ 8,539 $ 9,581
6/30/2008 $ 7,729 $ 8,773
7/31/2008 $ 7,653 $ 8,699
8/31/2008 $ 8,077 $ 8,825
9/30/2008 $ 7,220 $ 8,039
10/31/2008 $ 5,580 $ 6,689
11/30/2008 $ 5,052 $ 6,209
12/31/2008 $ 5,276 $ 6,275
1/31/2009 $ 5,035 $ 5,746
2/28/2009 $ 4,572 $ 5,134
3/31/2009 $ 5,218 $ 5,584
4/30/2009 $ 6,048 $ 6,118
Total Returns -39.52% -38.82%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -27.28%
Since Inception (12/13/07) -27.89%
CLASS C (12/13/07-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN
FOCUSED CORE
EQUITY FUND - S&P 500
DATE CLASS C INDEX
- ------------- ------------- -------
12/13/2007 $10,000 $10,000
12/31/2007 $10,110 $ 9,960
1/31/2008 $ 9,300 $ 9,362
2/29/2008 $ 8,740 $ 9,058
3/31/2008 $ 8,100 $ 9,019
4/30/2008 $ 8,670 $ 9,458
5/31/2008 $ 9,040 $ 9,581
6/30/2008 $ 8,180 $ 8,773
7/31/2008 $ 8,100 $ 8,699
8/31/2008 $ 8,540 $ 8,825
9/30/2008 $ 7,620 $ 8,039
10/31/2008 $ 5,890 $ 6,689
11/30/2008 $ 5,320 $ 6,209
12/31/2008 $ 5,561 $ 6,275
1/31/2009 $ 5,306 $ 5,746
2/28/2009 $ 4,806 $ 5,134
3/31/2009 $ 5,490 $ 5,584
4/30/2009 $ 6,367 $ 6,118
Total Returns -36.33% -38.82%
20 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09
- ------- -------
1-Year -26.30%
Since Inception (12/13/07) -27.64%
AVERAGE ANNUAL TOTAL RETURN
(PERFORMANCE GRAPH)
FRANKLIN
FOCUSED CORE
EQUITY FUND - S&P 500
DATE CLASS R INDEX
- ------------- ------------- -------
12/13/2007 $10,000 $10,000
12/31/2007 $10,110 $ 9,960
1/31/2008 $ 9,310 $ 9,362
2/29/2008 $ 8,750 $ 9,058
3/31/2008 $ 8,120 $ 9,019
4/30/2008 $ 8,680 $ 9,458
5/31/2008 $ 9,050 $ 9,581
6/30/2008 $ 8,190 $ 8,773
7/31/2008 $ 8,110 $ 8,699
8/31/2008 $ 8,560 $ 8,825
9/30/2008 $ 7,650 $ 8,039
10/31/2008 $ 5,910 $ 6,689
11/30/2008 $ 5,350 $ 6,209
12/31/2008 $ 5,591 $ 6,275
1/31/2009 $ 5,336 $ 5,746
2/28/2009 $ 4,836 $ 5,134
3/31/2009 $ 5,519 $ 5,584
4/30/2009 $ 6,397 $ 6,118
Total Returns -3603% -38.82%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09
- ------------- -------
1-Year -25.93%
Since Inception (12/13/07) -27.26%
AVERAGE ANNUAL TOTAL RETURN
(PERFORMANCE GRAPH)
FRANKLIN
FOCUSED CORE
EQUITY FUND - S&P 500
DATE ADVISOR CLASS INDEX
- ------------- ------------- -------
12/13/2007 $10,000 $10,000
12/31/2007 $10,120 $ 9,960
1/31/2008 $ 9,320 $ 9,362
2/29/2008 $ 8,760 $ 9,058
3/31/2008 $ 8,130 $ 9,019
4/30/2008 $ 8,700 $ 9,458
5/31/2008 $ 9,070 $ 9,581
6/30/2008 $ 8,220 $ 8,773
7/31/2008 $ 8,140 $ 8,699
8/31/2008 $ 8,590 $ 8,825
9/30/2008 $ 7,680 $ 8,039
10/31/2008 $ 5,940 $ 6,689
11/30/2008 $ 5,370 $ 6,209
12/31/2008 $ 5,613 $ 6,275
1/31/2009 $ 5,366 $ 5,746
2/28/2009 $ 4,864 $ 5,134
3/31/2009 $ 5,561 $ 5,584
4/30/2009 $ 6,444 $ 6,118
Total Returns -35.56% -38.82%
Annual Report | 21
Performance Summary (CONTINUED)
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. THERE ARE
SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A PARTICULAR SECTOR,
INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC, BUSINESS, OR OTHER
DEVELOPMENTS AFFECTING THAT SECTOR, WHICH MAY RESULT IN INCREASED VOLATILITY.
THE FUND ALSO HAS THE POTENTIAL TO INVEST IN FOREIGN COMPANY STOCKS, WHICH
INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL UNCERTAINTY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS C: 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.) If the manager and administrator had not waived fees, the Fund's total
returns would have been lower.
(2.) Cumulative total return represents the average annual 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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(7.) Source: (C) 2009 Morningstar. 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.
22 | Annual Report
Your Fund's Expenses
FRANKLIN FOCUSED CORE EQUITY FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
Annual Report | 23
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.
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.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT ACCOUNT ACTUAL
VALUE 11/1/08 VALUE 4/30/09 11/1/08-4/30/09
------------- ------------- ---------------
CLASS A
Actual $1,000 $1,083.90 $5.94
Hypothetical (5% return before expenses) $1,000 $1,019.09 $5.76
CLASS C
Actual $1,000 $1,081.00 $9.39
Hypothetical (5% return before expenses) $1,000 $1,015.77 $9.10
CLASS R
Actual $1,000 $1,082.40 $7.28
Hypothetical (5% return before expenses) $1,000 $1,017.80 $7.05
ADVISOR CLASS
Actual $1,000 $1,084.80 $4.60
Hypothetical (5% return before expenses) $1,000 $1,020.38 $4.46
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.15%; C: 1.82%; R:
1.41%; and Advisor: 0.89%), multiplied by the average account value over
the period, multiplied by 181/365 to reflect the one-half year period.
24 | Annual Report
Franklin Growth Opportunities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Opportunities 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.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Growth Opportunities Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Growth Opportunities Fund - Class A had
a -30.81% cumulative total return. The Fund performed comparably with its narrow
benchmark, the Russell 3000 Growth Index, which had a -31.46% total return, and
performed better than its broad benchmark, the Standard & Poor's 500 Index (S&P
500), which had a -35.31% total return for the same period.(1) You can find the
Fund's long-term performance data in the Performance Summary beginning on page
28.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
bottom-up investors we focus primarily on finding individual securities that
meet our criteria for growth potential, quality and valuation. We search for
high-quality companies that have identifiable drivers of future earnings growth.
We rely on our team of analysts to help provide in-depth industry expertise and
use both qualitative and quantitative analysis to evaluate companies. Our
analysts identify each company's market opportunity, competitive position,
management and financial strength, business and financial risks, and valuation.
We choose
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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 74.
Annual Report | 25
to invest in those companies that, in our opinion, offer the best trade-off
between growth opportunity, business and financial risk, and valuation.
PORTFOLIO BREAKDOWN
Franklin Growth Opportunities Fund
Based on Total Net Assets as of 4/30/09
(BAR CHART)
Information Technology* 35.0%
Health Care 19.2%
Energy 11.6%
Industrials 10.9%
Consumer Discretionary 7.8%
Financials 3.7%
Telecommunication Services 3.6%
Materials 2.4%
Consumer Staples 1.7%
Short-Term Investments & Other Net Assets 4.1%
* 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.
MANAGER'S DISCUSSION
Among the most significant detractors from the Fund's absolute performance
during the 12 months under review were NII Holdings in the telecommunications
sector, Celgene in the health care sector and FLIR Systems in the information
technology sector.
From a sector perspective, our investments in the information technology,
industrials and health care sectors were significant detractors from the Fund's
total returns. A key information technology underperformer included Google,
which operates the world's leading Internet search engine. In the industrials
sector, the Fund was negatively impacted by investments in ABB, a developer and
manufacturer of power and automation technologies for a broad base of utilities,
industrial and commercial customers; and Precision Castparts, which makes tools
and parts used primarily in aerospace and power generation applications. In the
health care sector, Covance, a contract research organization for the
pharmaceutical industry, was a notable detractor.
During a period when almost every sector represented in the Fund fell in tandem
with the overall equity market, we had some contributors. Individual securities
that aided the Fund's absolute performance included Myriad Genetics, which
manufactures drugs and diagnostic testing systems aimed at finding and treating
specific cancers; Research in Motion, a Canadian wireless equipment and services
company that produces the popular Blackberry smart phone; and ITT Educational
Services, a provider of technology-oriented postsecondary degree programs in the
U.S.
One sector that delivered positive results for the Fund was the consumer staples
sector. Within the sector, food products manufacturer Bunge benefited Fund
performance. Within the consumer discretionary sector, gaming machine
distributor WMS Industries and specialty retailer Abercrombie & Fitch boosted
Fund returns. In the energy sector, oil and natural gas producer Continental
Resources performed well for the Fund.
26 | Annual Report
Thank you for your continued participation in Franklin Growth Opportunities
Fund. We look forward to serving your future investment needs.
(PHOTO OF GRANT BOWERS)
/s/ Grant Bowers
Grant Bowers
Portfolio Manager
Franklin Growth Opportunities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2009, 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 Growth Opportunities Fund
4/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Apple Inc. 3.0%
INFORMATION TECHNOLOGY
FLIR Systems Inc. 2.9%
INFORMATION TECHNOLOGY
QUALCOMM Inc. 2.8%
INFORMATION TECHNOLOGY
MasterCard Inc., A 2.8%
INFORMATION TECHNOLOGY
Celgene Corp. 2.6%
HEALTH CARE
Myriad Genetics Inc. 2.6%
HEALTH CARE
C.H. Robinson Worldwide Inc. 2.4%
INDUSTRIALS
Life Technologies Corp. 2.2%
HEALTH CARE
Illumina Inc. 2.2%
HEALTH CARE
Visa Inc., A 2.2%
INFORMATION TECHNOLOGY
Annual Report | 27
Performance Summary as of 4/30/09
FRANKLIN GROWTH OPPORTUNITIES 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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FGRAX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.18 $13.88 $20.06
CLASS B (SYMBOL: FKABX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$5.93 $13.02 $18.95
CLASS C (SYMBOL: FKACX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$5.92 $12.99 $18.91
CLASS R (SYMBOL: FKARX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$6.13 $13.67 $19.80
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 4/30/09 4/30/08
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$6.30 $14.30 $20.60
28 | Annual 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.
CLASS A 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------- ------ ------- -------------------
Cumulative Total Return(1) -30.81% +10.42% +42.12%
Average Annual Total Return(2) -34.77% +0.80% +3.01%
Value of $10,000 Investment(3) $6,523 $10,405 $13,395
Avg. Ann. Total Return (3/31/09)(4) -34.61% -1.90% +2.02%
Total Annual Operating
Expenses(5) 1.29%
CLASS B 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------- ------ ------- -------------------
Cumulative Total Return(1) -31.29% +6.55% +34.99%
Average Annual Total Return(2) -34.04% +0.89% +3.09%
Value of $10,000 Investment(3) $6,596 $10,455 $13,499
Avg. Ann. Total Return (3/31/09)(4) -33.86% -1.82% +2.10%
Total Annual Operating
Expenses(5) 2.01%
CLASS C 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------- ------ ------- -------------------
Cumulative Total Return(1) -31.31% +6.56% +32.90%
Average Annual Total Return(2) -31.99% +1.28% +2.93%
Value of $10,000 Investment(3) $6,801 $10,656 $13,290
Avg. Ann. Total Return (3/31/09)(4) -31.80% -1.43% +1.95%
Total Annual Operating
Expenses(5) 2.01%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------ ------- -------------------
Cumulative Total Return(1) -30.96% +9.27% -0.58%
Average Annual Total Return(2) -30.96% +1.79% -0.08%
Value of $10,000 Investment(3) $6,904 $10,927 $9,942
Avg. Ann. Total Return (3/31/09)(4) -30.71% -0.92% -1.41%
Total Annual Operating
Expenses(5) 1.51%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (6/23/99)
- ------------- ------ ------- -------------------
Cumulative Total Return(1) -30.58% +12.06% +46.59%
Average Annual Total Return(2) -30.58% +2.30% +3.96%
Value of $10,000 Investment(3) $6,942 $11,206 $14,659
Avg. Ann. Total Return (3/31/09)(4) -30.40% -0.44% +2.96%
Total Annual Operating
Expenses(5) 1.01%
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 (800) 342-5236.
Annual Report | 29
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -34.77%
5-Year +0.80%
Since Inception (6/23/99) +3.01%
CLASS A (6/23/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH
OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS A S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
6/23/1999 $ 9,425 $10,000 $10,000
6/30/1999 $10,160 $10,129 $10,160
7/31/1999 $11,235 $ 9,813 $ 9,838
8/31/1999 $12,385 $ 9,765 $ 9,960
9/30/1999 $13,195 $ 9,497 $ 9,778
10/31/1999 $15,438 $10,098 $10,482
11/30/1999 $18,596 $10,303 $11,084
12/31/1999 $23,095 $10,910 $12,291
1/31/2000 $22,603 $10,362 $11,748
2/29/2000 $30,639 $10,166 $12,482
3/31/2000 $28,536 $11,160 $13,188
4/30/2000 $24,330 $10,824 $12,509
5/31/2000 $21,899 $10,602 $11,848
6/30/2000 $26,443 $10,864 $12,788
7/31/2000 $25,594 $10,694 $12,215
8/31/2000 $28,401 $11,358 $13,333
9/30/2000 $27,147 $10,759 $12,112
10/31/2000 $23,896 $10,713 $11,510
11/30/2000 $17,239 $ 9,868 $ 9,787
12/31/2000 $17,130 $ 9,917 $ 9,536
1/31/2001 $19,340 $10,269 $10,203
2/28/2001 $14,833 $ 9,332 $ 8,494
3/31/2001 $12,874 $ 8,741 $ 7,581
4/30/2001 $14,766 $ 9,420 $ 8,537
5/31/2001 $14,717 $ 9,483 $ 8,436
6/30/2001 $14,611 $ 9,253 $ 8,273
7/31/2001 $13,694 $ 9,162 $ 8,031
8/31/2001 $12,411 $ 8,588 $ 7,385
9/30/2001 $10,046 $ 7,895 $ 6,617
10/31/2001 $11,253 $ 8,045 $ 6,982
11/30/2001 $12,835 $ 8,662 $ 7,647
12/31/2001 $13,260 $ 8,738 $ 7,664
1/31/2002 $12,652 $ 8,611 $ 7,520
2/28/2002 $11,726 $ 8,444 $ 7,196
3/31/2002 $12,652 $ 8,762 $ 7,470
4/30/2002 $11,948 $ 8,231 $ 6,891
5/31/2002 $11,523 $ 8,170 $ 6,707
6/30/2002 $10,268 $ 7,588 $ 6,090
7/31/2002 $ 8,850 $ 6,997 $ 5,714
8/31/2002 $ 8,657 $ 7,043 $ 5,730
9/30/2002 $ 7,798 $ 6,277 $ 5,146
10/31/2002 $ 8,531 $ 6,830 $ 5,605
11/30/2002 $ 9,458 $ 7,232 $ 5,925
12/31/2002 $ 8,522 $ 6,807 $ 5,516
1/31/2003 $ 8,483 $ 6,629 $ 5,381
2/28/2003 $ 8,415 $ 6,529 $ 5,348
3/31/2003 $ 8,512 $ 6,593 $ 5,447
4/30/2003 $ 9,168 $ 7,136 $ 5,857
5/31/2003 $ 9,959 $ 7,512 $ 6,172
6/30/2003 $10,046 $ 7,607 $ 6,260
7/31/2003 $10,539 $ 7,741 $ 6,437
8/31/2003 $11,060 $ 7,892 $ 6,611
9/30/2003 $10,712 $ 7,809 $ 6,533
10/31/2003 $11,668 $ 8,250 $ 6,914
11/30/2003 $11,967 $ 8,323 $ 6,998
12/31/2003 $12,266 $ 8,759 $ 7,224
1/31/2004 $12,546 $ 8,920 $ 7,389
2/29/2004 $12,565 $ 9,044 $ 7,431
3/31/2004 $12,613 $ 8,908 $ 7,307
4/30/2004 $12,131 $ 8,768 $ 7,200
5/31/2004 $12,469 $ 8,888 $ 7,335
6/30/2004 $12,913 $ 9,061 $ 7,438
7/31/2004 $11,996 $ 8,761 $ 6,997
8/31/2004 $11,812 $ 8,797 $ 6,953
9/30/2004 $12,498 $ 8,892 $ 7,044
10/31/2004 $12,903 $ 9,028 $ 7,159
11/30/2004 $13,800 $ 9,393 $ 7,435
12/31/2004 $14,389 $ 9,713 $ 7,724
1/31/2005 $13,849 $ 9,476 $ 7,459
2/28/2005 $13,849 $ 9,675 $ 7,540
3/31/2005 $13,472 $ 9,504 $ 7,390
4/30/2005 $12,864 $ 9,324 $ 7,222
5/31/2005 $13,714 $ 9,620 $ 7,584
6/30/2005 $13,907 $ 9,634 $ 7,579
7/31/2005 $14,669 $ 9,992 $ 7,963
8/31/2005 $14,582 $ 9,901 $ 7,860
9/30/2005 $14,881 $ 9,981 $ 7,898
10/31/2005 $14,891 $ 9,815 $ 7,803
11/30/2005 $15,895 $10,186 $ 8,148
12/31/2005 $15,982 $10,190 $ 8,124
1/31/2006 $17,082 $10,460 $ 8,322
2/28/2006 $17,188 $10,488 $ 8,306
3/31/2006 $17,738 $10,618 $ 8,455
4/30/2006 $17,661 $10,761 $ 8,442
5/31/2006 $16,281 $10,451 $ 8,126
6/30/2006 $16,474 $10,465 $ 8,098
7/31/2006 $15,711 $10,530 $ 7,920
8/31/2006 $15,846 $10,781 $ 8,166
9/30/2006 $16,242 $11,058 $ 8,376
10/31/2006 $16,618 $11,419 $ 8,691
11/30/2006 $17,178 $11,636 $ 8,867
12/31/2006 $17,062 $11,799 $ 8,892
1/31/2007 $17,487 $11,978 $ 9,115
2/28/2007 $17,217 $11,743 $ 8,956
3/31/2007 $17,487 $11,875 $ 9,007
4/30/2007 $17,892 $12,401 $ 9,416
5/31/2007 $18,529 $12,833 $ 9,762
6/30/2007 $18,655 $12,620 $ 9,623
7/31/2007 $18,635 $12,229 $ 9,444
8/31/2007 $19,243 $12,412 $ 9,602
9/30/2007 $21,145 $12,876 $ 9,994
10/31/2007 $22,351 $13,081 $10,343
11/30/2007 $20,604 $12,534 $ 9,934
12/31/2007 $20,633 $12,447 $ 9,906
1/31/2008 $18,317 $11,701 $ 9,122
2/29/2008 $17,574 $11,321 $ 8,930
3/31/2008 $17,526 $11,272 $ 8,876
4/30/2008 $19,359 $11,821 $ 9,341
5/31/2008 $20,623 $11,974 $ 9,698
6/30/2008 $19,099 $10,964 $ 9,010
7/31/2008 $18,549 $10,872 $ 8,867
8/31/2008 $18,481 $11,029 $ 8,972
9/30/2008 $15,663 $10,047 $ 7,935
10/31/2008 $13,250 $ 8,359 $ 6,512
11/30/2008 $12,092 $ 7,760 $ 5,974
12/31/2008 $12,363 $ 7,842 $ 6,098
1/31/2009 $12,054 $ 7,181 $ 5,792
2/28/2009 $11,147 $ 6,416 $ 5,344
3/31/2009 $12,160 $ 6,979 $ 5,821
4/30/2009 $13,395 $ 7,646 $ 6,402
Total Returns 33.95% -23.54% -35.98%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09
- ------- -------
1-Year -34.04%
5-Year +0.89%
Since Inception (6/23/99) +3.09%
CLASS B (6/23/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH
OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS B S&P 500 INDEX Growth INDEX
- ------------- --------------- ------------- ------------
6/23/1999 $10,000 $10,000 $10,000
6/30/1999 $10,780 $10,129 $10,160
7/31/1999 $11,920 $ 9,813 $ 9,838
8/31/1999 $13,140 $ 9,765 $ 9,960
9/30/1999 $13,970 $ 9,497 $ 9,778
10/31/1999 $16,380 $10,098 $10,482
11/30/1999 $19,720 $10,303 $11,084
12/31/1999 $24,486 $10,910 $12,291
1/31/2000 $23,975 $10,362 $11,748
2/29/2000 $32,485 $10,166 $12,482
3/31/2000 $30,245 $11,160 $13,188
4/30/2000 $25,755 $10,824 $12,509
5/31/2000 $23,177 $10,602 $11,848
6/30/2000 $27,964 $10,864 $12,788
7/31/2000 $27,043 $10,694 $12,215
8/31/2000 $29,999 $11,358 $13,333
9/30/2000 $28,660 $10,759 $12,112
10/31/2000 $25,213 $10,713 $11,510
11/30/2000 $18,176 $ 9,868 $ 9,787
12/31/2000 $18,049 $ 9,917 $ 9,536
1/31/2001 $20,362 $10,269 $10,203
2/28/2001 $15,604 $ 9,332 $ 8,494
3/31/2001 $13,547 $ 8,741 $ 7,581
4/30/2001 $15,522 $ 9,420 $ 8,537
5/31/2001 $15,461 $ 9,483 $ 8,436
6/30/2001 $15,348 $ 9,253 $ 8,273
7/31/2001 $14,376 $ 9,162 $ 8,031
8/31/2001 $13,015 $ 8,588 $ 7,385
9/30/2001 $10,529 $ 7,895 $ 6,617
10/31/2001 $11,798 $ 8,045 $ 6,982
11/30/2001 $13,435 $ 8,662 $ 7,647
12/31/2001 $13,875 $ 8,738 $ 7,664
1/31/2002 $13,230 $ 8,611 $ 7,520
2/28/2002 $12,258 $ 8,444 $ 7,196
3/31/2002 $13,220 $ 8,762 $ 7,470
4/30/2002 $12,483 $ 8,231 $ 6,891
5/31/2002 $12,023 $ 8,170 $ 6,707
6/30/2002 $10,713 $ 7,588 $ 6,090
7/31/2002 $ 9,219 $ 6,997 $ 5,714
8/31/2002 $ 9,014 $ 7,043 $ 5,730
9/30/2002 $ 8,114 $ 6,277 $ 5,146
10/31/2002 $ 8,881 $ 6,830 $ 5,605
11/30/2002 $ 9,843 $ 7,232 $ 5,925
12/31/2002 $ 8,861 $ 6,807 $ 5,516
1/31/2003 $ 8,820 $ 6,629 $ 5,381
2/28/2003 $ 8,738 $ 6,529 $ 5,348
3/31/2003 $ 8,830 $ 6,593 $ 5,447
4/30/2003 $ 9,516 $ 7,136 $ 5,857
5/31/2003 $10,324 $ 7,512 $ 6,172
6/30/2003 $10,406 $ 7,607 $ 6,260
7/31/2003 $10,907 $ 7,741 $ 6,437
8/31/2003 $11,450 $ 7,892 $ 6,611
9/30/2003 $11,081 $ 7,809 $ 6,533
10/31/2003 $12,064 $ 8,250 $ 6,914
11/30/2003 $12,360 $ 8,323 $ 6,998
12/31/2003 $12,667 $ 8,759 $ 7,224
1/31/2004 $12,943 $ 8,920 $ 7,389
2/29/2004 $12,964 $ 9,044 $ 7,431
3/31/2004 $13,005 $ 8,908 $ 7,307
4/30/2004 $12,504 $ 8,768 $ 7,200
5/31/2004 $12,841 $ 8,888 $ 7,335
6/30/2004 $13,291 $ 9,061 $ 7,438
7/31/2004 $12,340 $ 8,761 $ 6,997
8/31/2004 $12,135 $ 8,797 $ 6,953
9/30/2004 $12,841 $ 8,892 $ 7,044
10/31/2004 $13,250 $ 9,028 $ 7,159
11/30/2004 $14,161 $ 9,393 $ 7,435
12/31/2004 $14,755 $ 9,713 $ 7,724
1/31/2005 $14,202 $ 9,476 $ 7,459
2/28/2005 $14,192 $ 9,675 $ 7,540
3/31/2005 $13,793 $ 9,504 $ 7,390
4/30/2005 $13,169 $ 9,324 $ 7,222
5/31/2005 $14,028 $ 9,620 $ 7,584
6/30/2005 $14,212 $ 9,634 $ 7,579
7/31/2005 $14,980 $ 9,992 $ 7,963
8/31/2005 $14,888 $ 9,901 $ 7,860
9/30/2005 $15,184 $ 9,981 $ 7,898
10/31/2005 $15,184 $ 9,815 $ 7,803
11/30/2005 $16,187 $10,186 $ 8,148
12/31/2005 $16,279 $10,190 $ 8,124
1/31/2006 $17,384 $10,460 $ 8,322
2/28/2006 $17,476 $10,488 $ 8,306
3/31/2006 $18,019 $10,618 $ 8,455
4/30/2006 $17,937 $10,761 $ 8,442
5/31/2006 $16,525 $10,451 $ 8,126
6/30/2006 $16,709 $10,465 $ 8,098
7/31/2006 $15,931 $10,530 $ 7,920
8/31/2006 $16,064 $10,781 $ 8,166
9/30/2006 $16,453 $11,058 $ 8,376
10/31/2006 $16,821 $11,419 $ 8,691
11/30/2006 $17,384 $11,636 $ 8,867
12/31/2006 $17,251 $11,799 $ 8,892
1/31/2007 $17,671 $11,978 $ 9,115
2/28/2007 $17,384 $11,743 $ 8,956
3/31/2007 $17,650 $11,875 $ 9,007
4/30/2007 $18,049 $12,401 $ 9,416
5/31/2007 $18,684 $12,833 $ 9,762
6/30/2007 $18,811 $12,620 $ 9,623
7/31/2007 $18,792 $12,229 $ 9,444
8/31/2007 $19,405 $12,412 $ 9,602
9/30/2007 $21,322 $12,876 $ 9,994
10/31/2007 $22,540 $13,081 $10,343
11/30/2007 $20,777 $12,534 $ 9,934
12/31/2007 $20,806 $12,447 $ 9,906
1/31/2008 $18,470 $11,701 $ 9,122
2/29/2008 $17,720 $11,321 $ 8,930
3/31/2008 $17,672 $11,272 $ 8,876
4/30/2008 $19,520 $11,821 $ 9,341
5/31/2008 $20,795 $11,974 $ 9,698
6/30/2008 $19,258 $10,964 $ 9,010
7/31/2008 $18,704 $10,872 $ 8,867
8/31/2008 $18,636 $11,029 $ 8,972
9/30/2008 $15,794 $10,047 $ 7,935
10/31/2008 $13,362 $ 8,359 $ 6,512
11/30/2008 $12,194 $ 7,760 $ 5,974
12/31/2008 $12,466 $ 7,842 $ 6,098
1/31/2009 $12,154 $ 7,181 $ 5,792
2/28/2009 $11,239 $ 6,416 $ 5,344
3/31/2009 $12,261 $ 6,979 $ 5,821
4/30/2009 $13,499 $ 7,646 $ 6,402
Total Returns 34.99% -23.54% -35.98%
30 | Annual Report
Performance Summary (CONTINUED)
CLASS C (6/23/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH
OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS C S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
6/23/1999 $10,000 $10,000 $10,000
6/30/1999 $10,780 $10,129 $10,160
7/31/1999 $11,920 $ 9,813 $ 9,838
8/31/1999 $13,150 $ 9,765 $ 9,960
9/30/1999 $13,980 $ 9,497 $ 9,778
10/31/1999 $16,370 $10,098 $10,482
11/30/1999 $19,710 $10,303 $11,084
12/31/1999 $24,443 $10,910 $12,291
1/31/2000 $23,921 $10,362 $11,748
2/29/2000 $32,389 $10,166 $12,482
3/31/2000 $30,149 $11,160 $13,188
4/30/2000 $25,690 $10,824 $12,509
5/31/2000 $23,123 $10,602 $11,848
6/30/2000 $27,899 $10,864 $12,788
7/31/2000 $26,989 $10,694 $12,215
8/31/2000 $29,935 $11,358 $13,333
9/30/2000 $28,595 $10,759 $12,112
10/31/2000 $25,158 $10,713 $11,510
11/30/2000 $18,133 $ 9,868 $ 9,787
12/31/2000 $18,016 $ 9,917 $ 9,536
1/31/2001 $20,329 $10,269 $10,203
2/28/2001 $15,582 $ 9,332 $ 8,494
3/31/2001 $13,515 $ 8,741 $ 7,581
4/30/2001 $15,489 $ 9,420 $ 8,537
5/31/2001 $15,428 $ 9,483 $ 8,436
6/30/2001 $15,316 $ 9,253 $ 8,273
7/31/2001 $14,344 $ 9,162 $ 8,031
8/31/2001 $12,983 $ 8,588 $ 7,385
9/30/2001 $10,507 $ 7,895 $ 6,617
10/31/2001 $11,776 $ 8,045 $ 6,982
11/30/2001 $13,413 $ 8,662 $ 7,647
12/31/2001 $13,853 $ 8,738 $ 7,664
1/31/2002 $13,208 $ 8,611 $ 7,520
2/28/2002 $12,236 $ 8,444 $ 7,196
3/31/2002 $13,198 $ 8,762 $ 7,470
4/30/2002 $12,461 $ 8,231 $ 6,891
5/31/2002 $12,001 $ 8,170 $ 6,707
6/30/2002 $10,691 $ 7,588 $ 6,090
7/31/2002 $ 9,208 $ 6,997 $ 5,714
8/31/2002 $ 9,003 $ 7,043 $ 5,730
9/30/2002 $ 8,103 $ 6,277 $ 5,146
10/31/2002 $ 8,870 $ 6,830 $ 5,605
11/30/2002 $ 9,822 $ 7,232 $ 5,925
12/31/2002 $ 8,839 $ 6,807 $ 5,516
1/31/2003 $ 8,798 $ 6,629 $ 5,381
2/28/2003 $ 8,727 $ 6,529 $ 5,348
3/31/2003 $ 8,819 $ 6,593 $ 5,447
4/30/2003 $ 9,494 $ 7,136 $ 5,857
5/31/2003 $10,302 $ 7,512 $ 6,172
6/30/2003 $10,384 $ 7,607 $ 6,260
7/31/2003 $10,886 $ 7,741 $ 6,437
8/31/2003 $11,428 $ 7,892 $ 6,611
9/30/2003 $11,059 $ 7,809 $ 6,533
10/31/2003 $12,042 $ 8,250 $ 6,914
11/30/2003 $12,338 $ 8,323 $ 6,998
12/31/2003 $12,635 $ 8,759 $ 7,224
1/31/2004 $12,921 $ 8,920 $ 7,389
2/29/2004 $12,942 $ 9,044 $ 7,431
3/31/2004 $12,973 $ 8,908 $ 7,307
4/30/2004 $12,471 $ 8,768 $ 7,200
5/31/2004 $12,809 $ 8,888 $ 7,335
6/30/2004 $13,259 $ 9,061 $ 7,438
7/31/2004 $12,308 $ 8,761 $ 6,997
8/31/2004 $12,113 $ 8,797 $ 6,953
9/30/2004 $12,819 $ 8,892 $ 7,044
10/31/2004 $13,218 $ 9,028 $ 7,159
11/30/2004 $14,139 $ 9,393 $ 7,435
12/31/2004 $14,722 $ 9,713 $ 7,724
1/31/2005 $14,170 $ 9,476 $ 7,459
2/28/2005 $14,159 $ 9,675 $ 7,540
3/31/2005 $13,760 $ 9,504 $ 7,390
4/30/2005 $13,136 $ 9,324 $ 7,222
5/31/2005 $13,996 $ 9,620 $ 7,584
6/30/2005 $14,180 $ 9,634 $ 7,579
7/31/2005 $14,947 $ 9,992 $ 7,963
8/31/2005 $14,855 $ 9,901 $ 7,860
9/30/2005 $15,152 $ 9,981 $ 7,898
10/31/2005 $15,152 $ 9,815 $ 7,803
11/30/2005 $16,154 $10,186 $ 8,148
12/31/2005 $16,236 $10,190 $ 8,124
1/31/2006 $17,351 $10,460 $ 8,322
2/28/2006 $17,433 $10,488 $ 8,306
3/31/2006 $17,986 $10,618 $ 8,455
4/30/2006 $17,894 $10,761 $ 8,442
5/31/2006 $16,492 $10,451 $ 8,126
6/30/2006 $16,676 $10,465 $ 8,098
7/31/2006 $15,899 $10,530 $ 7,920
8/31/2006 $16,032 $10,781 $ 8,166
9/30/2006 $16,410 $11,058 $ 8,376
10/31/2006 $16,779 $11,419 $ 8,691
11/30/2006 $17,341 $11,636 $ 8,867
12/31/2006 $17,208 $11,799 $ 8,892
1/31/2007 $17,628 $11,978 $ 9,115
2/28/2007 $17,351 $11,743 $ 8,956
3/31/2007 $17,617 $11,875 $ 9,007
4/30/2007 $18,016 $12,401 $ 9,416
5/31/2007 $18,641 $12,833 $ 9,762
6/30/2007 $18,753 $12,620 $ 9,623
7/31/2007 $18,733 $12,229 $ 9,444
8/31/2007 $19,326 $12,412 $ 9,602
9/30/2007 $21,219 $12,876 $ 9,994
10/31/2007 $22,416 $13,081 $10,343
11/30/2007 $20,656 $12,534 $ 9,934
12/31/2007 $20,666 $12,447 $ 9,906
1/31/2008 $18,334 $11,701 $ 9,122
2/29/2008 $17,577 $11,321 $ 8,930
3/31/2008 $17,525 $11,272 $ 8,876
4/30/2008 $19,346 $11,821 $ 9,341
5/31/2008 $20,595 $11,974 $ 9,698
6/30/2008 $19,070 $10,964 $ 9,010
7/31/2008 $18,497 $10,872 $ 8,867
8/31/2008 $18,426 $11,029 $ 8,972
9/30/2008 $15,602 $10,047 $ 7,935
10/31/2008 $13,187 $ 8,359 $ 6,512
11/30/2008 $12,031 $ 7,760 $ 5,974
12/31/2008 $12,287 $ 7,842 $ 6,098
1/31/2009 $11,980 $ 7,181 $ 5,792
2/28/2009 $11,070 $ 6,416 $ 5,344
3/31/2009 $12,072 $ 6,979 $ 5,821
4/30/2009 $13,290 $ 7,646 $ 6,402
Total Returns 32.90% -23.54% -35.98%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -31.99%
5-Year +1.28%
Since Inception (6/23/99) +2.93%
CLASS R (1/1/02-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH
OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS R S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,535 $ 9,854 $ 9,811
2/28/2002 $ 8,837 $ 9,664 $ 9,389
3/31/2002 $ 9,535 $10,027 $ 9,746
4/30/2002 $ 8,997 $ 9,420 $ 8,991
5/31/2002 $ 8,678 $ 9,350 $ 8,750
6/30/2002 $ 7,731 $ 8,684 $ 7,946
7/31/2002 $ 6,655 $ 8,007 $ 7,455
8/31/2002 $ 6,510 $ 8,060 $ 7,476
9/30/2002 $ 5,862 $ 7,184 $ 6,715
10/31/2002 $ 6,415 $ 7,816 $ 7,313
11/30/2002 $ 7,114 $ 8,276 $ 7,730
12/31/2002 $ 6,408 $ 7,790 $ 7,196
1/31/2003 $ 6,379 $ 7,586 $ 7,021
2/28/2003 $ 6,321 $ 7,472 $ 6,978
3/31/2003 $ 6,393 $ 7,545 $ 7,107
4/30/2003 $ 6,888 $ 8,166 $ 7,641
5/31/2003 $ 7,477 $ 8,596 $ 8,053
6/30/2003 $ 7,542 $ 8,706 $ 8,167
7/31/2003 $ 7,906 $ 8,859 $ 8,399
8/31/2003 $ 8,299 $ 9,032 $ 8,625
9/30/2003 $ 8,037 $ 8,936 $ 8,524
10/31/2003 $ 8,757 $ 9,442 $ 9,021
11/30/2003 $ 8,975 $ 9,525 $ 9,131
12/31/2003 $ 9,201 $10,024 $ 9,425
1/31/2004 $ 9,412 $10,208 $ 9,641
2/29/2004 $ 9,426 $10,350 $ 9,696
3/31/2004 $ 9,455 $10,194 $ 9,533
4/30/2004 $ 9,099 $10,034 $ 9,394
5/31/2004 $ 9,346 $10,172 $ 9,570
6/30/2004 $ 9,674 $10,370 $ 9,704
7/31/2004 $ 8,982 $10,026 $ 9,129
8/31/2004 $ 8,844 $10,067 $ 9,072
9/30/2004 $ 9,361 $10,176 $ 9,191
10/31/2004 $ 9,659 $10,332 $ 9,341
11/30/2004 $10,335 $10,750 $ 9,701
12/31/2004 $10,772 $11,115 $10,078
1/31/2005 $10,371 $10,844 $ 9,732
2/28/2005 $10,364 $11,073 $ 9,838
3/31/2005 $10,081 $10,877 $ 9,642
4/30/2005 $ 9,630 $10,670 $ 9,422
5/31/2005 $10,263 $11,010 $ 9,895
6/30/2005 $10,400 $11,025 $ 9,888
7/31/2005 $10,968 $11,435 $10,390
8/31/2005 $10,903 $11,331 $10,255
9/30/2005 $11,128 $11,423 $10,305
10/31/2005 $11,136 $11,232 $10,180
11/30/2005 $11,871 $11,657 $10,631
12/31/2005 $11,942 $11,661 $10,599
1/31/2006 $12,758 $11,970 $10,858
2/28/2006 $12,830 $12,003 $10,837
3/31/2006 $13,238 $12,152 $11,031
4/30/2006 $13,180 $12,315 $11,014
5/31/2006 $12,146 $11,961 $10,603
6/30/2006 $12,292 $11,977 $10,565
7/31/2006 $11,725 $12,051 $10,334
8/31/2006 $11,820 $12,338 $10,654
9/30/2006 $12,110 $12,655 $10,929
10/31/2006 $12,386 $13,068 $11,339
11/30/2006 $12,808 $13,316 $11,568
12/31/2006 $12,714 $13,503 $11,602
1/31/2007 $13,034 $13,707 $11,893
2/28/2007 $12,830 $13,439 $11,685
3/31/2007 $13,027 $13,590 $11,752
4/30/2007 $13,332 $14,192 $12,285
5/31/2007 $13,797 $14,687 $12,736
6/30/2007 $13,885 $14,443 $12,556
7/31/2007 $13,877 $13,995 $12,322
8/31/2007 $14,321 $14,205 $12,527
9/30/2007 $15,732 $14,736 $13,039
10/31/2007 $16,627 $14,970 $13,494
11/30/2007 $15,332 $14,345 $12,961
12/31/2007 $15,346 $14,245 $12,924
1/31/2008 $13,615 $13,391 $11,902
2/29/2008 $13,063 $12,956 $11,652
3/31/2008 $13,027 $12,900 $11,581
4/30/2008 $14,401 $13,528 $12,188
5/31/2008 $15,339 $13,703 $12,654
6/30/2008 $14,205 $12,548 $11,755
7/31/2008 $13,790 $12,442 $11,568
8/31/2008 $13,739 $12,622 $11,705
9/30/2008 $11,638 $11,498 $10,352
10/31/2008 $ 9,841 $ 9,567 $ 8,496
11/30/2008 $ 8,982 $ 8,880 $ 7,795
12/31/2008 $ 9,179 $ 8,975 $ 7,956
1/31/2009 $ 8,953 $ 8,218 $ 7,556
2/28/2009 $ 8,277 $ 7,343 $ 6,973
3/31/2009 $ 9,026 $ 7,986 $ 7,595
4/30/2009 $ 9,942 $ 8,751 $ 8,353
Total Returns -0.58% -12.49% -16.47%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09
- ------- -------
1-Year -30.96%
5-Year +1.79%
Since Inception (1/1/02) -0.08%
Annual Report | 31
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09
- ------------------ ---------
1-Year -30.53%
5-Year +2.30%
Since Inception (6/23/99) +3.96%
Advisor Class (6/23/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH
OPPORTUNITIES
FUND - RUSSELL 3000
DATE Advisor Class S&P 500 INDEX GROWTH INDEX
- ------------- --------------- ------------- ------------
6/23/1999 $10,000 $10,000 $10,000
6/30/1999 $10,780 $10,129 $10,160
7/31/1999 $11,920 $ 9,813 $ 9,838
8/31/1999 $13,150 $ 9,765 $ 9,960
9/30/1999 $14,000 $ 9,497 $ 9,778
10/31/1999 $16,410 $10,098 $10,482
11/30/1999 $19,770 $10,303 $11,084
12/31/1999 $24,566 $10,910 $12,291
1/31/2000 $24,064 $10,362 $11,748
2/29/2000 $32,615 $10,166 $12,482
3/31/2000 $30,393 $11,160 $13,188
4/30/2000 $25,918 $10,824 $12,509
5/31/2000 $23,337 $10,602 $11,848
6/30/2000 $28,191 $10,864 $12,788
7/31/2000 $27,280 $10,694 $12,215
8/31/2000 $30,290 $11,358 $13,333
9/30/2000 $28,959 $10,759 $12,112
10/31/2000 $25,498 $10,713 $11,510
11/30/2000 $18,402 $ 9,868 $ 9,787
12/31/2000 $18,285 $ 9,917 $ 9,536
1/31/2001 $20,652 $10,269 $10,203
2/28/2001 $15,837 $ 9,332 $ 8,494
3/31/2001 $13,747 $ 8,741 $ 7,581
4/30/2001 $15,776 $ 9,420 $ 8,537
5/31/2001 $15,724 $ 9,483 $ 8,436
6/30/2001 $15,622 $ 9,253 $ 8,273
7/31/2001 $14,649 $ 9,162 $ 8,031
8/31/2001 $13,266 $ 8,588 $ 7,385
9/30/2001 $10,746 $ 7,895 $ 6,617
10/31/2001 $12,047 $ 8,045 $ 6,982
11/30/2001 $13,737 $ 8,662 $ 7,647
12/31/2001 $14,198 $ 8,738 $ 7,664
1/31/2002 $13,542 $ 8,611 $ 7,520
2/28/2002 $12,559 $ 8,444 $ 7,196
3/31/2002 $13,563 $ 8,762 $ 7,470
4/30/2002 $12,805 $ 8,231 $ 6,891
5/31/2002 $12,344 $ 8,170 $ 6,707
6/30/2002 $11,002 $ 7,588 $ 6,090
7/31/2002 $ 9,486 $ 6,997 $ 5,714
8/31/2002 $ 9,281 $ 7,043 $ 5,730
9/30/2002 $ 8,359 $ 6,277 $ 5,146
10/31/2002 $ 9,158 $ 6,830 $ 5,605
11/30/2002 $10,152 $ 7,232 $ 5,925
12/31/2002 $ 9,148 $ 6,807 $ 5,516
1/31/2003 $ 9,117 $ 6,629 $ 5,381
2/28/2003 $ 9,035 $ 6,529 $ 5,348
3/31/2003 $ 9,148 $ 6,593 $ 5,447
4/30/2003 $ 9,855 $ 7,136 $ 5,857
5/31/2003 $10,705 $ 7,512 $ 6,172
6/30/2003 $10,797 $ 7,607 $ 6,260
7/31/2003 $11,330 $ 7,741 $ 6,437
8/31/2003 $11,893 $ 7,892 $ 6,611
9/30/2003 $11,524 $ 7,809 $ 6,533
10/31/2003 $12,559 $ 8,250 $ 6,914
11/30/2003 $12,887 $ 8,323 $ 6,998
12/31/2003 $13,204 $ 8,759 $ 7,224
1/31/2004 $13,512 $ 8,920 $ 7,389
2/29/2004 $13,542 $ 9,044 $ 7,431
3/31/2004 $13,594 $ 8,908 $ 7,307
4/30/2004 $13,081 $ 8,768 $ 7,200
5/31/2004 $13,440 $ 8,888 $ 7,335
6/30/2004 $13,921 $ 9,061 $ 7,438
7/31/2004 $12,938 $ 8,761 $ 6,997
8/31/2004 $12,743 $ 8,797 $ 6,953
9/30/2004 $13,491 $ 8,892 $ 7,044
10/31/2004 $13,932 $ 9,028 $ 7,159
11/30/2004 $14,905 $ 9,393 $ 7,435
12/31/2004 $15,540 $ 9,713 $ 7,724
1/31/2005 $14,966 $ 9,476 $ 7,459
2/28/2005 $14,977 $ 9,675 $ 7,540
3/31/2005 $14,557 $ 9,504 $ 7,390
4/30/2005 $13,911 $ 9,324 $ 7,222
5/31/2005 $14,833 $ 9,620 $ 7,584
6/30/2005 $15,048 $ 9,634 $ 7,579
7/31/2005 $15,878 $ 9,992 $ 7,963
8/31/2005 $15,786 $ 9,901 $ 7,860
9/30/2005 $16,114 $ 9,981 $ 7,898
10/31/2005 $16,124 $ 9,815 $ 7,803
11/30/2005 $17,210 $10,186 $ 8,148
12/31/2005 $17,312 $10,190 $ 8,124
1/31/2006 $18,511 $10,460 $ 8,322
2/28/2006 $18,623 $10,488 $ 8,306
3/31/2006 $19,217 $10,618 $ 8,455
4/30/2006 $19,136 $10,761 $ 8,442
5/31/2006 $17,650 $10,451 $ 8,126
6/30/2006 $17,865 $10,465 $ 8,098
7/31/2006 $17,046 $10,530 $ 7,920
8/31/2006 $17,199 $10,781 $ 8,166
9/30/2006 $17,630 $11,058 $ 8,376
10/31/2006 $18,039 $11,419 $ 8,691
11/30/2006 $18,654 $11,636 $ 8,867
12/31/2006 $18,531 $11,799 $ 8,892
1/31/2007 $19,002 $11,978 $ 9,115
2/28/2007 $18,705 $11,743 $ 8,956
3/31/2007 $19,013 $11,875 $ 9,007
4/30/2007 $19,453 $12,401 $ 9,416
5/31/2007 $20,150 $12,833 $ 9,762
6/30/2007 $20,293 $12,620 $ 9,623
7/31/2007 $20,283 $12,229 $ 9,444
8/31/2007 $20,949 $12,412 $ 9,602
9/30/2007 $23,008 $12,876 $ 9,994
10/31/2007 $24,329 $13,081 $10,343
11/30/2007 $22,444 $12,534 $ 9,934
12/31/2007 $22,475 $12,447 $ 9,906
1/31/2008 $19,955 $11,701 $ 9,122
2/29/2008 $19,146 $11,321 $ 8,930
3/31/2008 $19,105 $11,272 $ 8,876
4/30/2008 $21,102 $11,821 $ 9,341
5/31/2008 $22,485 $11,974 $ 9,698
6/30/2008 $20,836 $10,964 $ 9,010
7/31/2008 $20,232 $10,872 $ 8,867
8/31/2008 $20,170 $11,029 $ 8,972
9/30/2008 $17,097 $10,047 $ 7,935
10/31/2008 $14,475 $ 8,359 $ 6,512
11/30/2008 $13,215 $ 7,760 $ 5,974
12/31/2008 $13,512 $ 7,842 $ 6,098
1/31/2009 $13,184 $ 7,181 $ 5,792
2/28/2009 $12,190 $ 6,416 $ 5,344
3/31/2009 $13,297 $ 6,979 $ 5,821
4/30/2009 $14,659 $ 7,646 $ 6,402
Total Returns 46.59% -23.54% -35.98%
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 MAY BE BEST SUITED FOR LONG-TERM INVESTORS.
THE FUND'S INVESTMENTS IN SMALLER AND MIDSIZED COMPANY STOCKS INVOLVE SPECIAL
RISKS SUCH AS RELATIVELY SMALLER REVENUES, LIMITED PRODUCT LINES AND SMALLER
MARKET SHARE. SMALLER AND MIDSIZED COMPANY STOCKS HISTORICALLY HAVE EXHIBITED
GREATER PRICE VOLATILITY THAN LARGER COMPANY STOCKS, PARTICULARLY OVER THE SHORT
TERM. THE FUND'S PORTFOLIO INCLUDES TECHNOLOGY STOCKS, A SECTOR WHICH HAS BEEN
ONE OF THE MOST VOLATILE 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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2009 Morningstar. 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
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.
32 | Annual Report
Your Fund's Expenses
FRANKLIN GROWTH OPPORTUNITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
Annual Report | 33
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.
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 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09
- --------------------------------------- ------------------- ---------------- ------------------------
Actual $1,000 $1,010.90 $6.83
Hypothetical (5% return before expenses) $1,000 $1,018.00 $6.85
CLASS B
Actual $1,000 $1,007.70 $10.40
Hypothetical (5% return before expenses) $1,000 $1,014.43 $10.44
CLASS C
Actual $1,000 $1,007.80 $10.40
Hypothetical (5% return before expenses) $1,000 $1,014.43 $10.44
CLASS R
Actual $1,000 $1,010.30 $8.02
Hypothetical (5% return before expenses) $1,000 $1,016.81 $8.05
ADVISOR CLASS
Actual $1,000 $1,012.70 $5.54
Hypothetical (5% return before expenses) $1,000 $1,019.29 $5.56
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.37%; B: 2.09%; C: 2.09%; R: 1.61%; and
Advisor: 1.11%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
34 | Annual Report
Franklin Small Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Small Cap Growth Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Small Cap Growth Fund - Class A had a
- -28.54% cumulative total return. The Fund performed better than its benchmarks,
the Russell 2000 Growth Index and the Standard & Poor's 500 Index (S&P 500),
which had total returns of -30.36% and -35.31% for the same period.(2) You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 38.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
bottom-up investors we focus primarily on finding individual securities that
meet our criteria for growth potential, quality and valuation. We search for
high-quality companies that have identifiable drivers of future earnings growth.
We rely on our team of analysts to help provide in-depth industry expertise and
use both qualitative and quantitative analysis to evaluate companies. Our
analysts identify each company's market opportunity, competitive position,
management
(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: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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 82.
Annual Report | 35
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets as of 4/30/09
(BAR CHART)
Information Technology* 38.0%
Health Care 16.8%
Consumer Discretionary 12.7%
Industrials 10.2%
Energy 7.5%
Financials 5.2%
Consumer Staples 4.5%
Telecommunication Services 1.8%
Materials 1.2%
Short-Term Investments & Other Net Assets 2.1%
* 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.
and financial strength, business and financial risks, and valuation. We choose
to invest in those companies that, in our opinion, offer the best trade-off
between growth opportunity, business and financial risk, and valuation.
MANAGER'S DISCUSSION
Among the most significant detractors from Fund performance relative to the
Russell 2000 Growth Index for the 12 months under review were K-V
Pharmaceutical, a generic drug manufacturer (sold by period-end); Tenneco, an
auto parts company; and Mariner Energy, an oil and gas exploration and
production company.
On a sector basis, stock selection in consumer discretionary, health care and
financials constrained relative Fund performance. An overweighted position in
the consumer discretionary sector including Fund holding Lions Gate
Entertainment,(3) an independent film distribution and production company, also
hindered returns. In the health care sector, significant detractors included
Angiotech Pharmaceuticals,(3) a medical products company (sold by period-end),
and Psychiatric Solutions, which owns a franchise of 90 psychiatric hospitals
and residential treatment facilities across the U.S. and the Caribbean. An
underweighting in the financials sector and Fund positions in real estate
investment trusts FelCor Lodging Trust and iStar Financial(3) also detracted
from relative performance.
In contrast, major contributors during the reporting period included Allegiant
Travel, a charter flight operator; Force Protection, a military armored land
vehicles manufacturer; and beverages company Hansen Natural.(3)
Our investments in the industrials, information technology and telecommunication
services sectors supported the Fund's relative performance. Stock selection and
an underweighting in the industrials sector contributed to Fund returns. An
overweighted position in the information technology sector aided relative
performance, supported by positive returns from Riverbed Technology, which
designs and manufactures Wide Area Network (WAN) optimization products, and
ViaSat, an advanced broadband digital satellite communications distributor and
television broadcaster. Despite a loss in absolute terms, wireless
communications infrastructure company SBA Communications,(3) the Fund's only
telecommunication services holding, performed better than the sector overall and
helped relative Fund performance.
(3.) This holding is not an index component.
36 | Annual Report
Thank you for your continued participation in Franklin Small Cap Growth Fund. We
look forward to serving your future investment needs.
(PHOTO OF MICHAEL P. MCCARTHY)
/s/ Michael P. McCarthy
Michael P. McCarthy, CFA
Portfolio Manager
Franklin Small Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2009, 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
4/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Nuance Communications Inc. 2.2%
INFORMATION TECHNOLOGY
ViaSat Inc. 2.2%
INFORMATION TECHNOLOGY
Bottomline Technologies Inc. 2.0%
INFORMATION TECHNOLOGY
Hain Celestial Group Inc. 1.9%
CONSUMER STAPLES
FGX International Holdings Ltd.
(British Virgin Islands) 1.9%
CONSUMER DISCRETIONARY
FTI Consulting Inc. 1.9%
INDUSTRIALS
SBA Communications Corp. 1.8%
TELECOMMUNICATION SERVICES
Sapient Corp. 1.8%
INFORMATION TECHNOLOGY
Silicon Laboratories Inc. 1.8%
INFORMATION TECHNOLOGY
Varian Semiconductor Equipment
Associates Inc. 1.7%
INFORMATION TECHNOLOGY
Annual Report | 37
Performance Summary as of 4/30/09
FRANKLIN SMALL 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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FSGRX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.68 $6.41 $9.09
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.0669
Long-Term Capital Gain $0.0071
TOTAL $0.0740
CLASS B (SYMBOL: FBSGX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.54 $5.89 $8.43
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.0669
Long-Term Capital Gain $0.0071
TOTAL $0.0740
CLASS C (SYMBOL: FCSGX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.54 $5.89 $8.43
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.0669
Long-Term Capital Gain $0.0071
TOTAL $0.0740
CLASS R (SYMBOL: FSSRX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.65 $6.26 $8.91
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.0669
Long-Term Capital Gain $0.0071
TOTAL $0.0740
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 4/30/09 4/30/08
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$2.74 $6.63 $9.37
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.0669
Long-Term Capital Gain $0.0071
TOTAL $0.0740
38 | Annual 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.
CLASS A 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------- -------- ------- ------------------
Cumulative Total Return(1) -28.54% -16.48% -11.89%
Average Annual Total Return(2) -32.61% -4.67% -2.04%
Value of $10,000 Investment(3) $ 6,739 $ 7,874 $ 8,305
Avg. Ann. Total Return (3/31/09)(4) -37.47% -7.94% -3.55%
Total Annual Operating Expenses(5) 1.17%
CLASS B 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------- -------- ------- ------------------
Cumulative Total Return(1) -29.11% -19.55% -16.80%
Average Annual Total Return(2) -31.91% -4.53% -2.02%
Value of $10,000 Investment(3) $ 6,809 $ 7,930 $ 8,320
Avg. Ann. Total Return (3/31/09)(4) -36.87% -7.84% -3.53%
Total Annual Operating Expenses(5) 1.92%
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------- -------- ------- ------------------
Cumulative Total Return(1) -29.11% -19.57% -17.40%
Average Annual Total Return(2) -29.81% -4.26% -2.10%
Value of $10,000 Investment(3) $ 7,019 $ 8,043 $ 8,260
Avg. Ann. Total Return (3/31/09)(4) -34.80% -7.55% -3.61%
Total Annual Operating Expenses(5) 1.92%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- -------- ------- ------------------
Cumulative Total Return(1) -28.78% -17.53% -12.44%
Average Annual Total Return(2) -28.78% -3.78% -1.80%
Value of $10,000 Investment(3) $ 7,122 $ 8,247 $ 8,756
Avg. Ann. Total Return (3/31/09)(4) -33.79% -7.07% -3.65%
Total Annual Operating Expenses(5) 1.42%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------- -------- ------- ------------------
Cumulative Total Return(1) -28.32% -15.41% -9.57%
Average Annual Total Return(2) -28.32% -3.29% -1.11%
Value of $10,000 Investment(3) $ 7,168 $ 8,459 $ 9,043
Avg. Ann. Total Return (3/31/09)(4) -33.47% -6.61% -2.63%
Total Annual Operating Expenses(5) 0.92%
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 (800) 342-5236.
