UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
----------
Franklin Strategic Series
--------------------------------------------------
(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
---------------------------------------------------
(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
------------
Date of fiscal year end: 4/30
----
Date of reporting period: 10/31/09
--------
Item 1. Reports to Stockholders.
OCTOBER 31, 2009
(GRAPHIC)
SEMIANNUAL 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
SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com
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 semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Economic and Market Overview .............................................. 3
Franklin Flex Cap Growth Fund ............................................. 5
Franklin Focused Core Equity Fund ......................................... 13
Franklin Growth Opportunities Fund ........................................ 21
Franklin Small Cap Growth Fund ............................................ 29
Franklin Small-Mid Cap Growth Fund ........................................ 37
Financial Highlights and Statements of Investments ........................ 45
Financial Statements ...................................................... 85
Notes to Financial Statements ............................................. 94
Shareholder Information ................................................... 113
Shareholder Letter
Dear Shareholder:
During the six-month period ended October 31, 2009, economic activity
showed signs of stabilization. In early 2009, deteriorating economic
conditions and investor uncertainty contributed to market woes until
some indicators offered a better economic outlook, and markets rallied
beginning in March 2009. At period-end, although some observers
thought the worst of the economic crises was behind us, others
believed significant challenges remained.
We think it is important to put short-term market developments in
perspective. Keep in mind we have navigated through past periods of
high market volatility by remaining committed to our long-term
perspective and disciplined investment philosophy. During such times,
we search for bargains we believe may be well positioned to become
eventual winners. Although conditions remain challenging, our
experience gives us reason to be optimistic about future market
stabilization and economic recovery.
Franklin Strategic Series' semiannual report goes into greater detail
about prevailing conditions during the period under review. In
addition, you will find performance data, financial information and
discussions from the portfolio managers. Please remember that all
securities markets fluctuate, as do mutual fund share prices.
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.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the semiannual report | 1
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 OCTOBER 31, 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 semiannual report
Semiannual Report
Economic and Market Overview
During the six months under review, signs emerged of improving
economic conditions and hopes ran high for a sustainable and
broadening recovery. Although the pace of job losses subsided
somewhat, the U.S. employment market remained troubled as the
unemployment rate continued to climb, hitting 10.2% at period-end.(1)
The real estate market stabilized at low levels across the country,
with the government's tax credit for first-time homebuyers partly
supporting home sales and prices. Industrial production picked up, as
exports and orders rose for big-ticket items. Consumer spending
overall improved, mainly due to the temporary cash-for-clunkers
program.
Many commodities' prices rose during the six months under review but
remained well below highs hit in 2008, helping to mute inflationary
pressures. October's inflation rate was an annualized -0.2%, while
core inflation, which excludes food and energy costs, was an
annualized 1.7%.(1) The Federal Reserve Board (Fed) maintained the
federal funds target rate in a range of 0% to 0.25% throughout the
period, but given better credit and economic conditions, the Fed began
to move away from crisis mode by allowing some of its government
support measures to expire or shrink. Economic activity, as measured
by U.S. gross domestic product (GDP), fell at an annualized rate of
0.7% in the second quarter of 2009 and rose at an annualized 2.8% rate
in the third quarter. After a year-long contraction, GDP returned to
stronger-than-expected growth on improved consumer spending and
homebuilding, yet much of the expansion was tied to federal government
spending.
U.S. equity markets rose and were fueled by renewed optimism and
aggregate corporate earnings that beat consensus expectations.
Skepticism about the sustainability of positive trends led to market
volatility near period-end. For the
(1.) Source: Bureau of Labor Statistics.
Semiannual Report | 3
six months under review, the Dow Jones Industrial Average, Standard &
Poor's 500 Index (S&P 500) and NASDAQ Composite Index posted total
returns of +20.73%, +20.04% and +19.62%, respectively.(2) All sectors
made gains, and the financials, information technology and energy
sectors had the strongest returns.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF
OCTOBER 31, 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 | Semiannual Report
Franklin Flex Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks
capital appreciation. The Fund invests predominantly in equity securities of
companies that the manager believes have the potential for capital appreciation.
The Fund has flexibility to invest in companies located, headquartered or
operating inside and outside the U.S., across the entire market capitalization
spectrum from small, emerging growth companies to well-established, large cap
companies.