Annual Report | 39
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -32.61%
5-Year -4.67%
Since Inception (5/1/00) -2.04%
CLASS A (5/1/00-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX
- ------------- --------------------- ------- ------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $ 8,982 $ 9,795 $ 9,124
6/30/2000 $11,178 $10,036 $10,303
7/31/2000 $10,688 $ 9,879 $ 9,420
8/31/2000 $12,319 $10,493 $10,411
9/30/2000 $11,744 $ 9,939 $ 9,894
10/31/2000 $11,008 $ 9,897 $ 9,091
11/30/2000 $ 9,048 $ 9,117 $ 7,440
12/31/2000 $ 9,623 $ 9,161 $ 7,895
1/31/2001 $10,707 $ 9,486 $ 8,534
2/28/2001 $ 9,161 $ 8,621 $ 7,365
3/31/2001 $ 8,539 $ 8,075 $ 6,695
4/30/2001 $ 9,680 $ 8,703 $ 7,515
5/31/2001 $ 9,623 $ 8,761 $ 7,689
6/30/2001 $ 9,906 $ 8,548 $ 7,898
7/31/2001 $ 9,444 $ 8,464 $ 7,225
8/31/2001 $ 8,954 $ 7,934 $ 6,773
9/30/2001 $ 7,333 $ 7,293 $ 5,680
10/31/2001 $ 8,096 $ 7,432 $ 6,227
11/30/2001 $ 8,822 $ 8,002 $ 6,747
12/31/2001 $ 9,303 $ 8,072 $ 7,167
1/31/2002 $ 9,161 $ 7,955 $ 6,912
2/28/2002 $ 8,775 $ 7,801 $ 6,464
3/31/2002 $ 9,510 $ 8,095 $ 7,026
4/30/2002 $ 9,227 $ 7,604 $ 6,874
5/31/2002 $ 8,803 $ 7,548 $ 6,472
6/30/2002 $ 8,096 $ 7,010 $ 5,923
7/31/2002 $ 6,814 $ 6,464 $ 5,013
8/31/2002 $ 6,795 $ 6,506 $ 5,011
9/30/2002 $ 6,013 $ 5,799 $ 4,649
10/31/2002 $ 6,579 $ 6,310 $ 4,884
11/30/2002 $ 7,220 $ 6,681 $ 5,368
12/31/2002 $ 6,767 $ 6,288 $ 4,998
1/31/2003 $ 6,692 $ 6,124 $ 4,862
2/28/2003 $ 6,550 $ 6,032 $ 4,733
3/31/2003 $ 6,428 $ 6,090 $ 4,804
4/30/2003 $ 7,031 $ 6,592 $ 5,259
5/31/2003 $ 7,729 $ 6,939 $ 5,851
6/30/2003 $ 7,851 $ 7,028 $ 5,964
7/31/2003 $ 8,238 $ 7,152 $ 6,415
8/31/2003 $ 9,048 $ 7,291 $ 6,760
9/30/2003 $ 8,577 $ 7,214 $ 6,589
10/31/2003 $ 9,595 $ 7,622 $ 7,158
11/30/2003 $ 9,953 $ 7,689 $ 7,391
12/31/2003 $10,047 $ 8,092 $ 7,424
1/31/2004 $10,415 $ 8,241 $ 7,814
2/29/2004 $10,358 $ 8,355 $ 7,802
3/31/2004 $10,320 $ 8,229 $ 7,839
4/30/2004 $ 9,943 $ 8,100 $ 7,445
5/31/2004 $10,236 $ 8,211 $ 7,593
6/30/2004 $10,622 $ 8,371 $ 7,846
7/31/2004 $ 9,774 $ 8,094 $ 7,142
8/31/2004 $ 9,548 $ 8,127 $ 6,988
9/30/2004 $10,057 $ 8,215 $ 7,374
10/31/2004 $10,207 $ 8,340 $ 7,553
11/30/2004 $10,782 $ 8,678 $ 8,192
12/31/2004 $11,159 $ 8,973 $ 8,486
1/31/2005 $10,707 $ 8,754 $ 8,104
2/28/2005 $10,999 $ 8,938 $ 8,215
3/31/2005 $10,688 $ 8,780 $ 7,907
4/30/2005 $10,019 $ 8,614 $ 7,404
5/31/2005 $10,669 $ 8,888 $ 7,926
6/30/2005 $11,018 $ 8,900 $ 8,182
7/31/2005 $11,640 $ 9,231 $ 8,754
8/31/2005 $11,404 $ 9,147 $ 8,631
9/30/2005 $11,508 $ 9,221 $ 8,699
10/31/2005 $10,971 $ 9,067 $ 8,378
11/30/2005 $11,762 $ 9,410 $ 8,852
12/31/2005 $11,659 $ 9,414 $ 8,839
1/31/2006 $12,592 $ 9,663 $ 9,691
2/28/2006 $12,743 $ 9,689 $ 9,640
3/31/2006 $13,148 $ 9,810 $10,108
4/30/2006 $13,101 $ 9,941 $10,079
5/31/2006 $12,224 $ 9,655 $ 9,370
6/30/2006 $12,205 $ 9,668 $ 9,375
7/31/2006 $11,480 $ 9,728 $ 8,888
8/31/2006 $11,772 $ 9,959 $ 9,149
9/30/2006 $11,744 $10,216 $ 9,211
10/31/2006 $12,356 $10,549 $ 9,807
11/30/2006 $12,771 $10,750 $10,042
12/31/2006 $12,761 $10,900 $10,018
1/31/2007 $13,106 $11,065 $10,205
2/28/2007 $13,263 $10,849 $10,172
3/31/2007 $13,315 $10,970 $10,266
4/30/2007 $13,628 $11,456 $10,535
5/31/2007 $14,161 $11,856 $11,015
6/30/2007 $14,025 $11,659 $10,953
7/31/2007 $13,263 $11,297 $10,384
8/31/2007 $13,492 $11,467 $10,645
9/30/2007 $13,868 $11,896 $10,955
10/31/2007 $14,464 $12,085 $11,448
11/30/2007 $13,263 $11,580 $10,657
12/31/2007 $13,181 $11,499 $10,724
1/31/2008 $11,736 $10,810 $ 9,740
2/29/2008 $11,225 $10,458 $ 9,403
3/31/2008 $10,918 $10,413 $ 9,348
4/30/2008 $11,621 $10,920 $ 9,829
5/31/2008 $12,311 $11,062 $10,386
6/30/2008 $11,276 $10,129 $ 9,766
7/31/2008 $11,237 $10,044 $ 9,994
8/31/2008 $11,749 $10,189 $10,242
9/30/2008 $10,394 $ 9,281 $ 9,084
10/31/2008 $ 8,335 $ 7,723 $ 7,113
11/30/2008 $ 7,428 $ 7,169 $ 6,252
12/31/2008 $ 7,761 $ 7,245 $ 6,591
1/31/2009 $ 7,191 $ 6,634 $ 6,090
2/28/2009 $ 6,491 $ 5,928 $ 5,459
3/31/2009 $ 7,242 $ 6,447 $ 5,949
4/30/2009 $ 8,305 $ 7,064 $ 6,844
Total Returns -16.95% -29.36% -31.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09
- ------- -------
1-Year -31.91%
5-Year -4.53%
Since Inception (5/1/00) -2.02%
CLASS B (5/1/00-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX
- ------------- --------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,850 $10,036 $10,303
7/31/2000 $11,330 $ 9,879 $ 9,420
8/31/2000 $13,040 $10,493 $10,411
9/30/2000 $12,430 $ 9,939 $ 9,894
10/31/2000 $11,640 $ 9,897 $ 9,091
11/30/2000 $ 9,570 $ 9,117 $ 7,440
12/31/2000 $10,170 $ 9,161 $ 7,895
1/31/2001 $11,300 $ 9,486 $ 8,534
2/28/2001 $ 9,670 $ 8,621 $ 7,365
3/31/2001 $ 9,010 $ 8,075 $ 6,695
4/30/2001 $10,200 $ 8,703 $ 7,515
5/31/2001 $10,140 $ 8,761 $ 7,689
6/30/2001 $10,430 $ 8,548 $ 7,898
7/31/2001 $ 9,940 $ 8,464 $ 7,225
8/31/2001 $ 9,420 $ 7,934 $ 6,773
9/30/2001 $ 7,710 $ 7,293 $ 5,680
10/31/2001 $ 8,510 $ 7,432 $ 6,227
11/30/2001 $ 9,270 $ 8,002 $ 6,747
12/31/2001 $ 9,760 $ 8,072 $ 7,167
1/31/2002 $ 9,610 $ 7,955 $ 6,912
2/28/2002 $ 9,200 $ 7,801 $ 6,464
3/31/2002 $ 9,970 $ 8,095 $ 7,026
4/30/2002 $ 9,660 $ 7,604 $ 6,874
5/31/2002 $ 9,220 $ 7,548 $ 6,472
6/30/2002 $ 8,470 $ 7,010 $ 5,923
7/31/2002 $ 7,130 $ 6,464 $ 5,013
8/31/2002 $ 7,100 $ 6,506 $ 5,011
9/30/2002 $ 6,280 $ 5,799 $ 4,649
10/31/2002 $ 6,870 $ 6,310 $ 4,884
11/30/2002 $ 7,540 $ 6,681 $ 5,368
12/31/2002 $ 7,060 $ 6,288 $ 4,998
1/31/2003 $ 6,980 $ 6,124 $ 4,862
2/28/2003 $ 6,830 $ 6,032 $ 4,733
3/31/2003 $ 6,690 $ 6,090 $ 4,804
4/30/2003 $ 7,330 $ 6,592 $ 5,259
5/31/2003 $ 8,040 $ 6,939 $ 5,851
6/30/2003 $ 8,160 $ 7,028 $ 5,964
7/31/2003 $ 8,560 $ 7,152 $ 6,415
8/31/2003 $ 9,400 $ 7,291 $ 6,760
9/30/2003 $ 8,900 $ 7,214 $ 6,589
10/31/2003 $ 9,950 $ 7,622 $ 7,158
11/30/2003 $10,320 $ 7,689 $ 7,391
12/31/2003 $10,410 $ 8,092 $ 7,424
1/31/2004 $10,780 $ 8,241 $ 7,814
2/29/2004 $10,710 $ 8,355 $ 7,802
3/31/2004 $10,670 $ 8,229 $ 7,839
4/30/2004 $10,270 $ 8,100 $ 7,445
5/31/2004 $10,560 $ 8,211 $ 7,593
6/30/2004 $10,960 $ 8,371 $ 7,846
7/31/2004 $10,070 $ 8,094 $ 7,142
8/31/2004 $ 9,840 $ 8,127 $ 6,988
9/30/2004 $10,350 $ 8,215 $ 7,374
10/31/2004 $10,500 $ 8,340 $ 7,553
11/30/2004 $11,090 $ 8,678 $ 8,192
12/31/2004 $11,470 $ 8,973 $ 8,486
1/31/2005 $10,990 $ 8,754 $ 8,104
2/28/2005 $11,290 $ 8,938 $ 8,215
3/31/2005 $10,960 $ 8,780 $ 7,907
4/30/2005 $10,260 $ 8,614 $ 7,404
5/31/2005 $10,930 $ 8,888 $ 7,926
6/30/2005 $11,280 $ 8,900 $ 8,182
7/31/2005 $11,910 $ 9,231 $ 8,754
8/31/2005 $11,660 $ 9,147 $ 8,631
9/30/2005 $11,750 $ 9,221 $ 8,699
10/31/2005 $11,200 $ 9,067 $ 8,378
11/30/2005 $12,000 $ 9,410 $ 8,852
12/31/2005 $11,890 $ 9,414 $ 8,839
1/31/2006 $12,830 $ 9,663 $ 9,691
2/28/2006 $12,980 $ 9,689 $ 9,640
3/31/2006 $13,380 $ 9,810 $10,108
4/30/2006 $13,320 $ 9,941 $10,079
5/31/2006 $12,420 $ 9,655 $ 9,370
6/30/2006 $12,400 $ 9,668 $ 9,375
7/31/2006 $11,650 $ 9,728 $ 8,888
8/31/2006 $11,940 $ 9,959 $ 9,149
9/30/2006 $11,910 $10,216 $ 9,211
10/31/2006 $12,520 $10,549 $ 9,807
11/30/2006 $12,930 $10,750 $10,042
12/31/2006 $12,920 $10,900 $10,018
1/31/2007 $13,254 $11,065 $10,205
2/28/2007 $13,410 $10,849 $10,172
3/31/2007 $13,444 $10,970 $10,266
4/30/2007 $13,756 $11,456 $10,535
5/31/2007 $14,290 $11,856 $11,015
6/30/2007 $14,134 $11,659 $10,953
7/31/2007 $13,366 $11,297 $10,384
8/31/2007 $13,589 $11,467 $10,645
9/30/2007 $13,956 $11,896 $10,955
10/31/2007 $14,546 $12,085 $11,448
11/30/2007 $13,332 $11,580 $10,657
12/31/2007 $13,231 $11,499 $10,724
1/31/2008 $11,780 $10,810 $ 9,740
2/29/2008 $11,268 $10,458 $ 9,403
3/31/2008 $10,950 $10,413 $ 9,348
4/30/2008 $11,655 $10,920 $ 9,829
5/31/2008 $12,347 $11,062 $10,386
6/30/2008 $11,309 $10,129 $ 9,766
7/31/2008 $11,270 $10,044 $ 9,994
8/31/2008 $11,783 $10,189 $10,242
9/30/2008 $10,425 $ 9,281 $ 9,084
10/31/2008 $ 8,361 $ 7,723 $ 7,113
11/30/2008 $ 7,450 $ 7,169 $ 6,252
12/31/2008 $ 7,784 $ 7,245 $ 6,591
1/31/2009 $ 7,212 $ 6,634 $ 6,090
2/28/2009 $ 6,510 $ 5,928 $ 5,459
3/31/2009 $ 7,264 $ 6,447 $ 5,949
4/30/2009 $ 8,320 $ 7,064 $ 6,844
Total Returns -16.80% -29.36% -31.56%
40 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -29.81%
5-Year -4.26%
Since Inception (5/1/00) -2.10%
CLASS C (5/1/00-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX
- ------------- --------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,840 $10,036 $10,303
7/31/2000 $11,330 $ 9,879 $ 9,420
8/31/2000 $13,040 $10,493 $10,411
9/30/2000 $12,430 $ 9,939 $ 9,894
10/31/2000 $11,650 $ 9,897 $ 9,091
11/30/2000 $ 9,570 $ 9,117 $ 7,440
12/31/2000 $10,180 $ 9,161 $ 7,895
1/31/2001 $11,310 $ 9,486 $ 8,534
2/28/2001 $ 9,680 $ 8,621 $ 7,365
3/31/2001 $ 9,020 $ 8,075 $ 6,695
4/30/2001 $10,210 $ 8,703 $ 7,515
5/31/2001 $10,150 $ 8,761 $ 7,689
6/30/2001 $10,440 $ 8,548 $ 7,898
7/31/2001 $ 9,950 $ 8,464 $ 7,225
8/31/2001 $ 9,420 $ 7,934 $ 6,773
9/30/2001 $ 7,720 $ 7,293 $ 5,680
10/31/2001 $ 8,520 $ 7,432 $ 6,227
11/30/2001 $ 9,270 $ 8,002 $ 6,747
12/31/2001 $ 9,770 $ 8,072 $ 7,167
1/31/2002 $ 9,620 $ 7,955 $ 6,912
2/28/2002 $ 9,210 $ 7,801 $ 6,464
3/31/2002 $ 9,970 $ 8,095 $ 7,026
4/30/2002 $ 9,670 $ 7,604 $ 6,874
5/31/2002 $ 9,230 $ 7,548 $ 6,472
6/30/2002 $ 8,470 $ 7,010 $ 5,923
7/31/2002 $ 7,130 $ 6,464 $ 5,013
8/31/2002 $ 7,110 $ 6,506 $ 5,011
9/30/2002 $ 6,280 $ 5,799 $ 4,649
10/31/2002 $ 6,870 $ 6,310 $ 4,884
11/30/2002 $ 7,550 $ 6,681 $ 5,368
12/31/2002 $ 7,070 $ 6,288 $ 4,998
1/31/2003 $ 6,990 $ 6,124 $ 4,862
2/28/2003 $ 6,830 $ 6,032 $ 4,733
3/31/2003 $ 6,700 $ 6,090 $ 4,804
4/30/2003 $ 7,330 $ 6,592 $ 5,259
5/31/2003 $ 8,050 $ 6,939 $ 5,851
6/30/2003 $ 8,170 $ 7,028 $ 5,964
7/31/2003 $ 8,570 $ 7,152 $ 6,415
8/31/2003 $ 9,400 $ 7,291 $ 6,760
9/30/2003 $ 8,910 $ 7,214 $ 6,589
10/31/2003 $ 9,960 $ 7,622 $ 7,158
11/30/2003 $10,330 $ 7,689 $ 7,391
12/31/2003 $10,410 $ 8,092 $ 7,424
1/31/2004 $10,780 $ 8,241 $ 7,814
2/29/2004 $10,720 $ 8,355 $ 7,802
3/31/2004 $10,670 $ 8,229 $ 7,839
4/30/2004 $10,270 $ 8,100 $ 7,445
5/31/2004 $10,570 $ 8,211 $ 7,593
6/30/2004 $10,960 $ 8,371 $ 7,846
7/31/2004 $10,080 $ 8,094 $ 7,142
8/31/2004 $ 9,840 $ 8,127 $ 6,988
9/30/2004 $10,360 $ 8,215 $ 7,374
10/31/2004 $10,500 $ 8,340 $ 7,553
11/30/2004 $11,090 $ 8,678 $ 8,192
12/31/2004 $11,480 $ 8,973 $ 8,486
1/31/2005 $11,000 $ 8,754 $ 8,104
2/28/2005 $11,290 $ 8,938 $ 8,215
3/31/2005 $10,970 $ 8,780 $ 7,907
4/30/2005 $10,270 $ 8,614 $ 7,404
5/31/2005 $10,930 $ 8,888 $ 7,926
6/30/2005 $11,280 $ 8,900 $ 8,182
7/31/2005 $11,920 $ 9,231 $ 8,754
8/31/2005 $11,660 $ 9,147 $ 8,631
9/30/2005 $11,760 $ 9,221 $ 8,699
10/31/2005 $11,210 $ 9,067 $ 8,378
11/30/2005 $12,010 $ 9,410 $ 8,852
12/31/2005 $11,900 $ 9,414 $ 8,839
1/31/2006 $12,840 $ 9,663 $ 9,691
2/28/2006 $12,990 $ 9,689 $ 9,640
3/31/2006 $13,380 $ 9,810 $10,108
4/30/2006 $13,330 $ 9,941 $10,079
5/31/2006 $12,430 $ 9,655 $ 9,370
6/30/2006 $12,400 $ 9,668 $ 9,375
7/31/2006 $11,660 $ 9,728 $ 8,888
8/31/2006 $11,950 $ 9,959 $ 9,149
9/30/2006 $11,920 $10,216 $ 9,211
10/31/2006 $12,530 $10,549 $ 9,807
11/30/2006 $12,940 $10,750 $10,042
12/31/2006 $12,919 $10,900 $10,018
1/31/2007 $13,264 $11,065 $10,205
2/28/2007 $13,420 $10,849 $10,172
3/31/2007 $13,454 $10,970 $10,266
4/30/2007 $13,766 $11,456 $10,535
5/31/2007 $14,300 $11,856 $11,015
6/30/2007 $14,144 $11,659 $10,953
7/31/2007 $13,376 $11,297 $10,384
8/31/2007 $13,599 $11,467 $10,645
9/30/2007 $13,966 $11,896 $10,955
10/31/2007 $14,556 $12,085 $11,448
11/30/2007 $13,342 $11,580 $10,657
12/31/2007 $13,241 $11,499 $10,724
1/31/2008 $11,790 $10,810 $ 9,740
2/29/2008 $11,265 $10,458 $ 9,403
3/31/2008 $10,947 $10,413 $ 9,348
4/30/2008 $11,652 $10,920 $ 9,829
5/31/2008 $12,329 $11,062 $10,386
6/30/2008 $11,293 $10,129 $ 9,766
7/31/2008 $11,237 $10,044 $ 9,994
8/31/2008 $11,749 $10,189 $10,242
9/30/2008 $10,394 $ 9,281 $ 9,084
10/31/2008 $ 8,321 $ 7,723 $ 7,113
11/30/2008 $ 7,422 $ 7,169 $ 6,252
12/31/2008 $ 7,741 $ 7,245 $ 6,591
1/31/2009 $ 7,166 $ 6,634 $ 6,090
2/28/2009 $ 6,465 $ 5,928 $ 5,459
3/31/2009 $ 7,208 $ 6,447 $ 5,949
4/30/2009 $ 8,260 $ 7,064 $ 6,844
Total Returns -17.40% -29.36% -31.56%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09
- ------- -------
1-Year -28.78%
5-Year -3.78%
Since Inception (1/1/02) -1.80%
CLASS R (1/1/02-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX
- ------------- --------------------- ------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,838 $ 9,854 $ 9,644
2/28/2002 $ 9,423 $ 9,664 $ 9,020
3/31/2002 $10,213 $10,027 $ 9,804
4/30/2002 $ 9,909 $ 9,420 $ 9,592
5/31/2002 $ 9,463 $ 9,350 $ 9,031
6/30/2002 $ 8,694 $ 8,684 $ 8,265
7/31/2002 $ 7,318 $ 8,007 $ 6,995
8/31/2002 $ 7,288 $ 8,060 $ 6,992
9/30/2002 $ 6,447 $ 7,184 $ 6,487
10/31/2002 $ 7,045 $ 7,816 $ 6,815
11/30/2002 $ 7,743 $ 8,276 $ 7,490
12/31/2002 $ 7,257 $ 7,790 $ 6,974
1/31/2003 $ 7,176 $ 7,586 $ 6,784
2/28/2003 $ 7,014 $ 7,472 $ 6,603
3/31/2003 $ 6,883 $ 7,545 $ 6,703
4/30/2003 $ 7,540 $ 8,166 $ 7,338
5/31/2003 $ 8,280 $ 8,596 $ 8,165
6/30/2003 $ 8,400 $ 8,706 $ 8,322
7/31/2003 $ 8,816 $ 8,859 $ 8,951
8/31/2003 $ 9,686 $ 9,032 $ 9,432
9/30/2003 $ 9,180 $ 8,936 $ 9,193
10/31/2003 $10,263 $ 9,442 $ 9,987
11/30/2003 $10,647 $ 9,525 $10,313
12/31/2003 $10,739 $10,024 $10,359
1/31/2004 $11,124 $10,208 $10,903
2/29/2004 $11,063 $10,350 $10,886
3/31/2004 $11,022 $10,194 $10,937
4/30/2004 $10,617 $10,034 $10,388
5/31/2004 $10,921 $10,172 $10,595
6/30/2004 $11,335 $10,370 $10,948
7/31/2004 $10,425 $10,026 $ 9,965
8/31/2004 $10,193 $10,067 $ 9,750
9/30/2004 $10,729 $10,176 $10,289
10/31/2004 $10,881 $10,332 $10,539
11/30/2004 $11,498 $10,750 $11,430
12/31/2004 $11,903 $11,115 $11,841
1/31/2005 $11,406 $10,844 $11,308
2/28/2005 $11,720 $11,073 $11,463
3/31/2005 $11,386 $10,877 $11,033
4/30/2005 $10,668 $10,670 $10,331
5/31/2005 $11,356 $11,010 $11,059
6/30/2005 $11,731 $11,025 $11,417
7/31/2005 $12,388 $11,435 $12,215
8/31/2005 $12,136 $11,331 $12,043
9/30/2005 $12,237 $11,423 $12,138
10/31/2005 $11,670 $11,232 $11,690
11/30/2005 $12,510 $11,657 $12,351
12/31/2005 $12,398 $11,661 $12,333
1/31/2006 $13,390 $11,970 $13,523
2/28/2006 $13,542 $12,003 $13,450
3/31/2006 $13,968 $12,152 $14,104
4/30/2006 $13,917 $12,315 $14,063
5/31/2006 $12,976 $11,961 $13,074
6/30/2006 $12,955 $11,977 $13,082
7/31/2006 $12,186 $12,051 $12,402
8/31/2006 $12,500 $12,338 $12,765
9/30/2006 $12,469 $12,655 $12,852
10/31/2006 $13,118 $13,068 $13,685
11/30/2006 $13,542 $13,316 $14,012
12/31/2006 $13,532 $13,503 $13,979
1/31/2007 $13,891 $13,707 $14,239
2/28/2007 $14,060 $13,439 $14,194
3/31/2007 $14,116 $13,590 $14,325
4/30/2007 $14,441 $14,192 $14,701
5/31/2007 $15,003 $14,687 $15,370
6/30/2007 $14,857 $14,443 $15,283
7/31/2007 $14,049 $13,995 $14,489
8/31/2007 $14,284 $14,205 $14,854
9/30/2007 $14,688 $14,736 $15,285
10/31/2007 $15,306 $14,970 $15,974
11/30/2007 $14,037 $14,345 $14,870
12/31/2007 $13,936 $14,245 $14,964
1/31/2008 $12,418 $13,391 $13,591
2/29/2008 $11,866 $12,956 $13,121
3/31/2008 $11,535 $12,900 $13,044
4/30/2008 $12,295 $13,528 $13,715
5/31/2008 $13,012 $13,703 $14,491
6/30/2008 $11,922 $12,548 $13,628
7/31/2008 $11,866 $12,442 $13,944
8/31/2008 $12,404 $12,622 $14,291
9/30/2008 $10,983 $11,498 $12,676
10/31/2008 $ 8,803 $ 9,567 $ 9,925
11/30/2008 $ 7,851 $ 8,880 $ 8,724
12/31/2008 $ 8,183 $ 8,975 $ 9,197
1/31/2009 $ 7,595 $ 8,218 $ 8,497
2/28/2009 $ 6,854 $ 7,343 $ 7,617
3/31/2009 $ 7,637 $ 7,986 $ 8,301
4/30/2009 $ 8,756 $ 8,751 $ 9,550
Total Returns -12.44% -12.49% -4.50%
Annual Report | 41
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09
- ------------- -------
1-Year -28.32%
5-Year -3.29%
Since Inception (5/1/00) -1.11%
ADVISOR CLASS (5/1/00-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP GROWTH S&P 500 RUSSELL 2000
DATE FUND - ADVISOR CLASS INDEX GROWTH INDEX
- ------------- ------------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,870 $10,036 $10,303
7/31/2000 $11,350 $ 9,879 $ 9,420
8/31/2000 $13,080 $10,493 $10,411
9/30/2000 $12,490 $ 9,939 $9,894
10/31/2000 $11,710 $ 9,897 $ 9,091
11/30/2000 $ 9,630 $ 9,117 $ 7,440
12/31/2000 $10,240 $ 9,161 $ 7,895
1/31/2001 $11,390 $ 9,486 $ 8,534
2/28/2001 $ 9,760 $ 8,621 $ 7,365
3/31/2001 $ 9,100 $ 8,075 $ 6,695
4/30/2001 $10,310 $ 8,703 $ 7,515
5/31/2001 $10,250 $ 8,761 $ 7,689
6/30/2001 $10,560 $ 8,548 $ 7,898
7/31/2001 $10,070 $ 8,464 $ 7,225
8/31/2001 $ 9,550 $ 7,934 $ 6,773
9/30/2001 $ 7,830 $ 7,293 $ 5,680
10/31/2001 $ 8,640 $ 7,432 $ 6,227
11/30/2001 $ 9,420 $ 8,002 $ 6,747
12/31/2001 $ 9,930 $ 8,072 $ 7,167
1/31/2002 $ 9,780 $ 7,955 $ 6,912
2/28/2002 $ 9,370 $ 7,801 $ 6,464
3/31/2002 $10,160 $ 8,095 $ 7,026
4/30/2002 $ 9,860 $ 7,604 $ 6,874
5/31/2002 $ 9,420 $ 7,548 $ 6,472
6/30/2002 $ 8,660 $ 7,010 $ 5,923
7/31/2002 $ 7,290 $ 6,464 $ 5,013
8/31/2002 $ 7,270 $ 6,506 $ 5,011
9/30/2002 $ 6,430 $ 5,799 $ 4,649
10/31/2002 $ 7,040 $ 6,310 $ 4,884
11/30/2002 $ 7,740 $ 6,681 $ 5,368
12/31/2002 $ 7,250 $ 6,288 $ 4,998
1/31/2003 $ 7,180 $ 6,124 $ 4,862
2/28/2003 $ 7,030 $ 6,032 $ 4,733
3/31/2003 $ 6,890 $ 6,090 $ 4,804
4/30/2003 $ 7,550 $ 6,592 $ 5,259
5/31/2003 $ 8,300 $ 6,939 $ 5,851
6/30/2003 $ 8,430 $ 7,028 $ 5,964
7/31/2003 $ 8,850 $ 7,152 $ 6,415
8/31/2003 $ 9,720 $ 7,291 $ 6,760
9/30/2003 $ 9,220 $ 7,214 $ 6,589
10/31/2003 $10,310 $ 7,622 $ 7,158
11/30/2003 $10,700 $ 7,689 $ 7,391
12/31/2003 $10,800 $ 8,092 $ 7,424
1/31/2004 $11,190 $ 8,241 $ 7,814
2/29/2004 $11,140 $ 8,355 $ 7,802
3/31/2004 $11,100 $ 8,229 $ 7,839
4/30/2004 $10,690 $ 8,100 $ 7,445
5/31/2004 $11,010 $ 8,211 $ 7,593
6/30/2004 $11,430 $ 8,371 $ 7,846
7/31/2004 $10,510 $ 8,094 $ 7,142
8/31/2004 $10,280 $ 8,127 $ 6,988
9/30/2004 $10,820 $ 8,215 $ 7,374
10/31/2004 $10,980 $ 8,340 $ 7,553
11/30/2004 $11,610 $ 8,678 $ 8,192
12/31/2004 $12,020 $ 8,973 $ 8,486
1/31/2005 $11,530 $ 8,754 $ 8,104
2/28/2005 $11,850 $ 8,938 $ 8,215
3/31/2005 $11,520 $ 8,780 $ 7,907
4/30/2005 $10,790 $ 8,614 $ 7,404
5/31/2005 $11,500 $ 8,888 $ 7,926
6/30/2005 $11,880 $ 8,900 $ 8,182
7/31/2005 $12,550 $ 9,231 $ 8,754
8/31/2005 $12,300 $ 9,147 $ 8,631
9/30/2005 $12,410 $ 9,221 $ 8,699
10/31/2005 $11,840 $ 9,067 $ 8,378
11/30/2005 $12,690 $ 9,410 $ 8,852
12/31/2005 $12,590 $ 9,414 $ 8,839
1/31/2006 $13,600 $ 9,663 $ 9,691
2/28/2006 $13,760 $ 9,689 $ 9,640
3/31/2006 $14,200 $ 9,810 $10,108
4/30/2006 $14,150 $ 9,941 $10,079
5/31/2006 $13,200 $ 9,655 $ 9,370
6/30/2006 $13,190 $ 9,668 $ 9,375
7/31/2006 $12,400 $ 9,728 $ 8,888
8/31/2006 $12,730 $ 9,959 $ 9,149
9/30/2006 $12,700 $10,216 $ 9,211
10/31/2006 $13,370 $10,549 $ 9,807
11/30/2006 $13,810 $10,750 $10,042
12/31/2006 $13,810 $10,900 $10,018
1/31/2007 $14,186 $11,065 $10,205
2/28/2007 $14,363 $10,849 $10,172
3/31/2007 $14,418 $10,970 $10,266
4/30/2007 $14,750 $11,456 $10,535
5/31/2007 $15,336 $11,856 $11,015
6/30/2007 $15,192 $11,659 $10,953
7/31/2007 $14,374 $11,297 $10,384
8/31/2007 $14,617 $11,467 $10,645
9/30/2007 $15,037 $11,896 $10,955
10/31/2007 $15,679 $12,085 $11,448
11/30/2007 $14,385 $11,580 $10,657
12/31/2007 $14,300 $11,499 $10,724
1/31/2008 $12,738 $10,810 $ 9,740
2/29/2008 $12,186 $10,458 $ 9,403
3/31/2008 $11,849 $10,413 $ 9,348
4/30/2008 $12,616 $10,920 $ 9,829
5/31/2008 $13,370 $11,062 $10,386
6/30/2008 $12,253 $10,129 $ 9,766
7/31/2008 $12,199 $10,044 $ 9,994
8/31/2008 $12,765 $10,189 $10,242
9/30/2008 $11,297 $ 9,281 $ 9,084
10/31/2008 $ 9,062 $ 7,723 $ 7,113
11/30/2008 $ 8,079 $ 7,169 $ 6,252
12/31/2008 $ 8,443 $ 7,245 $ 6,591
1/31/2009 $ 7,829 $ 6,634 $ 6,090
2/28/2009 $ 7,065 $ 5,928 $ 5,459
3/31/2009 $ 7,884 $ 6,447 $ 5,949
4/30/2009 $ 9,043 $ 7,064 $ 6,844
Total Returns -9.57% -29.36% -31.56%
ENDNOTES
SMALLER OR NEWER COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC
CONDITIONS. THEIR GROWTH PROSPECTS ARE LESS CERTAIN THAN THOSE OF LARGER, MORE
ESTABLISHED COMPANIES, AND THEY CAN BE VOLATILE. THE FUND IS INTENDED FOR
LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM FLUCTUATIONS IN SHARE
PRICE. THERE ARE SPECIAL RISKS INVOLVED WITH SIGNIFICANT EXPOSURE TO A
PARTICULAR SECTOR, INCLUDING INCREASED SUSCEPTIBILITY RELATED TO ECONOMIC,
BUSINESS, OR OTHER DEVELOPMENTS AFFECTING THAT SECTOR. THE FUND INCLUDES
INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE 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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2009 Morningstar. 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
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.
42 | Annual Report
Your Fund's Expenses
FRANKLIN SMALL CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
Annual Report | 43
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.
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
VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 996.30 $ 6.73
Hypothetical (5% return before expenses) $1,000 $1,018.05 $ 6.80
CLASS B
Actual $1,000 $ 992.70 $10.18
Hypothetical (5% return before expenses) $1,000 $1,014.58 $10.29
CLASS C
Actual $1,000 $ 992.70 $10.23
Hypothetical (5% return before expenses) $1,000 $1,014.53 $10.34
CLASS R
Actual $1,000 $ 994.70 $ 7.76
Hypothetical (5% return before expenses) $1,000 $1,017.01 $ 7.85
ADVISOR CLASS
Actual $1,000 $ 997.90 $ 5.30
Hypothetical (5% return before expenses) $1,000 $1,019.49 $ 5.36
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.36%; B: 2.06%; C: 2.07%; R: 1.57%; and
Advisor: 1.07%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
44 | Annual 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-cap and mid-cap companies. The Fund defines small-cap
companies as those within the market capitalization range of companies in the
Russell 2500(TM) Index at the time of purchase, and mid-cap companies as those
within the market capitalization range of the Russell Midcap(R) Index 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Small-Mid Cap Growth Fund -Class A had
a -31.46% cumulative total return. The Fund performed better than its
benchmarks, the Russell Midcap Growth Index and the Standard & Poor's 500 Index
(S&P 500), which had total returns of -35.66% and -35.31% for the same
period.(2) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 48.
INVESTMENT STRATEGY
We are research-driven, fundamental investors pursuing a growth strategy. As
bottom-up investors we focus primarily on finding individual securities that
meet our criteria for growth potential, quality and valuation. We search for
high-quality companies that have identifiable drivers of future earnings growth.
We rely on our team of analysts to help provide in-depth industry expertise and
use
(1.) The Russell 2500 Index is market capitalization weighted and measures
performance of the 2,500 smallest companies in the Russell 3000 Index,
which represent approximately 17% of total market capitalization of the
Russell 3000 Index. The Russell Midcap Index is market capitalization
weighted and measures performance of the 800 smallest companies in the
Russell 1000(R) Index, which represent approximately 26% of total market
capitalization of the Russell 1000 Index.
(2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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 90.
Annual Report | 45
PORTFOLIO BREAKDOWN
Franklin Small-Mid Cap Growth Fund
Based on Total Net Assets as of 4/30/09
(BAR CHART)
Information Technology 27.9%
Health Care 21.2%
Industrials 13.1%
Consumer Discretionary 11.4%
Energy 8.8%
Financials 5.7%
Consumer Staples 3.4%
Telecommunication Services 2.4%
Materials 1.0%
Utilities 0.8%
Short-Term Investments & Other Net Assets 4.3%
* 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.
both qualitative and quantitative analysis to evaluate companies. Our analysts
identify each company's market opportunity, competitive position, management and
financial strength, business and financial risks, and valuation. We choose to
invest in those companies that, in our opinion, offer the best trade-off between
growth opportunity, business and financial risk, and valuation.
MANAGER'S DISCUSSION
Major detractors relative to the Russell Midcap Growth Index during the 12-month
reporting period included iStar Financial,(3) a real estate investment trust;
Sequenom,(3) which makes a sequencing system to analyze DNA variations; and
Smith International, a U.S.-based provider of drilling equipment and services to
the oil and gas industries.
From a sector perspective, stock selection in consumer discretionary, financials
and telecommunication services had a negative impact on the Fund's relative
performance. Our underweighted position in the consumer discretionary sector
also hurt Fund returns, and upscale department store chain Nordstrom was a key
detractor. In the financials sector, another real estate investment trust that
weighed on relative performance besides iStar Financial was FelCor Lodging
Trust.(3) Wireless services provider NII Holdings in the telecommunication
services sector was another significant detractor.
On the other hand, notable contributors to relative Fund performance during the
reporting period included molecular diagnostic test designer Myriad Genetics,(3)
and oil and gas exploration and production companies Petrohawk Energy and
Southwestern Energy.
Our investments in the energy, industrials and utilities sectors supported the
Fund's relative performance. Stock selection in energy and industrials stocks
had a positive impact on Fund results. Despite a loss in absolute terms, in the
industrials sector, freight and logistics company C.H. Robinson Worldwide was a
major relative contributor as it performed better than the overall sector. In
addition, an underweighting in utilities, one of the poorest performing sectors,
benefited relative Fund performance.
(3.) This holding is not an index component.
46 | Annual Report
Thank you for your continued participation in Franklin Small-Mid Cap Growth
Fund. We look forward to serving your future investment needs.
(PHOTO OF EDWARD B. JAMIESON)
/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 APRIL 30, 2009, 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-Mid Cap Growth Fund
4/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Nuance Communications Inc. 2.5%
INFORMATION TECHNOLOGY
MasterCard Inc., A 2.5%
INFORMATION TECHNOLOGY
Precision Castparts Corp. 2.4%
INDUSTRIALS
Southwestern Energy Co. 2.4%
ENERGY
Express Scripts Inc. 2.2%
HEALTH CARE
Silicon Laboratories Inc. 2.2%
INFORMATION TECHNOLOGY
FLIR Systems Inc. 1.9%
INFORMATION TECHNOLOGY
Guess? Inc. 1.8%
CONSUMER DISCRETIONARY
Community Health Systems Inc. 1.8%
HEALTH CARE
AMETEK Inc. 1.8%
INDUSTRIALS
Annual Report | 47
Performance Summary as of 4/30/09
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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSGX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$10.36 $22.34 $32.70
DISTRIBUTIONS (5/1/08-4/30/09)
Long-Term Capital Gain $0.0620
CLASS B (SYMBOL: FBSMX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$9.99 $21.01 $31.00
DISTRIBUTIONS (5/1/08-4/30/09)
Long-Term Capital Gain $0.0620
CLASS C (SYMBOL: FRSIX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$9.63 $20.29 $29.92
DISTRIBUTIONS (5/1/08-4/30/09)
Long-Term Capital Gain $0.0620
CLASS R (SYMBOL: FSMRX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$10.21 $21.85 $32.06
DISTRIBUTIONS (5/1/08-4/30/09)
Long-Term Capital Gain $0.0620
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 4/30/09 4/30/08
- ----------------------------- ------- ------- -------
Net Asset Value (NAV) -$10.53 $22.90 $33.43
DISTRIBUTIONS (5/1/08-4/30/09)
Long-Term Capital Gain $0.0620
48 | Annual 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -31.46% -3.34% +19.10%
Average Annual Total Return(2) -35.39% -1.85% +1.16%
Value of $10,000 Investment(3) $ 6,461 $9,111 $11,227
Avg. Ann. Total Return (3/31/09)(4) -37.70% -4.90% +0.68%
Total Annual Operating Expenses(5) 1.04%
CLASS B 1-YEAR 5-YEAR INCEPTION (7/1/02)
- ------- ------ ------ ------------------
Cumulative Total Return(1) -31.99% -6.91% +12.03%
Average Annual Total Return(2) -34.70% -1.73% +1.68%
Value of $10,000 Investment(3) $ 6,530 $9,165 $11,203
Avg. Ann. Total Return (3/31/09)(4) -37.05% -4.79% -0.06%
Total Annual Operating Expenses(5) 1.79%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) -31.94% -6.84% +10.55%
Average Annual Total Return(2) -32.62% -1.41% +1.01%
Value of $10,000 Investment(3) $ 6,738 $9,316 $11,055
Avg. Ann. Total Return (3/31/09)(4) -35.06% -4.48% +0.52%
Total Annual Operating Expenses(5) 1.79%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------ ------ ------------------
Cumulative Total Return(1) -31.62% -4.51% -9.60%
Average Annual Total Return(2) -31.62% -0.92% -1.37%
Value of $10,000 Investment(3) $ 6,838 $9,549 $9,040
Avg. Ann. Total Return (3/31/09)(4) -34.09% -4.00% -2.98%
Total Annual Operating Expenses(5) 1.29%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------ ------ -------
Cumulative Total Return(1) -31.28% -2.10% +22.05%
Average Annual Total Return(2) -31.28% -0.42% +2.01%
Value of $10,000 Investment(3) $ 6,872 $9,790 $12,205
Avg. Ann. Total Return (3/31/09)(4) -33.74% -3.52% +1.52%
Total Annual Operating Expenses(5) 0.79%
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 (800) 342-5236.
Annual Report | 49
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -35.39%
5-Year -1.85%
10-Year +1.16%
CLASS A (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500
DATE GROWTH FUND - CLASS A GROWTH INDEX INDEX
- ------------- ---------------------- -------------- -------
5/1/1999 $ 9,426 $10,000 $10,000
5/31/1999 $ 9,388 $ 9,871 $ 9,764
6/30/1999 $10,172 $10,561 $10,306
7/31/1999 $10,119 $10,224 $ 9,984
8/31/1999 $10,272 $10,118 $ 9,935
9/30/1999 $10,646 $10,032 $ 9,662
10/31/1999 $11,893 $10,808 $10,274
11/30/1999 $13,667 $11,927 $10,482
12/31/1999 $17,010 $13,992 $11,100
1/31/2000 $16,752 $13,989 $10,542
2/29/2000 $21,127 $16,930 $10,343
3/31/2000 $19,342 $16,948 $11,354
4/30/2000 $17,530 $15,302 $11,013
5/31/2000 $16,378 $14,187 $10,787
6/30/2000 $18,914 $15,692 $11,053
7/31/2000 $17,769 $14,699 $10,880
8/31/2000 $20,209 $16,916 $11,556
9/30/2000 $19,535 $16,089 $10,946
10/31/2000 $18,024 $14,987 $10,899
11/30/2000 $14,162 $11,731 $10,040
12/31/2000 $15,343 $12,348 $10,089
1/31/2001 $16,100 $13,054 $10,447
2/28/2001 $13,057 $10,796 $ 9,495
3/31/2001 $11,645 $ 9,251 $ 8,893
4/30/2001 $13,322 $10,793 $ 9,584
5/31/2001 $13,205 $10,742 $ 9,648
6/30/2001 $13,065 $10,748 $ 9,414
7/31/2001 $12,382 $10,023 $ 9,321
8/31/2001 $11,536 $ 9,296 $ 8,737
9/30/2001 $ 9,780 $ 7,760 $ 8,032
10/31/2001 $10,615 $ 8,576 $ 8,185
11/30/2001 $11,594 $ 9,499 $ 8,813
12/31/2001 $12,194 $ 9,860 $ 8,890
1/31/2002 $11,720 $ 9,540 $ 8,760
2/28/2002 $11,055 $ 8,999 $ 8,591
3/31/2002 $11,857 $ 9,686 $ 8,915
4/30/2002 $11,286 $ 9,173 $ 8,374
5/31/2002 $10,922 $ 8,899 $ 8,312
6/30/2002 $ 9,886 $ 7,917 $ 7,720
7/31/2002 $ 8,630 $ 7,148 $ 7,118
8/31/2002 $ 8,583 $ 7,123 $ 7,165
9/30/2002 $ 7,828 $ 6,557 $ 6,386
10/31/2002 $ 8,509 $ 7,065 $ 6,949
11/30/2002 $ 9,244 $ 7,618 $ 7,358
12/31/2002 $ 8,587 $ 7,158 $ 6,925
1/31/2003 $ 8,473 $ 7,087 $ 6,744
2/28/2003 $ 8,368 $ 7,026 $ 6,643
3/31/2003 $ 8,379 $ 7,157 $ 6,707
4/30/2003 $ 9,052 $ 7,644 $ 7,260
5/31/2003 $ 9,901 $ 8,379 $ 7,642
6/30/2003 $ 9,956 $ 8,499 $ 7,740
7/31/2003 $10,206 $ 8,803 $ 7,876
8/31/2003 $10,734 $ 9,287 $ 8,030
9/30/2003 $10,394 $ 9,107 $ 7,944
10/31/2003 $11,223 $ 9,841 $ 8,394
11/30/2003 $11,607 $10,105 $ 8,468
12/31/2003 $11,822 $10,215 $ 8,912
1/31/2004 $12,158 $10,552 $ 9,075
2/29/2004 $12,166 $10,729 $ 9,202
3/31/2004 $12,088 $10,709 $ 9,063
4/30/2004 $11,615 $10,406 $ 8,920
5/31/2004 $11,978 $10,652 $ 9,043
6/30/2004 $12,338 $10,822 $ 9,219
7/31/2004 $11,513 $10,105 $ 8,914
8/31/2004 $11,360 $ 9,980 $ 8,950
9/30/2004 $11,818 $10,353 $ 9,047
10/31/2004 $12,233 $10,704 $ 9,185
11/30/2004 $12,847 $11,257 $ 9,556
12/31/2004 $13,363 $11,796 $ 9,882
1/31/2005 $12,996 $11,480 $ 9,641
2/28/2005 $13,312 $11,771 $ 9,844
3/31/2005 $12,867 $11,599 $ 9,669
4/30/2005 $12,248 $11,140 $ 9,486
5/31/2005 $12,992 $11,778 $ 9,788
6/30/2005 $13,383 $11,997 $ 9,802
7/31/2005 $14,197 $12,697 $10,166
8/31/2005 $14,185 $12,620 $10,073
9/30/2005 $14,326 $12,783 $10,155
10/31/2005 $13,997 $12,407 $ 9,986
11/30/2005 $14,733 $13,080 $10,363
12/31/2005 $14,772 $13,223 $10,367
1/31/2006 $15,595 $14,015 $10,642
2/28/2006 $15,564 $13,843 $10,670
3/31/2006 $15,877 $14,230 $10,803
4/30/2006 $15,826 $14,290 $10,948
5/31/2006 $14,968 $13,617 $10,633
6/30/2006 $14,929 $13,562 $10,648
7/31/2006 $14,447 $13,076 $10,713
8/31/2006 $14,816 $13,377 $10,968
9/30/2006 $14,953 $13,682 $11,251
10/31/2006 $15,427 $14,207 $11,617
11/30/2006 $16,034 $14,765 $11,838
12/31/2006 $15,884 $14,632 $12,004
1/31/2007 $16,363 $15,165 $12,186
2/28/2007 $16,548 $15,132 $11,948
3/31/2007 $16,821 $15,212 $12,081
4/30/2007 $17,469 $15,880 $12,616
5/31/2007 $18,239 $16,524 $13,057
6/30/2007 $18,028 $16,237 $12,840
7/31/2007 $17,591 $15,874 $12,442
8/31/2007 $17,894 $15,960 $12,628
9/30/2007 $18,911 $16,586 $13,100
10/31/2007 $19,416 $17,009 $13,309
11/30/2007 $17,742 $16,260 $12,752
12/31/2007 $17,737 $16,304 $12,664
1/31/2008 $15,899 $15,009 $11,904
2/29/2008 $15,448 $14,780 $11,518
3/31/2008 $15,097 $14,519 $11,468
4/30/2008 $16,380 $15,573 $12,026
5/31/2008 $17,111 $16,393 $12,182
6/30/2008 $15,849 $15,194 $11,155
7/31/2008 $15,293 $14,617 $11,061
8/31/2008 $15,678 $14,751 $11,221
9/30/2008 $13,830 $12,497 $10,221
10/31/2008 $11,130 $ 9,755 $ 8,505
11/30/2008 $10,153 $ 8,756 $ 7,895
12/31/2008 $10,196 $ 9,078 $ 7,979
1/31/2009 $ 9,805 $ 8,669 $ 7,306
2/28/2009 $ 9,151 $ 8,009 $ 6,528
3/31/2009 $ 9,980 $ 8,772 $ 7,100
4/30/2009 $11,227 $10,019 $ 7,779
Total Returns 12.27% 0.19% -22.21%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09
- ------- -------
1-Year -34.70%
5-Year -1.73%
Since Inception (7/1/02) +1.68%
CLASS B (7/1/02-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500
DATE GROWTH FUND - CLASS B GROWTH INDEX INDEX
- ------------- ---------------------- -------------- -------
7/1/2002 $10,000 $10,000 $10,000
7/31/2002 $ 9,063 $ 9,028 $ 9,220
8/31/2002 $ 9,001 $ 8,997 $ 9,281
9/30/2002 $ 8,208 $ 8,282 $ 8,272
10/31/2002 $ 8,915 $ 8,924 $ 9,000
11/30/2002 $ 9,684 $ 9,622 $ 9,530
12/31/2002 $ 8,989 $ 9,041 $ 8,970
1/31/2003 $ 8,861 $ 8,952 $ 8,735
2/28/2003 $ 8,751 $ 8,874 $ 8,604
3/31/2003 $ 8,755 $ 9,039 $ 8,688
4/30/2003 $ 9,453 $ 9,655 $ 9,403
5/31/2003 $10,329 $10,584 $ 9,899
6/30/2003 $10,382 $10,735 $10,025
7/31/2003 $10,637 $11,118 $10,202
8/31/2003 $11,180 $11,731 $10,401
9/30/2003 $10,814 $11,503 $10,290
10/31/2003 $11,673 $12,430 $10,873
11/30/2003 $12,063 $12,763 $10,968
12/31/2003 $12,277 $12,902 $11,543
1/31/2004 $12,618 $13,328 $11,755
2/29/2004 $12,622 $13,552 $11,919
3/31/2004 $12,532 $13,526 $11,739
4/30/2004 $12,035 $13,144 $11,555
5/31/2004 $12,400 $13,454 $11,713
6/30/2004 $12,766 $13,668 $11,941
7/31/2004 $11,903 $12,763 $11,546
8/31/2004 $11,739 $12,606 $11,592
9/30/2004 $12,207 $13,077 $11,718
10/31/2004 $12,626 $13,520 $11,897
11/30/2004 $13,251 $14,218 $12,378
12/31/2004 $13,777 $14,899 $12,800
1/31/2005 $13,391 $14,501 $12,488
2/28/2005 $13,707 $14,868 $12,750
3/31/2005 $13,239 $14,651 $12,525
4/30/2005 $12,598 $14,071 $12,287
5/31/2005 $13,350 $14,877 $12,678
6/30/2005 $13,744 $15,153 $12,696
7/31/2005 $14,570 $16,038 $13,168
8/31/2005 $14,550 $15,940 $13,048
9/30/2005 $14,686 $16,146 $13,154
10/31/2005 $14,340 $15,671 $12,934
11/30/2005 $15,080 $16,521 $13,424
12/31/2005 $15,113 $16,702 $13,428
1/31/2006 $15,943 $17,702 $13,784
2/28/2006 $15,902 $17,485 $13,821
3/31/2006 $16,219 $17,973 $13,993
4/30/2006 $16,157 $18,049 $14,181
5/31/2006 $15,269 $17,200 $13,773
6/30/2006 $15,216 $17,129 $13,792
7/31/2006 $14,718 $16,516 $13,877
8/31/2006 $15,080 $16,896 $14,207
9/30/2006 $15,212 $17,282 $14,573
10/31/2006 $15,688 $17,945 $15,048
11/30/2006 $16,293 $18,649 $15,334
12/31/2006 $16,131 $18,482 $15,549
1/31/2007 $16,608 $19,155 $15,784
2/28/2007 $16,785 $19,113 $15,476
3/31/2007 $17,051 $19,214 $15,649
4/30/2007 $17,697 $20,057 $16,342
5/31/2007 $18,467 $20,871 $16,912
6/30/2007 $18,241 $20,509 $16,631
7/31/2007 $17,790 $20,050 $16,116
8/31/2007 $18,082 $20,158 $16,357
9/30/2007 $19,099 $20,949 $16,969
10/31/2007 $19,595 $21,484 $17,239
11/30/2007 $17,896 $20,538 $16,518
12/31/2007 $17,876 $20,594 $16,403
1/31/2008 $16,016 $18,957 $15,420
2/29/2008 $15,554 $18,669 $14,919
3/31/2008 $15,192 $18,339 $14,854
4/30/2008 $16,473 $19,669 $15,578
5/31/2008 $17,195 $20,706 $15,779
6/30/2008 $15,915 $19,191 $14,449
7/31/2008 $15,346 $18,462 $14,328
8/31/2008 $15,724 $18,631 $14,535
9/30/2008 $13,864 $15,785 $13,240
10/31/2008 $11,148 $12,321 $11,016
11/30/2008 $10,165 $11,059 $10,226
12/31/2008 $10,200 $11,466 $10,335
1/31/2009 $ 9,800 $10,950 $ 9,463
2/28/2009 $ 9,145 $10,116 $ 8,456
3/31/2009 $ 9,960 $11,080 $ 9,197
4/30/2009 $11,203 $12,655 $10,077
Total Returns 12.03% 26.55% 0.77%
50 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -32.62%
5-Year -1.41%
10-Year +1.01%
CLASS C (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500
DATE GROWTH FUND - CLASS C GROWTH INDEX INDEX
- ------------- ---------------------- -------------- -------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,955 $ 9,871 $ 9,764
6/30/1999 $10,777 $10,561 $10,306
7/31/1999 $10,715 $10,224 $ 9,984
8/31/1999 $10,868 $10,118 $ 9,935
9/30/1999 $11,258 $10,032 $ 9,662
10/31/1999 $12,570 $10,808 $10,274
11/30/1999 $14,437 $11,927 $10,482
12/31/1999 $17,953 $13,992 $11,100
1/31/2000 $17,671 $13,989 $10,542
2/29/2000 $22,276 $16,930 $10,343
3/31/2000 $20,379 $16,948 $11,354
4/30/2000 $18,458 $15,302 $11,013
5/31/2000 $17,233 $14,187 $10,787
6/30/2000 $19,891 $15,692 $11,053
7/31/2000 $18,673 $14,699 $10,880
8/31/2000 $21,224 $16,916 $11,556
9/30/2000 $20,504 $16,089 $10,946
10/31/2000 $18,905 $14,987 $10,899
11/30/2000 $14,844 $11,731 $10,040
12/31/2000 $16,069 $12,348 $10,089
1/31/2001 $16,857 $13,054 $10,447
2/28/2001 $13,658 $10,796 $ 9,495
3/31/2001 $12,175 $ 9,251 $ 8,893
4/30/2001 $13,916 $10,793 $ 9,584
5/31/2001 $13,791 $10,742 $ 9,648
6/30/2001 $13,633 $10,748 $ 9,414
7/31/2001 $12,912 $10,023 $ 9,321
8/31/2001 $12,025 $ 9,296 $ 8,737
9/30/2001 $10,184 $ 7,760 $ 8,032
10/31/2001 $11,050 $ 8,576 $ 8,185
11/30/2001 $12,058 $ 9,499 $ 8,813
12/31/2001 $12,675 $ 9,860 $ 8,890
1/31/2002 $12,175 $ 9,540 $ 8,760
2/28/2002 $11,479 $ 8,999 $ 8,591
3/31/2002 $12,304 $ 9,686 $ 8,915
4/30/2002 $11,700 $ 9,173 $ 8,374
5/31/2002 $11,317 $ 8,899 $ 8,312
6/30/2002 $10,238 $ 7,917 $ 7,720
7/31/2002 $ 8,934 $ 7,148 $ 7,118
8/31/2002 $ 8,876 $ 7,123 $ 7,165
9/30/2002 $ 8,093 $ 6,557 $ 6,386
10/31/2002 $ 8,789 $ 7,065 $ 6,949
11/30/2002 $ 9,543 $ 7,618 $ 7,358
12/31/2002 $ 8,859 $ 7,158 $ 6,925
1/31/2003 $ 8,734 $ 7,087 $ 6,744
2/28/2003 $ 8,622 $ 7,026 $ 6,643
3/31/2003 $ 8,626 $ 7,157 $ 6,707
4/30/2003 $ 9,318 $ 7,644 $ 7,260
5/31/2003 $10,184 $ 8,379 $ 7,642
6/30/2003 $10,234 $ 8,499 $ 7,740
7/31/2003 $10,488 $ 8,803 $ 7,876
8/31/2003 $11,021 $ 9,287 $ 8,030
9/30/2003 $10,663 $ 9,107 $ 7,944
10/31/2003 $11,509 $ 9,841 $ 8,394
11/30/2003 $11,892 $10,105 $ 8,468
12/31/2003 $12,104 $10,215 $ 8,912
1/31/2004 $12,442 $10,552 $ 9,075
2/29/2004 $12,446 $10,729 $ 9,202
3/31/2004 $12,358 $10,709 $ 9,063
4/30/2004 $11,867 $10,406 $ 8,920
5/31/2004 $12,229 $10,652 $ 9,043
6/30/2004 $12,596 $10,822 $ 9,219
7/31/2004 $11,746 $10,105 $ 8,914
8/31/2004 $11,584 $ 9,980 $ 8,950
9/30/2004 $12,046 $10,353 $ 9,047
10/31/2004 $12,462 $10,704 $ 9,185
11/30/2004 $13,079 $11,257 $ 9,556
12/31/2004 $13,587 $11,796 $ 9,882
1/31/2005 $13,204 $11,480 $ 9,641
2/28/2005 $13,520 $11,771 $ 9,844
3/31/2005 $13,054 $11,599 $ 9,669
4/30/2005 $12,421 $11,140 $ 9,486
5/31/2005 $13,166 $11,778 $ 9,788
6/30/2005 $13,554 $11,997 $ 9,802
7/31/2005 $14,370 $12,697 $10,166
8/31/2005 $14,349 $12,620 $10,073
9/30/2005 $14,483 $12,783 $10,155
10/31/2005 $14,141 $12,407 $ 9,986
11/30/2005 $14,874 $13,080 $10,363
12/31/2005 $14,907 $13,223 $10,367
1/31/2006 $15,724 $14,015 $10,642
2/28/2006 $15,686 $13,843 $10,670
3/31/2006 $15,994 $14,230 $10,803
4/30/2006 $15,932 $14,290 $10,948
5/31/2006 $15,057 $13,617 $10,633
6/30/2006 $15,007 $13,562 $10,648
7/31/2006 $14,516 $13,076 $10,713
8/31/2006 $14,874 $13,377 $10,968
9/30/2006 $15,003 $13,682 $11,251
10/31/2006 $15,470 $14,207 $11,617
11/30/2006 $16,069 $14,765 $11,838
12/31/2006 $15,905 $14,632 $12,004
1/31/2007 $16,381 $15,165 $12,186
2/28/2007 $16,557 $15,132 $11,948
3/31/2007 $16,817 $15,212 $12,081
4/30/2007 $17,455 $15,880 $12,616
5/31/2007 $18,210 $16,524 $13,057
6/30/2007 $17,990 $16,237 $12,840
7/31/2007 $17,545 $15,874 $12,442
8/31/2007 $17,833 $15,960 $12,628
9/30/2007 $18,835 $16,586 $13,100
10/31/2007 $19,329 $17,009 $13,309
11/30/2007 $17,649 $16,260 $12,752
12/31/2007 $17,633 $16,304 $12,664
1/31/2008 $15,798 $15,009 $11,904
2/29/2008 $15,337 $14,780 $11,518
3/31/2008 $14,984 $14,519 $11,468
4/30/2008 $16,243 $15,573 $12,026
5/31/2008 $16,955 $16,393 $12,182
6/30/2008 $15,695 $15,194 $11,155
7/31/2008 $15,136 $14,617 $11,061
8/31/2008 $15,505 $14,751 $11,221
9/30/2008 $13,670 $12,497 $10,221
10/31/2008 $10,994 $ 9,755 $ 8,505
11/30/2008 $10,027 $ 8,756 $ 7,895
12/31/2008 $10,063 $ 9,078 $ 7,979
1/31/2009 $ 9,671 $ 8,669 $ 7,306
2/28/2009 $ 9,022 $ 8,009 $ 6,528
3/31/2009 $ 9,829 $ 8,772 $ 7,100
4/30/2009 $11,055 $10,019 $ 7,779
Total Returns 10.55% 0.19% -22.21%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09
- ------- -------
1-Year -31.62%
5-Year -0.92%
Since Inception (1/1/02) -1.37%
CLASS R (1/1/02-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500
DATE GROWTH FUND - CLASS R GROWTH INDEX INDEX
- ------------- ---------------------- -------------- -------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,612 $ 9,675 $ 9,854
2/28/2002 $ 9,067 $ 9,127 $ 9,664
3/31/2002 $ 9,722 $ 9,823 $10,027
4/30/2002 $ 9,247 $ 9,303 $ 9,420
5/31/2002 $ 8,952 $ 9,026 $ 9,350
6/30/2002 $ 8,104 $ 8,030 $ 8,684
7/31/2002 $ 7,074 $ 7,249 $ 8,007
8/31/2002 $ 7,029 $ 7,224 $ 8,060
9/30/2002 $ 6,413 $ 6,650 $ 7,184
10/31/2002 $ 6,965 $ 7,165 $ 7,816
11/30/2002 $ 7,568 $ 7,726 $ 8,276
12/31/2002 $ 7,026 $ 7,259 $ 7,790
1/31/2003 $ 6,933 $ 7,188 $ 7,586
2/28/2003 $ 6,846 $ 7,126 $ 7,472
3/31/2003 $ 6,852 $ 7,258 $ 7,545
4/30/2003 $ 7,401 $ 7,753 $ 8,166
5/31/2003 $ 8,094 $ 8,498 $ 8,596
6/30/2003 $ 8,132 $ 8,620 $ 8,706
7/31/2003 $ 8,338 $ 8,928 $ 8,859
8/31/2003 $ 8,766 $ 9,419 $ 9,032
9/30/2003 $ 8,486 $ 9,237 $ 8,936
10/31/2003 $ 9,163 $ 9,981 $ 9,442
11/30/2003 $ 9,471 $10,248 $ 9,525
12/31/2003 $ 9,645 $10,360 $10,024
1/31/2004 $ 9,917 $10,702 $10,208
2/29/2004 $ 9,924 $10,882 $10,350
3/31/2004 $ 9,856 $10,861 $10,194
4/30/2004 $ 9,468 $10,554 $10,034
5/31/2004 $ 9,763 $10,803 $10,172
6/30/2004 $10,052 $10,975 $10,370
7/31/2004 $ 9,378 $10,248 $10,026
8/31/2004 $ 9,253 $10,122 $10,067
9/30/2004 $ 9,625 $10,500 $10,176
10/31/2004 $ 9,962 $10,856 $10,332
11/30/2004 $10,456 $11,417 $10,750
12/31/2004 $10,877 $11,964 $11,115
1/31/2005 $10,575 $11,643 $10,844
2/28/2005 $10,833 $11,938 $11,073
3/31/2005 $10,466 $11,764 $10,877
4/30/2005 $ 9,962 $11,298 $10,670
5/31/2005 $10,562 $11,945 $11,010
6/30/2005 $10,881 $12,168 $11,025
7/31/2005 $11,538 $12,878 $11,435
8/31/2005 $11,526 $12,799 $11,331
9/30/2005 $11,638 $12,965 $11,423
10/31/2005 $11,368 $12,583 $11,232
11/30/2005 $11,962 $13,266 $11,657
12/31/2005 $11,995 $13,411 $11,661
1/31/2006 $12,656 $14,214 $11,970
2/28/2006 $12,630 $14,039 $12,003
3/31/2006 $12,884 $14,432 $12,152
4/30/2006 $12,839 $14,493 $12,315
5/31/2006 $12,143 $13,811 $11,961
6/30/2006 $12,104 $13,754 $11,977
7/31/2006 $11,716 $13,261 $12,051
8/31/2006 $12,008 $13,567 $12,338
9/30/2006 $12,117 $13,876 $12,655
10/31/2006 $12,502 $14,409 $13,068
11/30/2006 $12,990 $14,975 $13,316
12/31/2006 $12,864 $14,840 $13,503
1/31/2007 $13,251 $15,380 $13,707
2/28/2007 $13,396 $15,347 $13,439
3/31/2007 $13,617 $15,428 $13,590
4/30/2007 $14,138 $16,105 $14,192
5/31/2007 $14,756 $16,758 $14,687
6/30/2007 $14,583 $16,468 $14,443
7/31/2007 $14,228 $16,099 $13,995
8/31/2007 $14,469 $16,186 $14,205
9/30/2007 $15,287 $16,821 $14,736
10/31/2007 $15,692 $17,251 $14,970
11/30/2007 $14,335 $16,491 $14,345
12/31/2007 $14,331 $16,536 $14,245
1/31/2008 $12,842 $15,222 $13,391
2/29/2008 $12,475 $14,990 $12,956
3/31/2008 $12,190 $14,725 $12,900
4/30/2008 $13,222 $15,794 $13,528
5/31/2008 $13,807 $16,626 $13,703
6/30/2008 $12,788 $15,410 $12,548
7/31/2008 $12,335 $14,825 $12,442
8/31/2008 $12,644 $14,960 $12,622
9/30/2008 $11,151 $12,675 $11,498
10/31/2008 $ 8,970 $ 9,893 $ 9,567
11/30/2008 $ 8,186 $ 8,880 $ 8,880
12/31/2008 $ 8,217 $ 9,207 $ 8,975
1/31/2009 $ 7,898 $ 8,792 $ 8,218
2/28/2009 $ 7,373 $ 8,123 $ 7,343
3/31/2009 $ 8,035 $ 8,897 $ 7,986
4/30/2009 $ 9,040 $10,161 $ 8,751
Total Returns -9.60% 1.61% -12.49%
Annual Report | 51
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/09
- ------------- -------
1-Year -31.28%
5-Year -0.42%
10-Year +2.01%
ADVISOR CLASS (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID CAP RUSSELL MIDCAP S&P 500
DATE GROWTH FUND - ADVISOR CLASS GROWTH INDEX INDEX
- ------------- --------------------------- -------------- -------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,960 $ 9,871 $ 9,764
6/30/1999 $10,792 $10,561 $10,306
7/31/1999 $10,740 $10,224 $ 9,984
8/31/1999 $10,901 $10,118 $ 9,935
9/30/1999 $11,302 $10,032 $ 9,662
10/31/1999 $12,631 $10,808 $10,274
11/30/1999 $14,523 $11,927 $10,482
12/31/1999 $18,072 $13,992 $11,100
1/31/2000 $17,803 $13,989 $10,542
2/29/2000 $22,454 $16,930 $10,343
3/31/2000 $20,563 $16,948 $11,354
4/30/2000 $18,643 $15,302 $11,013
5/31/2000 $17,424 $14,187 $10,787
6/30/2000 $20,127 $15,692 $11,053
7/31/2000 $18,912 $14,699 $10,880
8/31/2000 $21,512 $16,916 $11,556
9/30/2000 $20,799 $16,089 $10,946
10/31/2000 $19,193 $14,987 $10,899
11/30/2000 $15,085 $11,731 $10,040
12/31/2000 $16,345 $12,348 $10,089
1/31/2001 $17,159 $13,054 $10,447
2/28/2001 $13,911 $10,796 $ 9,495
3/31/2001 $12,411 $ 9,251 $ 8,893
4/30/2001 $14,200 $10,793 $ 9,584
5/31/2001 $14,081 $10,742 $ 9,648
6/30/2001 $13,932 $10,748 $ 9,414
7/31/2001 $13,209 $10,023 $ 9,321
8/31/2001 $12,304 $ 9,296 $ 8,737
9/30/2001 $10,432 $ 7,760 $ 8,032
10/31/2001 $11,325 $ 8,576 $ 8,185
11/30/2001 $12,370 $ 9,499 $ 8,813
12/31/2001 $13,016 $ 9,860 $ 8,890
1/31/2002 $12,509 $ 9,540 $ 8,760
2/28/2002 $11,806 $ 8,999 $ 8,591
3/31/2002 $12,663 $ 9,686 $ 8,915
4/30/2002 $12,056 $ 9,173 $ 8,374
5/31/2002 $11,669 $ 8,899 $ 8,312
6/30/2002 $10,563 $ 7,917 $ 7,720
7/31/2002 $ 9,225 $ 7,148 $ 7,118
8/31/2002 $ 9,175 $ 7,123 $ 7,165
9/30/2002 $ 8,372 $ 6,557 $ 6,386
10/31/2002 $ 9,096 $ 7,065 $ 6,949
11/30/2002 $ 9,890 $ 7,618 $ 7,358
12/31/2002 $ 9,187 $ 7,158 $ 6,925
1/31/2003 $ 9,067 $ 7,087 $ 6,744
2/28/2003 $ 8,959 $ 7,026 $ 6,643
3/31/2003 $ 8,971 $ 7,157 $ 6,707
4/30/2003 $ 9,694 $ 7,644 $ 7,260
5/31/2003 $10,605 $ 8,379 $ 7,642
6/30/2003 $10,667 $ 8,499 $ 7,740
7/31/2003 $10,937 $ 8,803 $ 7,876
8/31/2003 $11,507 $ 9,287 $ 8,030
9/30/2003 $11,141 $ 9,107 $ 7,944
10/31/2003 $12,035 $ 9,841 $ 8,394
11/30/2003 $12,446 $10,105 $ 8,468
12/31/2003 $12,679 $10,215 $ 8,912
1/31/2004 $13,045 $10,552 $ 9,075
2/29/2004 $13,058 $10,729 $ 9,202
3/31/2004 $12,974 $10,709 $ 9,063
4/30/2004 $12,467 $10,406 $ 8,920
5/31/2004 $12,862 $10,652 $ 9,043
6/30/2004 $13,249 $10,822 $ 9,219
7/31/2004 $12,368 $10,105 $ 8,914
8/31/2004 $12,205 $ 9,980 $ 8,950
9/30/2004 $12,700 $10,353 $ 9,047
10/31/2004 $13,149 $10,704 $ 9,185
11/30/2004 $13,810 $11,257 $ 9,556
12/31/2004 $14,371 $11,796 $ 9,882
1/31/2005 $13,980 $11,480 $ 9,641
2/28/2005 $14,321 $11,771 $ 9,844
3/31/2005 $13,843 $11,599 $ 9,669
4/30/2005 $13,182 $11,140 $ 9,486
5/31/2005 $13,985 $11,778 $ 9,788
6/30/2005 $14,409 $11,997 $ 9,802
7/31/2005 $15,286 $12,697 $10,166
8/31/2005 $15,278 $12,620 $10,073
9/30/2005 $15,435 $12,783 $10,155
10/31/2005 $15,082 $12,407 $ 9,986
11/30/2005 $15,876 $13,080 $10,363
12/31/2005 $15,926 $13,223 $10,367
1/31/2006 $16,814 $14,015 $10,642
2/28/2006 $16,781 $13,843 $10,670
3/31/2006 $17,127 $14,230 $10,803
4/30/2006 $17,077 $14,290 $10,948
5/31/2006 $16,155 $13,617 $10,633
6/30/2006 $16,113 $13,562 $10,648
7/31/2006 $15,600 $13,076 $10,713
8/31/2006 $15,997 $13,377 $10,968
9/30/2006 $16,151 $13,682 $11,251
10/31/2006 $16,668 $14,207 $11,617
11/30/2006 $17,323 $14,765 $11,838
12/31/2006 $17,164 $14,632 $12,004
1/31/2007 $17,692 $15,165 $12,186
2/28/2007 $17,893 $15,132 $11,948
3/31/2007 $18,193 $15,212 $12,081
4/30/2007 $18,896 $15,880 $12,616
5/31/2007 $19,732 $16,524 $13,057
6/30/2007 $19,513 $16,237 $12,840
7/31/2007 $19,043 $15,874 $12,442
8/31/2007 $19,374 $15,960 $12,628
9/30/2007 $20,480 $16,586 $13,100
10/31/2007 $21,030 $17,009 $13,309
11/30/2007 $19,218 $16,260 $12,752
12/31/2007 $19,217 $16,304 $12,664
1/31/2008 $17,230 $15,009 $11,904
2/29/2008 $16,747 $14,780 $11,518
3/31/2008 $16,369 $14,519 $11,468
4/30/2008 $17,761 $15,573 $12,026
5/31/2008 $18,558 $16,393 $12,182
6/30/2008 $17,193 $15,194 $11,155
7/31/2008 $16,593 $14,617 $11,061
8/31/2008 $17,012 $14,751 $11,221
9/30/2008 $15,015 $12,497 $10,221
10/31/2008 $12,082 $ 9,755 $ 8,505
11/30/2008 $11,030 $ 8,756 $ 7,895
12/31/2008 $11,081 $ 9,078 $ 7,979
1/31/2009 $10,654 $ 8,669 $ 7,306
2/28/2009 $ 9,946 $ 8,009 $ 6,528
3/31/2009 $10,846 $ 8,772 $ 7,100
4/30/2009 $12,205 $10,019 $ 7,779
Total Returns 22.05% 0.19% -22.21%
ENDNOTES
INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATIONS IN THE VALUE OF THEIR
INVESTMENT, AS SMALL AND MIDSIZED COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY
OVER THE SHORT TERM. SMALLER OR RELATIVELY NEW 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 INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY
VOLATILE 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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2009 Morningstar. 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
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.