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This semiannual report for Franklin Flex Cap Growth Fund covers the period ended
October 31, 2009.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Flex Cap Growth Fund - Class A posted
a +16.39% cumulative total return. The Fund underperformed its narrow
benchmarks, the Russell 3000(R) Growth Index, which had a +19.05% total return,
and the Russell 1000(R) Growth Index, which had a +19.32% total return, as well
as its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a
+20.04% total return for the same period.(1) The Fund also underperformed the
+18.29% 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
Russell 1000 Growth Index is market capitalization weighted and measures
performance of those Russell 1000 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, and an index is not representative
of the Fund's portfolio.
(2.) Source: Lipper Inc. The Lipper Multi-Cap Growth Funds Classification
Average is calculated by averaging the total returns of all funds within
the Lipper Multi-Cap Growth Funds classification in the Lipper Open-End
underlying funds universe for the period indicated. Lipper Multi-Cap Growth
Funds are defined as funds that normally invest in companies, of any size,
with long-term earnings expected to grow significantly faster than the
earnings of the stocks represented in the major unmanaged stock indexes.
For the six-month period ended 10/31/09, there were 472 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 an average, and an average is not 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 50.
Semiannual Report | 5
PORTFOLIO BREAKDOWN
Franklin Flex Cap Growth Fund
Based on Total Net Assets as of 10/31/09
(BAR CHART)
Software & Services* 18.7%
Technology Hardware & Equipment* 16.1%
Pharmaceuticals, Biotechnology & Life Sciences 10.4%
Health Care Equipment & Services 8.7%
Energy 7.0%
Materials 5.1%
Capital Goods 4.4%
Semiconductors & Semiconductor Equipment 4.4%
Retailing 2.6%
Diversified Financials 2.5%
Telecommunication Services 2.4%
Insurance 2.3%
Food & Staples Retailing 2.2%
Transportation 2.2%
Food, Beverage & Tobacco 2.1%
Other 7.1%
Short-Term Investments & Other Net Assets 1.8%
* 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 use fundamental, bottom-up research to seek companies meeting our criteria of
growth potential, quality and valuation. In seeking sustainable growth
characteristics, we look for companies we believe can produce sustainable
earnings and cash flow growth, evaluating the long-term market opportunity and
competitive structure of an industry to target leaders and emerging leaders. We
define quality companies as those with strong and improving competitive
positions in attractive markets. We also believe important attributes of quality
are experienced and talented management teams as well as financial strength
reflected in the capital structure, gross and operating margins, free cash flow
generation and returns on capital employed. Our valuation analysis includes a
range of potential outcomes based on an assessment of multiple scenarios. In
assessing value, we consider whether security prices fully reflect the balance
of the sustainable growth opportunities relative to business and financial
risks.
MANAGER'S DISCUSSION
During the six months under review, key contributors to Fund performance
relative to the Russell 3000 Growth Index included new holding Intuitive
Surgical, a robotic surgical systems maker, FMC Technologies, a subsea oil and
gas equipment manufacturer, and BlackRock, a money manager.
On a sector basis, stock selection in the financials, consumer discretionary and
telecommunication services sectors helped the Fund's relative performance.(3)
Insurance company Aflac in the financials sector positively affected Fund
results. An underweighting in the consumer discretionary sector, where online
retailer Amazon.com appreciated in value, also boosted relative performance.
Another significant contributor was mobile services provider NII Holdings in the
telecommunication services sector.
Among the holdings that detracted most from the Fund's relative performance were
Expeditors International of Washington, a freight and logistics company, VCA
Antech, operator of the largest animal hospital chain in the U.S., and QUALCOMM,
which specializes in wireless telecommunication equipment technologies.
(3.) The financials sector comprises banks, diversified financials and insurance
in the SOI. The consumer discretionary sector comprises automobiles and
components, consumer durables and apparel, media, and retailing in the SOI.
6 | Semiannual Report
For the reporting period, stock selection in information technology, consumer
staples and industrials weighed on relative Fund performance.(4) Besides
QUALCOMM, Blackberry smart phone maker Research In Motion(5) in the information
technology sector was another underperformer, and we sold our position by
period-end. Beverages company Hansen Natural in the consumer staples sector also
had a negative impact on Fund 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 Management
Franklin Flex Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 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.
(4.) The information technology sector comprises semiconductors and
semiconductor equipment, software and services, and technology hardware and
equipment in the SOI. The consumer staples sector comprises food and
staples retailing; food, beverage and tobacco; and household and personal
products in the SOI. The industrials sector comprises capital goods,
commercial and professional services, and transportation in the SOI.