52 | Annual Report
Your Fund's Expenses
FRANKLIN SMALL-MID CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
Annual Report | 53
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.
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
VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,008.70 $5.23
Hypothetical (5% return before expenses) $1,000 $1,019.59 $5.26
CLASS B
Actual $1,000 $1,004.90 $8.90
Hypothetical (5% return before expenses) $1,000 $1,015.92 $8.95
CLASS C
Actual $1,000 $1,005.60 $8.90
Hypothetical (5% return before expenses) $1,000 $1,015.92 $8.95
CLASS R
Actual $1,000 $1,007.90 $6.47
Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.51
ADVISOR CLASS
Actual $1,000 $1,010.20 $3.99
Hypothetical (5% return before expenses) $1,000 $1,020.83 $4.01
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.05%; B: 1.79%; C: 1.79%; R: 1.30%; and
Advisor: 0.80%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
54 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.03) (0.05) 0.06 0.11 (0.10)
Net realized and unrealized gains (losses) .. (13.28) 1.43 2.70 7.08 1.60
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... (13.31) 1.38 2.76 7.19 1.50
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ....................... -- (0.02) (0.06) -- --
Net realized gains .......................... -- (0.74) -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions ............................ -- (0.76) (0.06) -- --
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 32.46 $ 45.77 $ 45.15 $ 42.45 $ 35.26
========== ========== ========== ========== ==========
Total return(e) ................................ (29.08)% 2.98% 6.50% 20.39% 4.44%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.00% 0.93%(g) 0.96% 0.93% 0.96%
Net investment income (loss) ................... (0.08)% (0.10)% 0.15% 0.27% (0.29)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $1,370,025 $2,011,348 $1,977,605 $2,070,364 $1,505,342
Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 0.94%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 55
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------------
CLASS B 2009 2008 2007 2006 2005
- ------- ------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40
------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.29) (0.37) (0.23) (0.19) (0.35)
Net realized and unrealized gains (losses) .. (12.33) 1.34 2.52 6.74 1.54
------- ------- -------- -------- --------
Total from investment operations ............... (12.62) 0.97 2.29 6.55 1.19
------- ------- -------- -------- --------
Less distributions from net realized gains ..... -- (0.74) -- -- --
------- ------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
------- ------- -------- -------- --------
Net asset value, end of year ................... $ 30.04 $ 42.66 $ 42.43 $ 40.14 $ 33.59
======= ======= ======== ======== ========
Total return(e) ................................ (29.58)% 2.19% 5.71% 19.50% 3.67%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.75% 1.68%(g) 1.71% 1.68% 1.70%
Net investment income (loss) ................... (0.83)% (0.85)% (0.60)% (0.48)% (1.03)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $42,485 $95,600 $118,806 $143,477 $136,052
Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 1.69%.
The accompanying notes are an integral part of these financial statements.
56 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------
CLASS C 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.28) (0.37) (0.23) (0.18) (0.35)
Net realized and unrealized gains (losses) .. (12.38) 1.35 2.53 6.74 1.54
-------- -------- -------- -------- --------
Total from investment operations ............... (12.66) 0.98 2.30 6.56 1.19
-------- -------- -------- -------- --------
Less distributions from net realized gains ..... -- (0.74) -- -- --
-------- -------- -------- -------- --------
Redemption fees(c,d) ........................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 30.10 $ 42.76 $ 42.52 $ 40.22 $ 33.66
======== ======== ======== ======== ========
Total return(e) ................................ (29.61)% 2.21% 5.72% 19.49% 3.67%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.74% 1.68%(g) 1.69% 1.68% 1.71%
Net investment income (loss) ................... (0.82)% (0.85)% (0.58)% (0.48)% (1.04)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $243,308 $375,822 $371,164 $388,478 $296,868
Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 1.69%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
CLASS R 2009 2008 2007 2006 2005
- ------- ------- ------- ------- ------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.12) (0.16) (0.04) 0.01 (0.19)
Net realized and unrealized gains (losses) .. (13.07) 1.41 2.66 7.02 1.60
------- ------- ------- ------- -------
Total from investment operations ............... (13.19) 1.25 2.62 7.03 1.41
------- ------- ------- ------- -------
Less distributions from:
Net investment income ....................... -- (0.02) (0.02) -- --
Net realized gains .......................... -- (0.74) -- -- --
------- ------- ------- ------- -------
Total distributions ............................ -- (0.76) (0.02) -- --
------- ------- ------- ------- -------
Redemption fees(c,d) ........................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 31.91 $ 45.10 $ 44.61 $ 42.01 $ 34.98
======= ======= ======= ======= =======
Total return(e) ................................ (29.25)% 2.73% 6.25% 20.07% 4.20%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.25% 1.18%(g) 1.21% 1.18% 1.21%
Net investment income (loss) ................... (0.33)% (0.35)% (0.10)% 0.02% (0.54)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $43,940 $66,250 $81,398 $91,229 $69,103
Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 1.19%.
The accompanying notes are an integral part of these financial statements.
58 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------------
ADVISOR CLASS 2009 2008 2007 2006 2005(a)
- ------------- -------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 46.15 $ 45.41 $ 42.63 $ 35.32 $ 33.35
-------- -------- -------- -------- -------
Income from investment operations(b):
Net investment income (loss)(c) ............. 0.07 0.07 0.16 0.23 (0.01)
Net realized and unrealized gains (losses) .. (13.40) 1.43 2.71 7.08 1.98
-------- -------- -------- -------- -------
Total from investment operations ............... (13.33) 1.50 2.87 7.31 1.97
-------- -------- -------- -------- -------
Less distributions from:
Net investment income ....................... -- (0.02) (0.09) -- --
Net realized gains .......................... -- (0.74) -- -- --
-------- -------- -------- -------- -------
Total distributions ............................ -- (0.76) (0.09) -- --
-------- -------- -------- -------- -------
Redemption fees(d, e) .......................... -- -- -- -- --
-------- -------- -------- -------- -------
Net asset value, end of year ................... $ 32.82 $ 46.15 $ 45.41 $ 42.63 $ 35.32
======== ======== ======== ======== =======
Total return(f) ................................ (28.88)% 3.23% 6.77% 20.67% 5.91%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) .................................... 0.75% 0.68%(i) 0.71% 0.68% 0.71%
Net investment income (loss) ................... 0.17% 0.15% 0.40% 0.52% (0.04)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $364,798 $348,245 $297,856 $209,680 $71,193
Portfolio turnover rate ........................ 35.95% 36.70% 62.54% 66.63% 41.91%
(a) For the period August 2, 2004 (effective date) to April 30, 2005.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
(i) Ratio of expenses to average net assets before waiver and payments by
affiliates was 0.69%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 59
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ---------- --------------
COMMON STOCKS 96.7%
AUTOMOBILES & COMPONENTS 0.7%
Johnson Controls Inc. ................................................... 800,000 $ 15,208,000
--------------
BANKS 0.7%
Wells Fargo & Co. ....................................................... 699,800 14,002,998
--------------
CAPITAL GOODS 5.8%
AMETEK Inc. ............................................................. 600,000 19,326,000
Danaher Corp. ........................................................... 600,000 35,064,000
(a) Jacobs Engineering Group Inc. ........................................... 330,000 12,553,200
Precision Castparts Corp. ............................................... 400,000 29,944,000
(a) SunPower Corp., A ....................................................... 375,000 10,267,500
United Technologies Corp. ............................................... 250,000 12,210,000
--------------
119,364,700
--------------
COMMERCIAL & PROFESSIONAL SERVICES 1.4%
(a) Stericycle Inc. ......................................................... 600,000 28,248,000
--------------
CONSUMER SERVICES 0.5%
(a) ITT Educational Services Inc. ........................................... 100,000 10,077,000
--------------
DIVERSIFIED FINANCIALS 2.0%
BlackRock Inc. .......................................................... 145,000 21,245,400
T. Rowe Price Group Inc. ................................................ 500,000 19,260,000
--------------
40,505,400
--------------
ENERGY 8.8%
Devon Energy Corp. ...................................................... 425,000 22,036,250
(a) FMC Technologies Inc. ................................................... 500,000 17,115,000
Occidental Petroleum Corp. .............................................. 400,000 22,516,000
(a) Petrohawk Energy Corp. .................................................. 1,100,000 25,960,000
Range Resources Corp. ................................................... 575,000 22,982,750
Schlumberger Ltd. ....................................................... 450,000 22,045,500
Smith International Inc. ................................................ 800,000 20,680,000
XTO Energy Inc. ......................................................... 800,000 27,728,000
--------------
181,063,500
--------------
FOOD & STAPLES RETAILING 1.9%
CVS Caremark Corp. ...................................................... 1,250,000 39,725,000
--------------
FOOD, BEVERAGE & TOBACCO 2.7%
(a) Hansen Natural Corp. .................................................... 600,000 24,456,000
PepsiCo Inc. ............................................................ 650,000 32,344,000
--------------
56,800,000
--------------
HEALTH CARE EQUIPMENT & SERVICES 7.7%
Baxter International Inc. ............................................... 500,000 24,250,000
C. R. Bard Inc. ......................................................... 368,300 26,381,329
(a) DaVita Inc. ............................................................. 400,000 18,548,000
(a) Express Scripts Inc. .................................................... 550,000 35,183,500
Stryker Corp. ........................................................... 450,000 17,419,500
(a) Varian Medical Systems Inc. ............................................. 250,000 8,342,500
(a) VCA Antech Inc. ......................................................... 1,150,000 28,773,000
--------------
158,897,829
--------------
60 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ---------- --------------
COMMON STOCKS (CONTINUED)
HOUSEHOLD & PERSONAL PRODUCTS 3.0%
Clorox Co. .............................................................. 450,000 $ 25,222,500
(a) Mead Johnson Nutrition Co. , A .......................................... 325,000 9,181,250
The Procter & Gamble Co. ................................................ 550,000 27,192,000
--------------
61,595,750
--------------
INSURANCE 1.4%
AFLAC Inc. .............................................................. 575,000 16,611,750
Assurant Inc. ........................................................... 500,000 12,220,000
--------------
28,831,750
--------------
MATERIALS 4.4%
Ecolab Inc. ............................................................. 1,000,000 38,550,000
Praxair Inc. ............................................................ 700,000 52,227,000
--------------
90,777,000
--------------
MEDIA 1.2%
(a) The DIRECTV Group Inc. .................................................. 550,000 13,601,500
The Walt Disney Co. ..................................................... 500,000 10,950,000
--------------
24,551,500
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 8.6%
Abbott Laboratories ..................................................... 375,000 15,693,750
(a) Celgene Corp. ........................................................... 575,000 24,564,000
(a) Covance Inc. ............................................................ 250,000 9,820,000
(a) Gilead Sciences Inc. .................................................... 1,025,000 46,945,000
Johnson & Johnson ....................................................... 500,000 26,180,000
Schering-Plough Corp. ................................................... 1,500,000 34,530,000
(a) Waters Corp. ............................................................ 450,000 19,876,500
--------------
177,609,250
--------------
RETAILING 1.8%
(a) Amazon.com Inc. ......................................................... 275,000 22,143,000
PetSmart Inc. ........................................................... 700,000 16,016,000
--------------
38,159,000
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.0%
Altera Corp. ............................................................ 850,000 13,863,500
(a) Lam Research Corp. ...................................................... 600,000 16,728,000
Microchip Technology Inc. ............................................... 1,350,000 31,050,000
--------------
61,641,500
--------------
SOFTWARE & SERVICES 19.9%
Accenture Ltd. , A ...................................................... 800,000 23,544,000
(a) Activision Blizzard Inc. ................................................ 2,500,000 26,925,000
(a) Adobe Systems Inc. ...................................................... 950,000 25,982,500
(a) Alliance Data Systems Corp. ............................................. 300,000 12,561,000
(a) Autodesk Inc. ........................................................... 600,000 11,964,000
(a) Concur Technologies Inc. ................................................ 500,000 13,535,000
FactSet Research Systems Inc. ........................................... 600,000 32,154,000
(a) Google Inc., A .......................................................... 133,000 52,664,010
MasterCard Inc., A ...................................................... 260,000 47,697,000
(a) Nuance Communications Inc. .............................................. 1,600,000 21,360,000
Annual Report | 61
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ---------- --------------
COMMON STOCKS (CONTINUED)
SOFTWARE & SERVICES (CONTINUED)
Oracle Corp. ............................................................ 2,350,000 $ 45,449,000
Paychex Inc. ............................................................ 1,050,000 28,360,500
Quality Systems Inc. .................................................... 250,000 13,405,000
(a) Salesforce.com Inc. ..................................................... 300,000 12,843,000
Visa Inc., A ............................................................ 650,000 42,224,000
--------------
410,668,010
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 14.9%
(a) Apple Inc. .............................................................. 467,600 58,838,108
(a) Cisco Systems Inc. ...................................................... 3,000,000 57,960,000
(a) FLIR Systems Inc. ....................................................... 1,933,500 42,885,030
Hewlett-Packard Co. ..................................................... 1,000,000 35,980,000
QUALCOMM Inc. ........................................................... 1,550,000 65,596,000
(a) Research In Motion Ltd. (Canada) ........................................ 350,000 24,325,000
(a) Trimble Navigation Ltd. ................................................. 1,050,000 22,512,000
--------------
308,096,138
--------------
TELECOMMUNICATION SERVICES 2.9%
(a) American Tower Corp., A ................................................. 1,500,000 47,640,000
(a, b) Anda Networks ........................................................... 36,443 28,061
(a) NII Holdings Inc. ....................................................... 774,800 12,520,768
--------------
60,188,829
--------------
TRANSPORTATION 3.0%
C.H. Robinson Worldwide Inc. ............................................ 525,000 27,909,000
Expeditors International of Washington Inc. ............................. 1,000,000 34,710,000
--------------
62,619,000
--------------
UTILITIES 0.4%
Allegheny Energy Inc. ................................................... 300,000 7,776,000
--------------
TOTAL COMMON STOCKS (COST $2,005,670,866) ............................... 1,996,406,154
--------------
PREFERRED STOCKS (COST $9,999,998) 0.6%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.6%
(a, b) Fibrogen Inc., pfd., E .................................................. 2,227,171 11,224,942
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,015,670,864) ... 2,007,631,096
--------------
SHORT TERM INVESTMENTS (COST $56,101,240) 2.7%
MONEY MARKET FUNDS 2.7%
(c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .... 56,101,240 56,101,240
--------------
TOTAL INVESTMENTS (COST $2,071,772,104) 100.0% .......................... 2,063,732,336
OTHER ASSETS, LESS LIABILITIES 0.0%(d) .................................. 823,878
--------------
NET ASSETS 100.0% ....................................................... $2,064,556,214
==============
See Abbreviations on page 121.
(a) Non-income producing.
(b) See Note 8 regarding restricted and illiquid securities.
(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.
(d) Rounds to less than 0.1% of net assets.
The accompanying notes are an integral part of these financial statements.
62 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
CLASS A 2009 2008(a)
- ------- ---------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 8.69 $ 10.00
------- -------
Income from investment operations(b):
Net investment income(c) .................................. 0.06 0.03
Net realized and unrealized gains (losses) ................ (2.36) (1.34)
------- -------
Total from investment operations ............................. (2.30) (1.31)
------- -------
Less distributions from:
Net investment income ..................................... (0.10) --
Net realized gains ........................................ (0.02) --
------- -------
Total distributions .......................................... (0.12) --
------- -------
Net asset value, end of year ................................. $ 6.27 $ 8.69
======= =======
Total return(d) .............................................. (26.07)% (13.10)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates ............ 3.99% 5.48%
Expenses net of waiver and payments by affiliates ............ 1.17% 1.22%
Net investment income ........................................ 0.91% 0.91%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 4,889 $ 4,652
Portfolio turnover rate ...................................... 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
CLASS C 2009 2008(a)
- ------- ---------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 8.67 $ 10.00
------- -------
Income from investment operations(b):
Net investment income(c) .................................. --(d) 0.01
Net realized and unrealized gains (losses) ................ (2.33) (1.34)
------- -------
Total from investment operations ............................. (2.33) (1.33)
------- -------
Less distributions from:
Net investment income ..................................... (0.08) --
Net realized gains ........................................ (0.02) --
------- -------
Total distributions .......................................... (0.10) --
------- -------
Net asset value, end of year ................................. $ 6.24 $ 8.67
======= =======
Total return(e) .............................................. (26.56)% (13.30)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates ............ 4.67% 6.11%
Expenses net of waiver and payments by affiliates ............ 1.85% 1.85%
Net investment income ........................................ 0.23% 0.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 106 $ 41
Portfolio turnover rate ...................................... 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
64 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
CLASS R 2009 2008(a)
- ------- ---------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 8.68 $10.00
------- ------
Income from investment operations(b):
Net investment income(c) .................................. 0.05 0.03
Net realized and unrealized gains (losses) ................ (2.36) (1.35)
------- -------
Total from investment operations ............................. (2.31) (1.32)
------- -------
Less distributions from:
Net investment income ..................................... (0.08) --
Net realized gains ........................................ (0.02) --
------- -------
Total distributions .......................................... (0.10) --
------- -------
Net asset value, end of year ................................. $ 6.27 $ 8.68
======= =======
Total return(d) .............................................. (26.30)% (13.20)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates ............ 4.21% 5.65%
Expenses net of waiver and payments by affiliates ............ 1.39% 1.39%
Net investment income ........................................ 0.69% 0.74%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 6 $ 9
Portfolio turnover rate ...................................... 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED PERIOD ENDED
APRIL 30, APRIL 30,
ADVISOR CLASS 2009 2008(a)
- ------------- ---------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 8.70 $ 10.00
------- -------
Income from investment operations(b):
Net investment income(c) ......................... 0.08 0.04
Net realized and unrealized gains (losses) ....... (2.37) (1.34)
------- -------
Total from investment operations .................... (2.29) (1.30)
------- -------
Less distributions from:
Net investment income ............................ (0.11) --
Net realized gains ............................... (0.02) --
------- -------
Total distributions ................................. (0.13) --
------- -------
Net asset value, end of year ........................ $ 6.28 $ 8.70
======= =======
Total return(d) ..................................... (25.93)% (13.00)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates ... 3.71% 5.15%
Expenses net of waiver and payments by affiliates ... 0.89% 0.89%
Net investment income ............................... 1.19% 1.24%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 167 $ 171
Portfolio turnover rate ............................. 83.29% 35.64%
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return is not annualized for periods less than one year.
(e) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
66 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
--------------------------------- ------------- ------- ----------
COMMON STOCKS 90.9%
CONSUMER DISCRETIONARY 8.3%
CBS Corp., B ............................................................... United States 4,920 $ 34,638
Harley-Davidson Inc. ....................................................... United States 5,840 129,414
Harman International Industries Inc. ....................................... United States 3,800 69,122
(a) R.H. Donnelley Corp. ....................................................... United States 13,440 1,882
Target Corp. ............................................................... United States 4,700 193,922
----------
428,978
----------
CONSUMER STAPLES 10.1%
Corn Products International Inc. ........................................... United States 8,310 198,609
CVS Caremark Corp. ......................................................... United States 7,430 236,125
(a) Hansen Natural Corp. ....................................................... United States 2,100 85,596
----------
520,330
----------
ENERGY 9.9%
Marathon Oil Corp. ......................................................... United States 7,150 212,355
Petroplus Holdings AG ...................................................... Switzerland 14,723 254,089
(a) SEACOR Holdings Inc. ....................................................... United States 700 46,004
----------
512,448
----------
FINANCIALS 10.8%
(a) Berkshire Hathaway Inc., B ................................................. United States 85 260,525
CapitalSource Inc. ......................................................... United States 8,200 25,338
Discover Financial Services ................................................ United States 13,130 106,747
iStar Financial Inc. ....................................................... United States 5,400 18,198
Legg Mason Inc. ............................................................ United States 3,280 65,830
U.S. Bancorp ............................................................... United States 4,620 84,176
----------
560,814
----------
HEALTH CARE 15.3%
Merck & Co. Inc. ........................................................... United States 8,220 199,253
Pharmaceutical Product Development Inc. .................................... United States 5,230 102,560
Roche Holding AG ........................................................... Switzerland 1,930 244,315
Schering-Plough Corp. ...................................................... United States 10,520 242,170
----------
788,298
----------
INDUSTRIALS 15.6%
3M Co. ..................................................................... United States 2,760 158,976
Precision Castparts Corp. .................................................. United States 2,920 218,591
Republic Services Inc. ..................................................... United States 8,640 181,440
Rockwell Collins Inc. ...................................................... United States 3,830 146,881
(a) Ryanair Holdings PLC, ADR .................................................. Ireland 3,640 99,554
----------
805,442
----------
INFORMATION TECHNOLOGY 14.1%
(a) Apple Inc. ................................................................. United States 420 52,849
(a) Autodesk Inc. .............................................................. United States 9,450 188,433
Corning Inc. ............................................................... United States 4,370 63,889
MasterCard Inc., A ......................................................... United States 1,210 221,974
Annual Report | 67
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
--------------------------------- ------------- ------- ----------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Maxim Integrated Products Inc. ............................................. United States 11,990 $ 162,465
(a) VeriFone Holdings Inc. ..................................................... United States 5,170 38,827
----------
728,437
----------
MATERIALS 3.8%
Celanese Corp., A .......................................................... United States 9,510 198,188
----------
TELECOMMUNICATION SERVICES 3.0%
(a) NII Holdings Inc. .......................................................... United States 9,490 153,358
----------
TOTAL COMMON STOCKS (COST $6,086,206) ...................................... 4,696,293
----------
CONVERTIBLE PREFERRED STOCKS (COST $84,854) 2.3%
HEALTH CARE 2.3%
Mylan Inc., 6.50%, cvt. pfd. ............................................... United States 140 119,280
----------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $6,171,060) ........... 4,815,573
----------
SHORT TERM INVESTMENTS (COST $148,644) 2.9%
MONEY MARKET FUNDS 2.9%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% ....... United States 148,644 148,644
----------
TOTAL INVESTMENTS (COST $6,319,704) 96.1% .................................. 4,964,217
OTHER ASSETS, LESS LIABILITIES 3.9% ........................................ 203,458
----------
NET ASSETS 100.0% .......................................................... $5,167,675
==========
See Abbreviations on page 121.
(a) Non-income producing.
(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.
The accompanying notes are an integral part of these financial statements.
68 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- ------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57
------- -------- -------- -------- -------
Income from investment operations(a):
Net investment income (loss)(b) .............. (0.14) (0.15) (0.12) (0.15) (0.14)
Net realized and unrealized gains (losses) ... (6.04) 1.67 0.36 5.12 0.90
------- -------- -------- -------- -------
Total from investment operations ................ (6.18) 1.52 0.24 4.97 0.76
------- -------- -------- -------- -------
Redemption fees(c, d) ........................... -- -- -- -- --
------- -------- -------- -------- -------
Net asset value, end of year .................... $ 13.88 $ 20.06 $ 18.54 $ 18.30 $ 13.33
======= ======== ======== ======== =======
Total return(e) ................................. (30.81)% 8.20% 1.31% 37.28% 6.05%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ..................................... 1.32% 1.27% 1.38% 1.39% 1.51%
Net investment income (loss) .................... (0.89)% (0.77)% (0.70)% (0.92)% (1.05)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $99,939 $137,313 $105,407 $113,713 $80,611
Portfolio turnover rate ......................... 90.24% 133.58% 176.15% 183.31% 157.48%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 69
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------
CLASS B 2009 2008 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 18.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .............. (0.24) (0.28) (0.23) (0.26) (0.23)
Net realized and unrealized gains (losses) ... (5.69) 1.59 0.34 4.92 0.88
------- ------- ------- ------- -------
Total from investment operations ................ (5.93) 1.31 0.11 4.66 0.65
------- ------- ------- ------- -------
Redemption fees(c, d) ........................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year .................... $ 13.02 $ 18.95 $ 17.64 $ 17.53 $ 12.87
======= ======= ======= ======= =======
Total return(e) ................................. (31.29)% 7.43% 0.63% 36.21% 5.32%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ..................................... 2.02% 1.99% 2.08% 2.13% 2.21%
Net investment income (loss) .................... (1.59)% (1.49)% (1.40)% (1.66)% (1.75)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 5,124 $11,528 $15,638 $19,508 $17,017
Portfolio turnover rate ......................... 90.24% 133.58% 176.15% 183.31% 157.48%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
70 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------
CLASS C 2009 2008 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .............. (0.23) (0.28) (0.23) (0.26) (0.23)
Net realized and unrealized gains (losses) ... (5.69) 1.58 0.35 4.91 0.88
------- ------- ------- ------- -------
Total from investment operations ................ (5.92) 1.30 0.12 4.65 0.65
------- ------- ------- ------- -------
Redemption fees(c, d) ........................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year .................... $ 12.99 $ 18.91 $ 17.61 $ 17.49 $ 12.84
======= ======= ======= ======= =======
Total return(e) ................................. (31.31)% 7.38% 0.69% 36.21% 5.33%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ..................................... 2.03% 1.99% 2.09% 2.14% 2.22%
Net investment income (loss) .................... (1.60)% (1.49)% (1.41)% (1.67)% (1.76)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $27,519 $40,253 $31,518 $31,167 $24,450
Portfolio turnover rate ......................... 90.24% 133.58% 176.15% 183.31% 157.48%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 71
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
------------------------------------------------
CLASS R 2009 2008 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ........................ (0.17) (0.20) (0.16) (0.19) (0.17)
Net realized and unrealized gains (losses) ............. (5.96) 1.67 0.37 5.07 0.90
------- ------- ------- ------- -------
Total from investment operations .......................... (6.13) 1.47 0.21 4.88 0.73
------- ------- ------- ------- -------
Redemption fees(c, d) ..................................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year .............................. $ 13.67 $ 19.80 $ 18.33 $ 18.12 $ 13.24
======= ======= ======= ======= =======
Total return(e) ........................................... (30.96)% 8.02% 1.16% 36.86% 5.84%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ............................................... 1.54% 1.49% 1.59% 1.64% 1.72%
Net investment income (loss) .............................. (1.11)% (0.99)% (0.91)% (1.17)% (1.26)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 7,320 $ 7,863 $ 7,413 $ 5,171 $ 3,041
Portfolio turnover rate ................................... 90.24% 133.58% 176.15% 183.31% 157.48%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
72 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
ADVISOR CLASS 2009 2008 2007 2006 2005
- ------------- -------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77
-------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ........................ (0.10) (0.10) (0.07) (0.11) (0.10)
Net realized and unrealized gains (losses) ............. (6.20) 1.71 0.38 5.21 0.91
-------- -------- ------- ------- -------
Total from investment operations .......................... (6.30) 1.61 0.31 5.10 0.81
-------- -------- ------- ------- -------
Redemption fees(c, d) ..................................... -- -- -- -- --
-------- -------- ------- ------- -------
Net asset value, end of year .............................. $ 14.30 $ 20.60 $ 18.99 $ 18.68 $ 13.58
======== ======== ======= ======= =======
Total return .............................................. (30.58)% 8.48% 1.66% 37.56% 6.34%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ............................................... 1.04% 0.99% 1.09% 1.14% 1.22%
Net investment income (loss) .............................. (0.61)% (0.49)% (0.41)% (0.67)% (0.76)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $141,010 $101,885 $85,486 $36,744 $22,731
Portfolio turnover rate ................................... 90.24% 133.58% 176.15% 183.31% 157.48%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 73
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE
---------------------------------- ------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 95.7%
CONSUMER DISCRETIONARY 7.8%
Abercrombie & Fitch Co., A .............................................. United States 52,400 $ 1,417,944
Guess? Inc. ............................................................. United States 164,200 4,275,768
(a) ITT Educational Services Inc. ........................................... United States 39,300 3,960,261
NIKE Inc., B ............................................................ United States 39,600 2,077,812
Strayer Education Inc. .................................................. United States 23,400 4,432,194
(a) Urban Outfitters Inc. ................................................... United States 114,200 2,225,758
(a) WMS Industries Inc. ..................................................... United States 109,100 3,503,201
------------
21,892,938
------------
CONSUMER STAPLES 1.7%
Bunge Ltd. .............................................................. United States 27,100 1,301,071
(a) Hansen Natural Corp. .................................................... United States 70,800 2,885,808
(a) Mead Johnson Nutrition Co., A ........................................... United States 17,800 502,850
------------
4,689,729
------------
ENERGY 11.6%
(a) Alpha Natural Resources Inc. ............................................ United States 112,600 2,306,048
(a) Continental Resources Inc. .............................................. United States 200,700 4,686,345
(a) FMC Technologies Inc. ................................................... United States 142,280 4,870,244
(a) McMoRan Exploration Co. ................................................. United States 860,409 4,723,646
(a) Petrohawk Energy Corp. .................................................. United States 164,300 3,877,480
Schlumberger Ltd. ....................................................... United States 86,880 4,256,251
(a) Southwestern Energy Co. ................................................. United States 103,600 3,715,096
(a) Weatherford International Ltd. .......................................... United States 171,900 2,858,697
XTO Energy Inc. ......................................................... United States 36,700 1,272,022
------------
32,565,829
------------
FINANCIALS 3.7%
BlackRock Inc. .......................................................... United States 38,780 5,682,046
The Charles Schwab Corp. ................................................ United States 151,200 2,794,176
(a) MSCI Inc., A ............................................................ United States 94,000 1,973,060
------------
10,449,282
------------
HEALTH CARE 19.2%
Allergan Inc. ........................................................... United States 62,600 2,920,916
(a) Athenahealth Inc. ....................................................... United States 21,400 680,520
(a) BioMarin Pharmaceutical Inc. ............................................ United States 315,800 4,061,188
(a) Celgene Corp. ........................................................... United States 172,800 7,382,016
(a) Covance Inc. ............................................................ United States 57,260 2,249,173
(a) Gilead Sciences Inc. .................................................... United States 124,960 5,723,168
(a) Illumina Inc. ........................................................... United States 164,400 6,140,340
(a) Intuitive Surgical Inc. ................................................. United States 19,700 2,831,481
(a) Life Technologies Corp. ................................................. United States 165,200 6,161,960
(a) Myriad Genetics Inc. .................................................... United States 185,980 7,214,164
Perrigo Co. ............................................................. United States 186,466 4,833,199
(a) Psychiatric Solutions Inc. .............................................. United States 87,600 1,698,564
Roche Holding AG, ADR ................................................... Switzerland 62,300 1,970,549
------------
53,867,238
------------
74 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE
---------------------------------- ------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INDUSTRIALS 10.9%
ABB Ltd., ADR ........................................................... Switzerland 295,900 $ 4,207,698
AMETEK Inc. ............................................................. United States 131,000 4,219,510
(a) BE Aerospace Inc. ....................................................... United States 91,800 990,522
C.H. Robinson Worldwide Inc. ............................................ United States 126,030 6,699,754
Expeditors International of Washington Inc. ............................. United States 60,100 2,086,071
(a) First Solar Inc. ........................................................ United States 12,100 2,266,209
Flowserve Corp. ......................................................... United States 21,000 1,425,900
(a) Huron Consulting Group Inc. ............................................. United States 53,100 2,546,145
(a) Jacobs Engineering Group Inc. ........................................... United States 26,800 1,019,472
Precision Castparts Corp. ............................................... United States 54,730 4,097,088
(a) Ryanair Holdings PLC, ADR ............................................... Ireland 44,500 1,217,075
------------
30,775,444
------------
INFORMATION TECHNOLOGY 34.8%
Accenture Ltd., A ....................................................... United States 38,400 1,130,112
(a) Activision Blizzard Inc. ................................................ United States 393,500 4,237,995
(a) Adobe Systems Inc. ...................................................... United States 58,500 1,599,975
(a) Alliance Data Systems Corp. ............................................. United States 36,900 1,545,003
(a) ANSYS Inc. .............................................................. United States 80,300 2,217,886
(a) Apple Inc. .............................................................. United States 67,000 8,430,610
(a) Cavium Networks Inc. .................................................... United States 110,200 1,386,316
(a) Cisco Systems Inc. ...................................................... United States 159,100 3,073,812
(a) Concur Technologies Inc. ................................................ United States 204,850 5,545,289
(a) Data Domain Inc. ........................................................ United States 114,700 1,901,726
(a, b) Dilithium Networks Inc., wts., 12/31/09 ................................. United States 12,447 --
(a) Dolby Laboratories Inc., A .............................................. United States 50,300 2,018,539
(a) Equinix Inc. ............................................................ United States 10,200 716,346
(a) FLIR Systems Inc. ....................................................... United States 369,200 8,188,856
(a) FormFactor Inc. ......................................................... United States 123,300 2,149,119
(a) Google Inc., A .......................................................... United States 12,390 4,906,068
Harris Corp. ............................................................ United States 94,030 2,875,437
(a) Hittite Microwave Corp. ................................................. United States 59,291 2,203,254
(a) Juniper Networks Inc. ................................................... United States 134,700 2,916,255
MasterCard Inc., A ...................................................... United States 42,400 7,778,280
(a) Netlogic Microsystems Inc. .............................................. United States 67,800 2,209,602
QUALCOMM Inc. ........................................................... United States 184,780 7,819,890
(a) Research In Motion Ltd. ................................................. Canada 57,900 4,024,050
(a) Riverbed Technology Inc. ................................................ United States 105,785 1,937,981
(a) SAIC Inc. ............................................................... United States 126,900 2,296,890
(a) Salesforce.com Inc. ..................................................... United States 54,100 2,316,021
Tandberg ASA ............................................................ Norway 169,800 2,419,621
(a) Trimble Navigation Ltd. ................................................. United States 177,740 3,810,746
Visa Inc., A ............................................................ United States 93,400 6,067,264
------------
97,722,943
------------
MATERIALS 2.4%
Ecolab Inc. ............................................................. United States 75,800 2,922,090
Monsanto Co. ............................................................ United States 45,900 3,896,451
------------
6,818,541
------------
Annual Report | 75
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE
---------------------------------- ------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TELECOMMUNICATION SERVICES 3.6%
(a) NII Holdings Inc. ....................................................... United States 268,380 $ 4,337,021
(a) SBA Communications Corp. ................................................ United States 229,060 5,772,312
------------
10,109,333
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $234,065,268) .................................................. 268,891,277
------------
PREFERRED STOCKS (COST $873,300) 0.2%
INFORMATION TECHNOLOGY 0.2%
(a, b) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ....... United States 374,806 487,248
------------
PRINCIPAL
AMOUNT
---------------
NOTES (COST $14,501) 0.0%(c)
INFORMATION TECHNOLOGY 0.0%(c)
(a, b) Dilithium Networks Inc., 11.00%, 12/31/09 ............................... United States $ 14,501 14,501
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $234,953,069) .................................................. 269,393,026
------------
SHARES
---------------
SHORT TERM INVESTMENTS (COST $15,835,304) 5.6%
MONEY MARKET FUNDS 5.6%
(d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .... United States 15,835,304 15,835,304
------------
TOTAL INVESTMENTS (COST $250,788,373) 101.5% ............................ 285,228,330
OTHER ASSETS, LESS LIABILITIES (1.5)% ................................... (4,316,277)
------------
NET ASSETS 100.0% ....................................................... $280,912,053
============
See Abbreviations on page 121.
(a) Non-income producing.
(b) See Note 8 regarding restricted and illiquid securities.
(c) Rounds to less than 0.1% of net assets.
(d) 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.
The accompanying notes are an integral part of these financial statements.
76 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ................ (0.08) (0.09) (0.10) (0.08) (0.09)
Net realized and unrealized gains (losses) ..... (2.53) (1.59) 0.58 3.35 0.17
-------- -------- -------- -------- --------
Total from investment operations .................. (2.61) (1.68) 0.48 3.27 0.08
-------- -------- -------- -------- --------
Less distributions from net realized gains ........ (0.07) (2.28) (1.33) -- --
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ...................... $ 6.41 $ 9.09 $ 13.05 $ 13.90 $ 10.63
======== ======== ======== ======== ========
Total return(e) ................................... (28.54)% (14.73)% 4.02% 30.76% 0.76%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ....................................... 1.34% 1.17% 1.20% 1.16% 1.15%
Net investment income (loss) ...................... (1.07)% (0.72)% (0.77)% (0.61)% (0.84)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $123,037 $274,142 $549,733 $693,084 $765,216
Portfolio turnover rate ........................... 43.04% 48.52% 51.49% 44.34% 46.35%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 77
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
CLASS B 2009 2008 2007 2006 2005
- ------- ------- ------- ------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27
------- ------- ------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ........................ (0.12) (0.16) (0.18) (0.16) (0.17)
Net realized and unrealized gains (losses) ............. (2.35) (1.48) 0.54 3.22 0.16
------- ------- ------- -------- --------
Total from investment operations .......................... (2.47) (1.64) 0.36 3.06 (0.01)
------- ------- ------- -------- --------
Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- --
------- ------- ------- -------- --------
Redemption fees(c, d) ..................................... -- -- -- -- --
------- ------- ------- -------- --------
Net asset value, end of year .............................. $ 5.89 $ 8.43 $ 12.35 $ 13.32 $ 10.26
======= ======= ======= ======== ========
Total return(e) ........................................... (29.11)% (15.27)% 3.27% 29.82% (0.10)%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ............................................... 2.04% 1.92% 1.96% 1.91% 1.91%
Net investment income (loss) .............................. (1.77)% (1.47)% (1.53)% (1.36)% (1.60)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $15,159 $52,465 $85,684 $111,458 $105,070
Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
78 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------------
CLASS C 2009 2008 2007 2006 2005
- ------- ------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27
------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ........................ (0.12) (0.16) (0.18) (0.16) (0.17)
Net realized and unrealized gains (losses) ............. (2.35) (1.49) 0.54 3.22 0.17
------- ------- -------- -------- --------
Total from investment operations .......................... (2.47) (1.65) 0.36 3.06 --
------- ------- -------- -------- --------
Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- --
------- ------- -------- -------- --------
Redemption fees(c, d) ..................................... -- -- -- -- --
------- ------- -------- -------- --------
Net asset value, end of year .............................. $ 5.89 $8.43 $ 12.36 $ 13.33 $ 10.27
======= ======= ======== ======== ========
Total return(e) ........................................... (29.11)% (15.35)% 3.27% 29.80% --%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ............................................... 2.04% 1.92% 1.95% 1.92% 1.91%
Net investment income (loss) .............................. (1.77)% (1.47)% (1.52)% (1.37)% (1.60)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $40,180 $75,846 $120,900 $170,159 $164,117
Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 79
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------
CLASS R 2009 2008 2007 2006 2005
- ------- ------ ------- ------ ------ ------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 8.91 $ 12.86 $13.75 $10.54 $10.49
------- ------- ------ ------ ------
Income from investment operations(a):
Net investment income (loss)(b) ........................ (0.09) (0.11) (0.13) (0.11) (0.12)
Net realized and unrealized gains (losses) ............. (2.49) (1.56) 0.57 3.32 0.17
------- ------- ------ ------ ------
Total from investment operations .......................... (2.58) (1.67) 0.44 3.21 0.05
------- ------ ------ ------ ------
Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- --
------- ------- ------ ------ ------
Redemption fees(c, d) ..................................... -- -- -- -- --
------- ------- ------ ------ ------
Net asset value, end of year .............................. $ 6.26 $ 8.91 $12.86 $13.75 $10.54
======= ======= ====== ====== ======
Total return(e) ........................................... (28.78)% (14.87)% 3.77% 30.46% 0.48%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ............................................... 1.54% 1.42% 1.46% 1.42% 1.41%
Net investment income (loss) .............................. (1.27)% (0.97)% (1.03)% (0.87)% (1.10)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 1,912 $ 3,166 $5,759 $6,328 $4,392
Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
80 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
ADVISOR CLASS 2009 2008 2007 2006 2005
- ------------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ........................ (0.06) (0.05) (0.07) (0.05) (0.07)
Net realized and unrealized gains (losses) ............. (2.61) (1.64) 0.59 3.41 0.17
------- -------- -------- -------- --------
Total from investment operations .......................... (2.67) (1.69) 0.52 3.36 0.10
------- -------- -------- -------- --------
Less distributions from net realized gains ................ (0.07) (2.28) (1.33) -- --
------- -------- -------- -------- --------
Redemption fees(c, d) ..................................... -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year .............................. $ 6.63 $9.37 $ 13.34 $ 14.15 $ 10.79
======= ===== ======== ======== ========
Total return .............................................. (28.32)% (14.46)% 4.24% 31.14% 0.94%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ............................................... 1.04% 0.92% 0.96% 0.92% 0.91%
Net investment income (loss) .............................. (0.77)% (0.47)% (0.53)% (0.37)% (0.60)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $57,957 $220,857 $325,425 $326,475 $235,101
Portfolio turnover rate ................................... 43.04% 48.52% 51.49% 44.34% 46.35%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 81
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ ---------- ------------
COMMON STOCKS 97.9%
CONSUMER DISCRETIONARY 12.7%
(a) Capella Education Co. ......................................................... 56,200 $ 2,887,556
(a) Chipotle Mexican Grill Inc., B ................................................ 19,800 1,297,098
(a) Drew Industries Inc. .......................................................... 221,200 3,158,736
(a) FGX International Holdings Ltd. (Virgin Islands (British)) .................... 391,924 4,514,964
(a) Gaiam Inc., A ................................................................. 315,000 1,833,300
Guess? Inc. ................................................................... 40,100 1,044,204
(a) K12 Inc. ...................................................................... 171,100 3,009,649
(a) Lions Gate Entertainment Corp. ................................................ 601,900 2,955,329
(a) Panera Bread Co. .............................................................. 19,700 1,103,397
(a) Shuffle Master Inc. ........................................................... 976,100 3,718,941
Strayer Education Inc. ........................................................ 6,500 1,231,165
(a) Tenneco Inc. .................................................................. 241,300 738,378
(a) Tractor Supply Co. ............................................................ 29,600 1,195,248
(a) Under Armour Inc., A .......................................................... 17,300 407,242
(a) Universal Technical Institute Inc. ............................................ 78,400 1,116,416
------------
30,211,623
------------
CONSUMER STAPLES 4.5%
(a) Hain Celestial Group Inc. ..................................................... 276,600 4,616,454
(a) Hansen Natural Corp. .......................................................... 58,500 2,384,460
(a) TreeHouse Foods Inc. .......................................................... 136,400 3,626,876
------------
10,627,790
------------
ENERGY 7.5%
(a) Alpha Natural Resources Inc. .................................................. 95,100 1,947,648
(a) Bill Barrett Corp. ............................................................ 122,800 3,190,344
(a) Dril-Quip Inc. ................................................................ 77,800 2,674,764
(a) Helix Energy Solutions Group Inc. ............................................. 206,400 1,876,176
(a) Mariner Energy Inc. ........................................................... 306,400 3,486,832
(a) McMoRan Exploration Co. ....................................................... 428,600 2,353,014
(a) Superior Energy Services Inc. ................................................. 119,700 2,299,437
------------
17,828,215
------------
FINANCIALS 5.2%
(a) Affiliated Managers Group Inc. ................................................ 61,700 3,507,645
FelCor Lodging Trust Inc. ..................................................... 447,000 885,060
iStar Financial Inc. .......................................................... 383,600 1,292,732
(a) MSCI Inc., A .................................................................. 117,300 2,462,127
optionsXpress Holdings Inc. ................................................... 45,900 755,514
Waddell & Reed Financial Inc., A .............................................. 154,700 3,466,827
------------
12,369,905
------------
HEALTH CARE 16.8%
(a) American Medical Systems Holdings Inc. ........................................ 326,700 4,041,279
(a) Athenahealth Inc. ............................................................. 89,100 2,833,380
(a) BioMarin Pharmaceutical Inc. .................................................. 183,300 2,357,238
(a) Cadence Pharmaceuticals Inc. .................................................. 297,900 3,014,748
(a) Community Health Systems Inc. ................................................. 172,900 3,949,036
82 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ ---------- ------------
COMMON STOCKS (CONTINUED)
HEALTH CARE (CONTINUED)
(a) Dexcom Inc. ................................................................... 489,300 $ 2,192,064
(a) IDEXX Laboratories Inc. ....................................................... 70,300 2,762,790
(a) Impax Laboratories Inc. ....................................................... 190,700 1,008,803
(a) Masimo Corp. .................................................................. 41,700 1,205,130
(a) MWI Veterinary Supply Inc. .................................................... 45,800 1,423,464
(a) Myriad Genetics Inc. .......................................................... 48,600 1,885,194
(a) PAREXEL International Corp. ................................................... 301,000 2,982,910
(a) Penwest Pharmaceuticals Co. ................................................... 354,000 580,560
(a) Phase Forward Inc. ............................................................ 207,500 2,958,950
(a) Psychiatric Solutions Inc. .................................................... 192,500 3,732,575
(a) Sequenom Inc. ................................................................. 196,900 712,778
(a) VCA Antech Inc. ............................................................... 99,200 2,481,984
------------
40,122,883
------------
INDUSTRIALS 10.2%
(a) Allegiant Travel Co. .......................................................... 78,400 4,079,936
(a) Astec Industries Inc. ......................................................... 40,300 1,242,046
(a) BE Aerospace Inc. ............................................................. 340,300 3,671,837
(a) Force Protection Inc. ......................................................... 373,700 2,847,594
(a) FTI Consulting Inc. ........................................................... 81,100 4,450,768
(a) Huron Consulting Group Inc. ................................................... 80,200 3,845,590
(a) ICF International Inc. ........................................................ 26,200 720,762
(a) Mobile Mini Inc. .............................................................. 256,400 3,512,680
------------
24,371,213
------------
INFORMATION TECHNOLOGY 38.0%
(a) ANSYS Inc. .................................................................... 121,500 3,355,830
(a) Atheros Communications ........................................................ 134,100 2,309,202
(a) Bottomline Technologies Inc. .................................................. 592,504 4,651,157
(a) Coherent Inc. ................................................................. 154,600 2,937,400
(a) Compellent Technologies Inc. .................................................. 161,136 1,799,889
(a) Concur Technologies Inc. ...................................................... 81,000 2,192,670
(a) CyberSource Corp. ............................................................. 131,300 1,918,293
(a) Data Domain Inc. .............................................................. 72,500 1,202,050
(a) DealerTrack Holdings Inc. ..................................................... 202,500 3,073,950
(a) DivX Inc. ..................................................................... 168,800 865,944
(a) EPIQ Systems Inc. ............................................................. 156,100 2,414,867
(a) FARO Technologies Inc. ........................................................ 226,900 3,439,804
(a) FLIR Systems Inc. ............................................................. 164,700 3,653,046
(a) FormFactor Inc. ............................................................... 228,900 3,989,727
Global Payments Inc. .......................................................... 53,700 1,721,622
(a) Ixia .......................................................................... 421,200 2,426,112
(a) Microsemi Corp. ............................................................... 136,900 1,837,198
(a) Microtune Inc. ................................................................ 561,200 1,172,908
(a) Netlogic Microsystems Inc. .................................................... 126,800 4,132,412
(a) Nuance Communications Inc. .................................................... 390,300 5,210,505
(a) Omniture Inc. ................................................................. 147,800 1,820,896
Annual Report | 83
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ ---------- ------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Power Integrations Inc. ....................................................... 109,600 $ 2,334,480
Quality Systems Inc. .......................................................... 27,500 1,474,550
(a) Quest Software Inc. ........................................................... 229,900 3,340,447
(a) Riverbed Technology Inc. ...................................................... 156,300 2,863,416
(a) Sapient Corp. ................................................................. 833,800 4,277,394
(a) Silicon Laboratories Inc. ..................................................... 125,400 4,170,804
(a) SPSS Inc. ..................................................................... 61,400 1,897,260
Tandberg ASA (Norway) ......................................................... 111,200 1,584,581
(a) Trimble Navigation Ltd. ....................................................... 117,300 2,514,912
(a) Varian Semiconductor Equipment Associates Inc. ................................ 161,875 4,142,381
(a) ViaSat Inc. ................................................................... 222,900 5,124,471
(a) Xyratex Ltd. (Bermuda) ........................................................ 194,300 650,905
------------
90,501,083
------------
MATERIALS 1.2%
FMC Corp. ..................................................................... 59,900 2,918,927
------------
TELECOMMUNICATION SERVICES 1.8%
(a) SBA Communications Corp. ...................................................... 171,800 4,329,360
------------
TOTAL COMMON STOCKS (COST $254,766,055) ....................................... 233,280,999
------------
SHORT TERM INVESTMENTS (COST $7,667,621) 3.2%
MONEY MARKET FUNDS 3.2%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .......... 7,667,621 7,667,621
------------
TOTAL INVESTMENTS (COST $262,433,676) 101.1% .................................. 240,948,620
OTHER ASSETS, LESS LIABILITIES (1.1)% ......................................... (2,703,649)
------------
NET ASSETS 100.0% ............................................................. $238,244,971
============
See Abbreviations on page 121.
(a) Non-income producing.
(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.
The accompanying notes are an integral part of these financial statements.
84 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b) .................. (0.11) (0.19) (0.13) --(c) (0.08)
Net realized and unrealized gains (losses) ....... (10.19) (1.93) 4.09 9.15 1.70
---------- ---------- ---------- ---------- ----------
Total from investment operations .................... (10.30) (2.12) 3.96 9.15 1.62
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ............................ -- -- -- (0.04) --
Net realized gains ............................... (0.06) (6.72) (2.84) -- --
---------- ---------- ---------- ---------- ----------
Total distributions ................................. (0.06) (6.72) (2.84) (0.04) --
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ........................ $ 22.34 $ 32.70 $ 41.54 $ 40.42 $ 31.31
========== ========== ========== ========== ==========
Total return(e) ..................................... (31.46)% (6.24)% 10.38% 29.21% 5.46%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 1.08% 1.02% 0.98% 0.96% 0.97%
Net investment income (loss) ........................ (0.45)% (0.50)% (0.33)% --%(g) (0.27)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $2,195,975 $4,331,657 $5,619,694 $6,532,284 $6,636,792
Portfolio turnover rate ............................. 54.86% 55.09% 52.76% 39.84% 42.96%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 85
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
---------------------------------------------------
CLASS B 2009 2008 2007 2006 2005
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .................. (0.29) (0.46) (0.40) (0.27) (0.31)
Net realized and unrealized gains (losses) ....... (9.64) (1.82) 3.93 8.93 1.68
------- ------- ------- ------- -------
Total from investment operations .................... (9.93) (2.28) 3.53 8.66 1.37
------- ------- ------- ------- -------
Less distributions from net realized gains .......... (0.06) (6.72) (2.84) -- --
------- ------- ------- ------- -------
Redemption fees(c, d) ............................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ........................ $ 21.01 $ 31.00 $ 40.00 $ 39.31 $ 30.65
======= ======= ======= ======= =======
Total return(e) ..................................... (31.99)% (6.92)% 9.53% 28.25% 4.68%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 1.83% 1.77% 1.73% 1.71% 1.72%
Net investment income (loss) ........................ (1.20)% (1.25)% (1.08)% (0.75)% (1.02)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $13,399 $25,457 $32,570 $36,911 $31,733
Portfolio turnover rate ............................. 54.86% 55.09% 52.76% 39.84% 42.76%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
86 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------------
CLASS C 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .................. (0.27) (0.45) (0.39) (0.26) (0.31)
Net realized and unrealized gains (losses) ....... (9.30) (1.76) 3.83 8.69 1.64
-------- -------- -------- -------- --------
Total from investment operations .................... (9.57) (2.21) 3.44 8.43 1.33
-------- -------- -------- -------- --------
Less distributions from net realized gains .......... (0.06) (6.72) (2.84) -- --
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ........................ $ 20.29 $ 29.92 $ 38.85 $ 38.25 $ 29.82
======== ======== ======== ======== ========
Total return(e) ..................................... (31.94)% (6.94)% 9.56% 28.27% 4.67%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 1.83% 1.77% 1.72% 1.71% 1.72%
Net investment income (loss) ........................ (1.20)% (1.25)% (1.07)% (0.75)% (1.02)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $285,597 $523,040 $653,529 $728,710 $654,549
Portfolio turnover rate ............................. 54.86% 55.09% 52.76% 39.84% 42.96%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 87
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------
CLASS R 2009 2008 2007 2006 2005
- ------- ------- ------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50
------- ------- -------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .............. (0.17) (0.29) (0.23) (0.08) (0.15)
Net realized and unrealized gains (losses) ... (9.98) (1.89) 4.05 9.04 1.69
------- ------- -------- ------- -------
Total from investment operations ................ (10.15) (2.18) 3.82 8.96 1.54
------- ------- -------- ------- -------
Less distributions from:
Net investment income ........................ -- -- -- (0.02) --
Net realized gains ........................... (0.06) (6.72) (2.84) -- --
------- ------- -------- ------- -------
Total distributions ............................. (0.06) (6.72) (2.84) (0.02) --
------- ------- -------- ------- -------
Redemption fees(c, d) ........................... -- -- -- -- --
------- ------- -------- ------- -------
Net asset value, end of year .................... $ 21.85 $ 32.06 $ 40.96 $ 39.98 $ 31.04
======= ======= ======== ======= =======
Total return(e) ................................. (31.62)% (6.48)% 10.11% 28.88% 5.22%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ..................................... 1.33% 1.27% 1.23% 1.21% 1.22%
Net investment income (loss) .................... (0.70)% (0.75)% (0.58)% (0.25)% (0.52)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $54,180 $94,334 $118,387 $93,916 $54,139
Portfolio turnover rate ......................... 54.86% 55.09% 52.76% 39.84% 42.96%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
88 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------
ADVISOR CLASS 2009 2008 2007 2006 2005
- ------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .............. (0.05) (0.10) (0.03) 0.10 --(c)
Net realized and unrealized gains (losses) ... (10.42) (1.97) 4.16 9.26 1.72
-------- -------- -------- -------- --------
Total from investment operations ................ (10.47) (2.07) 4.13 9.36 1.72
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ........................ -- -- -- (0.14) --
Net realized gains ........................... (0.06) (6.72) (2.84) -- --
-------- -------- -------- -------- --------
Total distributions ............................. (0.06) (6.72) (2.84) (0.14) --
-------- -------- -------- -------- --------
Redemption fees(c, d) ........................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 22.90 $ 33.43 $ 42.22 $ 40.93 $ 31.71
======== ======== ======== ======== ========
Total return .................................... (31.28)% (6.00)% 10.65% 29.55% 5.74%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ..................................... 0.83% 0.77% 0.73% 0.71% 0.72%
Net investment income (loss) .................... (0.20)% (0.25)% (0.08)% 0.25% (0.02)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $498,207 $812,503 $803,365 $794,395 $347,518
Portfolio turnover rate ......................... 54.86% 55.09% 52.76% 39.84% 42.96%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 89
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- --------------- --------------
COMMON STOCKS 95.3%
CONSUMER DISCRETIONARY 11.4%
Abercrombie & Fitch Co., A .............................................................. 827,200 $ 22,384,033
BorgWarner Inc. ......................................................................... 1,112,200 32,198,190
(a) Chipotle Mexican Grill Inc., A .......................................................... 219,900 17,831,691
(a) Dick's Sporting Goods Inc. .............................................................. 1,509,550 28,681,450
Guess? Inc. ............................................................................. 2,109,200 54,923,568
(a) ITT Educational Services Inc. ........................................................... 357,100 35,984,967
(a) Jarden Corp. ............................................................................ 798,000 16,039,800
Johnson Controls Inc. ................................................................... 411,200 7,816,912
(a) Liberty Media Corp. - Entertainment, A .................................................. 1,147,800 27,948,930
NIKE Inc., B ............................................................................ 291,200 15,279,264
PetSmart Inc. ........................................................................... 635,360 14,537,037
(a) Under Armour Inc., A .................................................................... 155,700 3,665,178
(a) Urban Outfitters Inc. ................................................................... 1,248,700 24,337,163
Wolverine World Wide Inc. ............................................................... 2,269,075 47,264,832
--------------
348,893,015
--------------
CONSUMER STAPLES 3.4%
Clorox Co. .............................................................................. 484,500 27,156,225
(a) Hain Celestial Group Inc. ............................................................... 1,437,200 23,986,868
(a) Hansen Natural Corp. .................................................................... 709,800 28,931,448
(a) Mead Johnson Nutrition Co., A ........................................................... 811,500 22,924,875
--------------
102,999,416
--------------
ENERGY 8.8%
(a) Cameron International Corp. ............................................................. 931,900 23,838,002
(a) Concho Resources Inc. ................................................................... 189,100 5,185,122
(a) FMC Technologies Inc. ................................................................... 1,359,256 46,527,333
(a) Petrohawk Energy Corp. .................................................................. 2,000,300 47,207,080
Range Resources Corp. ................................................................... 1,269,800 50,753,906
Smith International Inc. ................................................................ 935,100 24,172,335
(a) Southwestern Energy Co. ................................................................. 1,999,600 71,705,656
--------------
269,389,434
--------------
FINANCIALS 5.7%
(a) Affiliated Managers Group Inc. .......................................................... 855,300 48,623,805
BlackRock Inc. .......................................................................... 182,400 26,725,248
The Charles Schwab Corp. ................................................................ 1,833,400 33,881,232
FelCor Lodging Trust Inc. ............................................................... 2,072,500 4,103,550
(b) iStar Financial Inc. .................................................................... 3,968,090 13,372,463
M&T Bancorp ............................................................................. 263,030 13,795,924
T. Rowe Price Group Inc. ................................................................ 840,100 32,360,652
--------------
172,862,874
--------------
HEALTH CARE 21.2%
Allergan Inc. ........................................................................... 319,000 14,884,540
Allscripts-Misys Healthcare Solutions Inc. .............................................. 1,448,700 17,992,854
(a) Athenahealth Inc. ....................................................................... 294,800 9,374,640
(a) BioMarin Pharmaceutical Inc. ............................................................ 1,148,500 14,769,710
90 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- --------------- --------------
COMMON STOCKS (CONTINUED)
HEALTH CARE (CONTINUED)
C. R. Bard Inc. ......................................................................... 523,200 $ 37,476,816
(a) Celgene Corp. ........................................................................... 716,600 30,613,152
(a) Cerner Corp. ............................................................................ 755,212 40,630,405
(a) Community Health Systems Inc. ........................................................... 2,389,064 54,566,222
(a) DaVita Inc. ............................................................................. 581,800 26,978,066
(a) Express Scripts Inc. .................................................................... 1,071,000 68,511,870
(a) Henry Schein Inc. ....................................................................... 462,000 18,960,480
(a) Illumina Inc. ........................................................................... 716,800 26,772,480
(a) Intuitive Surgical Inc. ................................................................. 140,100 20,136,573
(a) Life Technologies Corp. ................................................................. 887,100 33,088,830
(a) Masimo Corp. ............................................................................ 575,000 16,617,500
(a) Myriad Genetics Inc. .................................................................... 871,600 33,809,364
(a) OSI Pharmaceuticals Inc. ................................................................ 170,900 5,737,113
Perrigo Co. ............................................................................. 1,181,490 30,624,221
Pharmaceutical Product Development Inc. ................................................. 1,265,100 24,808,611
(a) QIAGEN NV (Netherlands) ................................................................. 1,563,700 25,769,776
(a) Sequenom Inc. ........................................................................... 1,156,000 4,184,720
(a) Stereotaxis Inc. ........................................................................ 1,463,200 4,887,088
(a) Varian Medical Systems Inc. ............................................................. 1,214,500 40,527,865
(a) Waters Corp. ............................................................................ 1,019,100 45,013,647
--------------
646,736,543
--------------
INDUSTRIALS 12.9%
(a) Allegiant Travel Co. .................................................................... 455,270 23,692,251
AMETEK Inc. ............................................................................. 1,672,000 53,855,120
C.H. Robinson Worldwide Inc. ............................................................ 518,200 27,547,512
Danaher Corp. ........................................................................... 398,400 23,282,496
Expeditors International of Washington Inc. ............................................. 856,800 29,739,528
Flowserve Corp. ......................................................................... 360,400 24,471,160
(a) Force Protection Inc. ................................................................... 2,409,100 18,357,342
(a) Jacobs Engineering Group Inc. ........................................................... 489,900 18,635,796
Precision Castparts Corp. ............................................................... 996,010 74,561,308
Robert Half International Inc. .......................................................... 1,543,400 37,072,468
Rockwell Collins Inc. ................................................................... 624,200 23,938,070
(a) Ryanair Holdings PLC, ADR (Ireland) ..................................................... 1,348,800 36,889,680
--------------
392,042,731
--------------
INFORMATION TECHNOLOGY 27.7%
(a) Activision Blizzard Inc. ................................................................ 3,868,700 41,665,899
(a) Affiliated Computer Services Inc., A .................................................... 734,100 35,515,758
(a) Alliance Data Systems Corp. ............................................................. 901,400 37,741,618
(a) ANSYS Inc. .............................................................................. 1,122,200 30,995,164
(a) Concur Technologies Inc. ................................................................ 559,600 15,148,372
(a) F5 Networks Inc. ........................................................................ 889,200 24,248,484
(b) FactSet Research Systems Inc. ........................................................... 826,200 44,276,058
(a) FLIR Systems Inc. ....................................................................... 2,597,200 57,605,896
(a, c) FormFactor Inc. ......................................................................... 2,717,524 47,366,443
Annual Report | 91
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- --------------- --------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Harris Corp. ............................................................................ 1,123,500 $ 34,356,630
(a) Hittite Microwave Corp. ................................................................. 799,300 29,701,988
(a) Juniper Networks Inc. ................................................................... 1,086,300 23,518,395
(a) Lam Research Corp. ...................................................................... 1,088,000 30,333,440
MasterCard Inc., A ...................................................................... 407,200 74,700,840
(a) Mettler-Toledo International Inc. ....................................................... 403,327 24,857,043
(a) Netlogic Microsystems Inc. .............................................................. 263,700 8,593,983
(a) Nuance Communications Inc. .............................................................. 5,804,500 77,490,075
(b) Quality Systems Inc. .................................................................... 350,200 18,777,724
(a) SAIC Inc. ............................................................................... 2,379,700 43,072,570
(a) Silicon Laboratories Inc. ............................................................... 2,030,400 67,531,104
Tandberg ASA (Norway) ................................................................... 2,607,800 37,160,704
(a) Trimble Navigation Ltd. ................................................................. 1,512,660 32,431,431
(a) ViaSat Inc. ............................................................................. 299,067 6,875,550
--------------
843,965,169
--------------
MATERIALS 1.0%
Ecolab Inc. ............................................................................. 821,300 31,661,115
--------------
TELECOMMUNICATION SERVICES 2.4%
(a) American Tower Corp., A ................................................................. 838,100 26,618,056
(a, d) Anda Networks ........................................................................... 91,107 70,152
(a) SBA Communications Corp. ................................................................ 1,844,000 46,468,800
--------------
73,157,008
--------------
UTILITIES 0.8%
(a) Calpine Corp. ........................................................................... 1,722,900 13,972,719
(a) Dynegy Inc. ............................................................................. 5,892,300 10,488,294
--------------
24,461,013
--------------
TOTAL COMMON STOCKS (COST $2,857,291,816) ............................................... 2,906,168,318
--------------
PRINCIPAL
AMOUNT
---------------
CONVERTIBLE BONDS 0.4%
INDUSTRIALS 0.2%
SunPower Corp., cvt., senior bond, 1.25%, 2/15/27 ....................................... $ 6,704,000 5,338,060
--------------
INFORMATION TECHNOLOGY 0.2%
Microchip Technology Inc., cvt., 2.125%, 12/15/37 ....................................... 8,161,000 6,345,178
--------------
TOTAL CONVERTIBLE BONDS (COST $10,008,798) .............................................. 11,683,238
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $2,867,300,614) ................................................................ 2,917,851,556
--------------
92 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- --------------- --------------
SHORT TERM INVESTMENTS 4.8%
MONEY MARKET FUNDS (COST $119,092,575) 3.9%
(e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .................... 119,092,575 $ 119,092,575
--------------
(f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.9%
MONEY MARKET FUNDS (COST $25,968,221) 0.9%
(g) Bank of New York Institutional Cash Reserve Fund, 0.14% ................................. 25,968,221 25,708,538
--------------
TOTAL INVESTMENTS (COST $3,012,361,410) 100.5% .......................................... 3,062,652,669
OTHER ASSETS, LESS LIABILITIES (0.5)% ................................................... (15,294,836)
--------------
NET ASSETS 100.0% ....................................................................... $3,047,357,833
==============
See Abbreviations on page 121.