(5.) This holding is not an index component.
TOP 10 HOLDINGS
Franklin Flex Cap Growth Fund 10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ---------------- ----------
Apple Inc. 3.2%
TECHNOLOGY HARDWARE & EQUIPMENT
Cisco Systems Inc. 2.8%
TECHNOLOGY HARDWARE & EQUIPMENT
QUALCOMM Inc. 2.8%
TECHNOLOGY HARDWARE & EQUIPMENT
Google Inc., A 2.7%
SOFTWARE & SERVICES
Schering-Plough Corp. 2.5%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES
MasterCard Inc., A 2.4%
SOFTWARE & SERVICES
Praxair Inc. 2.3%
MATERIALS
CVS Caremark Corp. 2.2%
FOOD & STAPLES RETAILING
Hewlett-Packard Co. 2.1%
TECHNOLOGY HARDWARE & EQUIPMENT
Visa Inc., A 1.9%
SOFTWARE & SERVICES
Semiannual Report | 7
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FKCGX) CHANGE 10/31/09 4/30/09
- ---------------------- ------ -------- -------
Net Asset Value (NAV) +$5.32 $37.78 $32.46
CLASS B (SYMBOL: FKCBX) CHANGE 10/31/09 4/30/09
- ---------------------- ------ -------- -------
Net Asset Value (NAV) +$4.79 $34.83 $30.04
CLASS C (SYMBOL: FCIIX) CHANGE 10/31/09 4/30/09
- ---------------------- ------ -------- -------
Net Asset Value (NAV) +$4.80 $34.90 $30.10
CLASS R (SYMBOL: FRCGX) CHANGE 10/31/09 4/30/09
- ---------------------- ------ -------- -------
Net Asset Value (NAV) +$5.18 $37.09 $31.91
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 10/31/09 4/30/09
- ---------------------- ------ -------- -------
Net Asset Value (NAV) +$5.43 $38.25 $32.82
8 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) +16.39% +13.56% +9.86% +20.17%
Average Annual Total Return(2) +9.70% +7.03% +0.70% +1.25%
Value of $10,000 Investment(3) $10,970 $10,703 $10,356 $11,327
Avg. Ann. Total Return (9/30/09)(4) -8.82% +1.52% +2.62%
Total Annual Operating Expenses(5) 1.02%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) +15.95% +12.72% +5.83% +13.15%
Average Annual Total Return(2) +11.95% +8.72% +0.76% +1.24%
Value of $10,000 Investment(3) $11,195 $10,872 $10,383 $11,315
Avg. Ann. Total Return (9/30/09)(4) -7.82% +1.59% +2.61%
Total Annual Operating Expenses(5) 1.77%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) +15.95% +12.69% +5.82% +11.45%
Average Annual Total Return(2) +14.95% +11.69% +1.14% +1.09%
Value of $10,000 Investment(3) $11,495 $11,169 $10,582 $11,145
Avg. Ann. Total Return (9/30/09)(4) -4.93% +1.97% +2.46%
Total Annual Operating Expenses(5) 1.77%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) +16.23% +13.25% +8.49% +18.41%
Average Annual Total Return(2) +16.23% +13.25% +1.64% +2.18%
Value of $10,000 Investment(3) $11,623 $11,325 $10,849 $11,841
Avg. Ann. Total Return (9/30/09)(4) -3.50% +2.47% +2.44%
Total Annual Operating Expenses(5) 1.27%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- ------- -------
Cumulative Total Return(1) +16.54% +13.84% +11.24% +21.75%
Average Annual Total Return(2) +16.54% +13.84% +2.15% +1.99%
Value of $10,000 Investment(3) $11,654 $11,384 $11,124 $12,175
Avg. Ann. Total Return (9/30/09)(4) -3.02% +2.98% +3.36%
Total Annual Operating Expenses(5) 0.77%
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.
Semiannual Report | 9
Performance Summary (CONTINUED)
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. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) 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 +16.75% and +3.00%.
10 | Semiannual 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.