(a) Non-income producing.
(b) A portion or all of the security is on loan at April 30, 2009. See Note
1(d).
(c) See Note 9 regarding holdings of 5% voting securities.
(d) See Note 8 regarding restricted and illiquid securities.
(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(d) regarding securities on loan.
(g) The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
Annual Report | 93
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2009
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ --------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................ $2,015,670,864 $ 6,171,060 $ 234,953,069
Cost - Sweep Money Fund (Note 7) ........... 56,101,240 148,644 15,835,304
-------------- ----------- -------------
Total cost of investments .................. $2,071,772,104 $ 6,319,704 $ 250,788,373
============== =========== =============
Value - Unaffiliated issuers ............... $2,007,631,096 $ 4,815,573 $ 269,393,026
Value - Sweep Money Fund (Note 7) .......... 56,101,240 148,644 15,835,304
-------------- ----------- -------------
Total value of investments ................. 2,063,732,336 4,964,217 285,228,330
Receivables:
Investment securities sold ................. 2,778,349 112,920 588,467
Capital shares sold ........................ 3,336,453 3,263 626,060
Dividends .................................. 1,327,991 7,357 48,595
Affiliates ................................. -- 83,378 --
Other assets .................................. 3,579 316 381
-------------- ----------- -------------
Total assets ............................ 2,071,178,708 5,171,451 286,491,833
-------------- ----------- -------------
Liabilities:
Payables:
Investment securities purchased ............ 2,042,934 -- 4,851,150
Capital shares redeemed .................... 2,468,047 -- 436,496
Affiliates ................................. 1,523,389 -- 221,701
Reports to shareholders .................... 150,970 440 20,780
Professional fees .......................... 9,871 1,866 1,860
Unaffiliated transfer agent fees ........... 408,976 168 44,766
Accrued expenses and other liabilities ........ 18,307 1,302 3,027
-------------- ----------- -------------
Total liabilities ....................... 6,622,494 3,776 5,579,780
-------------- ----------- -------------
Net assets, at value ................. $2,064,556,214 $ 5,167,675 $ 280,912,053
============== =========== =============
Net assets consist of:
Paid-in capital ............................... $2,169,148,719 $ 7,208,763 $ 453,819,115
Undistributed net investment income (loss) .... (4,440) 2,136 --
Net unrealized appreciation (depreciation) .... (8,039,768) (1,355,612) 34,440,127
Accumulated net realized gain (loss) .......... (96,548,297) (687,612) (207,347,189)
-------------- ----------- -------------
Net assets, at value ................. $2,064,556,214 $ 5,167,675 $ 280,912,053
============== =========== =============
The accompanying notes are an integral part of these financial statements.
94 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2009
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
CLASS A:
Net assets, at value ............................................. $1,370,025,294 $4,888,717 $ 99,939,154
-------------- ---------- ------------
Shares outstanding ............................................... 42,201,071 779,258 7,200,360
-------------- ---------- ------------
Net asset value per share(a) ..................................... $ 32.46 $ 6.27 $ 13.88
-------------- ---------- ------------
Maximum offering price per share (net asset value
per share / 94.25%) ........................................... $ 34.44 $ 6.65 $ 14.73
-------------- ---------- ------------
CLASS B:
Net assets, at value ............................................. $ 42,485,427 -- $ 5,124,284
-------------- ---------- ------------
Shares outstanding ............................................... 1,414,321 -- 393,531
-------------- ---------- ------------
Net asset value and maximum offering price per share(a) .......... $ 30.04 -- $ 13.02
-------------- ---------- ------------
CLASS C:
Net assets, at value ............................................. $ 243,307,740 $ 105,542 $ 27,518,871
-------------- ---------- ------------
Shares outstanding ............................................... 8,082,731 16,923 2,118,612
-------------- ---------- ------------
Net asset value and maximum offering price per share(a) .......... $ 30.10 $ 6.24 $ 12.99
-------------- ---------- ------------
CLASS R:
Net assets, at value ............................................. $ 43,939,910 $ 6,274 $ 7,320,126
-------------- ---------- ------------
Shares outstanding ............................................... 1,376,962 1,000 535,544
-------------- ---------- ------------
Net asset value and maximum offering price per share ............. $ 31.91 $ 6.27 $ 13.67
-------------- ---------- ------------
ADVISOR CLASS:
Net assets, at value ............................................. $ 364,797,843 $ 167,142 $141,009,618
-------------- ---------- ------------
Shares outstanding ............................................... 11,113,738 26,599 9,858,865
-------------- ---------- ------------
Net asset value and maximum offering price per share ............. $ 32.82 $ 6.28 $ 14.30
-------------- ---------- ------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 95
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2009
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------- --------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................... $ 254,766,055 $2,825,922,083
Cost - Non-controlled affiliated issuers (Note 9) .... -- 67,346,752
Cost - Sweep Money Fund (Note 7) ..................... 7,667,621 119,092,575
------------- --------------
Total cost of investments ............................ $ 262,433,676 $3,012,361,410
============= ==============
Value - Unaffiliated issuers ......................... $ 233,280,999 $2,896,193,651
Value - Non-controlled affiliated issuers (Note 9) ... -- 47,366,443
Value - Sweep Money Fund (Note 7) .................... 7,667,621 119,092,575
------------- --------------
Total value of investments(a) ........................ 240,948,620 3,062,652,669
Receivables:
Investment securities sold ........................... 1,991,353 45,142,843
Capital shares sold .................................. 191,603 1,625,597
Dividends and interest ............................... 50,003 1,510,432
Other assets ............................................ 594 102,843
------------- --------------
Total assets ................................... 243,182,173 3,111,034,384
------------- --------------
Liabilities:
Payables:
Investment securities purchased ...................... 3,618,029 16,347,446
Capital shares redeemed .............................. 932,941 17,413,414
Affiliates ........................................... 258,357 2,265,589
Reports to shareholders .............................. 34,360 228,762
Professional fees .................................... 5,440 13,150
Unaffiliated transfer agent fees ..................... 82,940 1,393,510
Payable upon return of securities loaned ................ -- 25,968,221
Accrued expenses and other liabilities .................. 5,135 46,459
------------- --------------
Total liabilities .............................. 4,937,202 63,676,551
------------- --------------
Net assets, at value ........................ $ 238,244,971 $3,047,357,833
============= ==============
Net assets consist of:
Paid-in capital ......................................... $ 381,099,177 $3,670,632,734
Undistributed net investment income (loss) .............. -- (285,426)
Net unrealized appreciation (depreciation) .............. (21,484,943) 50,386,205
Accumulated net realized gain (loss) .................... (121,369,263) (673,375,680)
------------- --------------
Net assets, at value ........................ $ 238,244,971 $3,047,357,833
============= ==============
(a) Includes securities loaned ............................ -- $ 21,649,874
The accompanying notes are an integral part of these financial statements.
96 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2009
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ --------------
CLASS A:
Net assets, at value .................................................... $123,037,378 $2,195,975,182
------------ --------------
Shares outstanding ...................................................... 19,198,471 98,290,141
------------ --------------
Net asset value per share(a) ............................................ $ 6.41 $ 22.34
------------ --------------
Maximum offering price per share (net asset value per share / 94.25%) ... $ 6.80 $ 23.70
------------ --------------
CLASS B:
Net assets, at value .................................................... $ 15,159,462 $ 13,399,182
------------ --------------
Shares outstanding ...................................................... 2,575,144 637,749
------------ --------------
Net asset value and maximum offering price per share(a) ................. $ 5.89 $ 21.01
------------ --------------
CLASS C:
Net assets, at value .................................................... $ 40,179,992 $ 285,596,896
------------ --------------
Shares outstanding ...................................................... 6,816,426 14,078,914
------------ --------------
Net asset value and maximum offering price per share(a) ................. $ 5.89 $ 20.29
------------ --------------
CLASS R:
Net assets, at value .................................................... $ 1,911,628 $ 54,179,598
------------ --------------
Shares outstanding ...................................................... 305,175 2,479,973
------------ --------------
Net asset value and maximum offering price per share .................... $ 6.26 $ 21.85
------------ --------------
ADVISOR CLASS:
Net assets, at value .................................................... $ 57,956,511 $ 498,206,975
------------ --------------
Shares outstanding ...................................................... 8,743,185 21,751,617
------------ --------------
Net asset value and maximum offering price per share .................... $ 6.63 $ 22.90
------------ --------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 97
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended April 30, 2009
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
------------- ------------ -------------
Investment income:
Dividends:
Unaffiliated issuers ............................................... $ 20,101,600 $ 90,748 $ 1,005,853
Sweep Money Fund (Note 7) .......................................... 1,161,485 3,309 92,732
Interest .............................................................. 171 -- --
Income from securities loaned ......................................... 40,098 -- 7,864
------------- ----------- ------------
Total investment income ...................................... 21,303,354 94,057 1,106,449
------------- ----------- ------------
Expenses:
Management fees (Note 3a) ............................................. 10,396,304 33,144 1,255,622
Administrative fees (Note 3b) ......................................... -- 9,040 514,157
Distribution fees: (Note 3c)
Class A ............................................................ 3,932,240 11,864 313,786
Class B ............................................................ 643,480 -- 75,203
Class C ............................................................ 2,890,889 897 319,843
Class R ............................................................ 250,108 34 32,777
Transfer agent fees (Note 3e) ......................................... 6,026,147 1,772 713,142
Custodian fees (Note 4) ............................................... 39,148 30 4,804
Reports to shareholders ............................................... 430,693 1,988 62,681
Registration and filing fees .......................................... 132,811 40,635 79,285
Professional fees ..................................................... 55,498 33,928 33,357
Trustees' fees and expenses ........................................... 39,841 99 5,558
Amortization of offering costs ........................................ -- 43,665 --
Other ................................................................. 144,352 3,560 14,488
------------- ----------- ------------
Total expenses ............................................... 24,981,511 180,656 3,424,703
Expense reductions (Note 4) .................................. (288) (30) (635)
Expenses waived/paid by affiliates (Note 3f) ................. -- (127,604) --
------------- ----------- ------------
Net expenses .............................................. 24,981,223 53,022 3,424,068
------------- ----------- ------------
Net investment income (loss) ........................... (3,677,869) 41,035 (2,317,619)
------------- ----------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................ (87,241,385) (680,200) (73,196,492)
Foreign currency transactions ...................................... 9,259 (3,256) 3,600
------------- ----------- ------------
Net realized gain (loss) ............................... (87,232,126) (683,456) (73,192,892)
------------- ----------- ------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................ (764,613,305) (643,842) (18,033,117)
Translation of other assets and liabilities denominated
in foreign currencies ........................................... -- (957) 2,592
------------- ----------- ------------
Net change in unrealized appreciation (depreciation) ... (764,613,305) (644,799) (18,030,525)
------------- ----------- ------------
Net realized and unrealized gain (loss) .................................. (851,845,431) (1,328,255) (91,223,417)
------------- ----------- ------------
Net increase (decrease) in net assets resulting from operations .......... $(855,523,300) $(1,287,220) $(93,541,036)
============= =========== ============
The accompanying notes are an integral part of these financial statements.
98 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended April 30, 2009
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------- ---------------
Investment income:
Dividends:
Unaffiliated issuers ............................................... $ 770,372 $ 15,467,711
Non-controlled affiliated issuers (Note 9) ......................... -- 1,560,878
Sweep Money Fund (Note 7) .......................................... 112,586 2,398,494
Interest .............................................................. 68 1,219,985
Income from securities loaned ......................................... 219,328 3,927,702
------------- ---------------
Total investment income ...................................... 1,102,354 24,574,770
------------- ---------------
Expenses:
Management fees (Note 3a) ............................................. 2,194,667 17,341,750
Administrative fees (Note 3b) ......................................... 820,861 --
Distribution fees: (Note 3c)
Class A ............................................................ 538,564 7,191,501
Class B ............................................................ 304,365 172,930
Class C ............................................................ 523,168 3,620,984
Class R ............................................................ 11,252 331,488
Transfer agent fees (Note 3e) ......................................... 1,012,717 13,804,127
Custodian fees (Note 4) ............................................... 11,618 82,146
Reports to shareholders ............................................... 90,103 612,962
Registration and filing fees .......................................... 67,946 122,325
Professional fees ..................................................... 38,200 76,691
Trustees' fees and expenses ........................................... 10,662 82,797
Other ................................................................. 23,903 177,656
------------- ---------------
Total expenses ............................................... 5,648,026 43,617,357
Expense reductions (Note 4) .................................. (1,157) (392)
------------- ---------------
Net expenses .............................................. 5,646,869 43,616,965
------------- ---------------
Net investment income (loss) ........................... (4,544,515) (19,042,195)
------------- ---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ............................................ (100,914,360) (481,038,995)
Non-controlled affiliated issuers (Note 9) ...................... -- (188,613,978)
Foreign currency transactions ...................................... 10,553 (243,831)
------------- ---------------
Net realized gain (loss) ............................... (100,903,807) (669,896,804)
------------- ---------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................ (67,036,827) (976,762,079)
Translation of other assets and liabilities denominated
in foreign currencies ........................................... 112 (13,443)
------------- ---------------
Net change in unrealized appreciation (depreciation) ... (67,036,715) (976,775,522)
------------- ---------------
Net realized and unrealized gain (loss) .................................. (167,940,522) (1,646,672,326)
------------- ---------------
Net increase (decrease) in net assets resulting from operations .......... $(172,485,037) $(1,665,714,521)
============= ===============
The accompanying notes are an integral part of these financial statements.
Annual Report | 99
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE
GROWTH FUND EQUITY FUND
------------------------------- ------------------------
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
------------------------------- ------------------------
2009 2008 2009 2008(a)
-------------- -------------- ----------- ----------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................... $ (3,677,869) $ (6,082,319) $ 41,035 $ 16,737
Net realized gain (loss) from investments and foreign
currency transactions ............................... (87,232,126) 73,881,873 (683,456) 8,991
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies ....... (764,613,305) 11,048,494 (644,799) (710,813)
-------------- -------------- ----------- ----------
Net increase (decrease) in net assets resulting
from operations ............................ (855,523,300) 78,848,048 (1,287,220) (685,085)
-------------- -------------- ----------- ----------
Distributions to shareholders from:
Net investment income:
Class A ............................................. -- (1,062,345) (74,501) --
Class C ............................................. -- -- (1,612) --
Class R ............................................. -- (43,876) (83) --
Advisor Class ....................................... -- (161,537) (2,076) --
Net realized gains:
Class A ............................................. -- (32,084,220) (16,497) --
Class B ............................................. -- (1,853,887) -- --
Class C ............................................. -- (6,486,834) (426) --
Class R ............................................. -- (1,221,188) (22) --
Advisor Class ....................................... -- (5,050,987) (403) --
-------------- -------------- ----------- ----------
Total distributions to shareholders ....................... -- (47,964,874) (95,620) --
-------------- -------------- ----------- ----------
Capital share transactions: (Note 2)
Class A ............................................. (51,271,229) 10,019,089 1,542,220 5,311,800
Class B ............................................. (26,638,743) (23,776,783) -- --
Class C ............................................. (19,089,342) 4,256,506 97,423 41,349
Class R ............................................. (3,859,450) (15,994,000) -- 10,000
Advisor Class ....................................... 123,671,368 45,026,229 38,570 194,238
-------------- -------------- ----------- ----------
Total capital share transactions .......................... 22,812,604 19,531,041 1,678,213 5,557,387
-------------- -------------- ----------- ----------
Redemption fees ........................................... 2,260 20,391 -- --
-------------- -------------- ----------- ----------
Net increase (decrease) in net assets ......... (832,708,436) 50,434,606 295,373 4,872,302
Net assets:
Beginning of year ......................................... 2,897,264,650 2,846,830,044 4,872,302 --
-------------- -------------- ----------- ----------
End of year ............................................... $2,064,556,214 $2,897,264,650 $ 5,167,675 $4,872,302
============== ============== =========== ==========
Undistributed net investment income (loss) included in
net assets:
End of year ............................................ $ (4,440) $ -- $ 2,136 $ 28,566
============== ============== =========== ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008.
The accompanying notes are an integral part of these financial statements.
100 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN GROWTH FRANKLIN SMALL CAP
OPPORTUNITIES FUND GROWTH FUND
--------------------------- ------------------------------
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
--------------------------- ------------------------------
2009 2008 2009 2008
------------ ------------ ------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................... $ (2,317,619) $ (2,243,513) $ (4,544,515) $ (7,026,827)
Net realized gain (loss) from investments and foreign
currency transactions ............................... (73,192,892) 12,002,488 (100,903,807) 89,522,745
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies ....... (18,030,525) 7,496,019 (67,036,715) (204,815,321)
------------ ------------ ------------- --------------
Net increase (decrease) in net assets resulting
from operations ............................ (93,541,036) 17,254,994 (172,485,037) (122,319,403)
------------ ------------ ------------- --------------
Distributions to shareholders from net realized gains:
Class A ................................................ -- -- (1,831,877) (80,597,900)
Class B ................................................ -- -- (287,838) (13,185,309)
Class C ................................................ -- -- (552,458) (19,085,424)
Class R ................................................ -- -- (22,400) (619,705)
Advisor Class .......................................... -- -- (1,312,092) (40,266,927)
------------ ------------ ------------- --------------
Total distributions to shareholders ....................... -- -- (4,006,665) (153,755,265)
------------ ------------ ------------- --------------
Capital share transactions: (Note 2)
Class A ................................................ 10,380,355 25,504,203 (75,656,594) (131,750,498)
Class B ................................................ (2,912,763) (5,044,139) (24,020,660) (9,331,447)
Class C ................................................ 1,204,624 6,765,860 (14,625,680) (10,395,508)
Class R ................................................ 1,865,922 (69,825) (472,497) (1,529,576)
Advisor Class .......................................... 65,072,564 8,963,605 (96,965,191) (31,944,950)
------------ ------------ ------------- --------------
Total capital share transactions .......................... 75,610,702 36,119,704 (211,740,622) (184,951,979)
------------ ------------ ------------- --------------
Redemption fees ........................................... 966 3,208 1,057 3,008
------------ ------------ ------------- --------------
Net increase (decrease) in net assets ......... (17,929,368) 53,377,906 (388,231,267) (461,023,639)
------------ ------------ ------------- --------------
Net assets:
Beginning of year ......................................... 298,841,421 245,463,515 626,476,238 1,087,499,877
------------ ------------ ------------- --------------
End of year ............................................... $280,912,053 $298,841,421 $ 238,244,971 $ 626,476,238
============ ============ ============= ==============
Undistributed net investment income (loss) included
in net assets:
End of year ............................................ $ -- $ -- $ -- $ --
============ ============ ============= ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 101
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
---------------------------------
YEAR ENDED APRIL 30,
---------------------------------
2009 2008
--------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ....................................................... $ (19,042,195) $ (35,942,600)
Net realized gain (loss) from investments and foreign currency transactions ........ (669,896,804) 535,546,104
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign currencies ... (976,775,522) (898,481,620)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ........... (1,665,714,521) (398,878,116)
--------------- ---------------
Distributions to shareholders from net realized gains:
Class A ............................................................................ (6,612,344) (790,889,652)
Class B ............................................................................ (42,726) (5,111,384)
Class C ............................................................................ (939,029) (105,273,976)
Class R ............................................................................ (162,759) (16,775,519)
Advisor Class ...................................................................... (1,349,787) (160,138,265)
--------------- ---------------
Total distributions to shareholders ................................................... (9,106,645) (1,078,188,796)
--------------- ---------------
Capital share transactions: (Note 2)
Class A ............................................................................ (895,592,567) (221,023,942)
Class B ............................................................................ (4,302,513) 132,361
Class C ............................................................................ (75,422,060) 16,278,421
Class R ............................................................................ (11,231,755) (1,881,624)
Advisor Class ...................................................................... (78,299,057) 242,909,931
--------------- ---------------
Total capital share transactions ...................................................... (1,064,847,952) 36,415,147
--------------- ---------------
Redemption fees ....................................................................... 35,916 97,409
--------------- ---------------
Net increase (decrease) in net assets ..................................... (2,739,633,202) (1,440,554,356)
Net assets:
Beginning of year ..................................................................... 5,786,991,035 7,227,545,391
--------------- ---------------
End of year ........................................................................... $ 3,047,357,833 $ 5,786,991,035
=============== ===============
Undistributed net investment income (loss) included in net assets:
End of year ........................................................................... $ (285,426) $ --
=============== ===============
The accompanying notes are an integral part of these financial statements.
102 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
eight separate funds, five of which are included in this report (Funds). 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 R & ADVISOR CLASS CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS
- ----------------------------------------- --------------------------------------------------
Franklin Focused Core Equity Fund Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth 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 and non-registered money market
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
Annual Report | 103
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
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. 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 at a future 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.
104 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITIES LENDING
Certain funds participate in a principal based security lending program. The
fund receives 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
a non-registered money market fund managed by the fund's custodian on the fund's
behalf. The fund receives income from the investment of cash collateral, in
addition to lending fees and rebates paid by the borrower. The fund bears the
market risk with respect to the collateral investment, securities loaned, and
the risk that the principal may default on its obligations to the fund.
E. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy 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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of April 30, 2009, and have
determined that no provision for income tax is required in the Funds' financial
statements.
F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. 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
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 of
America. 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, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.
Annual Report | 105
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. OFFERING COSTS
Offering costs are amortized on a straight line basis over twelve months.
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 was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
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, on behalf of the Funds, 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 April 30, 2009, there were an unlimited number of shares authorized (without
par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN FOCUSED
FLEX CAP GROWTH FUND CORE EQUITY FUND
--------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------- ----------
CLASS A SHARES:
Year ended April 30, 2009
Shares sold ..................................... 10,241,362 $ 362,573,642 292,595 $1,835,475
Shares issued in reinvestment of distributions .. -- -- 5,075 26,184
Shares redeemed ................................. (11,986,727) (413,844,871) (54,000) (319,439)
----------- ------------- ------- ----------
Net increase (decrease) ......................... (1,745,365) $ (51,271,229) 243,670 $1,542,220
=========== ============= ======= ==========
106 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED
FLEX CAP GROWTH FUND CORE EQUITY FUND
--------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------- ----------
CLASS A SHARES: (CONTINUED)
Year ended April 30, 2008(a)
Shares sold ..................................... 8,860,704 $ 412,850,677 539,141 $5,341,810
Shares issued in reinvestment of distributions .. 564,076 27,302,324 -- --
Shares redeemed ................................. (9,275,872) (430,133,912) (3,553) (30,010)
----------- ------------- ------- ----------
Net increase (decrease) ......................... 148,908 $ 10,019,089 535,588 $5,311,800
=========== ============= ======= ==========
CLASS B SHARES:
Year ended April 30, 2009
Shares sold ..................................... 174,451 $ 6,264,143
Shares redeemed ................................. (1,000,893) (32,902,886)
----------- -------------
Net increase (decrease) ......................... (826,442) $ (26,638,743)
=========== =============
Year ended April 30, 2008
Shares sold ..................................... 185,826 $ 8,281,945
Shares issued in reinvestment of distributions .. 38,247 1,733,727
Shares redeemed ................................. (783,309) (33,792,455)
----------- -------------
Net increase (decrease) ......................... (559,236) $ (23,776,783)
=========== =============
CLASS C SHARES:
Year ended April 30, 2009
Shares sold ..................................... 1,834,066 $ 61,876,028 30,484 $ 195,267
Shares issued in reinvestment of distributions .. -- -- 376 1,933
Shares redeemed ................................. (2,540,857) (80,965,370) (18,632) (99,777)
----------- ------------- ------- ----------
Net increase (decrease) ......................... (706,791) $ (19,089,342) 12,228 $ 97,423
=========== ============= ======= ==========
Year ended April 30, 2008(a)
Shares sold ..................................... 1,643,470 $ 72,227,327 4,695 $ 41,349
Shares issued in reinvestment of distributions .. 131,515 5,973,410 -- --
Shares redeemed ................................. (1,714,226) (73,944,231) -- --
----------- ------------- ------- ----------
Net increase (decrease) ......................... 60,759 $ 4,256,506 4,695 $ 41,349
=========== ============= ======= ==========
CLASS R SHARES:
Year ended April 30, 2009
Shares sold ..................................... 439,184 $ 15,149,663 -- $ --
Shares redeemed ................................. (531,171) (19,009,113) -- --
----------- ------------- ------- ----------
Net increase (decrease) ......................... (91,987) $ (3,859,450) -- $ --
=========== ============= ======= ==========
Year ended April 30, 2008(a)
Shares sold ..................................... 357,376 $ 16,514,361 1,000 $ 10,000
Shares issued in reinvestment of distributions .. 26,436 1,261,987 -- --
Shares redeemed ................................. (739,403) (33,770,348) -- --
----------- ------------- ------- ----------
Net increase (decrease) ......................... (355,591) $ (15,994,000) 1,000 $ 10,000
=========== ============= ======= ==========
Annual Report | 107
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED
FLEX CAP GROWTH FUND CORE EQUITY FUND
--------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------- ----------
ADVISOR CLASS SHARES:
Year ended April 30, 2009
Shares sold ..................................... 4,690,791 $ 161,366,894 9,728 $ 57,955
Shares issued in reinvestment of distributions .. -- -- 479 2,478
Shares redeemed ................................. (1,122,724) (37,695,526) (3,275) (21,863)
----------- ------------- ------- ----------
Net increase (decrease) ......................... 3,568,067 $ 123,671,368 6,932 $ 38,570
=========== ============= ======= ==========
Year ended April 30, 2008(a)
Shares sold ..................................... 1,150,962 $ 52,420,394 19,731 $ 194,788
Shares issued in reinvestment of distributions .. 106,767 5,206,091 -- --
Shares redeemed ................................. (270,893) (12,600,256) (64) (550)
----------- ------------- ------- ----------
Net increase (decrease) ......................... 986,836 $ 45,026,229 19,667 $ 194,238
=========== ============= ======= ==========
(a) For the period December 13, 2007 (commencement of operations) to April 30,
2008, for the Franklin Focused Core Equity Fund.
FRANKLIN GROWTH FRANKLIN
OPPORTUNITIES FUND SMALL CAP GROWTH FUND
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS A SHARES:
Year ended April 30, 2009
Shares sold ..................................... 3,112,008 $ 50,885,144 6,425,475 $ 44,816,186
Shares issued in reinvestment of distributions .. -- -- 303,971 1,674,888
Shares redeemed ................................. (2,756,442) (40,504,789) (17,673,940) (122,147,668)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 355,566 $ 10,380,355 (10,944,494) $ (75,656,594)
========== ============ =========== =============
Year ended April 30, 2008
Shares sold ..................................... 3,288,291 $ 67,103,617 5,142,888 $ 57,782,843
Shares issued in reinvestment of distributions .. -- -- 7,209,636 73,177,801
Shares redeemed ................................. (2,127,947) (41,599,414) (24,350,461) (262,711,142)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 1,160,344 $ 25,504,203 (11,997,937) $(131,750,498)
========== ============ =========== =============
CLASS B SHARES:
Year ended April 30, 2009
Shares sold ..................................... 89,385 $ 1,452,710 127,271 $ 787,604
Shares issued in reinvestment of distributions .. -- -- 50,780 257,961
Shares redeemed ................................. (304,157) (4,365,473) (3,829,822) (25,066,225)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... (214,772) $ (2,912,763) (3,651,771) $ (24,020,660)
========== ============ =========== =============
Year ended April 30, 2008
Shares sold ..................................... 82,357 $ 1,608,358 123,014 $ 1,243,897
Shares issued in reinvestment of distributions .. -- -- 1,228,476 11,584,529
Shares redeemed ................................. (360,405) (6,652,497) (2,064,247) (22,159,873)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... (278,048) $ (5,044,139) (712,757) $ (9,331,447)
========== ============ =========== =============
108 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN GROWTH FRANKLIN
OPPORTUNITIES FUND SMALL CAP GROWTH FUND
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS C SHARES:
Year ended April 30, 2009
Shares sold ..................................... 835,214 $ 12,871,578 643,124 $ 3,814,156
Shares issued in reinvestment of distributions .. -- -- 99,237 504,123
Shares redeemed ................................. (845,384) (11,666,954) (2,919,407) (18,943,959)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... (10,170) $ 1,204,624 (2,177,046) $ (14,625,680)
========== ============ =========== =============
Year ended April 30, 2008
Shares sold ..................................... 767,351 $ 14,696,919 305,315 $ 3,089,377
Shares issued in reinvestment of distributions .. -- -- 1,822,622 17,205,554
Shares redeemed ................................. (428,732) (7,931,059) (2,919,162) (30,690,439)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 338,619 $ 6,765,860 (791,225) $ (10,395,508)
========== ============ =========== =============
CLASS R SHARES:
Year ended April 30, 2009
Shares sold ..................................... 341,730 $ 4,955,460 125,708 $ 888,845
Shares issued in reinvestment of distributions .. -- -- 4,156 22,400
Shares redeemed ................................. (203,276) (3,089,538) (180,155) (1,383,742)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 138,454 $ 1,865,922 (50,291) $ (472,497)
========== ============ =========== =============
Year ended April 30, 2008
Shares sold ..................................... 174,256 $ 3,443,236 102,048 $ 1,100,387
Shares issued in reinvestment of distributions .. -- -- 62,282 619,705
Shares redeemed ................................. (181,695) (3,513,061) (256,839) (3,249,668)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... (7,439) $ (69,825) (92,509) $ (1,529,576)
========== ============ =========== =============
ADVISOR CLASS SHARES:
Year ended April 30, 2009
Shares sold ..................................... 5,178,762 $ 69,117,750 4,621,864 $ 31,513,259
Shares issued in reinvestment of distributions .. -- -- 228,548 1,302,723
Shares redeemed ................................. (264,983) (4,045,186) (19,665,807) (129,781,173)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 4,913,779 $ 65,072,564 (14,815,395) $ (96,965,191)
========== ============ =========== =============
Year ended April 30, 2008
Shares sold ..................................... 780,151 $ 15,851,341 7,904,170 $ 87,488,790
Shares issued in reinvestment of distributions .. -- -- 3,652,414 38,167,731
Shares redeemed ................................. (335,773) (6,887,736) (12,389,907) (157,601,471)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 444,378 $ 8,963,605 (833,323) $ (31,944,950)
========== ============ =========== =============
Annual Report | 109
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
-----------------------------
SHARES AMOUNT
----------- ---------------
CLASS A SHARES:
Year ended April 30, 2009
Shares sold ..................................... 17,662,329 $ 434,589,836
Shares issued in reinvestment of distributions .. 273,597 5,217,433
Shares redeemed ................................. (52,103,900) (1,335,399,836)
----------- ---------------
Net increase (decrease) ......................... (34,167,974) $ (895,592,567)
=========== ===============
Year ended April 30, 2008
Shares sold ..................................... 27,344,993 $ 1,030,832,137
Shares issued in reinvestment of distributions .. 17,940,000 630,770,384
Shares redeemed ................................. (48,105,487) (1,882,626,463)
----------- ---------------
Net increase (decrease) ......................... (2,820,494) $ (221,023,942)
=========== ===============
CLASS B SHARES:
Year ended April 30, 2009
Shares sold ..................................... 45,036 $ 1,007,278
Shares issued in reinvestment of distributions .. 2,216 39,845
Shares redeemed ................................. (230,737) (5,349,636)
----------- ---------------
Net increase (decrease) ......................... (183,485) $ (4,302,513)
=========== ===============
Year ended April 30, 2008
Shares sold ..................................... 58,760 $ 2,259,539
Shares issued in reinvestment of distributions .. 142,174 4,751,473
Shares redeemed ................................. (193,900) (6,878,651)
----------- ---------------
Net increase (decrease) ......................... 7,034 $ 132,361
=========== ===============
CLASS C SHARES:
Year ended April 30, 2009
Shares sold ..................................... 858,621 $ 19,025,475
Shares issued in reinvestment of distributions .. 46,706 810,803
Shares redeemed ................................. (4,306,440) (95,258,338)
----------- ---------------
Net increase (decrease) ......................... (3,401,113) $ (75,422,060)
=========== ===============
Year ended April 30, 2008
Shares sold ..................................... 1,327,722 $ 46,812,879
Shares issued in reinvestment of distributions .. 2,777,328 89,596,613
Shares redeemed ................................. (3,447,379) (120,131,071)
----------- ---------------
Net increase (decrease) ......................... 657,671 $ 16,278,421
=========== ===============
CLASS R SHARES:
Year ended April 30, 2009
Shares sold ..................................... 1,102,996 $ 27,082,387
Shares issued in reinvestment of distributions .. 8,509 158,871
Shares redeemed ................................. (1,573,683) (38,473,013)
----------- ---------------
Net increase (decrease) ......................... (462,178) $ (11,231,755)
=========== ===============
Year ended April 30, 2008
Shares sold ..................................... 1,064,140 $ 39,882,854
Shares issued in reinvestment of distributions .. 475,058 16,389,509
Shares redeemed ................................. (1,487,464) (58,153,987)
----------- ---------------
Net increase (decrease) ......................... 51,734 $ (1,881,624)
=========== ===============
110 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
-----------------------------
SHARES AMOUNT
----------- ---------------
ADVISOR CLASS SHARES:
Year ended April 30, 2009
Shares sold ..................................... 5,582,498 $ 134,594,968
Shares issued in reinvestment of distributions .. 63,569 1,241,512
Shares redeemed ................................. (8,196,350) (214,135,537)
----------- ---------------
Net increase (decrease) ......................... (2,550,283) $ (78,299,057)
=========== ===============
Year ended April 30, 2008
Shares sold ..................................... 11,838,328 $ 479,997,430
Shares issued in reinvestment of distributions .. 3,474,301 124,762,163
Shares redeemed ................................. (10,036,923) (361,849,662)
----------- ---------------
Net increase (decrease) ......................... 5,275,706 $ 242,909,931
=========== ===============
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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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
Annual Report | 111
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Focused Core Equity Fund pays an investment management fee to
Advisers based on the average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- -----------------------------------------------------
0.750% Up to and including $500 million
0.650% Over $500 million, up to and including $1 billion
0.600% Over $1 billion, up to and including $1.5 billion
0.550% Over $1.5 billion, up to and including $6.5 billion
0.525% Over $6.5 billion, up to and including $11.5 billion
0.500% Over $11.5 billion, up to and including $16.5 billion
0.490% Over $16.5 billion, up to and including $19 billion
0.480% Over $19 billion, up to and including $21.5 billion
0.470% In excess of $21.5 billion
The Franklin Growth Opportunities Fund pays an investment management fee to
Advisers based on the average daily net assets 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 pays an investment management fee to Advisers
based on the average daily net assets 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
112 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Franklin Focused Core Equity Fund, the Franklin Growth Opportunities Fund,
and the Franklin Small Cap Growth Fund 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.
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.
On December 2, 2008, the Trust's Board of Trustees approved a modification to
the Class A distribution plan for the Franklin Focused Core Equity Fund and the
Franklin Small Cap Growth Fund, changing the form of the plan from a
compensation to a reimbursement distribution plan. Under the distribution plan,
the Funds reimburse Distributors for costs incurred in connection with the
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate for each class. This change was effective February 1, 2009. Under the
Class A reimbursement distribution plans, costs exceeding the maximum for the
current plan year cannot be reimbursed in subsequent periods. Prior to February
1, 2009, under the fund's Class A compensation distribution plan, the fund paid
Distributors for costs incurred in connection with the servicing, sale and
distribution of the fund's shares up to a certain percentage per year of its
average daily net assets.
In addition, under the Funds' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND
----------- ------------ ------------- ----------- -------------
Reimbursement Plans:
Class A ......... 0.25% 0.35% 0.35% 0.35% 0.25%
Compensation Plans:
Class B ......... 1.00% -- 1.00% 1.00% 1.00%
Class C ......... 1.00% 1.00% 1.00% 1.00% 1.00%
Class R ......... 0.50% 0.50% 0.50% 0.50% 0.50%
Annual Report | 113
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
The Board of Trustees has set the current rate at 0.30% per year for Class A
shares for the Franklin Focused Core Equity Fund, the Franklin Growth
Opportunities Fund, and the Franklin Small Cap Growth Fund until further notice
and approval by the Board.
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 year:
FRANKLIN
FRANKLIN FRANKLIN GROWTH FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND
----------- ------------ ------------- -----------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ....... $530,130 $1,765 $72,197 $35,750
Contingent deferred sales charges retained ... $ 55,218 $ 84 $14,869 $ 3,974
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ....... $170,304
Contingent deferred sales charges retained ... $ 21,174
E. TRANSFER AGENT FEES
For the year ended April 30, 2009, 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 GROWTH FRANKLIN FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND
----------- ------------ ------------- ----------- -------------
Transfer agent fees ... $3,802,100 $1,772 $492,012 $629,019 $7,805,377
F. WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Focused Core Equity Fund, FT Services and Advisers have agreed
in advance to waive all or a portion of their respective fees and to assume
payment of other expenses through August 31, 2010. Total expenses waived or paid
are not subject to reimbursement by the Fund subsequent to the Fund's fiscal
year end. After August 31, 2010, FT Services and Advisers may discontinue this
waiver at any time upon notice to the Fund's Board of Trustees.
G. OTHER AFFILIATED TRANSACTIONS
At April 30, 2009, Advisers owned 60.57% of the Franklin Focused Core Equity
Fund's outstanding shares.
114 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 year ended April 30, 2009, 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, 2009, the capital loss carryforwards were as
follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
----------- ------------ -------------
Capital loss carryforwards expiring in:
2010 ............................... $ -- $ -- $ 82,516,835
2011 ............................... -- -- 47,112,100
2017 ............................... 2,534,738 82,022 33,744,357
---------- ------- ------------
$2,534,738 $82,022 $163,373,292
========== ======= ============
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
----------- -------------
Capital loss carryforwards expiring in 2017 ... $33,103,850 $78,384,777
=========== ===========
For tax purposes, realized capital losses and 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, 2009, deferred losses were as
follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND
----------- ------------ ------------- -----------
Realized capital losses ... $92,579,726 $573,978 $31,695,913 $75,605,864
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-------------
Realized capital losses .... $594,863,011
Realized currency losses ... $ 99,563
Annual Report | 115
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended April 30, 2009
and 2008, was as follows:
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE
GROWTH FUND EQUITY FUND
------------------ ---------------------
2009 2008 2009 2008
---- ----------- ------- ----
Distributions paid from:
Ordinary income .......... $-- $ 1,267,758 $95,510 $--
Long term capital gain ... -- 46,697,116 110 --
--- ----------- ------- ---
$-- $47,964,874 $95,620 $--
=== =========== ======= ===
FRANKLIN SMALL CAP FRANKLIN SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------------------- ---------------------------
2009 2008 2009 2008
---------- ------------ ---------- --------------
Distributions paid from:
Ordinary income .......... $3,622,227 $ 5,157,068 $ -- $ 36,223,776
Long term capital gain ... 384,438 148,598,197 9,106,645 1,041,965,020
---------- ------------ ---------- --------------
$4,006,665 $153,755,265 $9,106,645 $1,078,188,796
========== ============ ========== ==============
At April 30, 2009, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
Cost of investments .......................... $2,073,210,377 $ 6,351,342 $263,066,357
============== =========== ============
Unrealized appreciation ...................... $ 262,051,782 $ 373,810 $ 41,241,469
Unrealized depreciation ...................... (271,529,823) (1,760,935) (19,079,496)
-------------- ----------- ------------
Net unrealized appreciation (depreciation) ... $ (9,478,041) $(1,387,125) $ 22,161,973
============== =========== ============
Distributable earnings - undistributed
ordinary income ........................... $ -- $ 2,162 $ --
============== =========== ============
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ --------------
Cost of investments .......................... $275,093,229 $3,012,675,159
============ ==============
Unrealized appreciation ...................... $ 38,564,434 $ 494,447,407
Unrealized depreciation ...................... (72,709,043) (444,469,897)
------------ --------------
Net unrealized appreciation (depreciation) ... $(34,144,609) $ 49,977,510
============ ==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, bond
discounts and premiums, non-deductible expenses, and offering costs.
116 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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 of investments (excluding short term securities) for the
year ended April 30, 2009, were as follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND
------------ ------------ ------------- ------------ --------------
Purchases ... $863,649,717 $5,675,725 $296,128,649 $176,472,540 $2,073,864,959
Sales ....... $817,840,117 $3,623,529 $229,755,510 $382,009,530 $2,899,506,960
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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 (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 may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Annual Report | 117
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At April 30, 2009, 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/WARRANTS/ ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE COST VALUE
- ---------------- -------------------------------------------------------- ----------- ---------- -----------
FRANKLIN FLEX CAP GROWTH FUND
36,443 Anda Networks ............................................. 3/24/00 $2,000,000 $ 28,061
2,227,171 Fibrogen Inc., pfd., E .................................... 5/19/00 9,999,998 11,224,942
-----------
TOTAL RESTRICTED SECURITIES (0.55% of Net Assets) ... $11,253,003
===========
FRANKLIN GROWTH OPPORTUNITIES FUND
374,806 Dilithium Networks Inc., depository receipt,
D, pfd., 144A, PIPES ................................... 7/13/06 $ 873,300 487,248
14,501 Dilithium Networks Inc., 11.00%,
12/31/09 ............................................... 10/30/08 14,501 14,501
12,447 Dilithium Networks Inc., wts.,
12/31/09 ............................................... 10/30/08 -- --
-----------
TOTAL RESTRICTED SECURITIES (0.18% of Net Assets) ... $ 501,749
===========
FRANKLIN SMALL-MID CAP GROWTH FUND
91,107 Anda Networks ............................................. 3/24/00 $5,000,000 $ 70,152
===========
TOTAL RESTRICTED SECURITIES (0.00%(a) of Net Assets)
(a) Rounds to less than 0.01% of net assets.
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act 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 Small-Mid Cap Growth Fund
for the year ended April 30, 2009, were as shown below.
NUMBER NUMBER
OF SHARES OF SHARES
HELD AT HELD AT REALIZED
BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR INCOME GAIN (LOSS)
- -------------- --------- --------- ---------- --------- ----------- ---------- -------------
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
American Medical Systems Holdings Inc. ... 3,689,900 -- 3,689,900 -- $ --(a) $ -- $ (25,524,870)
Force Protection Inc. .................... 3,734,600 -- 1,325,500 2,409,100 --(a) -- (6,967,125)
FormFactor Inc. .......................... 3,689,300 -- 971,776 2,717,524 47,366,443 -- (25,615,375)
Microsemi Corp. .......................... 5,007,300 -- 5,007,300 -- --(a) -- (46,179,780)
Orbital Sciences Corp. ................... 3,420,100 -- 3,420,100 -- --(a) -- (23,689,450)
Silicon Laboratories Inc. ................ 3,561,500 -- 1,531,100 2,030,400 --(a) -- (1,758,951)
The Men--s Wearhouse Inc. ................ 3,301,000 -- 3,301,000 -- --(a) 394,940 (58,939,751)
Wolverine World Wide Inc. ................ 3,792,210 -- 1,523,135 2,269,075 --(a) 1,165,938 61,324
----------- ---------- -------------
TOTAL AFFILIATED SECURITIES
(1.55% of Net Assets) .............. $47,366,443 $1,560,878 $(188,613,978)
=========== ========== =============
(a) As of April 30, 2009 no longer an affiliate.
118 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CREDIT FACILITY
Effective January 23, 2009, the Funds, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to
interest charged on any borrowings made by the Funds and other costs incurred by
the Funds, pay its share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee based upon the unused portion of the Global Credit
Facility. During the period, the Funds incurred commitment fees of $3,720 of
their pro rata portion of the Global Credit Facility, which is reflected in
Other expenses on the Statements of Operations. During the year ended April 30,
2009, the Funds did not utilize the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Funds have determined that the implementation
of SFAS 157 did not have a material impact on the Funds' financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Trust's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Funds' investments and are summarized in the following fair
value hierarchy:
- Level 1 -- quoted prices in active markets for identical securities
- Level 2 -- other significant observable inputs (including quoted
prices for similar securities, interest rates, prepayment speed,
credit risk, etc.)
- Level 3 -- significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
Annual Report | 119
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of April 30, 2009, in valuing
the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ----------- ----------- --------------
FRANKLIN FLEX CAP GROWTH FUND
ASSETS:
Investments in Securities $2,052,479,333 $ -- $11,253,003 $2,063,732,336
FRANKLIN FOCUSED CORE EQUITY FUND
ASSETS:
Investments in Securities $ 4,964,217 $ -- $ -- $ 4,964,217
FRANKLIN GROWTH OPPORTUNITIES FUND
ASSETS:
Investments in Securities $ 284,726,581 $ -- $ 501,749 $ 285,228,330
FRANKLIN SMALL CAP GROWTH FUND
ASSETS:
Investments in Securities $ 240,948,620 $ -- $ -- $ 240,948,620
FRANKLIN SMALL-MID CAP GROWTH FUND
ASSETS:
Investments in Securities $3,025,190,741 $37,391,776 $ 70,152 $3,062,652,669
At April 30, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the funds' fair value,
were as follows:
FRANKLIN FRANKLIN GROWTH
FLEX CAP OPPORTUNITIES
GROWTH FUND FUND
------------- ---------------
INVESTMENTS INVESTMENTS
IN SECURITIES IN SECURITIES
------------- ---------------
Beginning Balance - May 1, 2008 ........................... $13,209,186 $1,293,081
Net realized gain (loss) ............................... -- --
Net change in unrealized appreciation (depreciation) ... (1,956,183) (805,833)
Net purchases (sales) .................................. -- 14,501
Transfers in and/or out of Level 3 ..................... -- --
----------- ----------
Ending Balance ............................................ $11,253,003 $ 501,749
=========== ==========
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ....... $(1,956,183) $ (805,833)
=========== ==========
120 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE MEASUREMENTS (CONTINUED)
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-------------
INVESTMENTS
IN SECURITIES
-------------
Beginning Balance - May 1, 2008 ................................................. $ 3,012,662
Net realized gain (loss) ..................................................... (16,635,019)
Net change in unrealized appreciation (depreciation) ......................... 13,692,509
Net purchases (sales) ........................................................ --
Transfers in and/or out of Level 3 ........................................... --
------------
Ending Balance .................................................................. $ 70,152
============
Net change in unrealized appreciation (depreciation) attributable to assets still
held at end of year .......................................................... $ (102,040)
============
12. NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Funds believe applying the various provisions of
SFAS 161 will not have a material impact on its financial statements.
In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP
FAS 157-4), which provides additional guidance when the volume and level of
activity for the asset or liability measured at fair value have significantly
decreased. Additionally, FSP FAS 157-4 amends SFAS 157, expanding disclosure
requirements by reporting entities surrounding the major categories of assets
and liabilities carried at fair value. FSP FAS 157-4 is effective for interim
and annual periods ending after June 15, 2009. The Funds are currently
evaluating the impact, if any, of applying FSP FAS 157-4.
In May 2009, FASB issued Statement No. 165, "Subsequent Events", which is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the statements are
issued or are available to be issued. FASB 165 is effective for interim or
annual financial periods ending after June 15, 2009, the adoption of FASB 165
will not have a material impact on the financial statements.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
PIPES - Private Investment in Public Equity Security
Annual Report | 121
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Flex Cap Growth Fund,
Franklin Focused Core Equity Fund, Franklin Growth Opportunities Fund, Franklin
Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund (separate
portfolios of Franklin Strategic Series, hereafter referred to as the "Funds")
at April 30, 2009, the results of each of their operations for the year then
ended, the changes in each of their net assets and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 2009 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 19, 2009
122 | Annual Report
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than the following amounts as
long term capital gain dividends for the fiscal year ended April 30, 2009:
FRANKLIN FRANKLIN FRANKLIN
FOCUSED CORE SMALL CAP SMALL-MID CAP
EQUITY FUND GROWTH FUND GROWTH FUND
- ------------ ----------- -------------
$110 $384,438 $9,473,895
Under Section 871(k)(2)(C) of the Code, the Franklin Focused Core Equity Fund
and Franklin Small Cap Growth Fund designate the maximum amount allowable but no
less than $17,123 and $3,622,227, respectively, as short term capital gain
dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code
for the fiscal year ended April 30, 2009.
Under Section 854(b)(2) of the Code, the Franklin Focused Core Equity Fund and
Franklin Small Cap Growth Fund designate 82.92% and 13.63%, respectively, of the
ordinary income dividends as income qualifying for the dividends received
deduction for the fiscal year ended April 30, 2009.
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended April 30, 2009:
FRANKLIN FRANKLIN FRANKLIN GROWTH FRANKLIN FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP SMALL-MID CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND GROWTH FUND
- ----------- ------------ --------------- ----------- -------------
$20,134,906 $93,869 $904,437 $514,803 $18,027,239
Distributions, including qualified dividend income, paid during calendar year
2009 will be reported to shareholders on Form 1099-DIV in January 2010.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Annual Report | 123
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ----------------------- -----------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 135 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 112 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement
Systems (CALPERS) (1971-2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of
California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 112 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 135 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J.
San Mateo, CA 94403-1906 Heinz Company (processed foods and
allied products), RTI International
Metals, Inc. (manufacture and
distribution of titanium), Canadian
National Railway (railroad) and
White Mountains Insurance Group,
Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
124 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ----------------------- -----------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 112 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2007 135 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 112 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm)
(1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ----------------------- -----------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 135 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42
of the investment companies in Franklin Templeton Investments.
Annual Report | 125
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ----------------------- -----------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 52 None
One Franklin Parkway President and 1991 and
San Mateo, CA 94403-1906 Chief President and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton
Investments.
EDWARD L. GEARY (1962) Vice President Since March 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer of 46 of the investment companies in Franklin Templeton Investments.
126 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ----------------------- -----------------------------------
ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of
four of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of six of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
Annual Report | 127
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ----------------------- -----------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ----------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
128 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 14, 2009, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds within the Trust
(Fund(s)). In reaching this decision, the Board took into account information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the annual renewal review process.
Information furnished and discussed throughout the year included investment
performance reports and related financial information for each Fund, as well as
periodic reports on shareholder services, legal, compliance, pricing, brokerage
commissions and execution and other services provided by the Investment Manager
(Manager) and its affiliates. Information furnished specifically in connection
with the renewal process included a report for each Fund prepared by Lipper,
Inc. (Lipper), an independent organization, as well as additional material,
including a Fund profitability analysis report prepared by management. The
Lipper reports compared each Fund's investment performance and expenses with
those of other mutual funds deemed comparable to the Fund as selected by Lipper.
The Fund profitability analysis report discussed the profitability to Franklin
Templeton Investments from its overall U.S. fund operations, as well as on an
individual fund-by-fund basis. Included with such profitability analysis report
was information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates including management's explanation of differences
where relevant and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Funds by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale and a comparative analysis concerning transfer agent fees
charged each Fund. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
Annual Report | 129
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Among other factors taken into account by the Board
were the Manager's best execution trading policies, including a favorable report
by an independent portfolio trading analytical firm. Consideration was also
given to the experience of each Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of a portfolio
manager's bonus compensation was the relative investment performance of the
funds he or she managed and that a portion of such bonus was required to be
invested in a predesignated list of funds within such person's fund management
area so as to be aligned with the interests of Fund shareholders. The Board also
took into account the quality of transfer agent and shareholder services
provided Fund shareholders by an affiliate of the Manager, noting continuing
expenditures by management to increase and improve the scope of such services,
periodic favorable reports on such service conducted by third parties, and the
continuous enhancements to and high industry ranking given the Franklin
Templeton website. Particular attention was given to the overall performance and
actions taken by the Manager and its affiliates in response to problems arising
out of the market turmoil and financial crisis experienced during the past year.
In this respect, the Board noted that management's independent credit analysis
and diligent risk management procedures had minimized exposure of funds within
the Franklin Templeton complex to subprime mortgages and that its continuous
monitoring of counterparty credit risk had limited fund exposure to firms
experiencing financial difficulties like Bear Stearns and AIG. The same type of
conservative approach and attention to risk had also prevented any structured
investment products or other volatile instruments from being held in the
portfolios of any of the money market funds within the Franklin Templeton
complex, including the sweep money fund utilized by many of the funds as part of
their cash management. The Board also took into account, among other things,
management's efforts in establishing a $725 million global credit facility for
the benefit of the funds and other accounts managed by Franklin Templeton
Investments to provide a source of cash for temporary and emergency purposes or
to meet unusual redemption requests as well as the strong financial position of
the Manager's parent company and its commitment to the mutual fund business. The
Board also noted that during the past year Franklin Templeton Investments, like
many other fund managers, had announced a hiring freeze and implemented employee
reductions, and the Board discussed with management the nature of such
reductions and steps being taken to minimize any negative impact on the nature
and quality of services being provided the Funds.
130 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Funds in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each individual Fund showed
the investment performance of its Class A shares for those having multiple share
classes in comparison to a performance universe selected by Lipper. Comparative
performance for each Fund was shown for the one-year period ended January 31,
2009, and previous periods ended that date of up to 10 years depending on when a
particular Fund commenced operations. The following summarizes the performance
results for each of these Funds and the Board's view of such performance.
FRANKLIN FLEX CAP GROWTH FUND -- The performance universe for this Fund
consisted of the Fund and all retail and institutional multi-cap growth funds as
selected by Lipper. Consistent with the market sell-off that occurred during the
past year, the Fund and most of the funds in the Lipper performance universe
experienced losses during such period. The Lipper report showed the Fund's total
return to be in the highest quintile of such performance universe for the
one-year period and on an annualized basis to be in the highest or
second-highest quintile of the performance universe during each of the previous
three-, five- and 10-year periods. The Board noted such favorable comparative
performance.
FRANKLIN FOCUSED CORE EQUITY FUND -- The performance universe for this Fund
consisted of all retail and institutional multi-cap core funds as selected by
Lipper. Consistent with the market sell-off that occurred during the past year,
the Fund and all the other funds in the Lipper performance universe experienced
losses during such period. The Fund has been in operation for only one full year
and the Lipper report showed its total return for the one-year period to be in
the second-lowest quintile of such performance universe. The Board discussed
such performance and steps being taken to improve it with management, but did
not believe it particularly meaningful in view of the Fund's brief period of
operation.
FRANKLIN GROWTH OPPORTUNITIES FUND -- The performance universe for this Fund
consisted of the Fund and all retail and institutional multi-cap growth funds as
selected by Lipper. Consistent with the market sell-off that occurred during the
past year, the Fund and most of the funds in the Lipper performance universe
experienced losses during such period. The Lipper report comparison showed the
Fund's total return for the one-year period to be in the highest quintile of its
performance universe, and on an annualized basis to be in the highest or
second-highest quintile of such universe during each of the previous three- and
five-year periods. The Fund has not been in operation for a full 10-year period.
The Board noted such favorable comparative performance.
FRANKLIN SMALL-MID CAP GROWTH FUND -- The performance universe for this Fund
consisted of all retail and institutional mid-cap growth funds as selected by
Lipper. Consistent with the market sell-off that occurred during the past year,
the Fund and all the other funds in the Lipper performance universe experienced
losses during such period. The Lipper report comparison for the Fund
Annual Report | 131
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
showed its total return during the one-year period to be in the second-highest
quintile of such performance universe, and on an annualized basis was in the
middle quintile of such universe during each of the previous three- and
five-year periods, and the second-highest quintile of such universe during the
previous 10-year period. The Board noted such comparative performance to be
acceptable.
FRANKLIN SMALL CAP GROWTH FUND -- The performance universe for this Fund
consisted of the Fund and all retail and institutional small cap growth funds as
selected by Lipper. Consistent with the market sell-off that occurred during the
past year, the Fund and most of the funds in the Lipper performance universe
experienced losses during such period. The Lipper report comparison for the Fund
showed its total return to be in the second-highest quintile of such performance
universe during the one-year period and to be in the second-lowest quintile of
such universe for the previous three- and five-year periods on an annualized
basis. The independent Trustees had met separately last year with the Fund's
lead portfolio manager and other management representatives to discuss its
relatively poor past performance and steps being taken to improve it, and noted
the Fund's favorable comparative performance during the past one-year period.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group.
Lipper expense data is based upon historical information taken from each fund's
most recent annual report and, as a result of the severe decline in mutual fund
industry assets during the last quarter of 2008, is based on asset levels that
are higher than the level currently existing for most funds. While recognizing
the limitations inherent in Lipper's methodology and recognizing that current
expense ratios may increase as assets decline, the Board believed that the
independent analysis conducted by Lipper remained an appropriate measure of
comparative expenses. In reviewing comparative costs, Lipper provides
information on each Fund's contractual investment management fee in comparison
with the investment management fee that would have been charged by other funds
within its Lipper expense group assuming they were similar in size to the Fund,
as well as the actual total expenses of the Fund in comparison with those of its
Lipper expense group. The Lipper contractual investment management fee analysis
includes administrative charges as being part of the investment management fee,
and actual total expenses, for comparative consistency, are shown by Lipper for
Fund Class A shares for those Funds with multiple share classes. The results of
such expense comparisons showed the contractual investment management fee rates
and actual total expense rates for each of Franklin Flex Cap Growth Fund and
Franklin Small Cap Growth Fund were in the least expensive quintile of their
respective Lipper expense groups. The contractual investment management fee rate
for Franklin Small Mid-Cap Growth Fund was in the least expensive quintile of
its Lipper expense group and its actual total expense rate was in the second
least expensive quintile of such expense group. The contractual management fee
rate for Franklin Growth Opportunities Fund was in the second least expensive
quintile of its Lipper expense group and its actual total expense rate was in
the second least expensive quintile of such group. The Board was satisfied with
the contractual management fees and total expenses of each of these Funds in
comparison to their expense group
132 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
as shown in the Lipper reports. The contractual investment management fee rate
for Franklin Focused Core Equity Fund was in the second most expensive quintile
of its Lipper expense group, but its actual total expense rate was in the least
expensive quintile of such expense group. The Board was satisfied with the
expenses of this Fund, noting they were subsidized by management.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds during the 12-month period ended September 30,
2008, being the most recent fiscal year end for Franklin Resources, Inc., the
Manager's parent. During such period, the assets of the Franklin Templeton U.S.
fund business were significantly higher than currently existing, and to such
extent the profitability analysis does not reflect current fund operations.
While taking this into account in assessing the significance of the Fund
profitability analysis, the Board recognized such analysis was made at a given
point in time and that the decline in assets and effect on profitability would
be reflected in the profitability analysis covering Franklin Resources' 2009
fiscal year period. In reviewing the analysis, attention was given to the
methodology followed in allocating costs to each Fund, it being recognized that
allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that, while being continuously refined and reflecting
changes in the Manager's own cost accounting, the allocation methodology was
consistent with that followed in profitability report presentations for the
Funds made in prior years and that the Funds' independent registered public
accounting firm had been engaged by the Manager to perform certain procedures on
a biennial basis, specified and approved by the Manager and the Funds' Board
solely for their purposes and use in reference to the profitability analysis. In
reviewing and discussing such analysis, management discussed with the Board its
belief that costs incurred in establishing the infrastructure necessary for the
type of mutual fund operations conducted by the Manager and its affiliates may
not be fully reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In
addition, the Board considered a third-party study comparing the profitability
of the Manager's parent on an overall basis as compared to other publicly held
managers broken down to show profitability from management operations exclusive
of distribution expenses, as well as profitability including distribution
expenses. The Board also considered the extent to which the Manager and its
affiliates might derive ancillary benefits from fund operations, including its
interest in a joint venture entity that financed up-front commissions paid to
brokers/dealers who sold fund Class B shares prior to February 2005 when the
offering of such shares was discontinued, as well as potential benefits
resulting from allocation of fund brokerage and the use of commission dollars to
pay for research. Based upon its consideration of all these
Annual Report | 133
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
factors, the Board determined that the level of profits realized by the Manager
and its affiliates from providing services to each Fund was not excessive in
view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreements for all of the Funds contains breakpoints that continued to asset
levels that exceeded their asset size at December 31, 2008. The assets of
Franklin Focused Core Equity Fund amounted to approximately $4 million at
December 31, 2008 and the Board did not believe such size afforded any economies
of scale, noting expenses were subsidized by management. In view of such fee
structure and the favorable expense comparisons of the other Funds within their
respective expense groups, the Board believed that to the extent economies of
scale may be realized by the manager of these Funds and its affiliates, that
there was a sharing of benefits with each Fund and its shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager 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 (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 (800)
SEC-0330.
134 | Annual Report
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Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL
BEN/(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.
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Global Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(3)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(3)
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(3)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(4)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(5)
LIMITED-/INTERMEDIATE-TERM
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(6)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(6)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(8)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(4.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(5.) The fund invests primarily in insured municipal securities.
(6.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(7.) The Board of Trustees approved the elimination of the non-fundamental
policy requiring the fund to invest at least 80% of net assets in insured
municipal securities and the removal of the word "Insured" from the fund
name. The changes became effective 2/17/09.
(8.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
04/09 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2009 06/09
APRIL 30, 2009
ANNUAL REPORT AND SHAREHOLDER LETTER
Franklin Biotechnology Discovery Fund
Franklin Natural Resources Fund
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Log onto franklintempleton.com and click "My Profile"
(GRAPHIC)
SECTOR
FRANKLIN STRATEGIC SERIES
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
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)
Not part of the annual report
Contents
ANNUAL REPORT
SHAREHOLDER LETTER ........................................................ 1
Economic and Market Overview .............................................. 3
Franklin Biotechnology Discovery Fund ..................................... 5
Franklin Natural Resources Fund ........................................... 12
Financial Highlights and Statements of Investments ........................ 22
Financial Statements ...................................................... 32
Notes to Financial Statements ............................................. 36
Report of Independent Registered Public Accounting Firm ................... 49
Tax Designation ........................................................... 50
Board Members and Officers ................................................ 51
Shareholder Information ................................................... 56
Shareholder Letter
Dear Shareholder:
The 12-month period ended April 30, 2009, was an extraordinary and stressful
time for investors and those of us who have worked in financial markets for many
years. During this turbulent period, the U.S. recession deepened, the
unemployment rate surged and consumer spending fell. Most stocks suffered major
losses as investors worried about an uncertain future. With a new president,
Barack Obama, the country and the financial markets were eager to see how
effectively the government could address these problems. Although this
environment is bound to provoke great concern, we think it is important to put
short-term market developments in perspective. Keep in mind that as daunting as
current conditions may be, we have navigated through other periods of high
market volatility, such as the U.S. stock market's severe decline of 1987 and
the bursting of the technology bubble in 2000. We remain committed to our
long-term perspective and disciplined investment philosophy. Therefore, we view
recent declines as potential opportunities to find bargains that we believe may
be well positioned to become eventual winners. Although conditions remain
challenging, our experience gives us ample reason to be optimistic about future
market stabilization and recovery.
Franklin Strategic Series' annual report goes into greater detail about
prevailing conditions during the year under review. In addition, the portfolio
managers discuss investment management decisions and Fund performance for the
period. You will also find performance data and financial information. Please
remember that all securities markets fluctuate, as do mutual fund share prices.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual 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.
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Funds, keeping in mind the trust you have
placed in us. 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 current market conditions.
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 APRIL 30, 2009. 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 annual report
Annual Report
Economic and Market Overview
During the 12-month period ended April 30, 2009, the U.S. economy and stock
markets suffered significant declines, but tentative signs of stabilization
emerged near period-end. The government's abrupt conservatorship of Fannie Mae
and Freddie Mac in early September 2008 and the failure of several blue chip
banks and financial institutions roiled equity markets for most of the reporting
period. Despite government interventions and massive emergency funding, the
nation's economic troubles were exacerbated as manufacturing activity weakened
at its fastest pace in nearly 30 years. Although home sales declined for most of
the period, they edged higher near period-end. Jobless claims mounted and the
unemployment rate rose to 8.9% in April 2009.(1) Reflecting a broad-based
contraction in consumer spending, falling corporate profits and slowing exports,
economic growth, as measured by gross domestic product (GDP), fell in the third
and fourth quarters of 2008 at annualized rates of 0.5% and 6.3% after
increasing at a 2.8% annualized rate in the second quarter. In 2009's first
quarter, GDP declined at an estimated 5.7% annualized rate.
Oil prices stood at $113 per barrel at the beginning of the period, but
retreated dramatically to $51 by period-end. Many other commodities such as
agricultural products and base metals followed similar trends. Partially as a
result of the steep price corrections, inflation declined significantly during
the period, and April's inflation rate was an annualized -0.7%.(1) Core
inflation, which excludes food and energy costs, rose at a 1.9% annual rate,
which was within the Federal Reserve Board's (Fed's) informal target range of
1.5%-2.0%.(1)
A slowing economy and decelerating inflation prompted policymakers to further
lower interest rates and enact stimulus plans. During the 12 months under
review, the Fed lowered the federal funds target rate to a range of 0% to 0.25%
from 2.00% at the start of the period. The government introduced various new
measures to enhance market liquidity and outlined details of its Public-Private
Investment Program, with an objective of removing devalued real estate-related
assets from banks' balance sheets.
(1.) Source: Bureau of Labor Statistics.
Annual Report | 3
Market volatility was high during the reporting period, but near period-end,
stock markets began to rebound from severely depressed levels. Overall, however,
they declined significantly during the period. For the 12 months under review,
the blue chip stocks of the Dow Jones Industrial Average had a total return of
- -34.19%, the broader Standard & Poor's 500 Index (S&P 500) a -35.31% total
return, and the technology-heavy NASDAQ Composite Index a -28.13% total
return.(2) All sectors lost value, and the financials, industrials and energy
sectors had the largest declines.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30,
2009. 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.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. 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.
4 | Annual 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.
PORTFOLIO BREAKDOWN
Franklin Biotechnology Discovery Fund
Based on Total Net Assets as of 4/30/09
(PIE CHART)
Biotechnology.............................. 67.5%
Pharmaceuticals............................ 16.5%
Life Sciences Tools & Services............. 9.0%
Short-Term Investments & Other Net Assets.. 7.0%
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Biotechnology Discovery Fund covers the fiscal
year ended April 30, 2009.
PERFORMANCE OVERVIEW
Franklin Biotechnology Discovery Fund - Class A had a -9.10% cumulative total
return for the 12 months under review. The Fund performed better than its narrow
benchmark, the NASDAQ Biotechnology Index, and its broad benchmark, the Standard
& Poor's 500 Index (S&P 500), which had -15.59% and -35.31% total returns for
the same period.(1) For comparison, the NASDAQ
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The NASDAQ Biotechnology Index contains companies
primarily engaged in using biomedical research for the discovery or
development of novel treatments or cures for human disease, which also meet
other eligibility criteria. The NASDAQ Biotechnology Index is calculated
under a modified capitalization-weighted methodology. 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 23.
Annual Report | 5
TOP 10 HOLDINGS
Franklin Biotechnology Discovery Fund
4/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Gilead Sciences Inc. 11.7%
BIOTECHNOLOGY
Celgene Corp. 8.9%
BIOTECHNOLOGY
Genzyme Corp. 8.4%
BIOTECHNOLOGY
Amgen Inc. 7.9%
BIOTECHNOLOGY
Biogen Idec Inc. 5.4%
BIOTECHNOLOGY
Teva Pharmaceutical Industries Ltd. (Israel) 5.1%
PHARMACEUTICALS
Life Technologies 4.4%
LIFE SCIENCES TOOLS & SERVICES
Roche Holding AG (Switzerland) 3.9%
PHARMACEUTICALS
Cephalon Inc. 3.9%
BIOTECHNOLOGY
BioMarin Pharmaceutical Inc. 2.7%
BIOTECHNOLOGY
Composite Index had a 12-month return of -28.13%.(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
The Fund had numerous detractors from absolute performance during an extremely
difficult year for stocks of all kinds, including many of those related to the
health care sector. Within the Fund's portfolio, these included biotechnology
holdings Celgene, Genzyme and Orexigen Therapeuutics; holdings within the life
sciences tools and services industry, Helicos Biosciences and Sequenom; and
pharmaceuticals industry holdings Somaxon Pharmaceuticals (sold by period-end),
XenoPort (sold by period-end), Cardiome Pharma and BioForm Medical. All these
positions posted double-digit losses during the year under review and subtracted
heavily from overall returns.
In contrast, but to a lesser extent, several contributors helped buoy the Fund's
absolute results during the fiscal year. The Fund benefited from a wave of
mergers in the biotechnology industry as it owned a large position in Genentech,
which during March was acquired by strategic partner and Swiss pharmaceutical
giant Roche Holding. Kosan Biosciences was another of our positions that
appreciated strongly before ultimately being acquired early in the reporting
period by drug maker Bristol-Myers Squibb. Myriad Genetics also stood out as a
top performer as its predictive medicine products continued to show strong
adoption in the marketplace. Genetic analytical tools and services provider
(2.) Source: (C) 2009 Morningstar. The NASDAQ Composite Index measures all
NASDAQ 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 index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
6 | Annual Report
Illumina posted solid returns, as did Life Technologies, a global leader in
biotechnology reagents and systems that was created from the summer 2008 merger
of Applied Biosystems and Invitrogen.
Thank you for your continued participation in Franklin Biotechnology Discovery
Fund. We look forward to serving your future investment needs.
(PHOTO OF EVAN MCCULLOCH)
/s/ Evan McCulloch
Evan McCulloch, CFA
Portfolio Manager
Franklin Biotechnology Discovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2009, 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.
Annual Report | 7
Performance Summary as of 4/30/09
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 and graph do not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FBDIX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- --------
Net Asset Value (NAV) -$4.99 $49.73 $54.72
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- --------
Cumulative Total Return(1) -9.12% -6.63% +113.51%
Average Annual Total Return(2) -14.33% -2.52% +7.24%
Value of $10,000 Investment(3) $ 8,567 $8,800 $ 20,121
Avg. Ann. Total Return (3/31/09)(4) -9.92% -1.10% +7.44%
Total Annual Operating Expenses(5) 1.27%
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 (800) 342-5236.
8 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged indexes include reinvestment of
any income or distributions. They differ from the Fund in composition and do not
pay management fees or expenses. One cannot invest directly in an index.
CLASS A (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN BIOTECHNOLOGY S&P 500 NASDAQ BIOTECHNOLOGY
DATE DISCOVERY FUND - CLASS A INDEX INDEX
- ---------- ------------------------ ------- --------------------
5/1/1999 $ 9,424 $10,000 $10,000
5/31/1999 $ 9,496 $ 9,764 $10,769
6/30/1999 $10,435 $10,306 $11,158
7/31/1999 $11,583 $ 9,984 $12,600
8/31/1999 $12,643 $ 9,935 $13,823
9/30/1999 $12,490 $ 9,662 $12,966
10/31/1999 $12,732 $10,274 $13,186
11/30/1999 $14,388 $10,482 $14,892
12/31/1999 $20,150 $11,100 $19,398
1/31/2000 $24,137 $10,542 $22,345
2/29/2000 $37,551 $10,343 $32,476
3/31/2000 $28,491 $11,354 $24,115
4/30/2000 $24,387 $11,013 $20,959
5/31/2000 $23,229 $10,787 $20,373
6/30/2000 $32,588 $11,053 $26,766
7/31/2000 $30,372 $10,880 $24,715
8/31/2000 $36,647 $11,556 $29,983
9/30/2000 $37,455 $10,946 $28,931
10/31/2000 $33,786 $10,899 $26,577
11/30/2000 $27,854 $10,040 $23,073
12/31/2000 $29,537 $10,089 $23,857
1/31/2001 $27,344 $10,447 $22,936
2/28/2001 $24,908 $ 9,495 $21,170
3/31/2001 $20,040 $ 8,893 $16,863
4/30/2001 $23,378 $ 9,584 $20,061
5/31/2001 $24,362 $ 9,648 $21,727
6/30/2001 $25,507 $ 9,414 $22,293
7/31/2001 $22,015 $ 9,321 $19,118
8/31/2001 $22,351 $ 8,737 $19,315
9/30/2001 $19,433 $ 8,032 $16,338
10/31/2001 $21,687 $ 8,185 $19,000
11/30/2001 $23,119 $ 8,813 $20,815
12/31/2001 $23,488 $ 8,890 $19,992
1/31/2002 $20,732 $ 8,760 $17,159
2/28/2002 $19,628 $ 8,591 $16,392
3/31/2002 $20,065 $ 8,915 $17,001
4/30/2002 $17,285 $ 8,374 $14,329
5/31/2002 $16,002 $ 8,312 $12,757
6/30/2002 $14,178 $ 7,720 $11,220
7/31/2002 $14,068 $ 7,118 $11,293
8/31/2002 $13,397 $ 7,165 $10,764
9/30/2002 $12,798 $ 6,386 $10,228
10/31/2002 $13,708 $ 6,949 $11,251
11/30/2002 $14,704 $ 7,358 $12,273
12/31/2002 $13,510 $ 6,925 $10,930
1/31/2003 $13,174 $ 6,744 $10,694
2/28/2003 $13,032 $ 6,643 $10,546
3/31/2003 $13,817 $ 6,707 $11,267
4/30/2003 $15,072 $ 7,260 $12,630
5/31/2003 $17,281 $ 7,642 $15,023
6/30/2003 $16,880 $ 7,740 $14,787
7/31/2003 $18,288 $ 7,876 $16,120
8/31/2003 $18,301 $ 8,030 $16,297
9/30/2003 $18,199 $ 7,944 $15,849
10/31/2003 $18,305 $ 8,394 $15,734
11/30/2003 $18,523 $ 8,468 $15,296
12/31/2003 $19,393 $ 8,912 $15,930
1/31/2004 $20,170 $ 9,075 $17,043
2/29/2004 $20,627 $ 9,202 $17,156
3/31/2004 $20,894 $ 9,063 $17,117
4/30/2004 $21,550 $ 8,920 $17,197
5/31/2004 $21,416 $ 9,043 $16,778
6/30/2004 $21,044 $ 9,219 $16,704
7/31/2004 $19,308 $ 8,914 $15,116
8/31/2004 $19,976 $ 8,950 $15,216
9/30/2004 $20,809 $ 9,047 $15,719
10/31/2004 $20,166 $ 9,185 $15,292
11/30/2004 $20,473 $ 9,556 $15,822
12/31/2004 $21,711 $ 9,882 $16,906
1/31/2005 $20,372 $ 9,641 $15,955
2/28/2005 $18,948 $ 9,844 $15,271
3/31/2005 $18,292 $ 9,669 $14,311
4/30/2005 $18,632 $ 9,486 $14,227
5/31/2005 $19,615 $ 9,788 $14,919
6/30/2005 $20,433 $ 9,802 $15,188
7/31/2005 $22,994 $10,166 $17,004
8/31/2005 $22,840 $10,073 $17,048
9/30/2005 $22,873 $10,155 $17,266
10/31/2005 $21,897 $ 9,986 $16,604
11/30/2005 $22,751 $10,363 $17,229
12/31/2005 $22,917 $10,367 $17,385
1/31/2006 $24,151 $10,642 $18,118
2/28/2006 $25,094 $10,670 $18,915
3/31/2006 $24,499 $10,803 $18,505
4/30/2006 $22,824 $10,948 $17,462
5/31/2006 $21,626 $10,633 $16,528
6/30/2006 $21,388 $10,648 $16,342
7/31/2006 $20,870 $10,713 $16,116
8/31/2006 $21,505 $10,968 $16,593
9/30/2006 $21,736 $11,251 $16,592
10/31/2006 $23,589 $11,617 $17,926
11/30/2006 $24,224 $11,838 $18,089
12/31/2006 $24,070 $12,004 $17,563
1/31/2007 $24,778 $12,186 $17,997
2/28/2007 $24,022 $11,948 $17,389
3/31/2007 $23,755 $12,081 $17,092
4/30/2007 $26,109 $12,616 $18,515
5/31/2007 $26,162 $13,057 $18,373
6/30/2007 $24,710 $12,840 $17,658
7/31/2007 $23,973 $12,442 $17,252
8/31/2007 $24,471 $12,628 $17,899
9/30/2007 $25,640 $13,100 $18,795
10/31/2007 $26,635 $13,309 $19,619
11/30/2007 $25,244 $12,752 $19,057
12/31/2007 $23,686 $12,664 $18,368
1/31/2008 $22,998 $11,904 $17,711
2/29/2008 $22,334 $11,518 $17,247
3/31/2008 $21,942 $11,468 $17,179
4/30/2008 $22,136 $12,026 $17,582
5/31/2008 $23,111 $12,182 $17,992
6/30/2008 $23,310 $11,155 $17,454
7/31/2008 $26,425 $11,061 $20,189
8/31/2008 $26,057 $11,221 $19,490
9/30/2008 $24,281 $10,221 $18,392
10/31/2008 $21,440 $ 8,505 $16,162
11/30/2008 $19,935 $ 7,895 $14,825
12/31/2008 $21,165 $ 7,979 $16,049
1/31/2009 $21,505 $ 7,306 $16,031
2/28/2009 $19,798 $ 6,528 $14,255
3/31/2009 $20,971 $ 7,100 $15,021
4/30/2009 $20,121 $ 7,779 $14,841
Total 101.21% -22.21% 48.41%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -14.33%
5-Year -2.52%
10-Year +7.24%
ENDNOTES
THE FUND IS A NONDIVERSIFIED FUND THAT CONCENTRATES IN A SINGLE SECTOR, WHICH
INVOLVES RISKS SUCH AS PATENT CONSIDERATIONS, PRODUCT LIABILITY, GOVERNMENT
REGULATORY REQUIREMENTS AND REGULATORY APPROVAL FOR NEW DRUGS AND MEDICAL
PRODUCTS. BIOTECHNOLOGY COMPANIES OFTEN ARE 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 INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS
AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF
THE MAIN INVESTMENT RISKS.
(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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2009 Morningstar. 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 Biotechnology Index contains companies primarily engaged in using
biomedical research for the discovery and development of novel treatments
or cures for human disease, which also meet other eligibility criteria. The
NADSAQ Biotechnology Index is calculated under a modified
capitalization-weighted methodology.
Annual Report | 9
Your Fund's Expenses
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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 | Annual 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.
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 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09
- ------- ----------------- -------------- -----------------------
Actual $1,000 $ 938.50 $6.83
Hypothetical (5% return before expenses) $1,000 $1,017.75 $7.10
* Expenses are calculated using the most recent six-month annualized expense
ratio of 1.42%, multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Annual Report | 11
Franklin Natural Resources Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks
high total return (total return consists of both capital appreciation and
current dividend and interest income) 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.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
GEOGRAPHIC BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 4/30/09
(BAR CHART)
North America 81.2%
Europe 4.9%
Australia & New Zealand 3.2%
Latin America & Caribbean 2.7%
Middle East & Africa 2.4%
Asia 0.2%
Short-Term Investments & Other Net Assets 5.4%
This annual report for Franklin Natural Resources Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
Franklin Natural Resources Fund - Class A had a -46.81% cumulative total return
for the 12 months under review. The Fund performed comparably to its narrow
benchmark, the Standard & Poor's (S&P) North American Natural Resources Index,
which had a -44.06% total return.(1) It underperformed its broad benchmark, the
S&P 500 Index (S&P 500), which had a -35.31% total return for the same
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 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.
(1.) Source: Standard & Poor's. The Standard & Poor's North American 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.
(2.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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 28.
12 | Annual Report
MANAGER'S DISCUSSION
For much of the year under review, the Fund's performance was hindered by
sharply subsiding commodity demand as a deepening global recession took hold and
the broad-based bear market for equities intensified. This was in stark contrast
to the first three months of the Fund's fiscal year, when many commodity prices
- -- including those for oil, coal, natural gas, precious metals, and raw
materials -- neared or surpassed all-time highs due to increased worldwide
demand, limited supplies and investors seeking alternatives to faltering stocks
and corporate bonds.
In anticipation of some level of weakness and shift in supply and demand, we
significantly reduced the Fund's weighting in the exploration and production
industry during late spring and early summer of 2008, and redeployed assets into
what we considered more conservative investments. Although these actions helped
mitigate the commodity downturn's impact and led to some measure of
outperformance versus many of our competitors, the speed and magnitude of the
decline in the second half of 2008 eventually engulfed most commodity-related
industries and negatively influenced the Fund's total return. In short, the
severity of the decline turned out to be more extreme than we anticipated,
pressuring nearly all investments with the exception of cash and equivalent
holdings.
During this difficult and volatile environment, our energy sector investments
constituted the bulk of the Fund's assets and, moreover, were responsible for a
major portion of its negative return during the year under review. Within the
sector, many of our holdings from the energy equipment and services industry
suffered significant price declines and hurt Fund performance on an absolute
basis.(3) Such companies support drilling and development efforts of oil and
natural gas explorers and producers around the world and are integral in efforts
to provide adequate supplies in the future. This is why we considered many of
the leading service providers to be core portfolio holdings. Notable detractors
included Smith International, Halliburton, Helix Energy Solutions Group,
Transocean and Schlumberger. These companies' share prices fell steeply as a
result of concerns related to lower commodity prices and spending by producers.
In addition, the credit crisis led to further pressure as many smaller producers
that held debt or were outspending their cash flow were forced to reduce
spending budgets more deeply and quickly than in previous economic downturns.
Lack of available credit also led to significant equity price declines for
companies with heretofore modest debt levels as investors grew concerned that
even some of the highest quality companies would have difficulty obtaining
credit or refinancing debt.
(3.) The energy equipment and services industry comprises oil and gas drilling
and oil and gas equipment and services in the SOI.
PORTFOLIO BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 4/30/09
Oil & Gas Exploration & Production 30.2%
Oil & Gas Equipment & Services 20.8%
Integrated Oil & Gas 14.9%
Diversified Metals & Mining 8.0%
Gold 7.0%
Oil & Gas Drilling 3.3%
Coal & Consumable Fuels 3.2%
Oil & Gas Refining & Marketing 3.0%
Precious Metals & Minerals 1.4%
Other 2.8%
Short-Term Investments & Other Net Assets 5.4%
Annual Report | 13
TOP 10 HOLDINGS
Franklin Natural Resources Fund
4/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Southwestern Energy Co. 4.0%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Petrohawk Energy Corp. 3.6%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
XTO Energy Inc. 3.5%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Devon Energy Corp. 3.3%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Marathon Oil Corp. 3.1%
INTEGRATED OIL & GAS, U.S.
Noble Energy Inc. 2.8%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Occidental Petroleum Corp. 2.8%
INTEGRATED OIL & GAS, U.S.
Range Resources Corp. 2.7%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Halliburton Co. 2.4%
OIL & GAS EQUIPMENT & SERVICES, U.S.
EOG Resources Inc. 2.4%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Several of the Fund's oil, gas and consumable fuels stocks also fared poorly and
generally tracked the precipitous decline in oil and natural gas prices
throughout most of the fiscal year, particularly Devon Energy, Mariner Energy
and ConocoPhillips.(4) In addition to leading to reduced cash flows, a decline
in commodity prices can lead to reductions in spending necessary to maintain and
grow production, eventually leading to lower equity valuations. This is one of
the reasons we focused the Fund's exploration and production holdings on what we
considered to be lower-cost producers with healthy balance sheets and
well-funded exploration and development programs.
In contrast, several Fund holdings outside of the beleaguered energy sector
contributed to absolute performance. These included metals and mining industry
stocks such as AngloGold Ashanti, Rio Tinto, Franco Nevada, BHP Billiton and
Osisko Mining, many of which benefited from the rise in the price of gold and
other metals late in the period.(5) Although most of the Fund's energy-related
holdings deteriorated, a few positions supported overall results, particularly
oil and natural gas developers such as Petrohawk Energy, Southwestern Energy and
Noble Energy. It should be noted that these stocks, similar to several other
Fund holdings, contributed positively to performance despite posting share price
declines over the past year. This resulted from the fact that we reduced
positions in the spring and early summer, as mentioned above, and made
incremental purchases at lower valuation levels throughout the downturn. These
purchases had a positive impact on the Fund during the first four months of
2009.
Although the past year was a trying period, our focus on higher quality
companies with strong business models and balance sheets helped the Fund weather
the downturn and provided us with conviction to make additional purchases of
core holdings at the depths of the crisis during the fall of 2008. We believe
this, in turn, positioned the Fund well for the subsequent recovery in equity
values. We did not avoid all of the pitfalls created over the past year and it
will be impossible to do so in the future. However, we continued to implement
our strategy of actively investing in companies that we feel present the best
risk-adjusted return potential with a focus on secular growth themes.
(4.) The oil, gas and consumable fuels industry comprises coal and consumable
fuels, integrated oil and gas, oil and gas exploration and production, oil
and gas refining and marketing, and oil and gas storage and transportation
in the SOI.
(5.) The metals and mining industry comprises aluminum, diversified metals and
mining, gold, and precious metals and minerals in the SOI.
14 | Annual Report
Thank you for your continued participation in Franklin Natural Resources Fund.
We look forward to serving your future investment needs.
(PHOTO OF FREDERICK G. FROMM)
/s/ Frederick G. Fromm
Frederick G. Fromm,
CFA Portfolio Manager
Franklin Natural Resources Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2009, 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.
Annual Report | 15
Performance Summary as of 4/30/09
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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRNRX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$23.23 $22.55 $45.78
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.6640
Long-Term Capital Gain $0.8367
TOTAL $1.5007
CLASS C (SYMBOL: FNCRX) CHANGE 4/30/09 4/30/08
- ----------------------- ------- ------- -------
Net Asset Value (NAV) -$23.20 $22.15 $45.35
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.6640
Long-Term Capital Gain $0.8367
TOTAL $1.5007
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 4/30/09 4/30/08
- ----------------------------- ------- ------- -------
Net Asset Value (NAV) -$24.33 $23.94 $48.27
DISTRIBUTIONS (5/1/08-4/30/09)
Short-Term Capital Gain $0.6640
Long-Term Capital Gain $0.8367
TOTAL $1.5007
16 | Annual 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 C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- --------
Cumulative Total Return(2) -46.81% +55.00% +128.71%
Average Annual Total Return(3) -49.87% +7.87% +7.98%
Value of $10,000 Investment(4) $ 5,013 $14,606 $ 21,553
Avg. Ann. Total Return (3/31/09)(5) -50.85% +5.16% +8.51%
Total Annual Operating Expenses(6) 0.99%
INCEPTION
CLASS C 1-YEAR 3-YEAR (9/1/05)
- ------- ------- ------- ---------
Cumulative Total Return(2) -47.19% -23.41% -10.03%
Average Annual Total Return(3) -47.68% -8.51% -2.85%
Value of $10,000 Investment(4) $ 5,232 $ 7,659 $ 8,997
Avg. Ann. Total Return (3/31/09)(5) -48.71% -10.41% -6.19%
Total Annual Operating Expenses(6) 1.70%
ADVISOR CLASS(1) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- --------
Cumulative Total Return(2) -46.66% +57.34% +136.74%
Average Annual Total Return(3) -46.66% +9.49% +9.00%
Value of $10,000 Investment(4) $ 5,334 $15,734 $ 23,674
Avg. Ann. Total Return (3/31/09)(5) -47.71% +6.72% +9.84%
Total Annual Operating Expenses(6) 0.70%
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 (800) 342-5236.
Annual Report | 17
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A(1) 4/30/09
- ---------- -------
1-Year -49.87%
5-Year +7.87%
10-Year +7.98%
CLASS A (5/1/99-4/30/09)(1)
(PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P 500 S&P NORTH AMERICAN
DATE RESOURCES FUND - CLASS A INDEX NATURAL RESOURCES INDEX
- ---- ------------------------ ------- -----------------------
5/1/1999 $ 9,424 $10,000 $10,000
5/31/1999 $ 8,976 $ 9,764 $ 9,562
6/30/1999 $ 9,614 $10,306 $10,008
7/31/1999 $ 9,864 $ 9,984 $10,081
8/31/1999 $10,014 $ 9,935 $10,390
9/30/1999 $ 9,778 $ 9,662 $ 9,997
10/31/1999 $ 9,335 $10,274 $ 9,777
11/30/1999 $ 9,392 $10,482 $ 9,855
12/31/1999 $ 9,971 $11,100 $10,092
1/31/2000 $ 9,714 $10,542 $ 9,684
2/29/2000 $ 9,628 $10,343 $ 9,259
3/31/2000 $11,338 $11,354 $10,568
4/30/2000 $11,259 $11,013 $10,373
5/31/2000 $12,196 $10,787 $11,134
6/30/2000 $11,953 $11,053 $10,572
7/31/2000 $11,123 $10,880 $10,217
8/31/2000 $12,690 $11,556 $11,316
9/30/2000 $12,675 $10,946 $11,220
10/31/2000 $11,817 $10,899 $10,881
11/30/2000 $11,059 $10,040 $10,270
12/31/2000 $13,443 $10,089 $11,686
1/31/2001 $12,962 $10,447 $11,390
2/28/2001 $13,041 $ 9,495 $11,302
3/31/2001 $13,019 $ 8,893 $10,959
4/30/2001 $13,910 $ 9,584 $12,127
5/31/2001 $14,220 $ 9,648 $11,963
6/30/2001 $12,566 $ 9,414 $10,812
7/31/2001 $12,099 $ 9,321 $10,756
8/31/2001 $11,294 $ 8,737 $10,382
9/30/2001 $ 9,964 $ 8,032 $ 9,352
10/31/2001 $10,589 $ 8,185 $ 9,727
11/30/2001 $10,445 $ 8,813 $ 9,427
12/31/2001 $11,199 $ 8,890 $ 9,864
1/31/2002 $10,874 $ 8,760 $ 9,652
2/28/2002 $11,486 $ 8,591 $10,072
3/31/2002 $12,451 $ 8,915 $10,810
4/30/2002 $12,503 $ 8,374 $10,480
5/31/2002 $12,473 $ 8,312 $10,410
6/30/2002 $11,884 $ 7,720 $10,014
7/31/2002 $10,005 $ 7,118 $ 8,711
8/31/2002 $10,285 $ 7,165 $ 8,845
9/30/2002 $ 9,674 $ 6,386 $ 7,989
10/31/2002 $ 9,909 $ 6,949 $ 8,142
11/30/2002 $10,462 $ 7,358 $ 8,538
12/31/2002 $10,611 $ 6,925 $ 8,583
1/31/2003 $10,153 $ 6,744 $ 8,376
2/28/2003 $10,198 $ 6,643 $ 8,507
3/31/2003 $ 9,954 $ 6,707 $ 8,434
4/30/2003 $10,050 $ 7,260 $ 8,535
5/31/2003 $11,321 $ 7,642 $ 9,472
6/30/2003 $11,239 $ 7,740 $ 9,488
7/31/2003 $10,693 $ 7,876 $ 9,290
8/31/2003 $11,491 $ 8,030 $ 9,858
9/30/2003 $11,232 $ 7,944 $ 9,695
10/31/2003 $11,483 $ 8,394 $10,017
11/30/2003 $11,786 $ 8,468 $10,248
12/31/2003 $13,262 $ 8,912 $11,535
1/31/2004 $13,210 $ 9,075 $11,310
2/29/2004 $13,846 $ 9,202 $11,938
3/31/2004 $13,972 $ 9,063 $11,938
4/30/2004 $13,905 $ 8,920 $11,699
5/31/2004 $13,905 $ 9,043 $11,803
6/30/2004 $14,874 $ 9,219 $12,475
7/31/2004 $15,200 $ 8,914 $12,716
8/31/2004 $14,948 $ 8,950 $12,565
9/30/2004 $16,302 $ 9,047 $13,709
10/31/2004 $16,302 $ 9,185 $13,771
11/30/2004 $17,729 $ 9,556 $14,739
12/31/2004 $17,404 $ 9,882 $14,372
1/31/2005 $17,596 $ 9,641 $14,536
2/28/2005 $19,963 $ 9,844 $16,514
3/31/2005 $19,268 $ 9,669 $16,151
4/30/2005 $17,988 $ 9,486 $15,180
5/31/2005 $18,558 $ 9,788 $15,569
6/30/2005 $19,756 $ 9,802 $16,751
7/31/2005 $21,568 $10,166 $17,863
8/31/2005 $22,951 $10,073 $19,041
9/30/2005 $24,438 $10,155 $20,226
10/31/2005 $22,611 $ 9,986 $18,554
11/30/2005 $23,195 $10,363 $19,091
12/31/2005 $23,930 $10,367 $19,633
1/31/2006 $27,464 $10,642 $22,451
2/28/2006 $24,658 $10,670 $20,405
3/31/2006 $25,931 $10,803 $21,408
4/30/2006 $27,541 $10,948 $22,809
5/31/2006 $26,368 $10,633 $22,103
6/30/2006 $26,583 $10,648 $22,364
7/31/2006 $26,659 $10,713 $22,821
8/31/2006 $25,946 $10,968 $22,024
9/30/2006 $24,305 $11,251 $20,936
10/31/2006 $25,977 $11,617 $21,885
11/30/2006 $28,124 $11,838 $23,554
12/31/2006 $27,337 $12,004 $22,940
1/31/2007 $27,033 $12,186 $22,821
2/28/2007 $27,476 $11,948 $22,708
3/31/2007 $29,119 $12,081 $23,847
4/30/2007 $31,082 $12,616 $25,089
5/31/2007 $33,341 $13,057 $27,144
6/30/2007 $33,571 $12,840 $27,372
7/31/2007 $33,407 $12,442 $27,424
8/31/2007 $32,848 $12,628 $27,160
9/30/2007 $36,413 $13,100 $29,471
10/31/2007 $38,672 $13,309 $30,725
11/30/2007 $36,044 $12,752 $28,824
12/31/2007 $37,964 $12,664 $30,840
1/31/2008 $34,972 $11,904 $27,998
2/29/2008 $38,158 $11,518 $30,431
3/31/2008 $36,547 $11,468 $29,333
4/30/2008 $40,522 $12,026 $32,135
5/31/2008 $43,735 $12,182 $34,578
6/30/2008 $45,195 $11,155 $35,385
7/31/2008 $38,123 $11,061 $30,134
8/31/2008 $36,751 $11,221 $29,731
9/30/2008 $29,015 $10,221 $24,965
10/31/2008 $20,730 $ 8,505 $18,599
11/30/2008 $18,933 $ 7,895 $18,153
12/31/2008 $18,533 $ 7,979 $17,717
1/31/2009 $18,829 $ 7,306 $17,158
2/28/2009 $17,434 $ 6,528 $15,380
3/31/2009 $19,059 $ 7,100 $16,477
4/30/2009 $21,553 $ 7,779 $17,978
Total Returns 115.53% -22.21% 79.78%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -47.68%
3-Year -8.51%
Since Inception (9/1/05) -2.85%
CLASS C (9/1/05-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P 500 S&P NORTH AMERICAN
DATE RESOURCES FUND - CLASS C INDEX NATURAL RESOURCES INDEX
- ---- ------------------------ ------- -----------------------
9/1/2005 $10,000 $10,000 $10,000
9/30/2005 $10,459 $10,081 $10,622
10/31/2005 $ 9,670 $ 9,913 $ 9,744
11/30/2005 $ 9,918 $10,288 $10,026
12/31/2005 $10,227 $10,291 $10,311
1/31/2006 $11,734 $10,564 $11,791
2/28/2006 $10,529 $10,593 $10,716
3/31/2006 $11,064 $10,724 $11,243
4/30/2006 $11,747 $10,868 $11,979
5/31/2006 $11,238 $10,556 $11,608
6/30/2006 $11,320 $10,570 $11,745
7/31/2006 $11,347 $10,635 $11,985
8/31/2006 $11,038 $10,888 $11,566
9/30/2006 $10,333 $11,169 $10,995
10/31/2006 $11,038 $11,533 $11,494
11/30/2006 $11,938 $11,752 $12,370
12/31/2006 $11,597 $11,917 $12,048
1/31/2007 $11,464 $12,097 $11,985
2/28/2007 $11,643 $11,861 $11,926
3/31/2007 $12,332 $11,993 $12,524
4/30/2007 $13,159 $12,524 $13,176
5/31/2007 $14,107 $12,961 $14,256
6/30/2007 $14,195 $12,746 $14,376
7/31/2007 $14,118 $12,351 $14,402
8/31/2007 $13,873 $12,536 $14,264
9/30/2007 $15,371 $13,005 $15,478
10/31/2007 $16,320 $13,212 $16,136
11/30/2007 $15,199 $12,659 $15,138
12/31/2007 $15,999 $12,572 $16,197
1/31/2008 $14,729 $11,818 $14,704
2/29/2008 $16,060 $11,434 $15,982
3/31/2008 $15,372 $11,384 $15,405
4/30/2008 $17,036 $11,939 $16,877
5/31/2008 $18,378 $12,093 $18,160
6/30/2008 $18,979 $11,074 $18,584
7/31/2008 $16,003 $10,981 $15,826
8/31/2008 $15,413 $11,140 $15,614
9/30/2008 $12,163 $10,147 $13,111
10/31/2008 $ 8,684 $ 8,443 $ 9,768
11/30/2008 $ 7,925 $ 7,837 $ 9,533
12/31/2008 $ 7,754 $ 7,920 $ 9,305
1/31/2009 $ 7,876 $ 7,253 $ 9,011
2/28/2009 $ 7,287 $ 6,481 $ 8,077
3/31/2009 $ 7,957 $ 7,048 $ 8,653
4/30/2009 $ 8,997 $ 7,723 $ 9,442
Total Returns -10.03% -22.77% -5.58%
18 | Annual Report
Performance Summary (CONTINUED)
ADVISOR CLASS (5/1/99-4/30/09)(1)
(PERFORMANCE GRAPH)
FRANKLIN NATURAL RESOURCES S&P 500 S&P NORTH AMERICAN
DATE FUND - ADVISOR CLASS INDEX NATURAL RESOURCES INDEX
- ---- -------------------------- ------- -----------------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,530 $ 9,764 $ 9,562
6/30/1999 $10,212 $10,306 $10,008
7/31/1999 $10,478 $ 9,984 $10,081
8/31/1999 $10,648 $ 9,935 $10,390
9/30/1999 $10,396 $ 9,662 $ 9,997
10/31/1999 $ 9,931 $10,274 $ 9,777
11/30/1999 $ 9,990 $10,482 $ 9,855
12/31/1999 $10,611 $11,100 $10,092
1/31/2000 $10,345 $10,542 $ 9,684
2/29/2000 $10,249 $10,343 $ 9,259
3/31/2000 $12,073 $11,354 $10,568
4/30/2000 $11,991 $11,013 $10,373
5/31/2000 $12,996 $10,787 $11,134
6/30/2000 $12,737 $11,053 $10,572
7/31/2000 $11,851 $10,880 $10,217
8/31/2000 $13,535 $11,556 $11,316
9/30/2000 $13,520 $10,946 $11,220
10/31/2000 $12,604 $10,899 $10,881
11/30/2000 $11,807 $10,040 $10,270
12/31/2000 $14,356 $10,089 $11,686
1/31/2001 $13,843 $10,447 $11,390
2/28/2001 $13,932 $ 9,495 $11,302
3/31/2001 $13,917 $ 8,893 $10,959
4/30/2001 $14,877 $ 9,584 $12,127
5/31/2001 $15,204 $ 9,648 $11,963
6/30/2001 $13,441 $ 9,414 $10,812
7/31/2001 $12,949 $ 9,321 $10,756
8/31/2001 $12,094 $ 8,737 $10,382
9/30/2001 $10,665 $ 8,032 $ 9,352
10/31/2001 $11,342 $ 8,185 $ 9,727
11/30/2001 $11,186 $ 8,813 $ 9,427
12/31/2001 $11,997 $ 8,890 $ 9,864
1/31/2002 $11,654 $ 8,760 $ 9,652
2/28/2002 $12,317 $ 8,591 $10,072
3/31/2002 $13,348 $ 8,915 $10,810
4/30/2002 $13,409 $ 8,374 $10,480
5/31/2002 $13,386 $ 8,312 $10,410
6/30/2002 $12,752 $ 7,720 $10,014
7/31/2002 $10,738 $ 7,118 $ 8,711
8/31/2002 $11,051 $ 7,165 $ 8,845
9/30/2002 $10,387 $ 6,386 $ 7,989
10/31/2002 $10,646 $ 6,949 $ 8,142
11/30/2002 $11,241 $ 7,358 $ 8,538
12/31/2002 $11,406 $ 6,925 $ 8,583
1/31/2003 $10,914 $ 6,744 $ 8,376
2/28/2003 $10,968 $ 6,643 $ 8,507
3/31/2003 $10,722 $ 6,707 $ 8,434
4/30/2003 $10,838 $ 7,260 $ 8,535
5/31/2003 $12,205 $ 7,642 $ 9,472
6/30/2003 $12,120 $ 7,740 $ 9,488
7/31/2003 $11,536 $ 7,876 $ 9,290
8/31/2003 $12,404 $ 8,030 $ 9,858
9/30/2003 $12,128 $ 7,944 $ 9,695
10/31/2003 $12,404 $ 8,394 $10,017
11/30/2003 $12,727 $ 8,468 $10,248
12/31/2003 $14,322 $ 8,912 $11,535
1/31/2004 $14,276 $ 9,075 $11,310
2/29/2004 $14,969 $ 9,202 $11,938
3/31/2004 $15,115 $ 9,063 $11,938
4/30/2004 $15,046 $ 8,920 $11,699
5/31/2004 $15,046 $ 9,043 $11,803
6/30/2004 $16,102 $ 9,219 $12,475
7/31/2004 $16,456 $ 8,914 $12,716
8/31/2004 $16,186 $ 8,950 $12,565
9/30/2004 $17,666 $ 9,047 $13,709
10/31/2004 $17,666 $ 9,185 $13,771
11/30/2004 $19,222 $ 9,556 $14,739
12/31/2004 $18,867 $ 9,882 $14,372
1/31/2005 $19,083 $ 9,641 $14,536
2/28/2005 $21,656 $ 9,844 $16,514
3/31/2005 $20,909 $ 9,669 $16,151
4/30/2005 $19,530 $ 9,486 $15,180
5/31/2005 $20,146 $ 9,788 $15,569
6/30/2005 $21,456 $ 9,802 $16,751
7/31/2005 $23,428 $10,166 $17,863
8/31/2005 $24,946 $10,073 $19,041
9/30/2005 $26,564 $10,155 $20,226
10/31/2005 $24,584 $ 9,986 $18,554
11/30/2005 $25,223 $10,363 $19,091
12/31/2005 $26,030 $10,367 $19,633
1/31/2006 $29,885 $10,642 $22,451
2/28/2006 $26,836 $10,670 $20,405
3/31/2006 $28,233 $10,803 $21,408
4/30/2006 $29,989 $10,948 $22,809
5/31/2006 $28,736 $10,633 $22,103
6/30/2006 $28,967 $10,648 $22,364
7/31/2006 $29,055 $10,713 $22,821
8/31/2006 $28,289 $10,968 $22,024
9/30/2006 $26,501 $11,251 $20,936
10/31/2006 $28,336 $11,617 $21,885
11/30/2006 $30,675 $11,838 $23,554
12/31/2006 $29,828 $12,004 $22,940
1/31/2007 $29,503 $12,186 $22,821
2/28/2007 $29,990 $11,948 $22,708
3/31/2007 $31,785 $12,081 $23,847
4/30/2007 $33,948 $12,616 $25,089
5/31/2007 $36,426 $13,057 $27,144
6/30/2007 $36,682 $12,840 $27,372
7/31/2007 $36,512 $12,442 $27,424
8/31/2007 $35,913 $12,628 $27,160
9/30/2007 $39,819 $13,100 $29,471
10/31/2007 $42,298 $13,309 $30,725
11/30/2007 $39,426 $12,752 $28,824
12/31/2007 $41,542 $12,664 $30,840
1/31/2008 $38,277 $11,904 $27,998
2/29/2008 $41,772 $11,518 $30,431
3/31/2008 $40,015 $11,468 $29,333
4/30/2008 $44,384 $12,026 $32,135
5/31/2008 $47,915 $12,182 $34,578
6/30/2008 $49,534 $11,155 $35,385
7/31/2008 $41,790 $11,061 $30,134
8/31/2008 $40,291 $11,221 $29,731
9/30/2008 $31,830 $10,221 $24,965
10/31/2008 $22,744 $ 8,505 $18,599
11/30/2008 $20,776 $ 7,895 $18,153
12/31/2008 $20,342 $ 7,979 $17,717
1/31/2009 $20,678 $ 7,306 $17,158
2/28/2009 $19,145 $ 6,528 $15,380
3/31/2009 $20,925 $ 7,100 $16,477
4/30/2009 $23,674 $ 7,779 $17,978
Total Returns 136.74% -22.21% 79.78%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(1) 4/30/09
- ---------------- -------
1-Year -46.66%
5-Year +9.49%
10-Year +9.00%
ENDNOTES
INVESTING IN A FUND CONCENTRATING IN THE NATURAL RESOURCES SECTOR INVOLVES
SPECIAL RISKS, INCLUDING INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND
REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE FUND MAY ALSO INVEST IN
FOREIGN STOCKS, WHICH INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL AND
ECONOMIC UNCERTAINTY. SMALLER COMPANIES INVOLVE SPECIAL RISKS ASSOCIATED WITH
SMALLER REVENUES AND MARKET SHARE, AND MORE LIMITED PRODUCT LINES. THE PRICES OF
SUCH SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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.
(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.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(7.) Sources: (C) 2009 Morningstar; Standard & Poor's. 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 North American Natural Resources Index is a
capitalization-weighted index that includes companies involved in
extractive industries (mining), energy and forestry services, producers of
pulp and paper, and owners and operators of timber tracts or plantations.
Annual Report | 19
Your Fund's Expenses
FRANKLIN NATURAL RESOURCES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - 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.
20 | Annual 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.
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.
EXPENSES PAID
BEGINNING ACCOUNT ENDING ACCOUNT DURING PERIOD*
VALUE 11/1/08 VALUE 4/30/09 11/1/08-4/30/09
----------------- -------------- ---------------
CLASS A
Actual $1,000 $1,039.70 $ 6.93
Hypothetical (5% return before expenses) $1,000 $1,018.00 $ 6.85
CLASS C
Actual $1,000 $1,036.10 $10.60
Hypothetical (5% return before expenses) $1,000 $1,014.38 $10.49
ADVISOR CLASS
Actual $1,000 $1,040.90 $ 5.62
Hypothetical (5% return before expenses) $1,000 $1,019.29 $ 5.56
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.37%; C: 2.10%; and Advisor: 1.11%),
multiplied by the average account value over the period, multiplied by
181/365 to reflect the one-half year period.
Annual Report | 21
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 54.72 $ 64.53 $ 56.44 $ 46.05 $ 53.26
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.21) (0.59) (0.57) (0.59) (0.58)
Net realized and unrealized gains (losses) .. (4.78) (9.22) 8.66 10.98 (6.63)
-------- -------- -------- -------- --------
Total from investment operations ............... (4.99) (9.81) 8.09 10.39 (7.21)
-------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 49.73 $ 54.72 $ 64.53 $ 56.44 $ 46.05
======== ======== ======== ======== ========
Total return(e) ................................ (9.12)% (15.22)% 14.39% 22.50% (13.54)%
RATIOS TO AVERAGE NET ASSETS
Expenses before expense reduction .............. 1.32% 1.24% 1.35% 1.25% 1.29%
Expenses net of expense reduction .............. 1.32%(f) 1.23% 1.35%(f) 1.25%(f) 1.29%(f)
Net investment income (loss) ................... (0.38)% (0.98)% (1.01)% (1.06)% (1.17)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $274,324 $318,537 $457,390 $510,700 $485,909
Portfolio turnover rate ........................ 45.57% 31.84% 42.08% 37.38% 34.34%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
22 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 90.7%
BIOTECHNOLOGY 65.2%
(a) 3SBio Inc., ADR ....................................................... China 135,600 $ 960,048
(a) AEterna Zentaris Inc. ................................................. Canada 719,500 798,645
(a) Amgen Inc. ............................................................ United States 447,300 21,680,631
(a) Anadys Pharmaceuticals Inc. ........................................... United States 349,500 870,255
(a) ARIAD Pharmaceuticals Inc. ............................................ United States 845,000 1,267,500
(a) ArQule Inc. ........................................................... United States 609,809 2,713,650
(a) Biogen Idec Inc. ...................................................... United States 304,461 14,717,645
(a) BioMarin Pharmaceutical Inc. .......................................... United States 568,200 7,307,052
(a) Celgene Corp. ......................................................... United States 568,600 24,290,592
(a) Cephalon Inc. ......................................................... United States 161,900 10,622,259
(a) ConjuChem Biotechnologies Inc., wts., 12/31/11 ........................ Canada 2,343,750 --
(a) Cougar Biotechnology Inc. ............................................. United States 15,500 541,260
(a) Curis Inc. ............................................................ United States 967,900 1,132,443
(a) Facet Biotech Corp. ................................................... United States 183,560 1,716,286
(a) Gentium SpA, ADR ...................................................... Italy 851,600 596,120
(a) Genzyme Corp. ......................................................... United States 430,600 22,963,898
(a) Gilead Sciences Inc. .................................................. United States 701,700 32,137,860
(a, b) Indevus Pharmaceuticals Inc., Escrow Account .......................... United States 1,006,900 1,100,743
(a) Myriad Genetics Inc. .................................................. United States 119,600 4,639,284
(a) Neurocrine Biosciences Inc. ........................................... United States 375,300 1,238,490
(a) Onyx Pharmaceuticals Inc. ............................................. United States 103,500 2,680,650
(a) Orexigen Therapeutics Inc. ............................................ United States 476,754 1,353,981
(a) OSI Pharmaceuticals Inc. .............................................. United States 188,800 6,338,016
PDL BioPharma Inc. .................................................... United States 917,800 6,562,270
(a) Pharmasset Inc. ....................................................... United States 178,800 1,609,200
(a) RXi Pharmaceuticals Corp. ............................................. United States 18,744 85,285
(a) United Therapeutics Corp. ............................................. United States 30,800 1,934,548
(a) VaxGen Inc. ........................................................... United States 826,000 355,180
(a) Vertex Pharmaceuticals Inc. ........................................... United States 216,100 6,660,202
------------
178,873,993
------------
LIFE SCIENCES TOOLS & SERVICES 9.0%
(a) Helicos BioSciences Corp. ............................................. United States 639,100 364,287
(a) Illumina Inc. ......................................................... United States 171,500 6,405,525
(a) Life Technologies Corp. ............................................... United States 322,200 12,018,060
(a) QIAGEN NV ............................................................. Netherlands 258,900 4,266,672
(a) Sequenom Inc. ......................................................... United States 416,120 1,506,354
------------
24,560,898
------------
PHARMACEUTICALS 16.5%
(a) Access Pharmaceuticals Inc. ........................................... United States 121,988 182,982
Allergan Inc. ......................................................... United States 78,300 3,653,478
(a) Ardea Biosciences Inc. ................................................ United States 169,012 2,085,608
(a) Biodel Inc. ........................................................... United States 175,900 844,320
(a) BioForm Medical Inc. .................................................. United States 1,309,000 1,466,080
(a) Cadence Pharmaceuticals Inc. .......................................... United States 199,600 2,019,952
(a) Cardiome Pharma Corp. ................................................. Canada 576,828 2,359,227
(a) Cypress Bioscience Inc. ............................................... United States 175,100 1,260,720
Annual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PHARMACEUTICALS (CONTINUED)
(a) Nuvo Research Inc. .................................................... Canada 6,795,800 $ 911,500
(a) Nuvo Research Inc., wts., 7/13/09 ..................................... Canada 3,443,000 --
(a) Oculus Innovative Sciences Inc. ....................................... United States 210,900 229,881
(a) Penwest Pharmaceuticals Co. ........................................... United States 369,400 605,816
Roche Holding AG ...................................................... Switzerland 84,300 10,671,353
Shire PLC, ADR ........................................................ United Kingdom 134,900 5,027,723
Teva Pharmaceutical Industries Ltd., ADR .............................. Israel 319,200 14,009,688
------------
45,328,328
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $256,969,341) ................................................ 248,763,219
------------
PREFERRED STOCKS (COST $5,065,937) 2.0%
BIOTECHNOLOGY 2.0%
(a, c) Fibrogen Inc., pfd., E ................................................ United States 1,128,271 5,686,486
------------
PRINCIPAL
AMOUNT(d)
-----------
CONVERTIBLE BONDS (COST $1,480,677) 0.3%
BIOTECHNOLOGY 0.3%
(c) ConjuChem Biotechnologies Inc., cvt., sub. note, 144A, 8.00%,
12/31/10 ........................................................... Canada 1,500,000 CAD 785,900
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $263,515,955) ................................................ 255,235,605
------------
SHARES
-----------
SHORT TERM INVESTMENTS (COST $19,628,804) 7.2%
MONEY MARKET FUNDS 7.2%
(e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.04% .. United States 19,628,804 19,628,804
------------
TOTAL INVESTMENTS (COST $283,144,759) 100.2% .......................... 274,864,409
OTHER ASSETS, LESS LIABILITIES (0.2)% ................................. (540,790)
------------
NET ASSETS 100.0% ..................................................... $274,323,619
============
See Abbreviations on page 48.
(a) Non-income producing.
(b) Security has been deemed illiquid because it may not be able to be sold
within seven days. At April 30, 2009, the value of this security was
$1,100,743, representing 0.40% of net assets.
(c) See Note 8 regarding restricted and illiquid securities.
(d) The principal amount is stated in U.S. dollars unless otherwise indicated.
(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.
The accompanying notes are an integral part of these financial statements.