Semiannual Report | 11
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,163.90 $5.40
Hypothetical (5% return before expenses) $1,000 $1,020.21 $5.04
CLASS B
Actual $1,000 $1,159.50 $9.47
Hypothetical (5% return before expenses) $1,000 $1,016.43 $8.84
CLASS C
Actual $1,000 $1,159.50 $9.47
Hypothetical (5% return before expenses) $1,000 $1,016.43 $8.84
CLASS R
Actual $1,000 $1,162.30 $6.76
Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31
ADVISOR CLASS
Actual $1,000 $1,165.40 $4.04
Hypothetical (5% return before expenses) $1,000 $1,021.48 $3.77
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 0.99%; B: 1.74%; C:
1.74%; R: 1.24%; and Advisor: 0.74%), multiplied by the average account
value over the period, multiplied by 184/365 to reflect the one-half year
period.
12 | Semiannual 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.
We are pleased to bring you Franklin Focused Core Equity Fund's semiannual
report for the period ended October 31, 2009.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Focused Core Equity Fund - Class A had
a +23.44% cumulative total return. The Fund outperformed its benchmark, the S&P
500, which had a +20.04% total return for the same period.(2) You can find more
of the Fund's performance data in the Performance Summary beginning on page 16.
INVESTMENT STRATEGY
We are research-driven, bottom-up, fundamental investors. Our investment
approach is opportunistic and contrarian, and we seek to identify mispriced
companies using fundamental analysis. We seek to take advantage of price
dislocations that result from the market's short-term focus. Our analysis
includes the investigation of the valuation for each investment based upon the
view that the price payoff of the security is a critical factor determining
long-term success. We rely on a 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 tradeoff between growth opportunity, business and
financial risk, and valuation.
(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, and an index is not 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 58.
Semiannual Report | 13
PORTFOLIO BREAKDOWN
Franklin Focused Core Equity Fund
Based on Total Net Assets as of 10/31/09
(BAR CHART)
Health Care 21.2%
Information Technology 14.4%
Consumer Discretionary 11.9%
Industrials 11.4%
Financials 10.4%
Energy 9.6%
Consumer Staples 8.5%
Materials 4.2%
Telecommunication Services 2.7%
Short-Term Investments & Other Net Assets 5.7%
MANAGER'S DISCUSSION
During the reporting period, all sectors rose in value. In particular, health
care, industrials and information technology delivered strong absolute returns
for the Fund. Within the health care sector, pharmaceutical companies Roche
Holding, Merck and Schering-Plough boosted Fund performance. Solid waste
collection and disposal services provider Republic Services in industrials, and
consumer payment system operator MasterCard and linear and mixed-signal
integrated circuits manufacturer Maxim Integrated Products in information
technology, also contributed to Fund results. Other holdings that helped Fund
performance included Latin American wireless communication service provider NII
Holdings, petroleum products supplier Petroplus Holdings and financial services
provider U.S. Bancorp.
Although most Fund holdings produced positive returns during the period, there
were a few detractors. Beverage manufacturer Hansen Natural and commercial real
estate finance company iStar Financial hampered the Fund slightly. We sold iStar
Financial by period-end.
14 | Semiannual Report
Thank you for your continued 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 BRENT LODER]
/s/ Brent Loder
- --------------------------------------------
Brent Loder
Portfolio Management Team
Franklin Focused Core Equity Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 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.
BRENT LODER assumed portfolio manager responsibilities for Franklin Focused Core
Equity Fund in September 2009, providing research and advice on regional banks
and payment processors. Prior to joining Franklin Templeton Investments in 2006,
he worked as an associate at Blum Capital Partners where he helped evaluate,
execute and monitor investments in public and private companies. Previously, Mr.
Loder worked at Morgan Stanley as an analyst in corporate finance and mergers
and acquisitions. Mr. Loder earned a B.A. in history (magna cum laude) from the
University of California at Los Angeles and an M.B.A. from the Stanford Graduate
School of Business.
TOP 10 EQUITY HOLDINGS
Franklin Focused Core Equity Fund 10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Roche Holding AG (Switzerland) 5.1%
HEALTH CARE
Berkshire Hathaway Inc., B 5.0%
FINANCIALS
Schering-Plough Corp. 5.0%
HEALTH CARE
CVS Caremark Corp. 4.7%
CONSUMER STAPLES
Celanese Corp., A 4.2%
MATERIALS
Corning Inc. 4.1%
INFORMATION TECHNOLOGY
Maxim Integrated Products Inc. 4.1%
INFORMATION TECHNOLOGY
MasterCard Inc., A 3.9%
INFORMATION TECHNOLOGY
U.S. Bancorp 3.9%
FINANCIALS
The Sherwin-Williams Co. 3.5%
CONSUMER DISCRETIONARY
Semiannual Report | 15
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 10/31/09 4/30/09
- --------------------- ------ -------- -------
Net Asset Value (NAV) +$1.47 $7.74 $6.27
CLASS C (SYMBOL: N/A) CHANGE 10/31/09 4/30/09
- --------------------- ------ -------- -------
Net Asset Value (NAV) +$1.43 $7.67 $6.24
CLASS R (SYMBOL: N/A) CHANGE 10/31/09 4/30/09
- --------------------- ------ -------- -------
Net Asset Value (NAV) +$1.46 $7.73 $6.27
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/09 4/30/09
- --------------------------- ------ -------- -------
Net Asset Value (NAV) +$1.48 $7.76 $6.28
16 | Semiannual 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.