24 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30,
----------------------------------------------------
CLASS A 2009 2008 2007 2006 2005
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 45.78 $ 37.84 $ 35.92 $ 24.32 $ 18.80
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ................. 0.05 0.05 0.09 0.13 0.04
Net realized and unrealized gains
(losses) .............................. (21.78) 11.11 4.29 12.64 5.48
-------- -------- -------- -------- --------
Total from investment operations ............ (21.73) 11.16 4.38 12.77 5.52
-------- -------- -------- -------- --------
Less distributions from:
Net investment income .................... -- (0.52) (0.25) (0.09) --
Net realized gains ....................... (1.50) (2.70) (2.21) (1.08) --
-------- -------- -------- -------- --------
Total distributions ......................... (1.50) (3.22) (2.46) (1.17) --
-------- -------- -------- -------- --------
Redemption fees(c, d) ....................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................ $ 22.55 $ 45.78 $ 37.84 $ 35.92 $ 24.32
======== ======== ======== ======== ========
Total return(e) ............................. (46.81)% 30.37% 12.86% 53.11% 29.36%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ................................. 1.09% 0.97% 1.03% 1.02% 1.08%
Net investment income ....................... 0.18% 0.13% 0.26% 0.44% 0.17%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $393,713 $752,051 $475,912 $440,475 $211,327
Portfolio turnover rate ..................... 46.97% 37.93% 51.51% 56.08% 29.89%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 25
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30,
-------------------------------------
CLASS C 2009 2008 2007 2006(a)
- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 45.35 $ 37.58 $ 35.79 $ 31.56
------- ------- ------- -------
Income from investment operations(b):
Net investment income (loss)(c) .......... (0.16) (0.25) (0.17) (0.01)
Net realized and unrealized gains
(losses) .............................. (21.54) 11.04 4.25 5.39
------- ------- ------- -------
Total from investment operations ............ (21.70) 10.79 4.08 5.38
------- ------- ------- -------
Less distributions from:
Net investment income .................... -- (0.32) (0.08) (0.07)
Net realized gains ....................... (1.50) (2.70) (2.21) (1.08)
------- ------- ------- -------
Total distributions ......................... (1.50) (3.02) (2.29) (1.15)
------- ------- ------- -------
Redemption fees(d, e) ....................... -- -- -- --
------- ------- ------- -------
Net asset value, end of year ................ $ 22.15 $ 45.35 $ 37.58 $ 35.79
======= ======= ======= =======
Total return(f) ............................. (47.19)% 29.47% 12.01% 17.47%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) ................................. 1.82% 1.68% 1.76% 1.67%
Net investment income (loss) ................ (0.55)% (0.58)% (0.47)% (0.21)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $61,360 $85,387 $33,723 $18,485
Portfolio turnover rate ..................... 46.97% 37.93% 51.51% 56.08%
(a) For the period September 1, 2005 (effective date) to April 30, 2006.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
26 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------
ADVISOR CLASS 2009 2008 2007 2006 2005
- ------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........ $ 48.27 $ 39.71 $ 37.57 $ 25.35 $ 19.53
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ................. 0.14 0.19 0.18 0.25 0.13
Net realized and unrealized gains
(losses) .............................. (22.97) 11.69 4.52 13.18 5.69
------- ------- ------- ------- -------
Total from investment operations ............ (22.83) 11.88 4.70 13.43 5.82
------- ------- ------- ------- -------
Less distributions from:
Net investment income .................... -- (0.62) (0.35) (0.13) --
Net realized gains ....................... (1.50) (2.70) (2.21) (1.08) --
------- ------- ------- ------- -------
Total distributions ......................... (1.50) (3.32) (2.56) (1.21) --
------- ------- ------- ------- -------
Redemption fees(c, d) ....................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................ $ 23.94 $ 48.27 $ 39.71 $ 37.57 $ 25.35
======= ======= ======= ======= =======
Total return ................................ (46.66)% 30.74% 13.20% 53.55% 29.80%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ................................. 0.82% 0.68% 0.76% 0.69% 0.73%
Net investment income ....................... 0.45% 0.42% 0.53% 0.77% 0.52%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $52,402 $77,361 $52,103 $43,874 $33,048
Portfolio turnover rate ..................... 46.97% 37.93% 51.51% 56.08% 29.89%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 91.5%
AGRICULTURAL PRODUCTS 0.7%
Bunge Ltd. ......................................... United States 77,000 $ 3,696,770
------------
ALUMINUM 0.4%
Alcoa Inc. ......................................... United States 200,000 1,814,000
------------
COAL & CONSUMABLE FUELS 3.2%
(a) Alpha Natural Resources Inc. ....................... United States 130,000 2,662,400
(a, b) Energy Coal Resources, 144A ........................ United States 199,375 221,306
(a) Patriot Coal Corp. ................................. United States 216,000 1,360,800
Peabody Energy Corp. ............................... United States 270,000 7,125,300
(a) Uranium One Inc. ................................... Canada 1,690,000 4,675,162
------------
16,044,968
------------
CONSTRUCTION & ENGINEERING 0.1%
Boart Longyear Group ............................... Australia 5,703,000 497,119
------------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS 0.4%
(a) Terex Corp. ........................................ United States 160,000 2,208,000
------------
DIVERSIFIED CHEMICALS 0.0%(c)
(a, d) Solutia Inc. ....................................... United States 789 2,966
(a, d) Solutia Inc., wts., 2/28/13 ........................ United States 5,878 588
------------
3,554
------------
DIVERSIFIED METALS & MINING 7.2%
(a) African Copper PLC ................................. United Kingdom 2,400,000 120,714
BHP Billiton PLC, ADR .............................. United Kingdom 197,000 8,242,480
(a) First Uranium Corp. ................................ South Africa 390,000 2,098,918
(a, e) First Uranium Corp., 144A .......................... Canada 205,200 1,104,354
Freeport-McMoRan Copper & Gold Inc., B ............. United States 65,000 2,772,250
(a) Ivanhoe Australia Ltd. ............................. Australia 300,000 411,869
(a) Ivanhoe Mines Ltd. ................................. Canada 400,000 2,564,000
(a) Mineral Deposits Ltd. .............................. Australia 3,000,000 1,612,608
(a) Mirabela Nickel Ltd. ............................... Australia 380,000 500,126
(a, e) Mirabela Nickel Ltd., 144A ......................... Australia 845,850 1,113,240
(a) Nautilus Minerals Inc. ............................. Canada 817,000 787,618
(a, e) Nautilus Minerals Inc., 144A ....................... Canada 474,000 456,954
OZ Minerals Ltd. ................................... Australia 2,700,000 1,470,960
(a) PanAust Ltd. ....................................... Australia 5,663,435 1,378,163
(a, e) PanAust Ltd., 144A ................................. Australia 4,180,000 1,017,178
Rio Tinto PLC, ADR ................................. United Kingdom 24,000 3,910,800
Southern Copper Corp. .............................. United States 132,000 2,451,240
Xstrata PLC ........................................ Switzerland 486,000 4,364,607
------------
36,378,079
------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.1%
(a) JA Solar Holdings Co. Ltd., ADR .................... China 90,000 315,900
------------
GOLD 7.0%
AngloGold Ashanti Ltd., ADR ........................ South Africa 130,000 4,004,000
Barrick Gold Corp. ................................. Canada 125,000 3,637,500
28 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
GOLD (CONTINUED)
(a, e) Centamin Egypt Ltd., 144A .......................... Australia 2,000,000 $ 1,626,289
(e) Franco-Nevada Corp., 144A .......................... Canada 90,000 1,915,584
(a) Gammon Gold Inc. ................................... Canada 425,000 2,825,258
Gold Fields Ltd., ADR .............................. South Africa 260,000 2,704,000
(a) Great Basin Gold Ltd. .............................. Canada 2,000,000 2,464,582
(a) Great Basin Gold Ltd., wts., 10/15/10 .............. Canada 1,000,000 301,786
IAMGOLD Corp. ...................................... Canada 301,000 2,404,990
(a) Jinshan Gold Mines Inc. ............................ Canada 378,300 215,646
(a, e) Jinshan Gold Mines Inc., 144A ...................... Canada 1,241,000 707,419
Newcrest Mining Ltd. ............................... Australia 300,000 6,524,525
Newmont Mining Corp. ............................... United States 55,000 2,213,200
(a) Osisko Mining Corp. ................................ Canada 642,200 3,014,771
(a) Osisko Mining Corp., wts., 11/17/09 ................ Canada 321,100 296,093
(a, e) Real Gold Mining Ltd., 144A ........................ Mongolia 744,000 549,116
------------
35,404,759
------------
INTEGRATED OIL & GAS 13.5%
Chevron Corp. ...................................... United States 124,003 8,196,598
ConocoPhillips ..................................... United States 147,000 6,027,000
Exxon Mobil Corp. .................................. United States 95,000 6,333,650
Hess Corp. ......................................... United States 110,000 6,026,900
Marathon Oil Corp. ................................. United States 537,000 15,948,900
Murphy Oil Corp. ................................... United States 125,000 5,963,750
Occidental Petroleum Corp. ......................... United States 250,000 14,072,500
Petroleo Brasileiro SA, ADR ........................ Brazil 68,000 2,282,760
Total SA, B, ADR ................................... France 69,000 3,430,680
------------
68,282,738
------------
MARINE 0.4%
Aries Maritime Transport Ltd. ...................... Bermuda 387,850 240,467
Genco Shipping & Trading Ltd. ...................... United States 103,000 1,967,300
------------
2,207,767
------------
OIL & GAS DRILLING 3.3%
(a) Nabors Industries Ltd. ............................. Bermuda 230,000 3,498,300
Noble Corp. ........................................ United States 60,000 1,639,800
Rowan Cos. Inc. .................................... United States 114,000 1,779,540
(a) Transocean Ltd. .................................... United States 145,000 9,784,600
------------
16,702,240
------------
OIL & GAS EQUIPMENT & SERVICES 20.8%
Baker Hughes Inc. .................................. United States 71,000 2,526,180
(a) Cal Dive International Inc. ........................ United States 235,000 1,861,200
(a) Cameron International Corp. ........................ United States 275,000 7,034,500
(a) Dresser-Rand Group Inc. ............................ United States 112,000 2,758,560
(a) Dril-Quip Inc. ..................................... United States 251,000 8,629,380
(a) FMC Technologies Inc. .............................. United States 260,000 8,899,800
(a) Global Industries Ltd. ............................. United States 600,000 3,882,000
Annual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
OIL & GAS EQUIPMENT & SERVICES (CONTINUED)
Halliburton Co. .................................... United States 610,000 $ 12,334,200
(a) Helix Energy Solutions Group Inc. .................. United States 437,000 3,972,330
(a) Hornbeck Offshore Services Inc. .................... United States 126,000 2,926,980
(a) National Oilwell Varco Inc. ........................ United States 270,000 8,175,600
(a) North American Energy Partners ..................... Canada 255,000 1,007,250
(a) Oil States International Inc. ...................... United States 150,000 2,835,000
(a) PHI Inc., non-voting ............................... United States 74,000 837,680
Schlumberger Ltd. .................................. United States 185,000 9,063,150
Smith International Inc. ........................... United States 455,000 11,761,750
(a) Superior Energy Services Inc. ...................... United States 200,000 3,842,000
(a) T-3 Energy Services Inc. ........................... United States 239,000 3,209,770
(a) Tesco Corp. ........................................ Canada 270,000 2,713,500
(a) Weatherford International Ltd. ..................... United States 430,000 7,150,900
------------
105,421,730
------------
OIL & GAS EXPLORATION & PRODUCTION 29.3%
Addax Petroleum Corp. .............................. Canada 215,000 5,918,853
(e) Addax Petroleum Corp., 144A ........................ Canada 150,000 4,129,433
(a) Bill Barrett Corp. ................................. United States 200,000 5,196,000
(a) Continental Resources Inc. ......................... United States 230,000 5,370,500
Devon Energy Corp. ................................. United States 320,000 16,592,000
EOG Resources Inc. ................................. United States 190,000 12,061,200
(a) Mariner Energy Inc. ................................ United States 670,000 7,624,600
(a) McMoRan Exploration Co. ............................ United States 1,094,000 6,006,060
Noble Energy Inc. .................................. United States 251,000 14,244,250
(a) Northern Oil & Gas Inc. ............................ United States 317,000 1,810,070
(a) Petrohawk Energy Corp. ............................. United States 781,300 18,438,680
Range Resources Corp. .............................. United States 340,000 13,589,800
(a) Southwestern Energy Co. ............................ United States 565,000 20,260,900
XTO Energy Inc. .................................... United States 510,000 17,676,600
------------
148,918,946
------------
OIL & GAS REFINING & MARKETING 3.0%
Aegean Marine Petroleum Network Inc. ............... United States 135,000 2,045,250
(a) CVR Energy Inc. .................................... United States 317,000 2,333,120
Holly Corp. ........................................ United States 130,000 2,724,800
Petroplus Holdings AG .............................. Switzerland 94,000 1,622,251
Valero Energy Corp. ................................ United States 330,000 6,547,200
------------
15,272,621
------------
OIL & GAS STORAGE & TRANSPORTATION 0.6%
DHT Maritime Inc. .................................. Jersey Islands 370,600 1,560,226
General Maritime Corp. ............................. United States 177,000 1,757,610
------------
3,317,836
------------
PRECIOUS METALS & MINERALS 1.4%
(e) Fresnillo PLC, 144A ................................ United Kingdom 427,400 3,380,266
Impala Platinum Holdings Ltd. ...................... South Africa 190,000 3,679,303
------------
7,059,569
------------
30 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
SPECIALTY CHEMICALS 0.1%
(a) Flotek Industries Inc. ............................. United States 293,000 $ 606,510
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $540,295,200) ............................. 464,153,106
------------
CONVERTIBLE PREFERRED STOCKS (COST $3,801,600) 0.9%
OIL & GAS EXPLORATION & PRODUCTION 0.9%
(e) Sandridge Energy Inc., 8.50%, cvt., pfd., 144A ..... United States 40,000 4,614,400
------------
PREFERRED STOCKS 2.2%
COAL & CONSUMABLE FUELS 0.0%(c)
(a, b) Energy Coal Resources, 144A, pfd. .................. United States 29,847 177,888
------------
DIVERSIFIED METALS & MINING 0.8%
Companhia Vale do Rio Doce, ADR, pfd., A ........... Brazil 298,000 4,091,540
------------
INTEGRATED OIL & GAS 1.4%
Petroleo Brasileiro SA, ADR, pfd. .................. Brazil 260,000 7,014,800
------------
TOTAL PREFERRED STOCKS (COST $11,456,542) .......... 11,284,228
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $555,553,342) ............................. 480,051,734
------------
SHORT TERM INVESTMENTS (COST $28,954,356) 5.7%
MONEY MARKET FUNDS 5.7%
(f) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 0.04% ................................ United States 28,954,356 28,954,356
------------
TOTAL INVESTMENTS (COST $584,507,698) 100.3% ....... 509,006,090
OTHER ASSETS, LESS LIABILITIES (0.3)% .............. (1,531,705)
------------
NET ASSETS 100.0% .................................. $507,474,385
============
See Abbreviations on page 48.
(a) Non-income producing.
(b) See Note 8 regarding restricted and illiquid securities.
(c) Rounds to less than 0.1% of net assets.
(d) See Note 10 regarding other considerations.
(e) 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 April 30, 2009,
the aggregate value of these securities was $20,614,233, representing 4.06%
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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 31
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2009
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............. $ 263,515,955 $555,553,342
Cost - Sweep Money Fund (Note 7) ......... 19,628,804 28,954,356
------------- ------------
Total cost of investments ................ $ 283,144,759 $584,507,698
============= ============
Value - Unaffiliated issuers ............. $ 255,235,605 $480,051,734
Value - Sweep Money Fund (Note 7) ........ 19,628,804 28,954,356
------------- ------------
Total value of investments ............... 274,864,409 509,006,090
Foreign currency, at value (cost $4,963) .... -- 3,394
Receivables:
Investment securities sold ............... -- 2,201,968
Capital shares sold ...................... 391,976 1,661,581
Dividends and interest ................... 105,993 425,976
Other assets ................................ 528 760
------------- ------------
Total assets .......................... 275,362,906 513,299,769
------------- ------------
Liabilities:
Payables:
Investment securities purchased .......... -- 4,475,294
Capital shares redeemed .................. 659,495 541,650
Affiliates ............................... 261,774 396,073
Unaffiliated transfer agent fees ......... 66,966 93,536
Accrued expenses and other liabilities ...... 51,052 318,831
------------- ------------
Total liabilities ..................... 1,039,287 5,825,384
------------- ------------
Net assets, at value ............... $ 274,323,619 $507,474,385
============= ============
Net assets consist of:
Paid-in capital ............................. $ 542,351,590 $653,168,883
Undistributed net investment income (loss) .. (789,307) (2,911,204)
Net unrealized appreciation (depreciation) .. (8,277,552) (75,505,288)
Accumulated net realized gain (loss) ........ (258,961,112) (67,278,006)
------------- ------------
Net assets, at value ............... $ 274,323,619 $507,474,385
============= ============
The accompanying notes are an integral part of these financial statements.
32 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2009
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
CLASS A:
Net assets, at value ..................................... $274,323,619 $393,713,073
============ ============
Shares outstanding ....................................... 5,515,726 17,458,472
============ ============
Net asset value per share(a) ............................. $ 49.73 $ 22.55
============ ============
Maximum offering price per share (net asset value
per share / 94.25%) ................................... $ 52.76 $ 23.93
============ ============
CLASS C:
Net assets, at value ..................................... -- $ 61,359,501
============ ============
Shares outstanding ....................................... -- 2,770,052
============ ============
Net asset value and maximum offering price per share(a) .. -- $ 22.15
============ ============
ADVISOR CLASS:
Net assets, at value ..................................... -- $ 52,401,811
============ ============
Shares outstanding ....................................... -- 2,188,578
============ ============
Net asset value and maximum offering price per share ..... -- $ 23.94
============ ============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 33
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended April 30, 2009
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Investment income:
Dividends:
Unaffiliated issuers .............................................. $ 2,545,986 $ 7,745,670
Sweep Money Fund (Note 7) ......................................... 315,042 295,121
Interest ............................................................. 105,665 2,693
Income from securities loaned ........................................ 473 6,370
------------ -------------
Total investment income ..................................... 2,967,166 8,049,854
------------ -------------
Expenses:
Management fees (Note 3a) ............................................ 1,583,109 3,033,087
Administrative fees (Note 3b) ........................................ 451,919 --
Distribution fees: (Note 3c)
Class A ........................................................... 793,506 1,399,081
Class C ........................................................... -- 663,239
Transfer agent fees (Note 3e) ........................................ 1,078,953 1,546,670
Custodian fees (Note 4) .............................................. 5,322 30,161
Reports to shareholders .............................................. 106,045 168,904
Registration and filing fees ......................................... 32,275 77,488
Professional fees .................................................... 27,619 37,468
Trustees' fees and expenses .......................................... -- 15,044
Other ................................................................ 67,074 290,141
------------ -------------
Total expenses .............................................. 4,145,822 7,261,283
Expense reductions (Note 4) ................................. (616) (807)
------------ -------------
Net expenses ............................................. 4,145,206 7,260,476
------------ -------------
Net investment income (loss) .......................... (1,178,040) 789,378
------------ -------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................... 15,152,955 (63,592,694)
Non-controlled affiliated issuers (Note 9) ..................... 9 --
Foreign currency transactions ..................................... (61,589) (80,376)
------------ -------------
Net realized gain (loss) .............................. 15,091,375 (63,673,070)
------------ -------------
Net change in unrealized appreciation (depreciation) on:
Investments ....................................................... (43,156,516) (381,786,813)
Translation of other assets and liabilities denominated in
foreign currencies ............................................. 2,798 (4,837)
------------ -------------
Net change in unrealized appreciation (depreciation) .. (43,153,718) (381,791,650)
------------ -------------
Net realized and unrealized gain (loss) ................................. (28,062,343) (445,464,720)
------------ -------------
Net increase (decrease) in net assets resulting from operations ......... $(29,240,383) $(444,675,342)
============ =============
The accompanying notes are an integral part of these financial statements.
34 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FRANKLIN
BIOTECHNOLOGY DISCOVERY FUND NATURAL RESOURCES FUND
---------------------------- ----------------------------
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
---------------------------- ----------------------------
2009 2008 2009 2008
------------ ------------- ------------- ------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................ $ (1,178,040) $ (3,785,400) $ 789,378 $ 697,403
Net realized gain (loss) from investments and
foreign currency transactions .................... 15,091,375 61,299,961 (63,673,070) 59,973,030
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies .... (43,153,718) (120,313,325) (381,791,650) 125,867,182
------------ ------------- ------------- ------------
Net increase (decrease) in net assets resulting
from operations ............................ (29,240,383) (62,798,764) (444,675,342) 186,537,615
------------ ------------- ------------- ------------
Distributions to shareholders from:
Net investment income:
Class A .......................................... -- -- -- (7,483,274)
Class C .......................................... -- -- -- (442,758)
Advisor Class .................................... -- -- -- (774,756)
Net realized gains:
Class A .......................................... -- -- (23,435,904) (39,049,422)
Class C .......................................... -- -- (3,211,358) (3,708,208)
Advisor Class .................................... -- -- (2,857,267) (3,364,045)
------------ ------------- ------------- ------------
Total distributions to shareholders .................... -- -- (29,504,529) (54,822,463)
------------ ------------- ------------- ------------
Capital share transactions: (Note 2)
Class A .......................................... (14,973,617) (76,055,391) 24,773,813 166,229,180
Class C .......................................... -- -- 26,255,441 42,076,375
Advisor Class .................................... -- -- 15,817,345 13,022,154
------------ ------------- ------------- ------------
Total capital share transactions ....................... (14,973,617) (76,055,391) 66,846,599 221,327,709
------------ ------------- ------------- ------------
Redemption fees ........................................ 245 1,096 9,119 18,227
------------ ------------- ------------- ------------
Net increase (decrease) in net assets ......... (44,213,755) (138,853,059) (407,324,153) 353,061,088
Net assets:
Beginning of year ...................................... 318,537,374 457,390,433 914,798,538 561,737,450
------------ ------------- ------------- ------------
End of year ............................................ $274,323,619 $ 318,537,374 $ 507,474,385 $914,798,538
============ ============= ============= ============
Undistributed net investment income (loss) included
in net assets:
End of year ............................................ $ (789,307) $ (417,755) $ (2,911,204) $ --
============ ============= ============= ============
Distributions in excess of net investment income
included in net assets, end of year .................... $ -- $ -- $ -- $ (4,465,240)
============ ============= ============= ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 35
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
eight separate funds, two of which are included in this report (Funds). 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 A, CLASS C & ADVISOR CLASS
- ------- --------------------------------
Franklin Biotechnology Discovery Fund Franklin Natural Resources 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 for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be
36 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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
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. 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 at a future 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.
D. SECURITIES LENDING
The Funds participate in a principal based security lending program. The fund
receives 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
Annual Report | 37
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITIES LENDING (CONTINUED)
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 a non-registered money market fund managed by the
fund's custodian on the fund's behalf and/or repurchase agreements. The fund
receives income from the investment of cash collateral, in addition to lending
fees and rebates paid by the borrower. The fund bears the market risk with
respect to the collateral investment, securities loaned, and the risk that the
principal may default on its obligations to the fund. At April 30, 2009, the
Funds had no securities on loan.
E. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy 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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of April 30, 2009, and have
determined that no provision for income tax is required in the Funds' financial
statements.
F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. 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
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 of
America. 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, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.
38 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. 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.
H. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
I. 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, on behalf of the Funds, 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 April 30, 2009, there were an unlimited number of shares authorized (without
par value). Transactions in the Funds' shares were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
CLASS A SHARES:
Year ended April 30, 2009
Shares sold .................... 1,476,331 $ 83,768,453 8,382,323 $ 262,904,772
Shares issued in reinvestment of
distributions ............... -- -- 1,158,432 21,778,628
Shares redeemed ................ (1,782,280) (98,742,070) (8,508,133) (259,909,587)
---------- ------------- ---------- -------------
Net increase (decrease) ........ (305,949) $ (14,973,617) 1,032,622 $ 24,773,813
========== ============= ========== =============
Year ended April 30, 2008
Shares sold .................... 560,747 $ 33,649,664 6,527,523 $ 277,675,020
Shares issued in reinvestment of
distributions ............... -- -- 1,025,717 42,536,277
Shares redeemed ................ (1,827,474) (109,705,055) (3,705,099) (153,982,117)
---------- ------------- ---------- -------------
Net increase (decrease) ........ (1,266,727) $ (76,055,391) 3,848,141 $ 166,229,180
========== ============= ========== =============
Annual Report | 39
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN NATURAL
RESOURCES FUND
-------------------------
SHARES AMOUNT
---------- ------------
CLASS C SHARES:
Year ended April 30, 2009
Shares sold .................... 1,939,748 $ 58,744,336
Shares issued in reinvestment of
distributions ............... 163,334 3,024,942
Shares redeemed ................ (1,216,090) (35,513,837)
---------- ------------
Net increase (decrease) ........ 886,992 $ 26,255,441
========== ============
Year ended April 30, 2008
Shares sold .................... 1,293,711 $ 54,788,982
Shares issued in reinvestment of
distributions ............... 95,855 3,947,327
Shares redeemed ................ (403,775) (16,659,934)
---------- ------------
Net increase (decrease) ........ 985,791 $ 42,076,375
========== ============
ADVISOR CLASS SHARES:
Year ended April 30, 2009
Shares sold .................... 816,508 $ 23,561,850
Shares issued in reinvestment of
distributions ............... 141,651 2,824,521
Shares redeemed ................ (372,382) (10,569,026)
---------- ------------
Net increase (decrease) ........ 585,777 $ 15,817,345
========== ============
Year ended April 30, 2008
Shares sold .................... 471,275 $ 20,778,690
Shares issued in reinvestment of
distributions ............... 89,583 3,912,111
Shares redeemed ................ (270,031) (11,668,647)
---------- ------------
Net increase (decrease) ........ 290,827 $ 13,022,154
========== ============
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
40 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Funds 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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
B ADMINISTRATIVE FEES
The Franklin Biotechnology Discovery Fund pays an administrative fee to FT
Services based on the fund's average daily net assets 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
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Natural Resources 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, 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 reimburses Distributors for costs incurred in connection with the
servicing, sale and distribution of each Funds' shares up to the maximum annual
plan rate for each class. Under the Class A reimbursement distribution plans,
costs exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
In addition, under the Franklin Natural Resources Fund's Class C compensation
distribution plan, the fund pays Distributors for costs incurred in connection
with the servicing, sale and distribution of the fund's shares up to the maximum
annual plan rate.
Annual Report | 41
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Reimbursement Plans:
Class A ......... 0.35% 0.35%
Compensation Plans:
Class C ......... -- 1.00%
Effective February 1, 2009, the Board of Trustees has set the current rate at
0.30% per year for Class A shares until further notice and approval by the
Board.
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 year:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Sales charges retained net of commissions paid to
unaffiliated broker/dealers ..................... $89,583 $517,771
Contingent deferred sales charges retained ......... $10,654 $ 82,407
E. TRANSFER AGENT FEES
For the year ended April 30, 2009, the Funds paid transfer agent fees as noted
in the Statements of Operations of which the following amounts were retained by
Investor Services:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Transfer agent fees .. $705,834 $971,579
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 year ended April 30, 2009, the
custodian fees were reduced as noted in the Statements of Operations.
42 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2009, the capital loss carryforwards were as
follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Capital loss carryforwards expiring in:
2011 ............................... $206,823,704 --
2012 ............................... 49,603,386 --
2017 ............................... -- 2,454,781
------------ ----------
$256,427,090 $2,454,781
============ ==========
During the year ended April 30, 2009, the Franklin Biotechnology Discovery Fund
utilized $15,069,761 of capital loss carryforwards.
For tax purposes, realized capital losses and 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, 2009, the Franklin Biotechnology
Discovery Fund deferred realized currency losses of $62,641 and the Franklin
Natural Resources Fund deferred realized capital losses and realized currency
losses of $48,401,953, and $130,978, respectively.
The tax character of distributions paid during the years ended April 30, 2009
and 2008, was as follows:
FRANKLIN
NATURAL RESOURCES FUND
-------------------------
2009 2008
----------- -----------
Distributions paid from:
Ordinary income ......... $13,054,755 $19,676,445
Long term capital gain .. 16,449,774 35,146,018
----------- -----------
$29,504,529 $54,822,463
=========== ===========
At April 30, 2009, the cost of investments, net unrealized appreciation
(depreciation) and undistributed ordinary income for income tax purposes were as
follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Cost of investments ............... $286,405,448 $ 604,894,423
============ =============
Unrealized appreciation ........... $ 48,585,195 $ 61,425,952
Unrealized depreciation ........... (60,126,234) (157,314,285)
------------ -------------
Net unrealized appreciation
(depreciation) ................. $(11,541,039) $ (95,888,333)
============ =============
Distributable earnings -
undistributed ordinary income .. $ -- $ 1,185,228
============ =============
Annual Report | 43
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, passive
foreign investment company shares, corporate actions and non-deductible
expenses.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2009, were as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Purchases .. $151,618,772 $362,746,482
Sales ...... $133,677,714 $296,323,044
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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 (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 may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
44 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At April 30, 2009, 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
PRINCIPAL AMOUNT ISSUER DATES COST VALUE
- ---------------- ------ ---------------- ---------- ----------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
1,500,000 CAD ConjuChem Biotechnologies Inc.,
cvt., sub. note, 144A, 8.00%,
12/31/10 ............................................. 12/12/07 $1,480,677 $ 785,900
1,128,271 Fibrogen Inc., pfd., E .................................. 5/19/00 5,065,937 5,686,486
----------
TOTAL RESTRICTED SECURITIES (2.36% of Net Assets) .... $6,472,386
==========
FRANKLIN NATURAL RESOURCES FUND
199,375 Energy Coal Resources, 144A ............................. 11/16/05-5/05/06 $ 741,939 $ 221,306
29,847 Energy Coal Resources, 144A, pfd. ....................... 3/17/09 2,376,164 177,888
----------
TOTAL RESTRICTED SECURITIES (0.08% of Net Assets) .... $ 399,194
==========
See Abbreviations on page 48.
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act 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 Biotechnology Discovery
Fund for the year ended April 30, 2009, were as shown below.
NUMBER NUMBER
OF SHARES OF SHARES
HELD AT HELD REALIZED
BEGINNING GROSS GROSS AT END VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR END OF YEAR INCOME GAIN (LOSS)
- -------------- --------- --------- ---------- --------- ----------- ---------- -----------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
NON-CONTROLLED AFFILIATES
Access Pharmaceuticals Inc.
(MacroChem Corp.) .................... 2,250,000 -- -- 121,988(a) $--(b) $-- $--
MacroChem Corp., wts., PIPES, 144A,
2/01/49 .............................. 675,000 -- 675,000 -- -- -- 9
--- --- ---
TOTAL AFFILIATED SECURITIES (0.00% of Net
Assets) .............................. $-- $-- $ 9
=== === ===
(a) Reflects the merger of MacroChem Corp. into Access Pharmaceuticals Inc. as
of March 2, 2009.
(b) As of April 30, 2009, no longer an affiliate.
10. OTHER CONSIDERATIONS
From time to time officers, directors or employees of the Franklin Natural
Resources Fund's Investment Manager may be provided material, non-public
information relating to a company which, pursuant to the fund's policies and
requirements of applicable securities laws, could
Annual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. OTHER CONSIDERATIONS (CONTINUED)
prevent the fund from trading in the securities of such company for limited or
extended periods of time.
11. CREDIT FACILITY
Effective January 23, 2009, the Funds, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to
interest charged on any borrowings made by the Funds and other costs incurred by
the Funds, pay its share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee based upon the unused portion of the Global Credit
Facility. During the period, the Funds incurred commitment fees of $453 of their
pro rata portion of the Global Credit Facility, which is reflected in Other
expenses on the Statements of Operations. During the year ended April 30, 2009,
the Funds did not utilize the Global Credit Facility.
12. FAIR VALUE MEASUREMENTS
The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Funds have determined that the implementation
of SFAS 157 did not have a material impact on the Funds' financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Trust's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Funds' investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the Funds' own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
46 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of April 30, 2009, in valuing
the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------ ---------- ---------- ------------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
ASSETS:
Investments in Securities $267,291,280 $ -- $7,573,129 $274,864,409
FRANKLIN NATURAL RESOURCES FUND
ASSETS:
Investments in Securities $503,992,496 $4,614,400 $ 399,194 $509,006,090
At April 30, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Funds' fair value,
were as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
INVESTMENTS INVESTMENTS
IN SECURITIES IN SECURITIES
-------------- ----------------
Beginning Balance - May 1, 2008 .......................... $6,679,166 $ 3,339,531
Net realized gain (loss) .............................. 2,796 --
Net change in unrealized appreciation (depreciation) .. (961,034) (2,940,337)
Net purchases (sales) ................................. (2,796) --
Transfers in and/or out of Level 3 .................... 1,854,997 --
---------- -----------
Ending Balance ........................................... $7,573,129 $ 399,194
---------- -----------
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ...... $ (938,667) $(2,940,337)
========== ===========
13. NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133" (SFAS 161), which expands disclosures about derivative investments and
hedging activities. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Trust believes applying the various
provisions of SFAS 161 will not have a material impact on its financial
statements.
In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP
FAS 157-4), which provides additional guidance when the volume and level of
activity for the asset or liability measured at fair value
Annual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
have significantly decreased. Additionally, FSP FAS 157-4 amends SFAS 157,
expanding disclosure requirements by reporting entities surrounding the major
categories of assets and liabilities carried at fair value. FSP FAS 157-4 is
effective for interim and annual periods ending after June 15, 2009. The Trust
is currently evaluating the impact, if any, of applying FSP FAS 157-4.
In May 2009, FASB issued Statement No. 165, "Subsequent Events", which is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the statements are
issued or are available to be issued. FASB 165 is effective for interim or
annual financial periods ending after June 15, 2009, the adoption of FASB 165
will not have a material impact on the financial statements.
ABBREVIATIONS
CURRENCY SELECTED PORTFOLIO
- -------- ------------------
CAD - Canadian Dollar ADR - American Depository Receipt
48 | Annual Report
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Biotechnology Discovery
Fund and Franklin Natural Resources Fund (separate portfolios of Franklin
Strategic Series, hereafter referred to as the "Funds") at April 30, 2009, the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Funds' management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 2009 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 19, 2009
Annual Report | 49
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Franklin
Natural Resources Fund designates the maximum amount allowable but no less than
$16,449,774 as a long term capital gain dividend for the fiscal year ended April
30, 2009.
Under Section 871(k)(2)(C) of the Code, the Franklin Natural Resources Fund
designates the maximum amount allowable but no less than $13,053,706 as a short
term capital gain dividend for purposes of the tax imposed under Section
871(a)(1)(A) of the Code for the fiscal year ended April 30, 2009.
Under Section 854(b)(2) of the Code, the Franklin Natural Resources Fund
designates 34.94% of the ordinary income dividends as income qualifying for the
dividends received deduction for the fiscal year ended April 30, 2009.
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended April 30, 2009:
FRANKLIN FRANKLIN
BIOTECHNOLOGY NATURAL
DISCOVERY FUND RESOURCES FUND
- -------------- --------------
$3,416,021 $7,346,044
Distributions, including qualified dividend income, paid during calendar year
2009 will be reported to shareholders on Form 1099-DIV in January 2010.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Under Section 871(k)(1)(C) of the Code, the Franklin Natural Resources Fund
designates the maximum amount allowable but no less than $42,393 as interest
related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of
the Code for the fiscal year ended April 30, 2009.
50 | Annual Report
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves a three-year term until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ---------------- ---------------- ------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 135 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until
1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 112 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees
Retirement Systems (CALPERS) (1971-2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate
Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 112 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board
and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups
(telephone holding company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 135 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution
of titanium), Canadian National
Railway (railroad) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and
Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor
to the Secretary and Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department
(1988-1989).
Annual Report | 51
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ---------------- ---------------- ------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 112 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture
capital).
FRANK A. OLSON (1932) Trustee Since 2007 135 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive
Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation
(airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and
FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider)
(1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of
Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 112 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and
non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000);
Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996);
Senior Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and
Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ---------------- ---------------- ------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 135 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton
Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
52 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ---------------- ---------------- ------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 52 None
One Franklin Parkway President and 1991 and
San Mateo, CA 94403-1906 Chief President and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.
and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment
companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources,
Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance,
Franklin Resources, Inc. (1994-2001).
LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004);
Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice
President, Franklin Templeton Services, LLC (1997-2003).
GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin
Templeton Investments.
EDWARD L. GEARY (1962) Vice President Since March 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 53
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ---------------- ---------------- ------------------------------------
ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources,
Inc. and of four of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of six of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in
Franklin Templeton Investments.
54 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ---------------- ---------------- ------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of
Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner,
Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
Annual Report | 55
Franklin Strategic Series
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 14, 2009, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds within the Trust
(Fund(s)). In reaching this decision, the Board took into account information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the annual renewal review process.
Information furnished and discussed throughout the year included investment
performance reports and related financial information for each Fund, as well as
periodic reports on shareholder services, legal, compliance, pricing, brokerage
commissions and execution and other services provided by the Investment Manager
(Manager) and its affiliates. Information furnished specifically in connection
with the renewal process included a report for each Fund prepared by Lipper,
Inc. (Lipper), an independent organization, as well as additional material,
including a Fund profitability analysis report prepared by management. The
Lipper reports compared each Fund's investment performance and expenses with
those of other mutual funds deemed comparable to the Fund as selected by Lipper.
The Fund profitability analysis report discussed the profitability to Franklin
Templeton Investments from its overall U.S. fund operations, as well as on an
individual fund-by-fund basis. Included with such profitability analysis report
was information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates including management's explanation of differences
where relevant and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Funds by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale and a comparative analysis concerning transfer agent fees
charged each Fund. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies
56 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
and restrictions for each Fund were consistently complied with as well as other
reports periodically furnished the Board covering matters such as the compliance
of portfolio managers and other management personnel with the code of ethics
adopted throughout the Franklin Templeton fund complex, the adherence to fair
value pricing procedures established by the Board, and the accuracy of net asset
value calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Among other factors taken into account by the Board
were the Manager's best execution trading policies, including a favorable report
by an independent portfolio trading analytical firm. Consideration was also
given to the experience of each Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of a portfolio
manager's bonus compensation was the relative investment performance of the
funds he or she managed and that a portion of such bonus was required to be
invested in a predesignated list of funds within such person's fund management
area so as to be aligned with the interests of Fund shareholders. The Board also
took into account the quality of transfer agent and shareholder services
provided Fund shareholders by an affiliate of the Manager, noting continuing
expenditures by management to increase and improve the scope of such services,
periodic favorable reports on such service conducted by third parties, and the
continuous enhancements to and high industry ranking given the Franklin
Templeton website. Particular attention was given to the overall performance and
actions taken by the Manager and its affiliates in response to problems arising
out of the market turmoil and financial crisis experienced during the past year.
In this respect, the Board noted that management's independent credit analysis
and diligent risk management procedures had minimized exposure of funds within
the Franklin Templeton complex to subprime mortgages and that its continuous
monitoring of counterparty credit risk had limited fund exposure to firms
experiencing financial difficulties like Bear Stearns and AIG. The same type of
conservative approach and attention to risk had also prevented any structured
investment products or other volatile instruments from being held in the
portfolios of any of the money market funds within the Franklin Templeton
complex, including the sweep money fund utilized by many of the funds as part of
their cash management. The Board also took into account, among other things,
management's efforts in establishing a $725 million global credit facility for
the benefit of the funds and other accounts managed by Franklin Templeton
Investments to provide a source of cash for temporary and emergency purposes or
to meet unusual redemption requests as well as the strong financial position of
the Manager's parent company and its commitment to the mutual fund business. The
Annual Report | 57
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Board also noted that during the past year Franklin Templeton Investments, like
many other fund managers, had announced a hiring freeze and implemented employee
reductions, and the Board discussed with management the nature of such
reductions and steps being taken to minimize any negative impact on the nature
and quality of services being provided the Funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Funds in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each individual Fund showed
the investment performance of its Class A shares for those having multiple share
classes in comparison to a performance universe selected by Lipper. Comparative
performance for each Fund was shown for the one-year period ended January 31,
2009, and previous periods ended that date of up to 10 years depending on when a
particular Fund commenced operations. The following summarizes the performance
results for each of these Funds and the Board's view of such performance.
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional health/biotechnology
funds as selected by Lipper. Consistent with the market sell-off that occurred
during the past year, the Fund and most of the funds in the Lipper performance
universe experienced losses during such period. The Lipper report showed the
Fund's total return for the one-year period to be in the second-highest quintile
of its performance universe and to be in either the highest or second-highest
quintile of such universe during each of the previous three-, five- and 10-year
periods on an annualized basis. The Board noted such favorable comparative
performance.
FRANKLIN NATURAL RESOURCES FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional global natural resources
funds as selected by Lipper. Consistent with the market sell-off that occurred
during the past year, the Fund and all the other funds in the Lipper performance
universe experienced losses during such period. The Lipper report comparison for
the Fund showed its total return for the one-year period to be in the middle
quintile of its performance universe and on an annualized basis to be in the
middle quintile of the performance universe for the previous three- and
five-year periods, and the second-lowest quintile of such universe for the
previous 10-year period. The Board did not believe such comparative performance
warranted any change in portfolio management, noting that the Lipper report
showed the Fund's annualized return for the 10-year period exceeded 10 percent.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group.
Lipper expense data is based upon historical information taken from each fund's
most recent annual report and, as a result of the severe
58 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
decline in mutual fund industry assets during the last quarter of 2008, is based
on asset levels that are higher than the level currently existing for most
funds. While recognizing the limitations inherent in Lipper's methodology and
recognizing that current expense ratios may increase as assets decline, the
Board believed that the independent analysis conducted by Lipper remained an
appropriate measure of comparative expenses. In reviewing comparative costs,
Lipper provides information on each Fund's contractual investment management fee
in comparison with the investment management fee that would have been charged by
other funds within its Lipper expense group assuming they were similar in size
to the Fund, as well as the actual total expenses of the Fund in comparison with
those of its Lipper expense group. The Lipper contractual investment management
fee analysis includes administrative charges as being part of the investment
management fee, and actual total expenses, for comparative consistency, are
shown by Lipper for Fund Class A shares for those Funds with multiple share
classes. The results of such expense comparisons showed the contractual
investment management fee rates and actual total expense rates for each of
Franklin Biotechnology Discovery Fund and Franklin Natural Resources Fund were
in the least expensive quintile of their respective Lipper expense groups. The
Board was satisfied with the contractual management fees and total expenses of
each of these Funds in comparison to their expense groups as shown in the Lipper
reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds during the 12-month period ended September 30,
2008, being the most recent fiscal year end for Franklin Resources, Inc., the
Manager's parent. During such period, the assets of the Franklin Templeton U.S.
fund business were significantly higher than currently existing, and to such
extent the profitability analysis does not reflect current fund operations.
While taking this into account in assessing the significance of the Fund
profitability analysis, the Board recognized such analysis was made at a given
point in time and that the decline in assets and effect on profitability would
be reflected in the profitability analysis covering Franklin Resources' 2009
fiscal year period. In reviewing the analysis, attention was given to the
methodology followed in allocating costs to each Fund, it being recognized that
allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that, while being continuously refined and reflecting
changes in the Manager's own cost accounting, the allocation methodology was
consistent with that followed in profitability report presentations for the
Funds made in prior years and that the Funds' independent registered public
accounting firm had been engaged by the Manager to perform certain procedures on
a biennial basis, specified and approved by the Manager and the Funds' Board
solely for their purposes and use in reference to the profitability analysis. In
reviewing and discussing such analysis, management discussed with the Board its
belief that costs incurred in establishing the
Annual Report | 59
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
infrastructure necessary for the type of mutual fund operations conducted by the
Manager and its affiliates may not be fully reflected in the expenses allocated
to each Fund in determining its profitability, as well as the fact that the
level of profits, to a certain extent, reflected operational cost savings and
efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Funds,
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory
requirements. In addition, the Board considered a third-party study comparing
the profitability of the Manager's parent on an overall basis as compared to
other publicly held managers broken down to show profitability from management
operations exclusive of distribution expenses, as well as profitability
including distribution expenses. The Board also considered the extent to which
the Manager and its affiliates might derive ancillary benefits from fund
operations, including its interest in a joint venture entity that financed
up-front commissions paid to brokers/dealers who sold fund Class B shares prior
to February 2005 when the offering of such shares was discontinued, as well as
potential benefits resulting from allocation of fund brokerage and the use of
commission dollars to pay for research. Based upon its consideration of all
these factors, the Board determined that the level of profits realized by the
Manager and its affiliates from providing services to each Fund was not
excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreements for all of the Funds contains breakpoints that continued to asset
levels that exceeded their asset size at December 31, 2008. In view of such fee
structure and the favorable expense comparisons of the Funds within their
respective expense groups, the Board believed that to the extent economies of
scale may be realized by the manager of these Funds and its affiliates, that
there was a sharing of benefits with each Fund and its shareholders.
60 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager 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 (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 (800)
SEC-0330.
Annual Report | 61
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Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL
BEN/(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.
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Global Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(3)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(3)
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(3)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(4)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(5)
LIMITED-/INTERMEDIATE-TERM
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(6)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(6)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(8)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(4.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(5.) The fund invests primarily in insured municipal securities.
(6.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(7.) The Board of Trustees approved the elimination of the non-fundamental
policy requiring the fund to invest at least 80% of net assets in insured
municipal securities and the removal of the word "Insured" from the fund
name. The changes became effective 2/17/09.
(8.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
04/09 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS (R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2009 06/09
APRIL 30, 2009
ANNUAL REPORT
AND SHAREHOLDER LETTER
A series of Franklin Strategic Series
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(GRAPHIC)
FIXED INCOME
FRANKLIN
STRATEGIC INCOME FUND
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
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)
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................ 1
ANNUAL REPORT
Franklin Strategic Income Fund ............................ 3
Performance Summary ....................................... 9
Your Fund's Expenses ...................................... 15
Financial Highlights and Statement of Investments ......... 17
Financial Statements ...................................... 40
Notes to Financial Statements ............................. 44
Report of Independent Registered Public Accounting Firm ... 59
Tax Designation ........................................... 60
Board Members and Officers ................................ 61
Shareholder Information ................................... 66
Shareholder Letter
Dear Shareholder:
The 12-month period ended April 30, 2009, was an extraordinary and stressful
time for investors and those of us who have worked in financial markets for many
years. During this turbulent period, the U.S. recession deepened, the
unemployment rate surged and consumer spending fell. Most stocks suffered major
losses as investors worried about an uncertain future. With a new president,
Barack Obama, the country and the financial markets were eager to see how
effectively the government could address these problems. Although this
environment is bound to provoke great concern, we think it is important to put
short-term market developments in perspective. Keep in mind that as daunting as
current conditions may be, we have navigated through other periods of high
market volatility, such as the U.S. stock market's severe decline of 1987 and
the bursting of the technology bubble in 2000. We remain committed to our
long-term perspective and disciplined investment philosophy. Therefore, we view
recent declines as potential opportunities to find bargains that we believe may
be well positioned to become eventual winners. Although conditions remain
challenging, our experience gives us ample reason to be optimistic about future
market stabilization and recovery.
Franklin Strategic Income Fund's annual report goes into greater detail about
prevailing conditions during the period under review. In addition, you will find
performance data, financial information and a discussion about investment
management decisions. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual 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.
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Fund, keeping in mind the trust you have
placed in us. 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 current market conditions.
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 APRIL 30, 2009. 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 annual report
Annual 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 under
normal market conditions invests at least 65% of its assets in U.S. and foreign
debt securities, including those in emerging markets, 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Strategic Income Fund covers the fiscal year
ended April 30, 2009.
PERFORMANCE OVERVIEW
Franklin Strategic Income Fund - Class A had a -6.32% cumulative total return
for the 12 months under review. The Fund underperformed its benchmark, the
Barclays Capital (BC) U.S. Aggregate Index, which had a +3.84% total return for
the same period.(1) During the same period, the Fund performed better than its
peers as measured by the Lipper Multi-Sector Income Funds Classification
Average's -10.07% total return.(2) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 9.
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC U.S. Aggregate Index is a market-capitalization
weighted index representing the U.S. investment-grade, fixed-rate, taxable
bond market with index components for government and corporate, mortgage
pass-through and asset-backed securities. All issues included are
SEC-registered, taxable, dollar denominated, nonconvertible, must have at
least one year to final maturity, and must be rated investment grade
(Baa3/BBB-/BBB- or above) using the middle rating of Moody's, Standard &
Poor's and Fitch, respectively. 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 12-month period ended
4/30/09, there were 147 funds in this category. Lipper calculations do not
include sales charges or expense subsidization by a fund's manager. Fund
performance relative to the average may have differed if these or other
factors had been considered. The Lipper average includes reinvestment of
any income or distributions. 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 22.
Annual Report | 3
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended April 30, 2009, economic conditions deteriorated. In
February 2009, the Conference Board's Consumer Confidence Index fell to an
all-time low since it began in 1967 as the U.S. economy faltered and as stock
markets declined. Despite far-reaching government interventions, the nation's
economic troubles worsened as manufacturing activity weakened at its fastest
pace in nearly 30 years and as home prices fell at an accelerated rate. Jobless
claims mounted and the unemployment rate rose to 8.9% by period-end.(3) Economic
growth, as measured by gross domestic product (GDP), rose in 2008's second and
third quarters at annualized rates of 2.1% and 0.7% before falling in 2008's
fourth quarter and 2009's first quarter at annualized rates of 6.3% and an
estimated 5.7%. The decline in GDP reflected a broad-based slowdown in consumer
spending, corporate profits and export growth.
Oil prices retreated from $113 per barrel in April 2008 to $51 per barrel at
period-end. Many other commodities and many industrial metals followed similar
trends. Partially as a result of the price corrections, April's inflation rate
was an annualized -0.7%.(3) Core inflation, which excludes food and energy
costs, rose at a 1.9% annualized rate, which was within the Federal Reserve
Board's (Fed's) informal target range of 1.5%-2.0%.(3) The core personal
consumption expenditures price index reported a 12-month increase of 1.9%.(4)
A slowing economy and decelerating inflation prompted policymakers to lower
interest rates and enact stimulus plans. During the 12 months under review, the
Fed lowered the federal funds target rate to a range of 0% to 0.25% from 2.00%
at the start of the reporting period. Congress passed a $787 billion fiscal
stimulus package (American Recovery and Reinvestment Act) that included tax
breaks, money for ailing state governments, aid to the poor and unemployed, and
spending on infrastructure, renewable energy, health care and education. The Fed
and U.S. Treasury Department also introduced new programs designed to shore up
beleaguered banks' capital, enable freer lending to businesses and consumers and
help struggling home buyers avoid foreclosure.
Treasury prices declined early in the period, then rose through 2008 before
declining again in early 2009. During the fiscal year, investors drove the yield
on the three-month Treasury bill to a multi-decade low. Fixed income spreads
were generally wide relative to Treasury yields over the period due to
heightened market turbulence and risk aversion. The spread between two-year and
10-year Treasury yields rose to 225 basis points (100 basis points equal one
percentage point) at the end of April from 148 basis points at the beginning of
the reporting
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Bureau of Economic Analysis.
4 | Annual Report
period. The two-year Treasury bill yield fell from 2.29% to 0.91% over the
12-month period. Over the same period, the 10-year Treasury note yield fell from
3.77% to 3.16%.
Other regions also experienced challenging economic environments. In the
eurozone, fourth quarter 2008 and first quarter 2009 GDP contracted 1.4% and
4.6% compared with the same quarters a year earlier, and labor markets
weakened.(5) Eurozone governments proposed various fiscal stimulus packages;
however, authorities remained hesitant to implement aggressive fiscal spending
given the European Monetary Union's institutional constraints, concerns about
the euro's integrity and possible effects on medium-term inflation. During the
12 months under review, the European Central Bank reduced its key interest rate
from 4.00% at the beginning of the period to 1.25% at period-end in an effort to
boost economic growth, while the Bank of England reduced its interest rate from
5.00% to 0.50%.
In Asia, signs began to emerge that the economic slowdown could be bottoming and
headed toward a recovery. Fiscal stimuli in larger developing countries,
especially China, seemed to help other Asian economies. Recent increases in
Chinese purchasing manager indexes, South Korean industrial production figures
and Asian exports were consistent with an early-stage recovery pattern. In
addition, many Asian countries' current accounts improved in the period's latter
half, especially oil importers such as South Korea, India and Thailand.
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
For the fiscal year under review, financial markets exhibited significant
volatility. Nearly all asset classes were pressured as risk aversion increased
in late 2008, followed by some rebound in several sectors during early 2009. The
global
(5.) Source: Eurostat.
Annual Report | 5
DIVIDEND DISTRIBUTIONS*
5/1/08-4/30/09
DIVIDEND PER SHARE
---------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- ----- ----------- ----------- ----------- ----------- -------------
May 5.00 cents 4.66 cents 4.68 cents 4.79 cents 5.21 cents
June 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents
July 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents
August 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.21 cents
September 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents
October 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents
November 5.00 cents 4.67 cents 4.69 cents 4.81 cents 5.20 cents
December** 25.00 cents 24.72 cents 24.73 cents 24.83 cents 25.16 cents
January 5.00 cents 4.72 cents 4.73 cents 4.83 cents 5.16 cents
February 3.80 cents 3.52 cents 3.53 cents 3.63 cents 3.96 cents
March 3.80 cents 3.52 cents 3.52 cents 3.63 cents 3.98 cents
April 3.80 cents 3.52 cents 3.52 cents 3.63 cents 3.98 cents
----------- ----------- ----------- ----------- -----------
TOTAL 76.40 CENTS 72.65 CENTS 72.76 CENTS 74.14 CENTS 78.68 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 20 cent per share distribution to meet excise tax
requirements.
economic recession and a credit market breakdown negatively affected most fixed
income spread sectors, with U.S. Treasury and other government securities
providing some of the few safe havens. However, although the economic backdrop
remained uncertain going into 2009, historically cheap valuations drew many
investors from government bonds into several depressed spread sectors, reversing
a portion of earlier declines. In this environment, the Fund underperformed the
BC U.S. Aggregate Index and performed better than the Lipper Multi-Sector Income
Funds Classification Average. The Fund's lower exposure to more U.S.
interest-rate sensitive fixed income sectors (i.e., U.S. Treasury securities,
agency bonds and mortgage-backed securities) constrained performance compared
with the index given the stronger performance of such securities during a period
of financial market volatility. The Fund's exposure to certain non-U.S. dollar
government bonds and diversified exposure to investment-grade and
noninvestment-grade sectors helped performance relative to the Fund's peers.
Although most fixed income sectors' performance varied significantly between
2008 and early 2009, high-quality U.S. government securities were some of the
best performing assets during the Fund's fiscal year. Consequently, U.S.
Treasuries, agency debentures and agency mortgage-backed securities delivered
positive returns. In addition, Treasury Inflation Protected Securities (TIPS)
provided particularly strong performance thus far in 2009. Although the Fund's
exposure to these sectors varied throughout the fiscal year, in general we added
to the Fund's TIPS position and maintained a heavier weighting in agency
6 | Annual Report
PORTFOLIO BREAKDOWN
Based on Total Net Assets
4/30/09 4/30/08
------- -------
High Yield Corporate Bonds & Preferred Stocks 22.1% 22.8%
Investment Grade Corporate Bonds 18.2% 9.4%
Mortgages & Other Asset-Backed Bonds 17.8% 16.7%
Floating Rate Bank Loans 9.6% 16.1%
U.S. Government & Agency Bonds* 8.9% 4.9%
Other International Bonds (non-$US) 8.3% 11.8%
Emerging Market Bonds ($US) 6.0% 1.5%
Municipal Bonds 2.8% 1.9%
International Developed Country Bonds (non-$US) 2.2% 9.6%
Convertible Securities 0.4% 2.7%
Common Stocks & Warrants -- 0.0%**
Short-Term Investments & Other Net Assets 3.7% 2.6%
* Includes 2.9% Treasury Inflation Protected Securities as of 4/30/09 and
0.6% as of 4/30/08. Also includes agency preferred stock.
** Rounds to less than 0.1% of net assets.
mortgage-backed securities relative to U.S. Treasuries. Our exposure to
asset-backed and commercial asset-backed securities, while generally in
AAA-rated tranches, hurt Fund performance during the period given increasing
concerns about rising delinquencies for these securitized issuers. However, both
sectors rebounded significantly from their lows in early 2009 through
period-end. Given these securities' seniority in the corporate structure, we
maintained our holdings following their partial price rebound. The Fund also
added municipal, tax-free bonds in states such as California given their
unusually cheap yield valuations relative to taxable government bonds.
The corporate credit sector experienced a dramatic reversal in performance
between 2008 and early 2009. After reaching the cheapest valuations in terms of
yield spreads over government bonds in decades, credit sectors such as
investment-grade bonds, high yield securities and leveraged bank loans rallied
during the first four months of 2009. Although the fundamental outlook for the
rest of 2009 remained challenging given the weak economic and corporate earnings
outlooks combined with less than ideal credit availability and cost, valuations
in early 2009 appeared to price in expectations of higher defaults and ratings
downgrades. We found what we considered value particularly in investment-grade
corporate bonds, where we believed yield spreads provided attractive
risk-adjusted return potential given these issuers' generally better quality. At
the same time, we maintained exposure to the noninvestment-grade sector
including corporate bonds and bank loans. Overall, the corporate sector
detracted from Fund performance during the fiscal year given widening yield
spreads, but the Fund maintained significant exposure to the sector at
period-end given what we believed were still attractive valuations. The Fund
held only
Annual Report | 7
a very small weighting in convertible securities given our assessment of more
promising investment opportunities in straight corporate debt markets.
During 2008, many investors' flight to quality contributed to the U.S. dollar's
appreciation versus many other currencies, as did negative fundamental outlooks
for certain other countries whose economies began to follow the U.S. downturn.
The Fund's non-U.S. dollar bond and currency positions had mixed performances
during the fiscal year. Our long exposure to the Japanese yen (sold by
period-end) contributed to performance, as did our short position in the euro,
which helped to hedge certain of the Fund's other European currency holdings.
The Fund's exposure to currencies such as the Polish zloty, Brazilian real and
Mexican peso, however, negatively impacted results. We added to the Fund's hard
currency U.S. dollar-denominated emerging market sovereign debt positions, in
countries such as Russia and Indonesia, as valuations declined materially during
2008's fourth quarter.
Thank you for your continued participation in Franklin Strategic Income Fund. We
look forward to serving your future investment needs.
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
(PHOTO OF ERIC G. TAKAHA)
/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 APRIL 30, 2009, 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 | Annual Report
Performance Summary as of 4/30/09
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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSTX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.45 $8.83 $10.28
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.7640
CLASS B (SYMBOL: FKSBX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.45 $8.87 $10.32
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.7265
CLASS C (SYMBOL: FSGCX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.44 $8.83 $10.27
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.7276
CLASS R (SYMBOL: FKSRX) CHANGE 4/30/09 4/30/08
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.44 $8.81 $10.25
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.7414
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 4/30/09 4/30/08
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$1.44 $8.84 $10.28
DISTRIBUTIONS (5/1/08-4/30/09)
Dividend Income $0.7868
Annual 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(2) -6.32% +22.36% +67.69%
Average Annual Total Return(3) -10.33% +3.21% +4.85%
Avg. Ann. Total Return (3/31/09)(4) -12.93% +1.73% +4.62%
Distribution Rate(5) 4.95%
30-Day Standardized Yield(6) 6.79%
Total Annual Operating Expenses(7) 0.91%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(2) -6.68% +19.94% +62.52%
Average Annual Total Return(3) -10.12% +3.40% +4.98%
Avg. Ann. Total Return (3/31/09)(4) -12.74% +1.92% +4.75%
Distribution Rate(5) 4.76%
30-Day Standardized Yield(6) 6.72%
Total Annual Operating Expenses(7) 1.31%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(2) -6.60% +19.97% +61.18%
Average Annual Total Return(3) -7.46% +3.71% +4.89%
Avg. Ann. Total Return (3/31/09)(4) -10.18% +2.21% +4.66%
Distribution Rate(5) 4.78%
30-Day Standardized Yield(6) 6.69%
Total Annual Operating Expenses(7) 1.31%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------ ------ ------------------
Cumulative Total Return(2) -6.47% +20.92% +53.17%
Average Annual Total Return(3) -6.47% +3.87% +6.00%
Avg. Ann. Total Return (3/31/09)(4) -9.22% +2.37% +5.36%
Distribution Rate(5) 4.94%
30-Day Standardized Yield(6) 6.83%
Total Annual Operating Expenses(7) 1.16%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------ -------
Cumulative Total Return(2) -5.98% +24.00% +71.91%
Average Annual Total Return(3) -5.98% +4.40% +5.57%
Avg. Ann. Total Return (3/31/09)(4) -8.74% +2.89% +5.34%
Distribution Rate(5) 5.40%
30-Day Standardized Yield(6) 7.33%
Total Annual Operating Expenses(7) 0.66%
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 (800) 342-5236.
10 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS A (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME
DATE INCOME FUND - CLASS A AGGREGATE INDEX CLASSIFICATION AVERAGE
- ------------- --------------------- --------------------- --------------------------
5/1/1999 $ 9,576 $10,000 $10,000
5/31/1999 $ 9,352 $ 9,912 $ 9,800
6/30/1999 $ 9,368 $ 9,881 $ 9,813
7/31/1999 $ 9,303 $ 9,839 $ 9,785
8/31/1999 $ 9,220 $ 9,834 $ 9,717
9/30/1999 $ 9,227 $ 9,948 $ 9,762
10/31/1999 $ 9,271 $ 9,985 $ 9,790
11/30/1999 $ 9,353 $ 9,984 $ 9,886
12/31/1999 $ 9,481 $ 9,936 $ 9,991
1/31/2000 $ 9,326 $ 9,903 $ 9,909
2/29/2000 $ 9,443 $10,023 $10,068
3/31/2000 $ 9,466 $10,155 $10,077
4/30/2000 $ 9,403 $10,126 $ 9,962
5/31/2000 $ 9,282 $10,121 $ 9,838
6/30/2000 $ 9,556 $10,332 $10,090
7/31/2000 $ 9,618 $10,426 $10,127
8/31/2000 $ 9,769 $10,577 $10,212
9/30/2000 $ 9,706 $10,643 $10,107
10/31/2000 $ 9,513 $10,714 $ 9,908
11/30/2000 $ 9,319 $10,889 $ 9,759
12/31/2000 $ 9,728 $11,091 $10,039
1/31/2001 $10,120 $11,272 $10,407
2/28/2001 $10,085 $11,371 $10,419
3/31/2001 $ 9,926 $11,428 $10,224
4/30/2001 $ 9,932 $11,380 $10,147
5/31/2001 $ 9,991 $11,449 $10,221
6/30/2001 $ 9,913 $11,492 $10,135
7/31/2001 $10,035 $11,749 $10,217
8/31/2001 $10,159 $11,884 $10,355
9/30/2001 $ 9,747 $12,022 $10,029
10/31/2001 $10,045 $12,274 $10,274
11/30/2001 $10,302 $12,104 $10,400
12/31/2001 $10,254 $12,028 $10,368
1/31/2002 $10,271 $12,125 $10,425
2/28/2002 $10,293 $12,243 $10,453
3/31/2002 $10,393 $12,039 $10,480
4/30/2002 $10,528 $12,272 $10,645
5/31/2002 $10,483 $12,377 $10,674
6/30/2002 $10,039 $12,484 $10,454
7/31/2002 $ 9,821 $12,634 $10,286
8/31/2002 $10,075 $12,848 $10,503
9/30/2002 $10,051 $13,056 $10,481
10/31/2002 $10,110 $12,996 $10,526
11/30/2002 $10,534 $12,993 $10,810
12/31/2002 $10,736 $13,261 $11,028
1/31/2003 $10,927 $13,273 $11,194
2/28/2003 $11,120 $13,456 $11,372
3/31/2003 $11,270 $13,446 $11,492
4/30/2003 $11,749 $13,557 $11,891
5/31/2003 $12,097 $13,810 $12,189
6/30/2003 $12,250 $13,782 $12,303
7/31/2003 $11,920 $13,319 $12,043
8/31/2003 $12,038 $13,407 $12,168
9/30/2003 $12,481 $13,762 $12,514
10/31/2003 $12,561 $13,634 $12,611
11/30/2003 $12,744 $13,667 $12,757
12/31/2003 $13,107 $13,806 $13,058
1/31/2004 $13,278 $13,917 $13,186
2/29/2004 $13,347 $14,067 $13,218
3/31/2004 $13,443 $14,173 $13,321
4/30/2004 $13,123 $13,804 $13,029
5/31/2004 $13,011 $13,749 $12,909
6/30/2004 $13,121 $13,826 $13,029
7/31/2004 $13,272 $13,964 $13,152
8/31/2004 $13,569 $14,230 $13,413
9/30/2004 $13,735 $14,268 $13,581
10/31/2004 $14,009 $14,388 $13,815
11/30/2004 $14,190 $14,273 $13,996
12/31/2004 $14,399 $14,405 $14,201
1/31/2005 $14,364 $14,495 $14,190
2/28/2005 $14,547 $14,410 $14,289
3/31/2005 $14,209 $14,336 $14,048
4/30/2005 $14,186 $14,530 $14,070
5/31/2005 $14,303 $14,687 $14,205
6/30/2005 $14,415 $14,767 $14,353
7/31/2005 $14,486 $14,633 $14,408
8/31/2005 $14,584 $14,820 $14,540
9/30/2005 $14,485 $14,667 $14,491
10/31/2005 $14,385 $14,551 $14,342
11/30/2005 $14,485 $14,616 $14,423
12/31/2005 $14,615 $14,755 $14,560
1/31/2006 $14,832 $14,755 $14,704
2/28/2006 $14,919 $14,804 $14,809
3/31/2006 $14,861 $14,659 $14,726
4/30/2006 $14,993 $14,633 $14,810
5/31/2006 $14,964 $14,617 $14,739
6/30/2006 $14,889 $14,648 $14,699
7/31/2006 $15,053 $14,846 $14,883
8/31/2006 $15,233 $15,073 $15,090
9/30/2006 $15,354 $15,206 $15,186
10/31/2006 $15,550 $15,306 $15,356
11/30/2006 $15,763 $15,484 $15,560
12/31/2006 $15,814 $15,394 $15,598
1/31/2007 $15,844 $15,388 $15,663
2/28/2007 $16,030 $15,625 $15,867
3/31/2007 $16,123 $15,625 $15,924
4/30/2007 $16,357 $15,710 $16,096
5/31/2007 $16,419 $15,591 $16,098
6/30/2007 $16,293 $15,545 $15,969
7/31/2007 $16,151 $15,674 $15,833
8/31/2007 $16,215 $15,866 $15,925
9/30/2007 $16,646 $15,987 $16,228
10/31/2007 $16,838 $16,130 $16,380
11/30/2007 $16,693 $16,420 $16,331
12/31/2007 $16,742 $16,466 $16,367
1/31/2008 $16,807 $16,743 $16,398
2/29/2008 $16,807 $16,766 $16,336
3/31/2008 $16,824 $16,823 $16,262
4/30/2008 $17,141 $16,788 $16,495
5/31/2008 $17,057 $16,665 $16,460
6/30/2008 $16,771 $16,652 $16,225
7/31/2008 $16,754 $16,638 $16,105
8/31/2008 $16,737 $16,796 $16,089
9/30/2008 $15,814 $16,571 $15,305
10/31/2008 $14,456 $16,180 $13,895
11/30/2008 $14,231 $16,706 $13,483
12/31/2008 $14,910 $17,329 $14,003
1/31/2009 $15,322 $17,176 $14,187
2/28/2009 $15,012 $17,112 $13,957
3/31/2009 $15,298 $17,350 $14,183
4/30/2009 $16,058 $17,432 $14,859
Total Returns 60.58% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/09
- ------- -------
1-Year -10.33%
5-Year +3.21%
10-Year +4.85%
CLASS B (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME
DATE INCOME FUND - CLASS B AGGREGATE INDEX CLASSIFICATION AVERAGE
- ------------- --------------------- --------------------- --------------------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,772 $ 9,912 $ 9,800
6/30/1999 $ 9,786 $ 9,881 $ 9,813
7/31/1999 $ 9,706 $ 9,839 $ 9,785
8/31/1999 $ 9,616 $ 9,834 $ 9,717
9/30/1999 $ 9,631 $ 9,948 $ 9,762
10/31/1999 $ 9,664 $ 9,985 $ 9,790
11/30/1999 $ 9,746 $ 9,984 $ 9,886
12/31/1999 $ 9,877 $ 9,936 $ 9,991
1/31/2000 $ 9,722 $ 9,903 $ 9,909
2/29/2000 $ 9,831 $10,023 $10,068
3/31/2000 $ 9,851 $10,155 $10,077
4/30/2000 $ 9,782 $10,126 $ 9,962
5/31/2000 $ 9,652 $10,121 $ 9,838
6/30/2000 $ 9,934 $10,332 $10,090
7/31/2000 $ 9,995 $10,426 $10,127
8/31/2000 $10,148 $10,577 $10,212
9/30/2000 $10,089 $10,643 $10,107
10/31/2000 $ 9,886 $10,714 $ 9,908
11/30/2000 $ 9,681 $10,889 $ 9,759
12/31/2000 $10,101 $11,091 $10,039
1/31/2001 $10,493 $11,272 $10,407
2/28/2001 $10,464 $11,371 $10,419
3/31/2001 $10,297 $11,428 $10,224
4/30/2001 $10,289 $11,380 $10,147
5/31/2001 $10,356 $11,449 $10,221
6/30/2001 $10,262 $11,492 $10,135
7/31/2001 $10,385 $11,749 $10,217
8/31/2001 $10,509 $11,884 $10,355
9/30/2001 $10,081 $12,022 $10,029
10/31/2001 $10,385 $12,274 $10,274
11/30/2001 $10,646 $12,104 $10,400
12/31/2001 $10,604 $12,028 $10,368
1/31/2002 $10,607 $12,125 $10,425
2/28/2002 $10,638 $12,243 $10,453
3/31/2002 $10,738 $12,039 $10,480
4/30/2002 $10,862 $12,272 $10,645
5/31/2002 $10,824 $12,377 $10,674
6/30/2002 $10,351 $12,484 $10,454
7/31/2002 $10,124 $12,634 $10,286
8/31/2002 $10,381 $12,848 $10,503
9/30/2002 $10,366 $13,056 $10,481
10/31/2002 $10,411 $12,996 $10,526
11/30/2002 $10,856 $12,993 $10,810
12/31/2002 $11,047 $13,261 $11,028
1/31/2003 $11,240 $13,273 $11,194
2/28/2003 $11,434 $13,456 $11,372
3/31/2003 $11,596 $13,446 $11,492
4/30/2003 $12,072 $13,557 $11,891
5/31/2003 $12,437 $13,810 $12,189
6/30/2003 $12,589 $13,782 $12,303
7/31/2003 $12,235 $13,319 $12,043
8/31/2003 $12,364 $13,407 $12,168
9/30/2003 $12,813 $13,762 $12,514
10/31/2003 $12,891 $13,634 $12,611
11/30/2003 $13,060 $13,667 $12,757
12/31/2003 $13,440 $13,806 $13,058
1/31/2004 $13,611 $13,917 $13,186
2/29/2004 $13,678 $14,067 $13,218
3/31/2004 $13,771 $14,173 $13,321
4/30/2004 $13,440 $13,804 $13,029
5/31/2004 $13,320 $13,749 $12,909
6/30/2004 $13,429 $13,826 $13,029
7/31/2004 $13,578 $13,964 $13,152
8/31/2004 $13,877 $14,230 $13,413
9/30/2004 $14,041 $14,268 $13,581
10/31/2004 $14,316 $14,388 $13,815
11/30/2004 $14,509 $14,273 $13,996
12/31/2004 $14,717 $14,405 $14,201
1/31/2005 $14,677 $14,495 $14,190
2/28/2005 $14,845 $14,410 $14,289
3/31/2005 $14,495 $14,336 $14,048
4/30/2005 $14,468 $14,530 $14,070
5/31/2005 $14,595 $14,687 $14,205
6/30/2005 $14,704 $14,767 $14,353
7/31/2005 $14,771 $14,633 $14,408
8/31/2005 $14,852 $14,820 $14,540
9/30/2005 $14,761 $14,667 $14,491
10/31/2005 $14,640 $14,551 $14,342
11/30/2005 $14,737 $14,616 $14,423
12/31/2005 $14,878 $14,755 $14,560
1/31/2006 $15,092 $14,755 $14,704
2/28/2006 $15,161 $14,804 $14,809
3/31/2006 $15,097 $14,659 $14,726
4/30/2006 $15,240 $14,633 $14,810
5/31/2006 $15,190 $14,617 $14,739
6/30/2006 $15,125 $14,648 $14,699
7/31/2006 $15,286 $14,846 $14,883
8/31/2006 $15,463 $15,073 $15,090
9/30/2006 $15,579 $15,206 $15,186
10/31/2006 $15,758 $15,306 $15,356
11/30/2006 $15,983 $15,484 $15,560
12/31/2006 $16,013 $15,394 $15,598
1/31/2007 $16,054 $15,388 $15,663
2/28/2007 $16,236 $15,625 $15,867
3/31/2007 $16,324 $15,625 $15,924
4/30/2007 $16,554 $15,710 $16,096
5/31/2007 $16,617 $15,591 $16,098
6/30/2007 $16,489 $15,545 $15,969
7/31/2007 $16,344 $15,674 $15,833
8/31/2007 $16,409 $15,866 $15,925
9/30/2007 $16,846 $15,987 $16,228
10/31/2007 $17,041 $16,130 $16,380
11/30/2007 $16,895 $16,420 $16,331
12/31/2007 $16,944 $16,466 $16,367
1/31/2008 $17,010 $16,743 $16,398
2/29/2008 $17,010 $16,766 $16,336
3/31/2008 $17,027 $16,823 $16,262
4/30/2008 $17,347 $16,788 $16,495
5/31/2008 $17,262 $16,665 $16,460
6/30/2008 $16,972 $16,652 $16,225
7/31/2008 $16,955 $16,638 $16,105
8/31/2008 $16,938 $16,796 $16,089
9/30/2008 $16,003 $16,571 $15,305
10/31/2008 $14,628 $16,180 $13,895
11/30/2008 $14,400 $16,706 $13,483
12/31/2008 $15,087 $17,329 $14,003
1/31/2009 $15,503 $17,176 $14,187
2/28/2009 $15,190 $17,112 $13,957
3/31/2009 $15,480 $17,350 $14,183
4/30/2009 $16,252 $17,432 $14,859
Total Returns 62.52% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/09
- ------- -------
1-Year -10.12%
5-Year +3.40%
10-Year +4.98%
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/09
- ------- -------
1-Year -7.46%
5-Year +3.71%
10-Year +4.89%
CLASS C (5/1/99-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME
DATE INCOME FUND - CLASS C AGGREGATE INDEX CLASSIFICATION AVERAGE
- ------------- --------------------- --------------------- --------------------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,762 $ 9,912 $ 9,800
6/30/1999 $ 9,776 $ 9,881 $ 9,813
7/31/1999 $ 9,705 $ 9,839 $ 9,785
8/31/1999 $ 9,605 $ 9,834 $ 9,717
9/30/1999 $ 9,619 $ 9,948 $ 9,762
10/31/1999 $ 9,662 $ 9,985 $ 9,790
11/30/1999 $ 9,744 $ 9,984 $ 9,886
12/31/1999 $ 9,875 $ 9,936 $ 9,991
1/31/2000 $ 9,710 $ 9,903 $ 9,909
2/29/2000 $ 9,828 $10,023 $10,068
3/31/2000 $ 9,848 $10,155 $10,077
4/30/2000 $ 9,780 $10,126 $ 9,962
5/31/2000 $ 9,650 $10,121 $ 9,838
6/30/2000 $ 9,932 $10,332 $10,090
7/31/2000 $ 9,994 $10,426 $10,127
8/31/2000 $10,147 $10,577 $10,212
9/30/2000 $10,078 $10,643 $10,107
10/31/2000 $ 9,874 $10,714 $ 9,908
11/30/2000 $ 9,679 $10,889 $ 9,759
12/31/2000 $10,090 $11,091 $10,039
1/31/2001 $10,493 $11,272 $10,407
2/28/2001 $10,464 $11,371 $10,419
3/31/2001 $10,286 $11,428 $10,224
4/30/2001 $10,289 $11,380 $10,147
5/31/2001 $10,346 $11,449 $10,221
6/30/2001 $10,262 $11,492 $10,135
7/31/2001 $10,386 $11,749 $10,217
8/31/2001 $10,510 $11,884 $10,355
9/30/2001 $10,081 $12,022 $10,029
10/31/2001 $10,386 $12,274 $10,274
11/30/2001 $10,647 $12,104 $10,400
12/31/2001 $10,594 $12,028 $10,368
1/31/2002 $10,608 $12,125 $10,425
2/28/2002 $10,628 $12,243 $10,453
3/31/2002 $10,728 $12,039 $10,480
4/30/2002 $10,852 $12,272 $10,645
5/31/2002 $10,814 $12,377 $10,674
6/30/2002 $10,352 $12,484 $10,454
7/31/2002 $10,123 $12,634 $10,286
8/31/2002 $10,381 $12,848 $10,503
9/30/2002 $10,354 $13,056 $10,481
10/31/2002 $10,411 $12,996 $10,526
11/30/2002 $10,845 $12,993 $10,810
12/31/2002 $11,050 $13,261 $11,028
1/31/2003 $11,243 $13,273 $11,194
2/28/2003 $11,438 $13,456 $11,372
3/31/2003 $11,588 $13,446 $11,492
4/30/2003 $12,065 $13,557 $11,891
5/31/2003 $12,431 $13,810 $12,189
6/30/2003 $12,583 $13,782 $12,303
7/31/2003 $12,228 $13,319 $12,043
8/31/2003 $12,357 $13,407 $12,168
9/30/2003 $12,807 $13,762 $12,514
10/31/2003 $12,885 $13,634 $12,611
11/30/2003 $13,067 $13,667 $12,757
12/31/2003 $13,435 $13,806 $13,058
1/31/2004 $13,607 $13,917 $13,186
2/29/2004 $13,674 $14,067 $13,218
3/31/2004 $13,768 $14,173 $13,321
4/30/2004 $13,435 $13,804 $13,029
5/31/2004 $13,316 $13,749 $12,909
6/30/2004 $13,425 $13,826 $13,029
7/31/2004 $13,574 $13,964 $13,152
8/31/2004 $13,860 $14,230 $13,413
9/30/2004 $14,039 $14,268 $13,581
10/31/2004 $14,314 $14,388 $13,815
11/30/2004 $14,495 $14,273 $13,996
12/31/2004 $14,703 $14,405 $14,201
1/31/2005 $14,662 $14,495 $14,190
2/28/2005 $14,845 $14,410 $14,289
3/31/2005 $14,494 $14,336 $14,048
4/30/2005 $14,466 $14,530 $14,070
5/31/2005 $14,581 $14,687 $14,205
6/30/2005 $14,690 $14,767 $14,353
7/31/2005 $14,757 $14,633 $14,408
8/31/2005 $14,839 $14,820 $14,540
9/30/2005 $14,747 $14,667 $14,491
10/31/2005 $14,640 $14,551 $14,342
11/30/2005 $14,723 $14,616 $14,423
12/31/2005 $14,865 $14,755 $14,560
1/31/2006 $15,080 $14,755 $14,704
2/28/2006 $15,164 $14,804 $14,809
3/31/2006 $15,085 $14,659 $14,726
4/30/2006 $15,229 $14,633 $14,810
5/31/2006 $15,193 $14,617 $14,739
6/30/2006 $15,113 $14,648 $14,699
7/31/2006 $15,275 $14,846 $14,883
8/31/2006 $15,453 $15,073 $15,090
9/30/2006 $15,570 $15,206 $15,186
10/31/2006 $15,764 $15,306 $15,356
11/30/2006 $15,975 $15,484 $15,560
12/31/2006 $16,021 $15,394 $15,598
1/31/2007 $16,046 $15,388 $15,663
2/28/2007 $16,228 $15,625 $15,867
3/31/2007 $16,317 $15,625 $15,924
4/30/2007 $16,548 $15,710 $16,096
5/31/2007 $16,606 $15,591 $16,098
6/30/2007 $16,474 $15,545 $15,969
7/31/2007 $16,324 $15,674 $15,833
8/31/2007 $16,383 $15,866 $15,925
9/30/2007 $16,814 $15,987 $16,228
10/31/2007 $17,003 $16,130 $16,380
11/30/2007 $16,851 $16,420 $16,331
12/31/2007 $16,878 $16,466 $16,367
1/31/2008 $16,938 $16,743 $16,398
2/29/2008 $16,949 $16,766 $16,336
3/31/2008 $16,943 $16,823 $16,262
4/30/2008 $17,257 $16,788 $16,495
5/31/2008 $17,184 $16,665 $16,460
6/30/2008 $16,890 $16,652 $16,225
7/31/2008 $16,850 $16,638 $16,105
8/31/2008 $16,844 $16,796 $16,089
9/30/2008 $15,910 $16,571 $15,305
10/31/2008 $14,539 $16,180 $13,895
11/30/2008 $14,307 $16,706 $13,483
12/31/2008 $14,985 $17,329 $14,003
1/31/2009 $15,394 $17,176 $14,187
2/28/2009 $15,060 $17,112 $13,957
3/31/2009 $15,360 $17,350 $14,183
4/30/2009 $16,118 $17,432 $14,859
Total Returns 61.18% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/09
- ------- -------
1-Year -6.47%
5-Year +3.87%
Since Inception (1/1/02) +6.00%
CLASS R (1/1/02-4/30/09)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME
DATE INCOME FUND - CLASS R AGGREGATE INDEX CLASSIFICATION AVERAGE
- ------------- --------------------- --------------------- --------------------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,974 $10,081 $10,055
2/28/2002 $ 9,982 $10,179 $10,081
3/31/2002 $10,078 $10,009 $10,107
4/30/2002 $10,207 $10,204 $10,267
5/31/2002 $10,172 $10,290 $10,295
6/30/2002 $ 9,739 $10,379 $10,083
7/31/2002 $ 9,513 $10,505 $ 9,920
8/31/2002 $ 9,758 $10,682 $10,130
9/30/2002 $ 9,745 $10,855 $10,108
10/31/2002 $ 9,788 $10,806 $10,152
11/30/2002 $10,209 $10,803 $10,426
12/31/2002 $10,403 $11,026 $10,637
1/31/2003 $10,575 $11,035 $10,796
2/28/2003 $10,759 $11,188 $10,968
3/31/2003 $10,915 $11,179 $11,084
4/30/2003 $11,366 $11,272 $11,469
5/31/2003 $11,711 $11,482 $11,755
6/30/2003 $11,857 $11,459 $11,866
7/31/2003 $11,524 $11,074 $11,616
8/31/2003 $11,647 $11,147 $11,735
9/30/2003 $12,061 $11,442 $12,070
10/31/2003 $12,149 $11,336 $12,163
11/30/2003 $12,312 $11,363 $12,304
12/31/2003 $12,660 $11,478 $12,594
1/31/2004 $12,836 $11,571 $12,717
2/29/2004 $12,901 $11,696 $12,748
3/31/2004 $12,978 $11,784 $12,847
4/30/2004 $12,666 $11,477 $12,566
5/31/2004 $12,568 $11,431 $12,450
6/30/2004 $12,659 $11,496 $12,566
7/31/2004 $12,803 $11,610 $12,684
8/31/2004 $13,088 $11,831 $12,937
9/30/2004 $13,246 $11,863 $13,098
10/31/2004 $13,508 $11,963 $13,324
11/30/2004 $13,680 $11,867 $13,498
12/31/2004 $13,878 $11,976 $13,697
1/31/2005 $13,842 $12,052 $13,686
2/28/2005 $14,016 $11,981 $13,782
3/31/2005 $13,686 $11,919 $13,549
4/30/2005 $13,662 $12,080 $13,570
5/31/2005 $13,772 $12,211 $13,701
6/30/2005 $13,876 $12,278 $13,843
7/31/2005 $13,942 $12,166 $13,896
8/31/2005 $14,034 $12,322 $14,024
9/30/2005 $13,935 $12,195 $13,976
10/31/2005 $13,837 $12,098 $13,832
11/30/2005 $13,930 $12,152 $13,911
12/31/2005 $14,052 $12,267 $14,043
1/31/2006 $14,258 $12,268 $14,182
2/28/2006 $14,340 $12,309 $14,283
3/31/2006 $14,280 $12,188 $14,203
4/30/2006 $14,405 $12,166 $14,284
5/31/2006 $14,373 $12,153 $14,215
6/30/2006 $14,299 $12,179 $14,177
7/31/2006 $14,454 $12,343 $14,354
8/31/2006 $14,624 $12,532 $14,553
9/30/2006 $14,737 $12,642 $14,646
10/31/2006 $14,923 $12,726 $14,811
11/30/2006 $15,124 $12,874 $15,008
12/31/2006 $15,155 $12,799 $15,044
1/31/2007 $15,196 $12,794 $15,107
2/28/2007 $15,371 $12,991 $15,303
3/31/2007 $15,457 $12,991 $15,358
4/30/2007 $15,664 $13,061 $15,524
5/31/2007 $15,736 $12,962 $15,526
6/30/2007 $15,612 $12,924 $15,401
7/31/2007 $15,457 $13,032 $15,271
8/31/2007 $15,530 $13,192 $15,359
9/30/2007 $15,941 $13,292 $15,651
10/31/2007 $16,122 $13,411 $15,798
11/30/2007 $15,980 $13,652 $15,751
12/31/2007 $16,008 $13,691 $15,785
1/31/2008 $16,066 $13,921 $15,815
2/29/2008 $16,063 $13,940 $15,755
3/31/2008 $16,076 $13,987 $15,684
4/30/2008 $16,376 $13,958 $15,909
5/31/2008 $16,309 $13,856 $15,875
6/30/2008 $16,032 $13,845 $15,648
7/31/2008 $15,996 $13,833 $15,532
8/31/2008 $15,976 $13,965 $15,517
9/30/2008 $15,106 $13,777 $14,761
10/31/2008 $13,803 $13,452 $13,402
11/30/2008 $13,583 $13,890 $13,004
12/31/2008 $14,230 $14,408 $13,506
1/31/2009 $14,622 $14,281 $13,682
2/28/2009 $14,322 $14,227 $13,461
3/31/2009 $14,593 $14,425 $13,679
4/30/2009 $15,317 $14,494 $14,331
Total Returns 53.17% 44.94% 43.31%
12 | Annual Report
Performance Summary (CONTINUED)
ADVISOR CLASS (5/1/99-4/30/09)(8)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC INCOME BARCLAYS CAPITAL U.S. LIPPER MULTI-SECTOR INCOME
DATE FUND - ADVISOR CLASS AGGREGATE INDEX CLASSIFICATION AVERAGE
- ------------- ------------------------- --------------------- --------------------------
5/1/1999 $10,000 $10,000 $10,000
5/31/1999 $ 9,766 $ 9,912 $ 9,800
6/30/1999 $ 9,783 $ 9,881 $ 9,813
7/31/1999 $ 9,715 $ 9,839 $ 9,785
8/31/1999 $ 9,628 $ 9,834 $ 9,717
9/30/1999 $ 9,647 $ 9,948 $ 9,762
10/31/1999 $ 9,686 $ 9,985 $ 9,790
11/30/1999 $ 9,773 $ 9,984 $ 9,886
12/31/1999 $ 9,909 $ 9,936 $ 9,991
1/31/2000 $ 9,759 $ 9,903 $ 9,909
2/29/2000 $ 9,874 $10,023 $10,068
3/31/2000 $ 9,899 $10,155 $10,077
4/30/2000 $ 9,836 $10,126 $ 9,962
5/31/2000 $ 9,711 $10,121 $ 9,838
6/30/2000 $10,000 $10,332 $10,090
7/31/2000 $10,067 $10,426 $10,127
8/31/2000 $10,227 $10,577 $10,212
9/30/2000 $10,173 $10,643 $10,107
10/31/2000 $ 9,974 $10,714 $ 9,908
11/30/2000 $9,772 $10,889 $ 9,759
12/31/2000 $10,203 $11,091 $10,039
1/31/2001 $10,605 $11,272 $10,407
2/28/2001 $10,581 $11,371 $10,419
3/31/2001 $10,417 $11,428 $10,224
4/30/2001 $10,415 $11,380 $10,147
5/31/2001 $10,479 $11,449 $10,221
6/30/2001 $10,399 $11,492 $10,135
7/31/2001 $10,530 $11,749 $10,217
8/31/2001 $10,662 $11,884 $10,355
9/30/2001 $10,232 $12,022 $10,029
10/31/2001 $10,547 $12,274 $10,274
11/30/2001 $10,818 $12,104 $10,400
12/31/2001 $10,782 $12,028 $10,368
1/31/2002 $10,790 $12,125 $10,425
2/28/2002 $10,816 $12,243 $10,453
3/31/2002 $10,935 $12,039 $10,480
4/30/2002 $11,068 $12,272 $10,645
5/31/2002 $11,023 $12,377 $10,674
6/30/2002 $10,558 $12,484 $10,454
7/31/2002 $10,331 $12,634 $10,286
8/31/2002 $10,600 $12,848 $10,503
9/30/2002 $10,590 $13,056 $10,481
10/31/2002 $10,641 $12,996 $10,526
11/30/2002 $11,090 $12,993 $10,810
12/31/2002 $11,305 $13,261 $11,028
1/31/2003 $11,509 $13,273 $11,194
2/28/2003 $11,714 $13,456 $11,372
3/31/2003 $11,874 $13,446 $11,492
4/30/2003 $12,382 $13,557 $11,891
5/31/2003 $12,764 $13,810 $12,189
6/30/2003 $12,914 $13,782 $12,303
7/31/2003 $12,569 $13,319 $12,043
8/31/2003 $12,696 $13,407 $12,168
9/30/2003 $13,166 $13,762 $12,514
10/31/2003 $13,254 $13,634 $12,611
11/30/2003 $13,449 $13,667 $12,757
12/31/2003 $13,835 $13,806 $13,058
1/31/2004 $14,019 $13,917 $13,186
2/29/2004 $14,109 $14,067 $13,218
3/31/2004 $14,199 $14,173 $13,321
4/30/2004 $13,864 $13,804 $13,029
5/31/2004 $13,761 $13,749 $12,909
6/30/2004 $13,881 $13,826 $13,029
7/31/2004 $14,029 $13,964 $13,152
8/31/2004 $14,347 $14,230 $13,413
9/30/2004 $14,539 $14,268 $13,581
10/31/2004 $14,818 $14,388 $13,815
11/30/2004 $15,027 $14,273 $13,996
12/31/2004 $15,251 $14,405 $14,201
1/31/2005 $15,217 $14,495 $14,190
2/28/2005 $15,400 $14,410 $14,289
3/31/2005 $15,058 $14,336 $14,048
4/30/2005 $15,024 $14,530 $14,070
5/31/2005 $15,165 $14,687 $14,205
6/30/2005 $15,287 $14,767 $14,353
7/31/2005 $15,365 $14,633 $14,408
8/31/2005 $15,458 $14,820 $14,540
9/30/2005 $15,370 $14,667 $14,491
10/31/2005 $15,253 $14,551 $14,342
11/30/2005 $15,362 $14,616 $14,423
12/31/2005 $15,518 $14,755 $14,560
1/31/2006 $15,751 $14,755 $14,704
2/28/2006 $15,832 $14,804 $14,809
3/31/2006 $15,773 $14,659 $14,726
4/30/2006 $15,932 $14,633 $14,810
5/31/2006 $15,889 $14,617 $14,739
6/30/2006 $15,829 $14,648 $14,699
7/31/2006 $16,006 $14,846 $14,883
8/31/2006 $16,201 $15,073 $15,090
9/30/2006 $16,332 $15,206 $15,186
10/31/2006 $16,529 $15,306 $15,356
11/30/2006 $16,774 $15,484 $15,560
12/31/2006 $16,815 $15,394 $15,598
1/31/2007 $16,868 $15,388 $15,663
2/28/2007 $17,068 $15,625 $15,867
3/31/2007 $17,171 $15,625 $15,924
4/30/2007 $17,406 $15,710 $16,096
5/31/2007 $17,493 $15,591 $16,098
6/30/2007 $17,363 $15,545 $15,969
7/31/2007 $17,198 $15,674 $15,833
8/31/2007 $17,286 $15,866 $15,925
9/30/2007 $17,749 $15,987 $16,228
10/31/2007 $17,958 $16,130 $16,380
11/30/2007 $17,807 $16,420 $16,331
12/31/2007 $17,845 $16,466 $16,367
1/31/2008 $17,918 $16,743 $16,398
2/29/2008 $17,922 $16,766 $16,336
3/31/2008 $17,943 $16,823 $16,262
4/30/2008 $18,285 $16,788 $16,495
5/31/2008 $18,217 $16,665 $16,460
6/30/2008 $17,915 $16,652 $16,225
7/31/2008 $17,883 $16,638 $16,105
8/31/2008 $17,887 $16,796 $16,089
9/30/2008 $16,905 $16,571 $15,305
10/31/2008 $15,458 $16,180 $13,895
11/30/2008 $15,203 $16,706 $13,483
12/31/2008 $15,950 $17,329 $14,003
1/31/2009 $16,393 $17,176 $14,187
2/28/2009 $16,046 $17,112 $13,957
3/31/2009 $16,374 $17,350 $14,183
4/30/2009 $17,191 $17,432 $14,859
Total Returns 71.91% 74.32% 48.59%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 4/30/09
- ---------------- -------
1-Year -5.98%
5-Year +4.40%
10-Year +5.57%
Annual Report | 13
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 LOANS AND
HIGH YIELD CORPORATE BONDS ARE RATED BELOW INVESTMENT GRADE AND ARE SUBJECT TO
GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT
MAY BE HEIGHTENED IN A SLOWING ECONOMY. THE RISKS OF FOREIGN SECURITIES INCLUDE
CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. INVESTMENTS IN DEVELOPING
MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO
THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY.
INVESTING IN DERIVATIVE SECURITIES AND THE USE OF FOREIGN CURRENCY TECHNIQUES
INVOLVE SPECIAL RISKS AS SUCH MAY NOT ACHIEVE THE ANTICIPATED BENEFITS AND/OR
RESULT IN LOSSES TO THE 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.
(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
April dividend and the maximum offering price (NAV for Classes B, C, R and
Advisor) per share on 4/30/09.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/09.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(8.) 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 +79.61% and +6.21%.
(9.) Sources: (C) 2009 Morningstar; Lipper Inc. The BC U.S. Aggregate Index is a
market-capitalization weighted index representing the U.S.
investment-grade, fixed-rate, taxable bond market with index components for
government and corporate, mortgage pass-through and asset-backed
securities. All issues included are SEC-registered, taxable, dollar
denominated, nonconvertible, must have at least one year to final maturity,
and must be rated investment grade (Baa3/BBB-/BBB- or above) using the
middle rating of Moody's, Standard & Poor's and Fitch, respectively. Total
return includes price appreciation/depreciation and income as a percentage
of the original investment. The index is rebalanced monthly by market
capitalization. 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 12-month period ended
4/30/09, there were 147 funds in this category. Lipper calculations do not
include sales charges, but include reinvestment of any income or
distributions. Fund performance relative to the average may have differed
if these and other factors had been considered.
14 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases fees;
and
- - 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.
Annual Report | 15
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.
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
VALUE 11/1/08 VALUE 4/30/09 PERIOD* 11/1/08-4/30/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,110.80 $4.76
Hypothetical (5% return before expenses) $1,000 $1,020.28 $4.56
CLASS B
Actual $1,000 $1,108.00 $6.85
Hypothetical (5% return before expenses) $1,000 $1,018.30 $6.56
CLASS C
Actual $1,000 $1,108.60 $6.85
Hypothetical (5% return before expenses) $1,000 $1,018.30 $6.56
CLASS R
Actual $1,000 $1,109.70 $6.07
Hypothetical (5% return before expenses) $1,000 $1,019.04 $5.81
ADVISOR CLASS
Actual $1,000 $1,112.10 $3.46
Hypothetical (5% return before expenses) $1,000 $1,021.52 $3.31
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.91%; B: 1.31%; C: 1.31%; R: 1.16%; and
Advisor: 0.66%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
16 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
2009 2008 2007 2006 2005
---------- ---------- ---------- -------- --------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09
---------- ---------- ---------- -------- --------
Income from investment operations(a):
Net investment income(b) .................................. 0.51 0.56 0.53 0.51 0.53
Net realized and unrealized gains (losses) ................ (1.20) (0.07) 0.35 0.05 0.27
---------- ---------- ---------- -------- --------
Total from investment operations ............................. (0.69) 0.49 0.88 0.56 0.80
---------- ---------- ---------- -------- --------
Less distributions from net investment income and net foreign
currency gains ............................................ (0.76) (0.69) (0.60) (0.60) (0.65)
---------- ---------- ---------- -------- --------
Redemption fees(c, d) ........................................ -- -- -- -- --
---------- ---------- ---------- -------- --------
Net asset value, end of year ................................. $ 8.83 $ 10.28 $ 10.48 $ 10.20 $ 10.24
========== ========== ========== ======== ========
Total return(e) .............................................. (6.32)% 4.80% 9.09% 5.69% 8.10%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................................. 0.89% 0.89% 0.92% 0.91% 0.91%(g)
Net investment income ........................................ 5.67% 5.44% 5.22% 5.05% 5.18%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $2,060,179 $2,123,947 $1,521,459 $998,182 $696,198
Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 0.92%.
(h) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 17
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
----------------------------------------------------
2009 2008 2007 2006 2005
------- -------- -------- -------- --------
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................................. 0.48 0.52 0.49 0.47 0.49
Net realized and unrealized gains (losses) ................ (1.20) (0.07) 0.35 0.06 0.27
------- -------- -------- -------- --------
Total from investment operations ............................. (0.72) 0.45 0.84 0.53 0.76
------- -------- -------- -------- --------
Less distributions from net investment income and net foreign
currency gains ............................................ (0.73) (0.65) (0.56) (0.56) (0.61)
------- -------- -------- -------- --------
Redemption fees(c, d) ........................................ -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year ................................. $ 8.87 $ 10.32 $ 10.52 $ 10.24 $ 10.27
======= ======== ======== ======== ========
Total return(e) .............................................. (6.68)% 4.35% 8.62% 5.34% 7.65%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................................. 1.29% 1.29% 1.32% 1.31% 1.31%(g)
Net investment income ........................................ 5.27% 5.04% 4.82% 4.65% 4.78%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $79,959 $105,620 $104,523 $104,477 $110,502
Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 1.32%.
(h) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- -------- -------- --------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................................. 0.48 0.52 0.49 0.47 0.49
Net realized and unrealized gains (losses) ................ (1.19) (0.08) 0.35 0.05 0.27
-------- -------- -------- -------- --------
Total from investment operations ............................. (0.71) 0.44 0.84 0.52 0.76
-------- -------- -------- -------- --------
Less distributions from net investment income and net foreign
currency gains ............................................ (0.73) (0.65) (0.56) (0.56) (0.61)
-------- -------- -------- -------- --------
Redemption fees(c, d) ........................................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................................. $ 8.83 $ 10.27 $ 10.48 $ 10.20 $ 10.24
======== ======== ======== ======== ========
Total return(e) .............................................. (6.60)% 4.28% 8.67% 5.27% 7.67%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................................. 1.29% 1.29% 1.32% 1.31% 1.31%(g)
Net investment income ........................................ 5.27% 5.04% 4.82% 4.65% 4.78%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $773,337 $733,071 $437,026 $294,412 $213,741
Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 1.32%.
(h) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- ------- ------- -------
CLASS R
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 10.25 $ 10.46 $ 10.18 $ 10.22 $ 10.07
-------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) .................................. 0.49 0.53 0.51 0.49 0.51
Net realized and unrealized gains (losses) ................ (1.19) (0.08) 0.35 0.05 0.26
-------- -------- ------- ------- -------
Total from investment operations ............................. (0.70) 0.45 0.86 0.54 0.77
-------- -------- ------- ------- -------
Less distributions from net investment income and net foreign
currency gains ............................................ (0.74) (0.66) (0.58) (0.58) (0.62)
-------- -------- ------- ------- -------
Redemption fees(c, d) ........................................ -- -- -- -- --
-------- -------- ------- ------- -------
Net asset value, end of year ................................. $ 8.81 $ 10.25 $ 10.46 $ 10.18 $ 10.22
======== ======== ======= ======= =======
Total return(e) .............................................. (6.47)% 4.55% 8.74% 5.44% 7.86%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................................. 1.14% 1.14% 1.17% 1.16% 1.16%(g)
Net investment income ........................................ 5.42% 5.19% 4.97% 4.80% 4.93%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $115,811 $108,020 $65,527 $32,971 $17,859
Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding mortgage dollar rolls(h) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Ratio of expenses to average net assets before waiver and payments by
affiliates was 1.17%.
(h) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- ------- ------- -------
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09
-------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) .................................. 0.53 0.58 0.56 0.54 0.56
Net realized and unrealized gains (losses) ................ (1.18) (0.07) 0.35 0.06 0.26
-------- -------- ------- ------- -------
Total from investment operations ............................. (0.65) 0.51 0.91 0.60 0.82
-------- -------- ------- ------- -------
Less distributions from net investment income and net foreign
currency gains ............................................ (0.79) (0.72) (0.63) (0.63) (0.67)
-------- -------- ------- ------- -------
Redemption fees(c, d) ........................................ -- -- -- -- --
-------- -------- ------- ------- -------
Net asset value, end of year ................................. $ 8.84 $ 10.28 $ 10.49 $ 10.21 $ 10.24
======== ======== ======= ======= =======
Total return ................................................. (5.98)% 5.05% 9.25% 6.05% 8.37%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .................................................. 0.64% 0.64% 0.67% 0.66% 0.66%(f)
Net investment income ........................................ 5.92% 5.69% 5.47% 5.30% 5.43%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $166,821 $111,346 $66,745 $57,367 $60,489
Portfolio turnover rate ...................................... 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding mortgage dollar rolls(g) ... 49.48% 31.71% 41.50% 33.59% 39.91%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Ratio of expenses to average net assets before waiver and payments by
affiliates was 0.67%.
(g) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION SHARES VALUE
------------------------------ ---------------- ------------------- --------------
COMMON STOCKS 0.0%
AUTOMOBILES & COMPONENTS 0.0%
(a, b) Cambridge Industries Liquidating Trust Interest ............... United States 516,372 $ --
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.0%
(a, b) VS Holdings Inc. .............................................. United States 64,666 --
--------------
TOTAL COMMON STOCKS (COST $64,666) ............................ --
--------------
CONVERTIBLE PREFERRED STOCKS 0.2%
BANKS 0.0%(c)
(a) Fannie Mae, 8.75%, cvt. pfd. .................................. United States 121,200 140,592
--------------
DIVERSIFIED FINANCIALS 0.2%
Affiliated Managers Group Inc., 5.10%, cvt. pfd. .............. United States 174,000 4,654,500
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $15,362,548) ......................................... 4,795,092
--------------
PREFERRED STOCKS 0.0%(c)
BANKS 0.0%(c)
(a) Freddie Mac, 8.375%, pfd., Z .................................. United States 200,000 102,000
--------------
DIVERSIFIED FINANCIALS 0.0%(c)
(d) Preferred Blocker Inc., 7.00%, pfd., 144A ..................... United States 2,081 624,430
--------------
TOTAL PREFERRED STOCKS (COST $5,738,755) ...................... 726,430
--------------
PRINCIPAL AMOUNT(e)
-------------------
(f, g) SENIOR FLOATING RATE INTERESTS 9.6%
AUTOMOBILES & COMPONENTS 0.0%(c)
(h) Dayco Products LLC (Mark IV), Replacement Term Loan,
6.06% - 6.75%, 6/23/11 ..................................... United States 2,042,544 312,509
(h) Key Safety Systems Inc., Term Loan B, 2.685% - 3.482%,
3/10/14 .................................................... United States 1,161,809 423,093
--------------
735,602
--------------
CAPITAL GOODS 0.3%
RBS Global Inc. (Rexnord Corp.),
Incremental Tranche B-2, 2.437%, 7/22/13 ................... United States 1,075,652 851,109
Term Loan, 3.00% - 3.625%, 7/22/13 ......................... United States 6,910,454 5,502,449
TransDigm Inc., Term Loan B, 3.227%, 6/23/13 .................. United States 3,230,676 2,974,913
--------------
9,328,471
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.6%
ARAMARK Corp.,
Synthetic L/C, 2.336%, 1/26/14 ............................. United States 1,007,512 921,874
Term Loan B, 3.095%, 1/26/14 ............................... United States 15,723,649 14,387,139
(h) Duratek Inc. (EnergySolutions), Term Loan B, 4.15%, 6/07/13 ... United States 984,205 925,153
(h) EnergySolutions LLC,
Synthetic L/C, 2.69%, 6/07/13 .............................. United States 136,307 128,128
Term Loan B, 4.15%, 6/07/13 ................................ United States 2,051,388 1,928,304
(i) EnviroSolutions Inc., Initial Term Loan, PIK, 10.50%,
7/07/12 .................................................... United States 4,064,970 2,017,241
--------------
20,307,839
--------------
22 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
(f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
CONSUMER DURABLES & APPAREL 0.5%
Jarden Corp.,
(h) Term Loan B1, 2.97%, 1/24/12 ............................... United States 6,731,733 $ 6,465,829
Term Loan B2, 2.97%, 1/24/12 ............................... United States 6,561,333 6,302,161
Jostens IH Corp. (Visant Holding Corp.), Term Loan C,
2.495%, 12/21/11 ........................................... United States 4,558,727 4,273,807
--------------
17,041,797
--------------
CONSUMER SERVICES 1.0%
Education Management LLC, Term Loan C, 3.00%, 6/01/13 ......... United States 11,973,249 10,788,747
(h, i) Kuilima Resort Co. (Turtle Bay), First Lien Term Loan, PIK,
9.00%, 9/30/10 ............................................. United States 34,394,534 8,598,634
(h) Penn National Gaming Inc., Term Loan B, 2.18% - 2.99%,
10/03/12 ................................................... United States 11,690,280 10,969,375
--------------
30,356,756
--------------
DIVERSIFIED FINANCIALS 0.2%
TD Ameritrade Holding Corp., Term Loan B, 1.95%, 12/31/12 ..... United States 5,308,980 5,036,895
--------------
FOOD, BEVERAGE & TOBACCO 0.5%
Constellation Brands Inc., Term Loan B, 2.00% - 2.813%,
6/05/13 .................................................... United States 4,761,162 4,548,609
Dean Foods Co., Term Loan B, 1.93% - 2.72%, 4/02/14 ........... United States 11,332,852 10,588,352
--------------
15,136,961
--------------
HEALTH CARE EQUIPMENT & SERVICES 1.9%
(h) Bausch and Lomb Inc.,
(j) Delayed Draw Term Loan, 3.678% - 4.47%, 4/28/15 ............ United States 543,867 326,635
Parent Term Loan B, 4.47%, 4/28/15 ......................... United States 2,864,364 2,489,849
Community Health Systems Inc.,
Delayed Draw Term Loan, 2.678%, 7/25/14 .................... United States 1,040,823 942,064
Term Loan, 2.678% - 3.506%, 7/25/14 ........................ United States 20,398,595 18,463,054
DaVita Inc., Term Loan B-1, 1.93% - 2.74%, 10/05/12 ........... United States 6,927,000 6,535,195
(h) DJO Finance LLC, Term Loan B, 3.428% - 4.22%, 5/20/14 ......... United States 7,336,971 6,533,573
Fresenius Medical Care Holdings Inc., Term Loan B,
2.514% - 2.674%, 3/31/13 ................................... Germany 7,897,011 7,545,349
HCA Inc.,
Term Loan A-1, 3.22%, 11/19/12 ............................. United States 4,613,123 4,186,432
Term Loan B-1, 3.47%, 11/18/13 ............................. United States 9,211,321 8,336,245
LifePoint Hospitals Inc., Term Loan B, 3.88%, 4/15/12 ......... United States 6,152,932 5,844,184
--------------
61,202,580
--------------
INSURANCE 0.1%
(h) Conseco Inc., Term Loan, 6.50%, 10/10/13 ...................... United States 2,700,000 1,134,000
--------------
MATERIALS 1.4%
(h) Celanese U.S. Holdings LLC, Dollar Term Loan, 2.942%,
4/02/14 .................................................... United States 13,984,162 12,449,079
Georgia-Pacific LLC,
(h) Additional Term Loan, 2.428% - 3.293%, 12/20/12 ............ United States 3,003,676 2,809,377
Term Loan B, 2.428% - 3.293%, 12/20/12 ..................... United States 12,061,614 11,281,384
Annual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
(f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
MATERIALS (CONTINUED)
Nalco Co., Term Loan B, 2.188% - 4.188%, 11/04/10 ............. United States 4,318,089 $ 4,276,260
Novelis Corp., US Term Loan, 3.22%, 7/07/14 ................... United States 7,101,997 5,109,887
(h) Rockwood Specialties Group Inc., Term Loan E, 2.178%,
7/30/12 .................................................... United States 10,965,564 9,892,507
--------------
45,818,494
--------------
MEDIA 1.5%
(h) Cinemark USA Inc., Term Loan, 2.19% - 2.99%, 10/05/13 ......... United States 1,866,018 1,745,505
(h) CSC Holdings Inc. (Cablevision), Incremental Term Loan,
2.198%, 3/29/13 ............................................ United States 10,641,539 9,873,358
(h) DIRECTV Holdings LLC, Term Loan B, 1.928%, 4/13/13 ............ United States 6,880,100 6,562,679
(h) Discovery Communications Inc., Term Loan B, 4.25%,
5/14/14 .................................................... United States 6,167,347 5,794,222
Metro-Goldwyn-Mayer Inc., Term Loan B, 3.678%, 4/08/12 ........ United States 5,664,418 2,777,927
Regal Cinemas Corp., Term Loan, 4.97%, 10/27/13 ............... United States 8,231,853 7,955,312
(k) Tribune Co., Incremental Term Loan, 5.25%, 5/14/14 ............ United States 10,984,928 2,833,200
UPC Financing Partnership, Term Loan N, 2.315%, 12/31/14 ...... Netherlands 12,387,944 11,474,333
--------------
49,016,536
--------------
SOFTWARE & SERVICES 0.6%
Affiliated Computer Services Inc., Additional Term Loan,
2.428% - 2.495%, 3/20/13 ................................... United States 8,961,619 8,471,222
Lender Processing Services Inc., Term Loan B, 2.928%,
7/02/14 .................................................... United States 1,090,068 1,061,454
SunGard Data Systems Inc., New U.S. Term Loan,
2.21% - 2.99%, 2/28/14 ..................................... United States 11,067,514 9,989,969
--------------
19,522,645
--------------
TELECOMMUNICATION SERVICES 0.7%
Hawaiian Telecom Communications Inc., Term Loan C, 2.989%,
6/01/14 .................................................... United States 4,004,841 2,005,756
Intelsat Corp. (Panamsat),
Incremental Term Loan B-2-A, 2.989%, 1/03/14 ............... United States 276,325 252,991
Incremental Term Loan B-2-B, 2.989%, 1/03/14 ............... United States 276,241 252,914
Incremental Term Loan B-2-C, 2.989%, 1/03/14 ............... United States 276,241 252,914
(h) Tranche B-2-A, 2.989%, 1/03/14 ............................. United States 2,527,805 2,314,347
(h) Tranche B-2-B, 2.989%, 1/03/14 ............................. United States 2,527,038 2,313,644
(h) Tranche B-2-C, 2.989%, 1/03/14 ............................. United States 2,527,038 2,313,644
NTELOS Inc., Term Loan B-1, 2.68%, 8/24/11 .................... United States 2,278,272 2,172,334
(h) Windstream Corp., Tranche B-1, 1.95% - 2.62%, 7/17/13 ......... United States 11,452,896 10,746,035
--------------
22,624,579
--------------
UTILITIES 0.3%
NRG Energy Inc.,
Credit Link, 1.12%, 2/01/13 ................................ United States 3,737,393 3,487,844
Term Loan, 2.72%, 2/01/13 .................................. United States 6,998,863 6,531,542
--------------
10,019,386
--------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $326,581,712) ........................................ 307,282,541
--------------
24 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS 40.2%
AUTOMOBILES & COMPONENTS 0.6%
Ford Motor Credit Co. LLC, senior note,
9.75%, 9/15/10 ............................................ United States 5,000,000 $ 4,501,570
9.875%, 8/10/11 ........................................... United States 11,000,000 9,630,940
(d) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 ........ United States 8,000,000 4,320,000
--------------
18,452,510
--------------
BANKS 1.6%
BB&T Capital Trust IV, junior sub. bond, 6.82%, 6/12/77 ....... United States 9,600,000 5,800,301
(h) BB&T Corp., senior note, 6.85%, 4/30/19 ....................... United States 2,500,000 2,439,347
(d, l) BNP Paribas, 144A, 7.195%, Perpetual .......................... France 10,000,000 6,502,700
HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 .................. United Kingdom 10,000,000 8,557,430
Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 .......... Sweden 3,780,000 NZD 2,204,751
UBS AG Stamford, senior note, 5.875%, 12/20/17 ................ United States 10,000,000 8,785,430
Wells Fargo & Co., senior note, 5.625%, 12/11/17 .............. United States 5,000,000 4,669,335
(l) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual .............. United States 8,000,000 5,240,000
(l) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ................ United States 6,700,000 5,661,500
--------------
49,860,794
--------------
CAPITAL GOODS 1.2%
(d) Allison Transmission Inc., senior note, 144A, 11.00%,
11/01/15 ................................................... United States 9,000,000 5,445,000
Case New Holland Inc., senior note, 7.125%, 3/01/14 ........... United States 8,500,000 7,480,000
Ingersoll-Rand Global Holding Co. Ltd., senior note,
9.50%, 4/15/14 ............................................. United States 4,900,000 5,132,530
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ........................................... United States 4,500,000 4,140,000
6.375%, 10/15/15 .......................................... United States 4,000,000 3,810,000
Nortek Inc., senior note, 10.00%, 12/01/13 .................... United States 900,000 580,500
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ....... United States 9,000,000 7,402,500
RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ....... United States 9,000,000 5,827,500
--------------
39,818,030
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.6%
ARAMARK Corp., senior note, 8.50%, 2/01/15 .................... United States 10,000,000 9,600,000
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 .......... United States 2,600,000 2,652,000
JohnsonDiversey Holdings Inc., senior disc. note, 10.67%,
5/15/13 .................................................... United States 5,000,000 4,000,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 .... United States 4,000,000 3,810,000
--------------
20,062,000
--------------
CONSUMER DURABLES & APPAREL 0.9%
D.R. Horton Inc., senior note, 6.50%, 4/15/16 ................. United States 7,500,000 6,375,000
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ................ United States 9,000,000 8,010,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 .......... United States 7,500,000 7,312,500
KB Home, senior note,
6.25%, 6/15/15 ............................................. United States 6,000,000 5,160,000
7.25%, 6/15/18 ............................................. United States 1,000,000 830,000
--------------
27,687,500
--------------
Annual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES 1.3%
(d, k) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ................ United States 8,000,000 $ 320,000
Host Hotels & Resorts LP, senior note,
6.875%, 11/01/14 ........................................... United States 1,000,000 920,000
K, 7.125%, 11/01/13 ........................................ United States 6,900,000 6,520,500
M, 7.00%, 8/15/12 .......................................... United States 2,000,000 1,910,000
MGM MIRAGE, senior note,
6.625%, 7/15/15 ............................................ United States 13,000,000 7,458,750
7.50%, 6/01/16 ............................................. United States 1,000,000 565,000
Pinnacle Entertainment Inc., senior sub. note,
8.25%, 3/15/12 ............................................. United States 3,300,000 3,234,000
8.75%, 10/01/13 ............................................ United States 4,200,000 4,074,000
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ..... United States 10,000,000 6,400,000
Starwood Hotels & Resorts Worldwide Inc., senior note,
6.75%, 5/15/18 ............................................. United States 10,000,000 8,665,400
(k) Station Casinos Inc.,
senior note, 6.00%, 4/01/12 ................................ United States 1,200,000 423,000
senior note, 7.75%, 8/15/16 ................................ United States 3,800,000 1,311,000
senior sub. note, 6.50%, 2/01/14 ........................... United States 500,000 20,000
senior sub. note, 6.875%, 3/01/16 .......................... United States 3,800,000 142,500
--------------
41,964,150
--------------
DIVERSIFIED FINANCIALS 3.8%
American Express Co., senior note, 7.00%, 3/19/18 ............. United States 8,000,000 7,599,904
American Express Credit Corp., senior note, C, 7.30%,
8/20/13 .................................................... United States 4,000,000 4,012,316
Bank of America Corp.,
(l) pfd., sub. bond, M, 8.125%, Perpetual ...................... United States 15,000,000 8,537,550
senior note, 5.65%, 5/01/18 ................................ United States 5,000,000 4,077,125
Citigroup Inc.,
senior note, 6.125%, 11/21/17 .............................. United States 5,000,000 4,128,850
sub. note, 5.00%, 9/15/14 .................................. United States 13,500,000 9,262,458
The Export-Import Bank of Korea, senior note, 8.125%,
1/21/14 .................................................... South Korea 7,905,000 8,303,412
General Electric Capital Corp.,
senior bond, 5.875%, 1/14/38 ............................... United States 5,000,000 3,464,305
senior note, A, 8.50%, 4/06/18 ............................. United States 170,000,000 MXN 10,588,202
(d) GMAC LLC, senior note, 144A,
7.25%, 3/02/11 ............................................. United States 2,849,000 2,508,545
6.875%, 9/15/11 ............................................ United States 8,000,000 6,920,000
6.875%, 8/28/12 ............................................ United States 2,532,000 2,002,331
The Goldman Sachs Group Inc.,
(h) senior note, 6.00%, 5/01/14 ................................ United States 900,000 897,873
sub. note, 6.75%, 10/01/37 ................................. United States 12,500,000 9,449,279
JPMorgan Chase & Co.,
6.00%, 1/15/18 ............................................. United States 5,000,000 4,869,265
(l) junior sub. note, 1, 7.90%, Perpetual ...................... United States 5,000,000 3,750,000
26 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIALS (CONTINUED)
JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 ........ United States 14,000,000 $ 10,129,923
(k) Lehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 .... United States 16,000,000 2,360,000
Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 ......... United States 10,000,000 8,107,689
Morgan Stanley, senior note, 6.00%, 4/28/15 ................... United States 12,000,000 11,348,091
--------------
122,317,118
--------------
ENERGY 6.0%
Baker Hughes Inc., senior note, 7.50%, 11/15/18 ............... United States 8,000,000 9,018,952
Canadian Natural Resources Ltd., 5.90%, 2/01/18 ............... Canada 10,000,000 9,356,810
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ............................................ United States 1,500,000 1,440,000
9.50%, 2/15/15 ............................................. United States 1,000,000 1,015,000
6.625%, 1/15/16 ............................................ United States 3,500,000 3,132,500
6.25%, 1/15/18 ............................................. United States 6,000,000 5,085,000
7.25%, 12/15/18 ............................................ United States 1,000,000 880,000
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ............................................. France 7,000,000 5,810,000
7.75%, 5/15/17 ............................................. France 1,800,000 1,449,000
ConocoPhillips, 5.75%, 2/01/19 ................................ United States 12,000,000 12,272,724
Copano Energy LLC, senior note,
8.125%, 3/01/16 ............................................ United States 7,000,000 6,405,000
(d) 144A, 7.75%, 6/01/18 ....................................... United States 2,000,000 1,760,000
El Paso Corp., senior note, 12.00%, 12/12/13 .................. United States 7,200,000 7,848,000
(d) Kazmunaigaz Finance Sub BV, 144A, 9.125%, 7/02/18 ............. Kazakhstan 6,500,000 5,655,000
Mariner Energy Inc., senior note, 7.50%, 4/15/13 .............. United States 9,000,000 7,335,000
MarkWest Energy Partners LP, senior note,
6.875%, 11/01/14 ........................................... United States 8,000,000 6,600,000
8.75%, 4/15/18 ............................................. United States 800,000 668,000
Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 ......... United States 8,000,000 7,880,000
(d) Petrohawk Energy Corp., senior note, 144A, 10.50%, 8/01/14 .... United States 9,000,000 9,090,000
(d) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ..... Switzerland 10,000,000 8,200,000
Plains Exploration & Production Co., senior note,
10.00%, 3/01/16 ............................................ United States 1,000,000 980,000
7.625%, 6/01/18 ............................................ United States 9,000,000 7,852,500
Quicksilver Resources Inc., senior note, 8.25%, 8/01/15 ....... United States 9,000,000 7,380,000
(d) SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 ...... United States 9,000,000 7,920,000
Smith International Inc., senior note, 9.75%, 3/15/19 ......... United States 10,000,000 10,585,600
Tesoro Corp., senior note,
6.25%, 11/01/12 ............................................ United States 500,000 457,500
6.50%, 6/01/17 ............................................. United States 10,000,000 8,175,000
Valero Energy Corp., senior note, 10.50%, 3/15/39 ............. United States 9,500,000 10,522,504
Weatherford International Ltd., senior note,
6.00%, 3/15/18 ............................................. United States 8,000,000 6,707,576
9.625%, 3/01/19 ............................................ United States 2,000,000 2,161,926
Annual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
The Williams Cos. Inc., senior note,
7.625%, 7/15/19 ............................................ United States 4,000,000 $ 3,946,876
7.875%, 9/01/21 ............................................ United States 4,400,000 4,353,448
8.75%, 3/15/32 ............................................. United States 1,300,000 1,224,895
(d) Woodside Finance Ltd., 144A, 8.75%, 3/01/19 ................... Australia 10,000,000 9,939,600
--------------
193,108,411
--------------
FOOD & STAPLES RETAILING 0.7%
CVS Caremark Corp., 6.60%, 3/15/19 ............................ United States 6,100,000 6,524,983
The Kroger Co.,
6.15%, 1/15/20 ............................................. United States 7,500,000 7,679,220
senior note, 7.50%, 1/15/14 ................................ United States 2,500,000 2,788,788
Supervalu Inc., senior note, 8.00%, 5/01/16 ................... United States 5,900,000 5,723,000
--------------
22,715,991
--------------
FOOD, BEVERAGE & TOBACCO 2.9%
Altria Group Inc.,
senior bond, 9.25%, 8/06/19 ................................ United States 3,300,000 3,785,242
senior note, 9.70%, 11/10/18 ............................... United States 8,000,000 9,363,392
(d) Anheuser-Busch InBev NV, senior note, 144A, 7.75%,
1/15/19 .................................................... United States 12,000,000 12,585,096
(d) BAT International Finance PLC, senior note, 144A, 9.50%,
11/15/18 ................................................... United Kingdom 5,000,000 5,693,945
(d) Cargill Inc.,
144A, 5.20%, 1/22/13 ....................................... United States 500,000 486,778
144A, 6.00%, 11/27/17 ...................................... United States 7,000,000 6,409,018
senior note, 144A, 7.35%, 3/06/19 .......................... United States 3,000,000 2,969,661
ConAgra Foods Inc., 5.875%, 4/15/14 ........................... United States 5,800,000 6,031,257
Dean Foods Inc., senior note, 7.00%, 6/01/16 .................. United States 9,000,000 8,820,000
Diageo Capital PLC, senior note, 7.375%, 1/15/14 .............. United Kingdom 3,100,000 3,447,200
(d) Dole Food Co. Inc, senior note, 144A, 13.875%, 3/15/14 ........ United States 9,000,000 9,517,500
(d) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 .............. United States 9,000,000 8,640,000
Reynolds American Inc., senior secured note, 7.625%,
6/01/16 .................................................... United States 7,500,000 6,693,750
Smithfield Foods Inc., senior note, 7.75%,
5/15/13 .................................................... United States 1,700,000 1,207,000
7/01/17 .................................................... United States 3,300,000 2,145,000
(d) Tyson Foods Inc., senior note, 144A, 10.50%, 3/01/14 .......... United States 5,100,000 5,355,000
--------------
93,149,839
--------------
HEALTH CARE EQUIPMENT & SERVICES 3.0%
Coventry Health Care Inc., senior note,
6.30%, 8/15/14 ............................................. United States 5,200,000 3,828,058
5.95%, 3/15/17 ............................................. United States 2,800,000 1,795,066
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ................. United States 9,500,000 9,333,750
FMC Finance III SA, senior note, 6.875%, 7/15/17 .............. Germany 7,500,000 7,387,500
Fresenius Medical Care Capital Trust IV, 7.875%, 6/15/11 ...... Germany 2,000,000 2,050,000
(d) Fresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 .... Germany 5,000,000 5,300,000
28 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES (CONTINUED)
HCA Inc.,
senior note, 6.50%, 2/15/16 ................................ United States 3,000,000 $ 2,325,000
senior secured note, 9.125%, 11/15/14 ...................... United States 10,000,000 9,925,000
(i) senior secured note, PIK, 9.625%, 11/15/16 ................. United States 4,000,000 3,720,000
Medco Health Solutions Inc., 7.125%, 3/15/18 .................. United States 10,000,000 9,908,420
Quest Diagnostics Inc., 6.40%, 7/01/17 ........................ United States 8,500,000 8,239,849
Tenet Healthcare Corp., senior note,
9.875%, 7/01/14 ............................................ United States 4,500,000 4,207,500
(d) 144A, 9.00%, 5/01/15 ....................................... United States 2,500,000 2,537,500
(d) 144A, 10.00%, 5/01/18 ...................................... United States 3,000,000 3,135,000
(i) United Surgical Partners International Inc., senior
sub. note, PIK, 9.25%, 5/01/17 ............................. United States 9,000,000 6,750,000
(f, i) U.S. Oncology Holdings Inc., senior note, PIK, FRN,
6.904%, 3/15/12 ............................................ United States 9,434,000 5,577,852
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%,
10/01/14 ................................................... United States 9,000,000 8,617,500
--------------
94,637,995
--------------
INSURANCE 0.3%
(d, f) MetLife Capital Trust X, secured bond, 144A, FRN, 9.25%,
4/08/68 .................................................... United States 1,900,000 1,218,113
MetLife Inc.,
7.717%, 2/15/19 ............................................ United States 3,000,000 3,014,151
(f) junior sub. note, FRN, 6.40%, 12/15/66 ..................... United States 8,000,000 4,371,129
senior note, A, 6.817%, 8/15/18 ............................ United States 2,000,000 1,891,062
--------------
10,494,455
--------------
MATERIALS 2.4%
(d) Anglo American Capital PLC, senior note, 144A, 9.375%,
4/08/14 .................................................... United Kingdom 8,200,000 8,359,213
Crown Americas Inc., senior note, 7.75%, 11/15/15 ............. United States 9,000,000 9,180,000
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%,
4/01/17 .................................................... United States 8,000,000 7,851,120
Huntsman International LLC, senior sub. note, 7.875%,
11/15/14 ................................................... United States 9,000,000 5,985,000
(d) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%,
2/15/16 .................................................... United Kingdom 11,000,000 1,705,000
(d) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 ........ United States 8,500,000 4,250,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 ................. United States 9,000,000 9,090,000
NewPage Corp., senior secured note, 10.00%, 5/01/12 ........... United States 9,000,000 4,275,000
Novelis Inc., senior note, 7.25%, 2/15/15 ..................... Canada 100,000 52,500
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 ................................................... United States 8,000,000 7,820,000
Owens-Illinois Inc., senior note, 7.80%, 5/15/18 .............. United States 1,000,000 977,500
RPM International Inc., 6.50%, 2/15/18 ........................ United States 7,500,000 6,543,990
Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15 ... Ireland 500,000 300,000
Annual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
MATERIALS (CONTINUED)
Solo Cup Co., senior sub. note, 8.50%, 2/15/14 ................ United States 1,500,000 $ 1,267,500
(d) Xstrata Finance Canada Ltd., 144A, 5.80%, 11/15/16 ............ United Kingdom 10,000,000 7,505,390
--------------
75,162,213
--------------
MEDIA 4.1%
(d) British Sky Broadcasting Group PLC, senior note, 144A,
6.10%, 2/15/18 ............................................. United Kingdom 10,000,000 9,116,050
(k) CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 .......... Canada 7,500,000 1,987,500
(k) CCH I LLC, senior secured note, 11.00%, 10/01/15 .............. United States 4,000,000 330,000
(k) CCH II LLC, senior note, 10.25%, 9/15/10 ...................... United States 10,000,000 9,150,000
(k) CCO Holdings LLC, senior note, 8.75%, 11/15/13 ................ United States 1,000,000 872,500
Comcast Corp., senior note, 6.30%, 11/15/17 ................... United States 10,000,000 10,204,420
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 ............................... United States 6,000,000 5,790,000
senior note, 6.75%, 4/15/12 ................................ United States 600,000 589,500
(d) senior note, 144A, 8.50%, 4/15/14 .......................... United States 2,000,000 2,050,000
(k, m) Dex Media Inc.,
senior disc. note, 9.00%, 11/15/13 ......................... United States 2,000,000 250,000
senior note, B, 8.00%, 11/15/13 ............................ United States 6,000,000 750,000
(k, m) Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ..... United States 4,000,000 1,150,000
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ............ United States 7,500,000 7,462,500
EchoStar DBS Corp., senior note,
6.375%, 10/01/11 ........................................... United States 5,500,000 5,348,750
7.125%, 2/01/16 ............................................ United States 5,000,000 4,700,000
(k) Idearc Inc., senior note, 8.00%, 11/15/16 ..................... United States 9,000,000 191,250
Lamar Media Corp.,
(d) senior note, 144A, 9.75%, 4/01/14 .......................... United States 1,000,000 1,010,000
senior sub. note, 7.25%, 1/01/13 ........................... United States 7,500,000 6,750,000
senior sub. note, B, 6.625%, 8/15/15 ....................... United States 1,500,000 1,155,000
Liberty Media Corp., senior note, 5.70%, 5/15/13 .............. United States 9,000,000 7,608,960
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ........ United States 8,500,000 4,972,500
Quebecor Media Inc., senior note, 7.75%, 3/15/16 .............. Canada 9,000,000 7,560,000
Radio One Inc., senior sub. note, 6.375%, 2/15/13 ............. United States 8,000,000 1,490,000
Reed Elsevier PLC, senior note, 8.625%, 1/15/19 ............... United Kingdom 10,000,000 10,486,200
Time Warner Cable Inc., senior note,
8.25%, 2/14/14 ............................................. United States 3,000,000 3,295,647
6.75%, 7/01/18 ............................................. United States 9,000,000 9,127,620
Time Warner Inc., 7.625%, 4/15/31 ............................. United States 9,000,000 8,166,717
(d, i) Univision Communications Inc., senior note, 144A, PIK,
9.75%, 3/15/15 ............................................. United States 7,500,000 1,200,000
Viacom Inc., senior note, 6.875%, 4/30/36 ..................... United States 12,000,000 9,822,840
--------------
132,587,954
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.9%
Pfizer Inc., senior note, 6.20%, 3/15/19 ...................... United States 12,000,000 12,920,880
(d) Roche Holdings Inc., 144A, 6.00%, 3/01/19 ..................... United States 14,000,000 14,583,562
--------------
27,504,442
--------------
30 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
REAL ESTATE 0.5%
Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 .... United States 6,600,000 $ 3,201,000
Simon Property Group LP, senior note, 10.35%, 4/01/19 ......... United States 12,000,000 12,544,680
--------------
15,745,680
--------------
RETAILING 0.4%
Dollar General Corp., senior note, 10.625%, 7/15/15 ........... United States 8,000,000 8,360,000
Michaels Stores Inc., senior note, 10.00%, 11/01/14 ........... United States 8,500,000 5,185,000
--------------
13,545,000
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1%
Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ... United States 7,000,000 2,415,000
--------------
SOFTWARE & SERVICES 0.4%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ............................... United States 6,000,000 5,760,000
senior sub. note, 10.25%, 8/15/15 .......................... United States 7,000,000 6,125,000
--------------
11,885,000
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.4%
Celestica Inc., senior sub. note, 7.625%, 7/01/13 ............. Canada 5,400,000 5,157,000
(d, k) Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16 ...... Canada 8,000,000 2,160,000
Sanmina-SCI Corp.,
(d, f) senior note, 144A, FRN, 4.07%, 6/15/14 ..................... United States 2,000,000 1,390,000
senior sub. note, 6.75%, 3/01/13 ........................... United States 4,300,000 2,451,000
senior sub. note, 8.125%, 3/01/16 .......................... United States 2,000,000 1,020,000
--------------
12,178,000
--------------
TELECOMMUNICATION SERVICES 3.9%
AT&T Corp., senior note, 6.70%, 11/15/13 ...................... United States 10,000,000 11,181,995
AT&T Inc., 5.80%, 2/15/19 ..................................... United States 2,000,000 2,038,658
(d) CC Holdings GS V LLC, senior secured note, 144A, 7.75%,
5/01/17 .................................................... United States 1,400,000 1,421,000
Crown Castle International Corp., senior note, 9.00%,
1/15/15 .................................................... United States 8,000,000 8,200,000
(d) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ........ Jamaica 9,000,000 6,570,000
Embarq Corp., senior note, 7.082%, 6/01/16 .................... United States 7,000,000 6,729,149
Inmarsat Finance PLC, senior note, 10.375%, 11/15/12 .......... United Kingdom 9,000,000 9,270,000
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 ........... Bermuda 3,500,000 3,596,250
(d) Intelsat Subsidiary Holding Co. Ltd., senior note, 144A, 8.50%,
1/15/13 .................................................... Bermuda 10,000,000 9,950,000
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 .......... United States 9,000,000 9,056,250
Millicom International Cellular SA, senior note, 10.00%,
12/01/13 ................................................... Luxembourg 8,000,000 8,040,000
Qwest Communications International Inc., senior note, 7.50%,
2/15/14 .................................................... United States 7,500,000 6,993,750
(d) Qwest Corp., senior note, 144A, 8.375%, 5/01/16 ............... United States 3,900,000 3,900,000
Annual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES (CONTINUED)
Telecom Italia Capital, senior note,
4.95%, 9/30/14 ............................................. Italy 9,000,000 $ 8,333,280
6.999%, 6/04/18 ............................................ Italy 1,500,000 1,414,362
Verizon Communications Inc., 6.10%, 4/15/18 ................... United States 4,000,000 4,099,476
Verizon New York Inc., senior deb.,
A, 6.875%, 4/01/12 ......................................... United States 5,000,000 5,215,860
B, 7.375%, 4/01/32 ......................................... United States 1,500,000 1,384,874
(d) Verizon Wireless Capital LLC, 144A,
7.375%, 11/15/13 ........................................... United States 5,000,000 5,571,805
5.55%, 2/01/14 ............................................. United States 3,000,000 3,152,319
(d) Wind Acquisition Finance SA, senior note, 144A, 10.75%,
12/01/15 ................................................... Italy 9,000,000 9,405,000
--------------
125,524,028
--------------
TRANSPORTATION 0.1%
(d) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ............ United Kingdom 9,000,000 4,500,000
--------------
UTILITIES 4.1%
The AES Corp., senior note,
8.00%, 10/15/17 ............................................ United States 8,000,000 7,360,000
(d) 144A, 8.00%, 6/01/20 ....................................... United States 2,000,000 1,760,000
CenterPoint Energy Inc., senior note,
6.125%, 11/01/17 ........................................... United States 7,500,000 6,607,350
6.50%, 5/01/18 ............................................. United States 1,500,000 1,285,377
Dominion Resources Inc., 6.40%, 6/15/18 ....................... United States 8,000,000 8,283,880
Duke Energy Corp., senior note, 6.30%, 2/01/14 ................ United States 10,000,000 10,562,690
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ............ United States 10,000,000 8,050,000
(d) E.ON International Finance BV, 144A, 5.80%, 4/30/18 ........... Germany 8,000,000 7,977,784
Edison Mission Energy, senior note, 7.00%, 5/15/17 ............ United States 8,000,000 6,080,000
(d) Electricite De France, 144A, 6.50%, 1/26/19 ................... France 10,000,000 10,791,290
(d) Enel Finance International, senior bond, 144A, 6.25%,
9/15/17 .................................................... Luxembourg 3,300,000 3,048,718
(d) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ........ Netherlands 9,000,000 8,595,000
Mirant North America LLC, senior note, 7.375%, 12/31/13 ....... United States 9,000,000 8,707,500
NRG Energy Inc., senior note,
7.25%, 2/01/14 ............................................. United States 2,500,000 2,418,750
7.375%, 2/01/16 ............................................ United States 6,000,000 5,790,000
7.375%, 1/15/17 ............................................ United States 2,500,000 2,393,750
PG&E Corp., senior note, 5.75%, 4/01/14 ....................... United States 10,000,000 10,221,023
Sempra Energy, senior note, 9.80%, 2/15/19 .................... United States 9,450,000 10,800,934
Texas Competitive Electric Holdings Co. LLC, senior note, A,
10.25%, 11/01/15 ........................................... United States 16,000,000 9,160,000
--------------
129,894,046
--------------
TOTAL CORPORATE BONDS (COST $1,433,459,035) ................... 1,285,210,156
--------------
CONVERTIBLE BONDS (COST $5,233,927) 0.2%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2%
Mylan Inc., cvt., senior note, 1.25%, 3/15/12 ................. United States 6,000,000 5,332,500
--------------
32 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES 6.4%
BANKS 3.8%
(f) Banc of America Commercial Mortgage Inc., 2005-6, A4, FRN,
5.179%, 9/10/47 ............................................ United States 8,000,000 $ 6,957,150
(f) Citibank Credit Card Issuance Trust, 2005-A3, A3, FRN, 0.51%,
4/24/14 .................................................... United States 13,000,000 11,925,793
Citigroup/Deutsche Bank Commercial Mortgage Trust,
(f) 2005-CD1, A4, FRN, 5.399%, 7/15/44 ......................... United States 5,440,000 4,756,138
2006-CD3, A5, 5.617%, 10/15/48 ............................. United States 22,000,000 18,293,284
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ............................... United States 186,030 184,841
2005-11, AF4, 5.21%, 3/25/34 ............................... United States 2,800,000 1,163,684
GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%,
1/10/38 .................................................... United States 1,827,831 1,706,180
Greenwich Capital Commercial Funding Corp.,
2004-GG1, A7, 5.317%, 6/10/36 .............................. United States 10,714,000 9,902,487
2005-GG5, A5, 5.224%, 4/10/37 .............................. United States 20,380,000 17,571,149
(f) 2006-GG7, A4, FRN, 5.916%, 7/10/38 ......................... United States 12,000,000 10,065,368
GS Mortgage Securities Corp. II,
2003-C1, A3, 4.608%, 1/10/40 ............................... United States 3,965,000 3,782,336
(f) 2006-GG6, A4, FRN, 5.553%, 4/10/38 ......................... United States 10,000,000 8,474,719
2006-GG8, A4, 5.56%, 11/10/39 .............................. United States 5,000,000 4,120,963
LB-UBS Commercial Mortgage Trust,
(f) 2002-C2, A4, FRN, 5.594%, 6/15/31 .......................... United States 5,000,000 4,899,353
2006-C1, A4, 5.156%, 2/15/31 ............................... United States 13,250,000 10,982,565
(f) Morgan Stanley Capital I Trust, 2004-IQ7, A4, FRN, 5.538%,
6/15/38 .................................................... United States 7,000,000 6,551,909
--------------
121,337,919
--------------
DIVERSIFIED FINANCIALS 2.6%
(f) American Express Credit Account Master Trust,
2004-4, A, FRN, 0.541%, 3/15/12 ............................ United States 3,000,000 2,975,962
2008-1, A, FRN, 0.901%, 8/15/13 ............................ United States 8,200,000 7,800,328
(f) Chase Issuance Trust, .
2005-A9, A9, FRN, 0.471%, 11/15/11 ......................... United States 2,000,000 1,994,879
2007-A9, A9, FRN, 0.481%, 6/16/14 .......................... United States 12,000,000 11,111,153
sub. note, 2006-A7, A, FRN, 0.461%, 2/15/13 ................ United States 4,000,000 3,879,560
Citigroup Commercial Mortgage Trust, 2008-C7, A4, 6.095%,
12/10/49 ................................................... United States 19,150,000 15,550,784
JPMorgan Chase Commercial Mortgage Securities Corp.,
(f) 2004-CB9, A4, FRN, 5.369%, 6/12/41 ......................... United States 8,871,306 7,909,049
2004-LN2, A2, 5.115%, 7/15/41 .............................. United States 807,292 716,605
(f) 2005-LDP5, A4, FRN, 5.344%, 12/15/44 ....................... United States 11,700,000 10,122,646
(d) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%,
12/25/24 ................................................... United States 6,342 6,314
(f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN,
0.491%, 11/15/12 ........................................... United States 6,000,000 5,901,013
Annual Report | 33
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (CONTINUED)
DIVERSIFIED FINANCIALS (CONTINUED)
(f) MBNA Master Credit Card Trust II, 1997-B, A, FRN, 0.611%,
8/15/14 .................................................... United States 15,000,000 $ 14,025,430
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%,
4/25/32 .................................................... United States 232,877 187,899
--------------
82,181,622
--------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $225,556,918) ............. 203,519,541
--------------
MORTGAGE-BACKED SECURITIES 11.4%
(f) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE
0.0%(c)
FHLMC, 4.073%, 1/01/33 ........................................ United States 294,388 293,604
--------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 4.3%
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ................. United States 5,153,547 5,321,447
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ................. United States 11,167,283 11,586,432
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 .................. United States 841,599 879,351
FHLMC Gold 15 Year, 6.50%, 4/01/11 ............................ United States 317 335
FHLMC Gold 15 Year, 7.00%, 9/01/11 ............................ United States 407 425
FHLMC Gold 30 Year, 5.00%, 3/01/34 - 9/01/38 .................. United States 33,543,055 34,531,697
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 7/01/38 .................. United States 27,101,979 28,079,919
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/38 .................. United States 30,272,792 31,669,696
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 8/01/38 ................. United States 23,559,399 24,994,344
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 .................. United States 210,875 226,903
FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 .................. United States 36,799 40,115
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ................. United States 797 877
FHLMC Gold 30 Year, 9.00%, 12/01/24 ........................... United States 336 376
--------------
137,331,917
--------------
(f) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE
0.1%
FNMA, 4.571%, 4/01/20 ......................................... United States 271,888 275,420
FNMA, 4.634%, 12/01/34 ........................................ United States 1,307,590 1,318,845
--------------
1,594,265
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 6.7%
FNMA 15 Year, 4.50%, 3/01/20 .................................. United States 1,147,698 1,183,743
FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ........................ United States 1,471,370 1,534,621
FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 ........................ United States 5,256,808 5,483,155
FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 ....................... United States 182,877 193,027
FNMA 15 Year, 6.50%, 4/01/11 - 6/01/13 ........................ United States 13,065 13,833
FNMA 15 Year, 7.50%, 10/01/14 ................................. United States 14,325 15,185
FNMA 30 Year, 4.50%, 4/01/39 .................................. United States 22,500,000 22,885,425
FNMA 30 Year, 5.00%, 4/01/34 - 6/01/38 ........................ United States 55,313,967 56,963,969
FNMA 30 Year, 5.50%, 9/01/33 - 6/01/37 ........................ United States 46,215,608 47,995,800
FNMA 30 Year, 6.00%, 6/01/34 - 11/01/37 ....................... United States 47,195,807 49,486,773
FNMA 30 Year, 6.50%, 1/01/24 - 10/01/37 ....................... United States 28,136,937 29,871,611
FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ...................... United States 34,374 37,489
FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 ........................ United States 17,689 19,371
FNMA 30 Year, 8.50%, 7/01/25 .................................. United States 725 795
--------------
215,684,797
--------------
34 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.3%
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 ................... United States 1,285,453 $ 1,335,686
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 ................... United States 4,041,312 4,215,044
GNMA I SF 30 Year, 6.00%, 8/15/36 ............................. United States 610,989 638,375
GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 ................... United States 269,340 287,425
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 .................. United States 52,583 56,404
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 ................... United States 15,202 16,439
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 ................... United States 13,193 14,643
GNMA I SF 30 Year, 8.50%, 8/15/24 ............................. United States 135 146
GNMA I SF 30 Year, 9.00%, 1/15/25 ............................. United States 472 514
GNMA I SF 30 Year, 9.50%, 6/15/25 ............................. United States 707 802
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ................. United States 1,806,451 1,873,204
GNMA II SF 30 Year, 5.50%, 6/20/34 ............................ United States 941,470 979,071
GNMA II SF 30 Year, 6.00%, 11/20/34 ........................... United States 819,207 854,850
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ................. United States 353,308 377,270
GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 .................. United States 190,735 203,214
--------------
10,853,087
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $350,397,614) ........................................ 365,757,670
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES 8.9%
FHLMC,
2.125%, 3/23/12 ............................................ United States 11,000,000 11,122,716
5.00%, 2/16/17 ............................................. United States 11,000,000 12,074,447
5.625%, 3/15/11 ............................................ United States 15,700,000 16,953,457
senior note, 4.75%, 3/05/12 ................................ United States 22,000,000 23,871,166
FNMA,
1.375%, 4/28/11 ............................................ United States 15,500,000 15,543,353
4.125%, 4/15/14 ............................................ United States 2,000,000 2,150,216
U.S. Treasury Bond,
4.50%, 2/15/16 ............................................. United States 13,100,000 14,708,850
4.50%, 5/15/17 ............................................. United States 5,000,000 5,587,110
5.25%, 2/15/29 ............................................. United States 1,750,000 2,021,798
6.25%, 8/15/23 ............................................. United States 6,800,000 8,519,128
6.88%, 8/15/25 ............................................. United States 1,000,000 1,355,313
7.125%, 2/15/23 ............................................ United States 10,200,000 13,703,068
7.875%, 2/15/21 ............................................ United States 7,200,000 10,058,630
(n) Index Linked, 2.375%, 1/15/25 .............................. United States 18,008,421 17,884,613
U.S. Treasury Note,
3.375%, 10/15/09 ........................................... United States 500,000 507,208
3.375%, 6/30/13 ............................................ United States 4,000,000 4,266,876
3.50%, 12/15/09 ............................................ United States 4,500,000 4,589,649
4.00%, 8/31/09 ............................................. United States 7,000,000 7,090,510
4.00%, 4/15/10 ............................................. United States 1,100,000 1,137,598
4.00%, 11/15/12 ............................................ United States 1,850,000 2,007,685
4.125%, 8/15/10 ............................................ United States 2,900,000 3,032,428
4.25%, 8/15/13 ............................................. United States 1,000,000 1,103,751
4.25%, 11/15/14 ............................................ United States 700,000 778,094
4.375%, 8/15/12 ............................................ United States 1,000,000 1,093,438
Annual Report | 35
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
U.S. Treasury Note, (continued)
4.50%, 9/30/11 ............................................. United States 2,500,000 $ 2,700,002
4.625%, 2/15/17 ............................................ United States 9,400,000 10,594,834
4.75%, 8/15/17 ............................................. United States 7,000,000 7,937,895
4.875%, 7/31/11 ............................................ United States 7,250,000 7,867,388
5.00%, 8/15/11 ............................................. United States 2,100,000 2,292,119
(n) Index Linked, 1.625%, 1/15/15 .............................. United States 3,333,282 3,318,699
(n) Index Linked, 2.00%, 1/15/14 ............................... United States 23,423,310 23,877,137
(n) Index Linked, 2.00%, 7/15/14 ............................... United States 12,155,680 12,417,781
(n) Index Linked, 2.00%, 1/15/16 ............................... United States 11,758,204 11,978,670
(n) Index Linked, 2.50%, 7/15/16 ............................... United States 20,485,506 21,612,209
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $274,667,699) ........................................ 285,757,836
--------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 15.8%
(d) Emirate of Abu Dhabi, 144A, 6.75%, 4/08/19 .................... United Arab
Emirates 9,640,000 9,824,182
European Investment Bank, senior note, 1612/37, 6.50%,
9/10/14 .................................................... Supranational(o) 12,905,000 NZD 7,573,765
(f, p) Government of Argentina, senior bond, FRN, 1.683%,
8/03/12 .................................................... Argentina 106,878,000 28,295,950
Government of Indonesia,
FR10, 13.15%, 3/15/10 ...................................... Indonesia 7,125,000,000 IDR 698,365
FR17, 13.15%, 1/15/12 ...................................... Indonesia 17,300,000,000 IDR 1,754,924
FR19, 14.25%, 6/15/13 ...................................... Indonesia 63,035,000,000 IDR 6,610,190
FR20, 14.275%, 12/15/13 .................................... Indonesia 28,415,000,000 IDR 3,006,594
FR26, 11.00%, 10/15/14 ..................................... Indonesia 4,500,000,000 IDR 420,879
FR28, 10.00%, 7/15/17 ...................................... Indonesia 10,200,000,000 IDR 869,674
FR34, 12.80%, 6/15/21 ...................................... Indonesia 108,710,000,000 IDR 10,578,298
FR39, 11.75%, 8/15/23 ...................................... Indonesia 29,150,000,000 IDR 2,629,971
FR42, 10.25%, 7/15/27 ...................................... Indonesia 86,000,000,000 IDR 6,784,127
FR47, 10.00%, 2/15/28 ...................................... Indonesia 28,000,000,000 IDR 2,155,880
(d) senior bond, 144A, 6.625%, 2/17/37 ......................... Indonesia 940,000 723,800
(d) senior bond, 144A, 7.75%, 1/17/38 .......................... Indonesia 11,270,000 9,736,716
(d) senior bond, 144A, 8.50%, 10/12/35 ......................... Indonesia 945,000 862,312
(d) senior note, 144A, 11.625%, 3/04/19 ........................ Indonesia 2,655,000 3,239,100
(q) Government of Iraq, Reg S, 5.80%, 1/15/28 ..................... Iraq 3,620,000 1,963,850
Government of Korea, senior note, 7.125%, 4/16/19 ............. South Korea 11,970,000 12,277,677
Government of Malaysia,
3.461%, 7/31/13 ............................................ Malaysia 28,900,000 MYR 8,041,255
3.756%, 4/28/11 ............................................ Malaysia 53,580,000 MYR 15,442,403
3.833%, 9/28/11 ............................................ Malaysia 6,150,000 MYR 1,774,413
4.24%, 2/07/18 ............................................. Malaysia 64,800,000 MYR 18,515,526
Government of Mexico,
8.00%, 12/17/15 ............................................ Mexico 725,000(r) MXN 5,427,432
10.00%, 12/05/24 ........................................... Mexico 4,035,000(r) MXN 34,680,458
Government of Poland,
5.75%, 9/23/22 ............................................. Poland 38,200,000 PLN 10,930,538
6.25%, 10/24/15 ............................................ Poland 44,475,000 PLN 13,569,301
0414, 5.75%, 4/25/14 ....................................... Poland 24,040,000 PLN 7,173,423
36 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
(d) Government of Qatar, senior note, 144A, 6.55%, 4/09/19 ........ Qatar 9,810,000 $ 10,177,875
Government of Russia,
(d) 144A, 7.50%, 3/31/30 ....................................... Russia 14,110,080 13,757,328
(q) senior bond, Reg S, 7.50%, 3/31/30 ......................... Russia 56,736,000 55,317,600
Government of South Africa, senior note, 5.875%, 5/30/22 ...... South Africa 13,645,000 12,610,300
Government of Sweden,
4.00%, 12/01/09 ............................................ Sweden 196,050,000 SEK 24,861,032
5.50%, 10/08/12 ............................................ Sweden 24,960,000 SEK 3,463,375
Government of Venezuela,
10.75%, 9/19/13 ............................................ Venezuela 6,450,000 5,192,250
(q) senior bond, Reg S, 5.375%, 8/07/10 ........................ Venezuela 7,755,000 6,902,338
KfW Bankengruppe, senior note, 6.50%, 11/15/11 ................ Germany 10,164,000 NZD 5,988,683
Korea Development Bank, senior note, 8.00%, 1/23/14 ........... South Korea 11,695,000 12,298,871
Korea Treasury Bond,
(h) 0475-1112, 4.75%, 12/10/11 ................................. South Korea 19,030,723,000 KRW 15,349,186
0525-1209, 5.25%, 9/10/12 .................................. South Korea 15,100,000,000 KRW 12,344,718
0525-2703, 5.25%, 3/10/27 .................................. South Korea 11,439,641,000 KRW 9,001,048
0550-1709, 5.50%, 9/10/17 .................................. South Korea 23,470,000,000 KRW 19,510,815
0575-1809, 5.75%, 9/10/18 .................................. South Korea 3,500,000,000 KRW 2,984,164
New South Wales Treasury Corp., senior note, 5.50%,
3/01/17 .................................................... Australia 12,025,000 AUD 8,729,273
Nota Do Tesouro Nacional,
10.082%, 1/01/12 ........................................... Brazil 15,300(s) BRL 6,766,635
10.082%, 1/01/14 ........................................... Brazil 5,200(s) BRL 2,170,646
10.082%, 1/01/17 ........................................... Brazil 60,650(s) BRL 23,805,284
(t) Index Linked, 6.00%, 5/15/15 ............................... Brazil 8,700(s) BRL 6,797,682
(t) Index Linked, 6.00%, 5/15/45 ............................... Brazil 3,570(s) BRL 2,560,230
Province of Manitoba, 6.375%, 9/01/15 ......................... Canada 3,000,000 NZD 1,673,970
Province of Ontario, 6.25%, 6/16/15 ........................... Canada 2,826,000 NZD 1,608,498
Queensland Treasury Corp.,
13, 6.00%, 8/14/13 ......................................... Australia 2,045,000 AUD 1,552,893
17, 6.00%, 9/14/17 ......................................... Australia 4,090,000 AUD 3,055,649
(d) 144A, 7.125%, 9/18/17 ...................................... Australia 15,990,000 NZD 9,709,671
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $558,647,016) ........................................ 503,751,017
--------------
MUNICIPAL BONDS 2.8%
Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay
Area, Refunding, Series F1, 5.00%, 4/01/39 ................. United States 880,000 866,527
California State GO,
6.00%, 4/01/38 ............................................. United States 20,000,000 20,693,000
Refunding, 5.00%, 4/01/38 .................................. United States 35,000,000 31,829,000
Chicago Board of Education GO, Refunding, Series C,
Assured Guaranty, 5.25%, 12/01/26 .......................... United States 2,625,000 2,759,977
Chicago GO, Project and Refunding, Series A, FSA Insured,
5.00%, 1/01/25 ............................................. United States 690,000 706,822
District of Columbia University Revenue, Georgetown
University, Refunding, Series D, BHAC Insured,
5.50%, 4/01/36 ............................................. United States 2,240,000 2,321,402
Energy Northwest Electric Revenue, Columbia Generating
Station, Refunding, Series A, 5.00%, 7/01/24 ............... United States 2,240,000 2,320,214
Annual Report | 37
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
MUNICIPAL BONDS (CONTINUED)
Kentucky State Municipal Power Agency Power System Revenue,
Prairie State Project, Series A, BHAC Insured, 5.25%,
9/01/42 .................................................... United States 3,470,000 $ 3,551,927
Las Vegas Valley Water District GO, Refunding, Series A,
MBIA Insured, 5.00%, 6/01/26 ............................... United States 570,000 574,725
Lewisville ISD, GO, School Building, 5.00%, 8/15/26 ........... United States 790,000 830,495
Los Angeles USD, GO, Series I, 5.00%,
7/01/26 .................................................... United States 265,000 266,240
7/01/27 .................................................... United States 280,000 278,659
Matanuska-Susitna Borough Lease Revenue, Goose Greek
Correctional Center, Assured Guaranty,
5.50%, 9/01/23 ............................................. United States 2,320,000 2,578,587
6.00%, 9/01/28 ............................................. United States 2,900,000 3,175,500
MTA Revenue,
Series B, Assured Guaranty, 5.25%, 11/15/20 ................ United States 1,120,000 1,229,805
Transportation, Series A, FSA Insured, 5.50%, 11/15/21 ..... United States 1,060,000 1,198,690
Metropolitan Water District of Southern California Waterworks
Revenue, Series A, 5.00%, 7/01/37 .......................... United States 2,140,000 2,149,823
Palomar Pomerado Health GO, Election of 2004, Series A,
MBIA Insured, 5.125%, 8/01/37 .............................. United States 3,015,000 2,841,246
Philadelphia GO, Series B, Assured Guaranty, 7.125%,
7/15/38 .................................................... United States 1,285,000 1,382,274
Placentia-Yorba Linda USD, GO, 2008 Election, Series A, 5.25%,
8/01/32 .................................................... United States 3,480,000 3,520,333
Poway USD, GO, Election of 2008, ID 07-1-A, zero cpn.,
8/01/27 .................................................... United States 1,025,000 341,971
8/01/30 .................................................... United States 1,025,000 272,271
8/01/32 .................................................... United States 1,280,000 292,762
8/01/33 .................................................... United States 675,000 143,876
Regional Transportation District Sales Tax Revenue, Fastracks
Project, Series A, AMBAC Insured, 5.00%, 11/01/27 .......... United States 850,000 878,943
San Bernardino Community College District GO, Election of 2002,
Series A,
6.38%, 8/01/26 ............................................. United States 580,000 654,866
6.50%, 8/01/27 ............................................. United States 840,000 949,494
6.50%, 8/01/28 ............................................. United States 350,000 393,393
6.25%, 8/01/33 ............................................. United States 870,000 940,905
San Mateo County Community College District GO, Election of
2001, Series C, MBIA Insured, zero cpn.,
9/01/30 .................................................... United States 2,475,000 711,959
3/01/31 .................................................... United States 675,000 184,221
--------------
TOTAL MUNICIPAL BONDS (COST $91,301,006) ...................... 90,839,907
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $3,287,010,896) ...................................... 3,052,972,690
--------------
38 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2009 (CONTINUED)
COUNTRY/
FRANKLIN STRATEGIC INCOME FUND ORGANIZATION PRINCIPAL AMOUNT(e) VALUE
------------------------------ ---------------- ------------------- --------------
SHORT TERM INVESTMENTS 3.1%
FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $25,884,094) 0.8%
(u) Egypt Treasury Bills, 6/09/09 - 9/22/09 ....................... Egypt 141,875,000 EGP $ 24,685,500
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $3,312,894,990) 3,077,658,190
--------------
SHARES
----------------
MONEY MARKET FUNDS (COST $73,334,951) 2.3%
(v) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 0.04% ........................................... United States 73,334,951 73,334,951
--------------
TOTAL INVESTMENTS (COST $3,386,229,941) 98.6% ................. 3,150,993,141
NET UNREALIZED APPRECIATION (DEPRECIATION) ON FORWARD
EXCHANGE CONTRACTS 0.7% .................................... 21,604,489
OTHER ASSETS, LESS LIABILITIES 0.7% ........................... 23,509,650
--------------
NET ASSETS 100.0% ............................................. $3,196,107,280
==============
See abbreviations on page 58.
(a) Non-income producing.
(b) See Note 10 regarding restricted and illiquid securities.
(c) Rounds to less than 0.1% of net assets.
(d) 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 April 30, 2009,
the aggregate value of these securities was $323,064,646, representing
10.11% of net assets.
(e) The principal amount is stated in U.S. dollars unless otherwise indicated.
(f) The coupon rate shown represents the rate at period end.
(g) See Note 1(f) regarding senior floating rate interests.
(h) A portion or all of the security purchased on a delayed delivery basis. See
Note 1(c).
(i) Income may be received in additional securities and/or cash.
(j) See Note 11 regarding unfunded loan commitments.
(k) See Note 9 regarding defaulted securities.
(l) Perpetual security with no stated maturity date.
(m) See Note 12 regarding other considerations.
(n) Principal amount of security is adjusted for inflation. See Note 1(h).
(o) A supranational organization is an entity formed by two or more central
governments through international treaties.
(p) The principal amount is stated in original face, and scheduled paydowns are
reflected in the market price on ex-date.
(q) 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 April 30, 2009, the aggregate value of these
securities was $64,183,788, representing 2.01% of net assets.
(r) Principal amount is stated in 100 Mexican Peso Units.
(s) Principal amount is stated in 1000 Brazilian Real Units.
(t) Redemption price at maturity is adjusted for inflation. See Note 1(h).
(u) The security is traded on a discount basis with no stated coupon rate.
(v) 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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 39
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2009
FRANKLIN
STRATEGIC
INCOME FUND
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................. $3,312,894,990
Cost - Sweep Money Fund (Note 7) ............................. 73,334,951
--------------
Total cost of investments .................................... $3,386,229,941
==============
Value - Unaffiliated issuers ................................. $3,077,658,190
Value - Sweep Money Fund (Note 7) ............................ 73,334,951
--------------
Total value of investments ................................... 3,150,993,141
Cash ............................................................ 226,040
Foreign currency, at value (cost $3,447,310) .................... 3,449,580
Receivables:
Investment securities sold ................................... 45,758,276
Capital shares sold .......................................... 14,168,928
Dividends and interest ....................................... 44,992,688
Unrealized appreciation on forward exchange contracts (Note 8) .. 29,334,991
Other assets .................................................... 5,064
--------------
Total assets .............................................. 3,288,928,708
--------------
Liabilities:
Payables:
Investment securities purchased .............................. 75,979,330
Capital shares redeemed ...................................... 6,286,643
Affiliates ................................................... 2,276,885
Unrealized depreciation on forward exchange contracts (Note 8) .. 7,730,502
Unrealized depreciation on unfunded loan commitments (Note 11) .. 3,597
Accrued expenses and other liabilities .......................... 544,471
--------------
Total liabilities ......................................... 92,821,428
--------------
Net assets, at value ................................... $3,196,107,280
==============
Net assets consist of:
Paid-in capital ................................................. $3,659,930,937
Distributions in excess of net investment income ................ (11,458,487)
Net unrealized appreciation (depreciation) ...................... (213,430,198)
Accumulated net realized gain (loss) ............................ (238,934,972)
--------------
Net assets, at value ................................... $3,196,107,280
==============
The accompanying notes are an integral part of these financial statements.
40 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2009
FRANKLIN
STRATEGIC
INCOME FUND
--------------
CLASS A:
Net assets, at value ..................... $2,060,178,962
--------------
Shares outstanding ....................... 233,260,459
--------------
Net asset value per share(a) ............. $ 8.83
--------------
Maximum offering price per share
(net asset value per share / 95.75%) .. $ 9.22
--------------
CLASS B:
Net assets, at value ..................... $ 79,959,260
--------------
Shares outstanding ....................... 9,012,771
--------------
Net asset value and maximum offering
price per share(a) .................... $ 8.87
--------------
CLASS C:
Net assets, at value ..................... $ 773,337,044
--------------
Shares outstanding ....................... 87,581,641
--------------
Net asset value and maximum offering
price per share(a) .................... $ 8.83
--------------
CLASS R:
Net assets, at value ..................... $ 115,811,450
--------------
Shares outstanding ....................... 13,146,051
--------------
Net asset value and maximum offering
price per share ....................... $ 8.81
--------------
ADVISOR CLASS:
Net assets, at value ..................... $ 166,820,564
--------------
Shares outstanding ....................... 18,872,368
--------------
Net asset value and maximum offering
price per share ....................... $ 8.84
--------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 41
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended April 30, 2009
FRANKLIN
STRATEGIC
INCOME FUND
-------------
Investment income:
Dividends:
Unaffiliated issuers ........................................ $ 2,474,848
Sweep Money Fund (Note 7) ................................... 1,079,752
Interest ....................................................... 195,112,518
-------------
Total investment income .................................. 198,667,118
-------------
Expenses:
Management fees (Note 3a) ...................................... 13,559,353
Distribution fees: (Note 3c)
Class A ..................................................... 4,944,346
Class B ..................................................... 584,130
Class C ..................................................... 4,678,977
Class R ..................................................... 534,987
Transfer agent fees (Note 3e) .................................. 4,602,919
Custodian fees (Note 4) ........................................ 514,552
Reports to shareholders ........................................ 314,026
Registration and filing fees ................................... 172,615
Professional fees .............................................. 116,498
Trustees' fees and expenses .................................... 63,434
Other .......................................................... 143,467
-------------
Total expenses ........................................... 30,229,304
Expense reductions (Note 4) .............................. (23,430)
-------------
Net expenses .......................................... 30,205,874
-------------
Net investment income .............................. 168,461,244
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. (213,853,495)
Foreign currency transactions ............................... 43,831,125
-------------
Net realized gain (loss) ........................... (170,022,370)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................. (239,237,004)
Translation of other assets and liabilities denominated
in foreign currencies .................................... 20,051,122
-------------
Net change in unrealized appreciation
(depreciation) .................................. (219,185,882)
-------------
Net realized and unrealized gain (loss) ........................... (389,208,252)
-------------
Net increase (decrease) in net assets resulting from operations ... $(220,747,008)
=============
The accompanying notes are an integral part of these financial statements.
42 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-------------------------------
2009 2008
-------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 168,461,244 $ 142,246,377
Net realized gain (loss) from investments and
foreign currency transactions ........................ (170,022,370) 45,899,679
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets
and liabilities denominated in foreign currencies .... (219,185,882) (56,027,125)
-------------- --------------
Net increase (decrease) in net assets resulting from
operations ........................................ (220,747,008) 132,118,931
-------------- --------------
Distributions to shareholders from net investment income and
net foreign currency gains:
Class A ................................................. (164,958,880) (121,244,242)
Class B ................................................. (7,067,919) (6,404,920)
Class C ................................................. (57,173,330) (35,256,134)
Class R ................................................. (8,712,653) (5,569,720)
Advisor Class ........................................... (10,950,834) (6,366,080)
-------------- --------------
Total distributions to shareholders ........................ (248,863,616) (174,841,096)
-------------- --------------
Capital share transactions: (Note 2)
Class A ................................................. 247,701,680 632,530,329
Class B ................................................. (10,236,429) 3,048,823
Class C ................................................. 151,132,374 304,040,457
Class R ................................................. 23,995,492 43,785,438
Advisor Class ........................................... 71,110,577 46,009,389
-------------- --------------
Total capital share transactions ........................... 483,703,694 1,029,414,436
-------------- --------------
Redemption fees ............................................ 9,563 32,113
-------------- --------------
Net increase (decrease) in net assets ................ 14,102,633 986,724,384
Net assets:
Beginning of year .......................................... 3,182,004,647 2,195,280,263
-------------- --------------
End of year ................................................ $3,196,107,280 $3,182,004,647
============== ==============
Undistributed net investment income (distributions in excess of
net investment income) included in net assets:
End of year ................................................ $ (11,458,487) $ 11,698,413
============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 43
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
eight separate funds. The Franklin Strategic Income Fund (Fund) is included in
this report. 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, municipal 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.
44 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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. 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.
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.
Annual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. SECURITIES PURCHASED ON A DELAYED DELIVERY AND TBA BASIS
The Fund may purchase securities on a delayed delivery and to-be-announced (TBA)
basis, with payment and delivery scheduled for a future date. These transactions
are subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention of holding the
securities, it may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
D. 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 or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
appreciation or depreciation 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.
E. MORTGAGE DOLLAR ROLLS
The Fund may enter into mortgage dollar rolls, typically on a TBA basis.
Mortgage dollar rolls are agreements between the Fund and a financial
institution to simultaneously sell and repurchase mortgage-backed securities at
a future date. Gains or losses are realized on the initial sale, and the
difference between the repurchase price and the sale price is recorded as an
unrealized gain or loss to the fund upon entering into the mortgage dollar roll.
In addition, the Fund may invest the cash proceeds that are received from the
initial sale. During the period between the sale and repurchase, the Fund is not
entitled to principal and interest paid on the mortgage backed securities. The
risks of mortgage dollar roll transactions include the potential inability of
the counterparty to fulfill its obligations.
46 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 it is the Fund's policy
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.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of April 30, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.
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. 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 of America. 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.
Annual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Realized and unrealized gains and losses and net investment income, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.
Inflation-indexed bonds provide an inflation hedge through periodic increases or
decreases 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 was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
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, on behalf of the Fund, 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.
48 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2009, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
YEAR ENDED APRIL 30,
---------------------------------------------------------
2009 2008
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES:
Shares sold .................... 89,966,491 $ 809,736,545 91,217,409 $ 936,036,841
Shares issued in reinvestment of
distributions ............... 14,281,669 124,892,924 8,915,352 91,352,929
Shares redeemed ................ (77,662,451) (686,927,789) (38,572,698) (394,859,441)
=========== ============= =========== =============
Net increase (decrease) ........ 26,585,709 $ 247,701,680 61,560,063 $ 632,530,329
=========== ============= =========== =============
CLASS B SHARES:
Shares sold .................... 3,223,884 $ 29,661,456 2,874,628 $ 29,428,423
Shares issued in reinvestment of
distributions ............... 540,736 4,759,007 408,776 4,208,385
Shares redeemed ................ (4,987,063) (44,656,892) (2,980,058) (30,587,985)
----------- ------------- ----------- -------------
Net increase (decrease) ........ (1,222,443) $ (10,236,429) 303,346 $ 3,048,823
=========== ============= =========== =============
CLASS C SHARES:
Shares sold .................... 38,790,729 $ 351,484,801 37,244,007 $ 381,547,354
Shares issued in reinvestment of
distributions ............... 4,622,193 40,270,851 2,345,925 24,029,491
Shares redeemed ................ (27,181,977) (240,623,278) (9,929,608) (101,536,388)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 16,230,945 $ 151,132,374 29,660,324 $ 304,040,457
=========== ============= =========== =============
CLASS R SHARES:
Shares sold .................... 5,861,272 $ 52,624,182 6,278,677 $ 64,256,553
Shares issued in reinvestment of
distributions ............... 927,934 8,059,242 505,060 5,161,628
Shares redeemed ................ (4,178,690) (36,687,932) (2,511,917) (25,632,743)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 2,610,516 $ 23,995,492 4,271,820 $ 43,785,438
=========== ============= =========== =============
ADVISOR CLASS SHARES:
Shares sold .................... 10,210,308 $ 89,961,976 5,446,481 $ 56,078,457
Shares issued in reinvestment of
distributions ............... 1,093,583 9,458,220 515,703 5,286,545
Shares redeemed ................ (3,258,282) (28,309,619) (1,497,484) (15,355,613)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 8,045,609 $ 71,110,577 4,464,700 $ 46,009,389
=========== ============= =========== =============
Annual Report | 49
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% Over $20 billion, up to and including $35 billion
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 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, 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 for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
50 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
In addition, under the Fund's Class B, C, and R compensation distribution plans,
the Fund pays Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate
for each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ... 0.25%
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 year:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ................................................. $1,086,109
Contingent deferred sales charges retained ........................ $ 449,538
E. TRANSFER AGENT FEES
For the year ended April 30, 2009, the Fund paid transfer agent fees of
$4,602,919, of which $2,756,005 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 year ended April 30, 2009, 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, 2009, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2011 ... $ 10,885,854
2017 ... 104,722,915
------------
$115,608,769
============
Annual Report | 51
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
5. INCOME TAXES (CONTINUED)
For tax purposes, realized capital 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, 2009, the Fund deferred realized capital losses of
$121,826,010.
The tax character of distributions paid during the years ended April 30, 2009
and 2008, was as follows:
2009 2008
------------ ------------
Distributions paid from
ordinary income .... $248,863,616 $174,841,096
At April 30, 2009, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ........................................ $3,394,816,588
==============
Unrealized appreciation .................................... $ 85,188,969
Unrealized depreciation .................................... (329,012,416)
--------------
Net unrealized appreciation (depreciation) ................. $ (243,823,447)
==============
Distributable earnings - undistributed ordinary income ..... $ 12,449,226
==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, mortgage dollar rolls, paydown losses, payments-in-kind, bond
discounts and premiums, and inflation related adjustments on foreign securities.
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, paydown losses, bond discounts and
premiums, and inflation related adjustments on foreign securities.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2009, aggregated $1,861,419,355 and $1,413,974,314,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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.
52 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
8. FORWARD EXCHANGE CONTRACTS
At April 30, 2009, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT(a) DATE APPRECIATION DEPRECIATION
------------- ---------- ------------ ------------
CONTRACTS TO BUY
88,338,174 Indian Rupee ........ 22,688,628 MXN 5/15/09 $ 134,362 $ --
9,550,000 Euro ................ 13,847,978 5/29/09 -- (1,221,875)
8,600,000 Euro ................ 11,090,130 5/29/09 279,974 --
187,895,953 Russian Ruble ....... 85,260,441 MXN 7/01/09 -- (542,752)
5,000,000 U.S. Dollar ......... 3,251,356 EUR 7/10/09 702,252 --
98,105,572 Russian Ruble ....... 5,846,578 NZD 8/12/09 -- (414,129)
97,208,161 Russian Ruble ....... 5,808,327 NZD 8/14/09 -- (420,307)
48,366,965 Russian Ruble ....... 2,908,311 NZD 9/15/09 -- (230,467)
20,000,000 U.S. Dollar ......... 14,359,254 EUR 9/17/09 1,022,537 --
102,616,000 Chinese Yuan ........ 14,958,601 9/23/09 181,341 --
85,937,019 Russian Ruble ....... 4,088,221 AUD 9/24/09 -- (461,310)
132,105,686 Russian Ruble ....... 6,349,870 AUD 9/28/09 -- (759,812)
32,917,966,021 Vietnamese Dong ..... 2,673,084 AUD 10/07/09 -- (117,758)
10,867,913 Chinese Yuan ........ 2,348,144 AUD 10/13/09 -- (83,886)
11,141,998 Chinese Yuan ........ 2,365,951 AUD 10/19/09 -- (55,177)
19,992,188 Chinese Yuan ........ 2,890,297 10/23/09 63,704 --
33,924,068 Chinese Yuan ........ 4,878,259 10/26/09 135,026 --
20,270,115 Chinese Yuan ........ 2,893,664 10/27/09 101,994 --
59,919,000 Indian Rupee ........ 1,157,989 4/09/10 20,629 --
128,487,000 Indian Rupee ........ 2,481,402 4/12/10 45,597 --
86,303,000 Indian Rupee ........ 1,654,265 4/13/10 43,005 --
84,715,000 Indian Rupee ........ 1,654,267 4/15/10 11,613 --
72,103,000 Indian Rupee ........ 1,410,043 4/19/10 7,555 --
60,176,000 Indian Rupee ........ 1,161,219 4/26/10 21,488 --
937,202,000 Chilean Peso ........ 1,601,644 4/27/10 -- (789)
940,566,000 Chilean Peso ........ 1,601,645 4/27/10 4,956 --
8,585,000 Indian Rupee ........ 165,894 4/27/10 2,829 --
1,699,825,000 Chilean Peso ........ 2,882,960 4/28/10 20,453 --
42,592,000 Indian Rupee ........ 829,445 4/28/10 7,583 --
42,633,000 Indian Rupee ........ 829,436 4/30/10 8,318 --
CONTRACTS TO SELL
24,100,000 Euro ................ 37,073,512 5/29/09 5,210,778 --
31,565,500,000 Indonesian Rupiah ... 2,875,725 5/29/09 -- (86,758)
12,522,000 Mexican Peso ........ 897,956 5/29/09 -- (4,428)
5,745,983 New Zealand Dollar .. 3,198,606 5/29/09 -- (43,291)
95,141,931 Mexican Peso ........ 4,303,650,105 CLP 6/12/09 550,623 --
13,542,000 Euro ................ 20,710,912 6/15/09 2,808,533 --
Annual Report | 53
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT(a) DATE APPRECIATION DEPRECIATION
--------------- ---------- ------------ ------------
CONTRACTS TO SELL (CONTINUED)
12,642,000 Mexican Peso ........ 897,939 7/31/09 $ -- $ (4,119)
3,664,583 New Zealand Dollar .. 2,035,477 7/31/09 -- (25,118)
2,601,679 New Zealand Dollar .. 1,453,912 8/03/09 -- (8,778)
1,018,449 New Zealand Dollar .. 581,565 8/03/09 8,983 --
11,270,000 Brazilian Real ...... 4,997,561 8/04/09 -- (36,034)
4,640,756 New Zealand Dollar .. 2,612,574 8/04/09 -- (21,414)
30,299,970 New Zealand Dollar .. 204,079,388,412 IDR 8/04/09 1,806,963 --
5,487,492 New Zealand Dollar .. 66,500,169,499 VND 8/14/09 590,476 --
35,638,464 Mexican Peso ........ 85,218,696 RUB 9/17/09 -- (57,414)
7,289,000 Euro ................ 9,902,107 1/12/10 269,661 --
45,187,500 Singapore Dollar .... 30,000,000 2/17/10 -- (533,202)
3,797,000 Singapore Dollar .... 2,499,918 3/23/10 -- (65,853)
Unrealized appreciation (depreciation)
on offsetting forward exchange
contracts ......................... 15,273,758 (2,535,831)
----------- -----------
Unrealized appreciation (depreciation)
on forward exchange contracts ..... 29,334,991 (7,730,502)
----------- -----------
Net unrealized appreciation
(depreciation) on forward
exchange contracts ............. $21,604,489
===========
(a) In U.S. dollars unless otherwise indicated.
See Abbreviations on page 58.
9. CREDIT RISK AND DEFAULTED SECURITIES
At April 30, 2009, the Fund had 37.29% of its portfolio invested in high yield,
senior secured floating rate notes, or other securities rated below investment
grade. These securities may be more sensitive to economic conditions causing
greater price volatility and are potentially subject to a greater risk of loss
due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At April 30, 2009, the aggregate value of these
securities was $24,250,950, representing 0.76% of the Fund's net assets. The
Fund discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. The
securities have been identified on the accompanying Statement of Investments.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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
54 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
10. RESTRICTED SECURITIES (CONTINUED)
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At April 30, 2009, 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 $ -- $--
64,666 VS Holdings Inc. ................................. 12/06/01 64,666 --
---
TOTAL RESTRICTED SECURITIES(0.0% of Net Assets) .. $--
===
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 April 30, 2009, unfunded commitments were as follows:
UNFUNDED
BORROWER COMMITMENTS
- -------- -----------
Bausch & Lomb Inc., Delayed Draw Term Loan .. $304,334
--------
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
12. OTHER CONSIDERATIONS
From time to time officers, directors or employees of the Fund's Investment
Manager may be provided material, non-public information relating to a company
which, pursuant to the Fund's policies and requirements of applicable securities
laws, could prevent the Fund from trading in the securities of such company for
limited or extended periods of time.
Annual Report | 55
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
13. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and
foreign investment funds managed by Franklin Templeton Investments
(individually, "Borrower"; collectively "Borrowers"), entered into a joint
syndicated senior unsecured credit facility totaling $725 million (Global Credit
Facility) to provide a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to
interest charged on any borrowings made by the Fund and other costs incurred by
the Fund, pay its share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee based upon the unused portion of the Global Credit
Facility. During the period, the Fund incurred commitment fees of $1,885 of its
pro rata portion of the Global Credit Facility, which is reflected in Other
expenses on the Statement of Operations. During the year ended April 30, 2009,
the Fund did not utilize the Global Credit Facility.
14. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on May 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Fund has determined that the implementation
of SFAS 157 did not have a material impact on the Fund's financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Fund's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Fund's investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
56 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
14. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of April 30, 2009, in valuing
the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- -------------- ------- --------------
ASSETS:
Investments in Securities $84,401,849 $3,066,591,292 $-- $3,150,993,141
Other Financial Instruments(a) -- 29,334,991 -- 29,334,991
LIABILITIES:
Other Financial Instruments(a) -- 7,734,099 -- 7,734,099
(a) Other financial instruments include net unrealized appreciation or
depreciation on forward exchange contracts and unfunded loan commitments.
At April 30, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:
INVESTMENTS
IN SECURITIES
-------------
Beginning Balance - May 1, 2008 ............................. $ 3,873
Net realized gain (loss) ................................. --
Net change in unrealized appreciation (depreciation) ..... (3,873)
Net purchases (sales) .................................... --
Transfers in and/or out of Level 3 ....................... --
-------
Ending Balance .............................................. $ --
=======
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of year ......... $(3,873)
=======
15. NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund believes applying the various provisions of
SFAS 161 will not have a material impact on its financial statements.
Annual Report | 57
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
15. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP
FAS 157-4), which provides additional guidance when the volume and level of
activity for the asset or liability measured at fair value have significantly
decreased. Additionally, FSP FAS 157-4 amends SFAS 157, expanding disclosure
requirements by reporting entities surrounding the major categories of assets
and liabilities carried at fair value. FSP FAS 157-4 is effective for interim
and annual periods ending after June 15, 2009. The Fund is currently evaluating
the impact, if any, of applying FSP FAS 157-4.
In May 2009, FASB issued Statement No. 165, "Subsequent Events", which is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the statements are
issued or are available to be issued. FASB 165 is effective for interim or
annual financial periods ending after June 15, 2009, the adoption of FASB 165
will not have a material impact on the financial statements.
ABBREVIATIONS
CURRENCY
AUD - Australian Dollar
BRL - Brazilian Real
CHF - Swiss Franc
CLP - Chilean Peso
EGP - Egyptian Pound
EUR - Euro
IDR - Indonesian Rupiah
KRW - South Korean Won
MXN - Mexican Peso
MYR - Malaysian Ringgit
NZD - New Zealand Dollar
PLN - Polish Zloty
RUB - Russian Ruble
SEK - Swedish Krona
VND - Vietnamese Dong
SELECTED PORTFOLIO
AMBAC - American Municipal Bond Assurance Corp.
BHAC - Berkshire Hathaway Assurance Corp.
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
FSA - Financial Security Assurance Inc.
GNMA - Government National Mortgage Association
GO - General Obligation
ISD - Independent School District
L/C - Letter of Credit
MBIA - Municipal Bond Investors Assurance Corp.
MTA - Metropolitan Transit Authority
PIK - Payment-In-Kind
SF - Single Family
USD - Unified/Union School District
58 | Annual Report
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FRANKLIN STRATEGIC INCOME FUND
TO THE BOARD OF TRUSTEES OF FRANKLIN STRATEGIC SERIES AND SHAREHOLDERS OF THE
FRANKLIN STRATEGIC INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin Strategic Income Fund
(one of the funds constituting the Franklin Strategic Series, hereafter referred
to as the "Fund") at April 30, 2009, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 2009 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 19, 2009
Annual Report | 59
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
FRANKLIN STRATEGIC INCOME FUND
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
the maximum amount allowable but no less than $1,564,361 as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended April 30, 2009. Distributions, including qualified dividend
income, paid during calendar year 2009 will be reported to shareholders on Form
1099-DIV in January 2010. Shareholders are advised to check with their tax
advisors for information on the treatment of these amounts on their individual
income tax returns.
60 | Annual Report
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- ---------------- ---------------- -------------- -------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 135 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 112 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement
Systems (CALPERS) (1971-2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of
California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 112 Chevron Corporation (global energy company)
One Franklin Parkway and ICO Global Communications (Holdings)
San Mateo, CA 94403-1906 Limited (satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 135 Hess Corporation (exploration and refining
One Franklin Parkway of oil and gas), H.J. Heinz Company
San Mateo, CA 94403-1906 (processed foods and allied products), RTI
International Metals, Inc. (manufacture and
distribution of titanium), Canadian
National Railway (railroad) and White
Mountains Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
Annual Report | 61
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- ---------------- ---------------- -------------- -------------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1991 112 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2007 135 Hess Corporation (exploration and refining
One Franklin Parkway of oil and gas) and Sentient Jet (private
San Mateo, CA 94403-1906 jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 112 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm)
(1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- ---------------- ---------------- -------------- -------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 135 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of
the Board
since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42
of the investment companies in Franklin Templeton Investments.
62 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- ---------------- ---------------- -------------- -------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 52 None
One Franklin Parkway President and 1991 and
San Mateo, CA 94403-1906 Chief President and
Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton
Investments.
EDWARD L. GEARY (1962) Vice President Since March 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 63
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- ---------------- ---------------- -------------- -------------------------------------------
ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of
four of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of six of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
64 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- ---------------- ---------------- -------------- -------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
Annual Report | 65
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 14, 2009, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for Franklin Strategic Income Fund, one of the
separate funds within the Trust (Fund(s)). In reaching this decision, the Board
took into account information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
annual renewal review process. Information furnished and discussed throughout
the year included investment performance reports and related financial
information for each Fund, as well as periodic reports on shareholder services,
legal, compliance, pricing, brokerage commissions and execution and other
services provided by the Investment Manager (Manager) and its affiliates.
Information furnished specifically in connection with the renewal process
included a report for each Fund prepared by Lipper, Inc. (Lipper), an
independent organization, as well as additional material, including a Fund
profitability analysis report prepared by management. The Lipper reports
compared each Fund's investment performance and expenses with those of other
mutual funds deemed comparable to the Fund as selected by Lipper. The Fund
profitability analysis report discussed the profitability to Franklin Templeton
Investments from its overall U.S. fund operations, as well as on an individual
fund-by-fund basis. Included with such profitability analysis report was
information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates including management's explanation of differences
where relevant and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Funds by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale and a comparative analysis concerning transfer agent fees
charged each Fund. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
66 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Among other factors taken into account by the Board
were the Manager's best execution trading policies, including a favorable report
by an independent portfolio trading analytical firm. Consideration was also
given to the experience of the Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of a portfolio
manager's bonus compensation was the relative investment performance of the
funds he or she managed and that a portion of such bonus was required to be
invested in a predesignated list of funds within such person's fund management
area so as to be aligned with the interests of Fund shareholders. The Board also
took into account the quality of transfer agent and shareholder services
provided Fund shareholders by an affiliate of the Manager, noting continuing
expenditures by management to increase and improve the scope of such services,
periodic favorable reports on such service conducted by third parties, and the
continuous enhancements to and high industry ranking given the Franklin
Templeton website. Particular attention was given to the overall performance and
actions taken by the Manager and its affiliates in response to problems arising
out of the market turmoil and financial crisis experienced during the past year.
In this respect, the Board noted that management's independent credit analysis
and diligent risk management procedures had minimized exposure of funds within
the Franklin Templeton complex to subprime mortgages and that its continuous
monitoring of counterparty credit risk had limited fund exposure to firms
experiencing financial difficulties like Bear Stearns and AIG. The same type of
conservative approach and attention to risk had also prevented any structured
investment products or other volatile instruments from being held in the
portfolios of any of the money market funds within the Franklin Templeton
complex, including the sweep money fund utilized by many of the funds as part of
their cash management. The Board also took into account, among other things,
management's efforts in establishing a $725 million global credit facility for
the benefit of the funds and other accounts managed by Franklin Templeton
Investments to provide a source of cash for temporary and emergency purposes or
to meet unusual redemption requests as well as the strong financial position of
the Manager's parent company and its commitment to the mutual fund business. The
Board also noted that during the past year Franklin Templeton Investments, like
many other fund managers, had announced a hiring freeze and implemented employee
reductions, and the Board
Annual Report | 67
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
discussed with management the nature of such reductions and steps being taken to
minimize any negative impact on the nature and quality of services being
provided the Fund.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for the Fund showed the
investment performance of its Class A shares in comparison to a performance
universe selected by Lipper. Comparative performance for the Fund was shown for
the one-year period ended January 31, 2009, and previous periods ended that date
of up to 10 years. The following summarizes the performance results for the Fund
and the Board's view of such performance.
The performance universe for the Fund consisted of the Fund and all retail and
institutional multisector income funds as selected by Lipper. The Lipper report
comparison showed that for the one-year period the Fund's income return was in
the highest quintile of such performance universe, and that on an annualized
basis the Fund's income return was in the highest or second-highest quintile of
such universe during each of the previous three-, five- and 10-year periods. The
Board was satisfied with such income performance. Consistent with the market
sell-off that occurred during the past year, the Fund and most of the funds in
the Lipper performance universe experienced losses during such period. On a
comparative basis, however, the Lipper report further showed the Fund's total
return to be in the second-highest quintile of the performance universe for the
one-year period and during the previous three-, five- and 10-year periods on an
annualized basis to be in the highest quintile of such performance universe. The
Board noted such favorable comparative performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group.
Lipper expense data is based upon historical information taken from each fund's
most recent annual report and, as a result of the severe decline in mutual fund
industry assets during the last quarter of 2008, is based on asset levels that
are higher than the level currently existing for most funds. While recognizing
the limitations inherent in Lipper's methodology and recognizing that current
expense ratios may increase as assets decline, the Board believed that the
independent analysis conducted by Lipper remained an appropriate measure of
comparative expenses. In reviewing comparative costs, Lipper provides
information on the Fund's contractual investment management fee in comparison
with the investment management fee that would have been charged by other funds
within its Lipper expense group assuming they were similar in size to the Fund,
as well as the actual total expenses of the Fund in comparison with those of its
Lipper expense group. The Lipper contractual investment management fee analysis
includes administrative charges as being part of the investment management fee,
68 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
and actual total expenses, for comparative consistency, are shown by Lipper for
Fund Class A shares. The results of such expense comparisons showed the
contractual investment management fee rates and actual total expense rates for
Franklin Strategic Income Fund were in the least expensive quintile of its
Lipper expense group. The Board was satisfied with the contractual management
fees and total expenses of the Fund in comparison to its expense group as shown
in the Lipper report.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
the Fund during the 12-month period ended September 30, 2008, being the most
recent fiscal year end for Franklin Resources, Inc., the Manager's parent.
During such period, the assets of the Franklin Templeton U.S. fund business were
significantly higher than currently existing, and to such extent the
profitability analysis does not reflect current fund operations. While taking
this into account in assessing the significance of the Fund profitability
analysis, the Board recognized such analysis was made at a given point in time
and that the decline in assets and effect on profitability would be reflected in
the profitability analysis covering Franklin Resources' 2009 fiscal year period.
In reviewing the analysis, attention was given to the methodology followed in
allocating costs to the Fund, it being recognized that allocation methodologies
are inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the Manager's
own cost accounting, the allocation methodology was consistent with that
followed in profitability report presentations for the Fund made in prior years
and that the Fund's independent registered public accounting firm had been
engaged by the Manager to perform certain procedures on a biennial basis,
specified and approved by the Manager and the Fund's Board solely for their
purposes and use in reference to the profitability analysis. In reviewing and
discussing such analysis, management discussed with the Board its belief that
costs incurred in establishing the infrastructure necessary for the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully reflected in the expenses allocated to the Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Fund, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In
addition, the Board considered a third-party study comparing the profitability
of the Manager's parent on an overall basis as compared to other publicly held
managers broken down to show profitability from management operations exclusive
of distribution expenses, as well as profitability including distribution
expenses. The Board also considered the extent to which the Manager and its
affiliates might derive ancillary benefits from fund operations, including its
interest in a joint venture entity that financed up-front commissions paid to
brokers/dealers who sold
Annual Report | 69
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
fund Class B shares prior to February 2005 when the offering of such shares was
discontinued, as well as potential benefits resulting from allocation of fund
brokerage and the use of commission dollars to pay for research. Based upon its
consideration of all these factors, the Board determined that the level of
profits realized by the Manager and its affiliates from providing services to
the Fund was not excessive in view of the nature, quality and extent of services
provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with the Fund and its shareholders through
management fee breakpoints so that as the Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreement for the Fund contains breakpoints that continued to asset levels that
exceeded its asset size at December 31, 2008. In view of such fee structure and
the favorable expense comparisons of the Fund within its expense group, the
Board believed that to the extent economies of scale may be realized by the
manager of the Fund and its affiliates, that there was a sharing of benefits
with the Fund and its shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager 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 (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 (800)
SEC-0330.
70 | Annual Report
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Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL
BEN/(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.
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Global Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(3)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(3)
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(3)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(4)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(5)
LIMITED-/INTERMEDIATE-TERM
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(6)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(6)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(8)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(4.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(5.) The fund invests primarily in insured municipal securities.
(6.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(7.) The Board of Trustees approved the elimination of the non-fundamental
policy requiring the fund to invest at least 80% of net assets in insured
municipal securities and the removal of the word "Insured" from the fund
name. The changes became effective 2/17/09.
(8.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
04/09 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC INCOME FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2009 06/09
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 John B. Wilson and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $292,534 for the fiscal year ended April 30, 2009 and $325,694 for the
fiscal year ended April 30, 2008.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $6,000 for the fiscal year ended
April 30, 2009 and $0 for the fiscal year ended April 30, 2008. The services for
which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $10,704 for the fiscal year ended April 30,
2009 and $0 for the fiscal year ended April 30, 2008. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant other than
services reported in paragraphs (a)-(c) of Item 4 were $273,373 for the fiscal
year ended April 30, 2009 and $0 for the fiscal year ended April 30, 2008. The
services for which these fees were paid included review of materials provided to
the fund Board in connection with the investment management contract renewal
process.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $290,077 for the fiscal year ended April 30, 2009 and $0 for the
fiscal year ended April 30, 2008.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to 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 Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting 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/Laura F. Fergerson
------------------
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date June 25, 2009
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/Laura F. Fergerson
------------------
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date June 25, 2009
By /s/Gaston Gardey
---------------------
Gaston Gardey
Chief Financial Officer and Chief Accounting Officer
Date June 25, 2009