CLASS A 6-MONTH 1-YEAR INCEPTION (12/13/07)
- ------- ------- ------- --------------------
Cumulative Total Return(2) +23.44% +33.80% -20.79%
Average Annual Total Return(3) +16.39% +26.13% -14.36%
Value of $10,000 Investment(4) $11,639 $12,613 $7,466
Avg. Ann. Total Return (9/30/09)(5) -1.81% -14.62%
Total Annual Operating Expenses(6)
Without Waiver 4.03%
With Waiver 1.19%
CLASS C 6-MONTH 1-YEAR INCEPTION (12/13/07)
- ------- ------- ------- --------------------
Cumulative Total Return(2) +22.92% +32.88% -21.74%
Average Annual Total Return(3) +21.92% +31.88% -12.19%
Value of $10,000 Investment(4) $12,192 $13,188 $7,826
Avg. Ann. Total Return (9/30/09)(5) +2.51% -12.35%
Total Annual Operating Expenses(6)
Without Waiver 4.71%
With Waiver 1.87%
CLASS R 6-MONTH 1-YEAR INCEPTION (12/13/07)
- ------- ------- ------- --------------------
Cumulative Total Return(2) +23.29% +33.44% -21.14%
Average Annual Total Return(3) +23.29% +33.44% -11.84%
Value of $10,000 Investment(4) $12,329 $13,344 $7,886
Avg. Ann. Total Return (9/30/09)(5) +4.02% -11.92%
Total Annual Operating Expenses(6)
Without Waiver 4.25%
With Waiver 1.41%
ADVISOR CLASS 6-MONTH 1-YEAR INCEPTION (12/13/07)
- ------------- ------- ------- --------------------
Cumulative Total Return(2) +23.57% +34.05% -20.38%
Average Annual Total Return(3) +23.57% +34.05% -11.39%
Value of $10,000 Investment(4) $12,357 $13,405 $7,962
Avg. Ann. Total Return (9/30/09)(5) +4.48% -11.51%
Total Annual Operating Expenses(6)
Without Waiver 3.75%
With Waiver 0.91%
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 NONROUTINE EXPENSES OR COSTS,
INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND
LIQUIDATIONS) UNTIL 8/31/10.
Semiannual Report | 17
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 IS
ADDITIONAL RISK WITH THIS FUND BECAUSE IT HAS A FAIRLY CONCENTRATED PORTFOLIO
AND INVESTS IN A RELATIVELY SMALLER NUMBER OF COMPANIES. 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 change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) In accordance with SEC rules, we provide standardized 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.
18 | Semiannual 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.
Semiannual Report | 19
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,234.40 $ 6.87
Hypothetical (5% return before expenses) $1,000 $1,019.06 $ 6.21
CLASS C
Actual $1,000 $1,229.20 $10.62
Hypothetical (5% return before expenses) $1,000 $1,015.68 $ 9.60
CLASS R
Actual $1,000 $1,232.90 $ 7.82
Hypothetical (5% return before expenses) $1,000 $1,018.20 $ 7.07
ADVISOR CLASS
Actual $1,000 $1,235.70 $ 5.02
Hypothetical (5% return before expenses) $1,000 $1,020.72 $ 4.53
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.22%; C: 1.89%; R:
1.39%; and Advisor: 0.89%), multiplied by the average account value over
the period, multiplied by 184/365 to reflect the one-half year period.
20 | Semiannual 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 semiannual report for Franklin Growth Opportunities Fund covers the period
ended October 31, 2009.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Growth Opportunities Fund -Class A had
a cumulative total return of +18.66%. The Fund performed comparably to its
narrow benchmark, the Russell 3000 Growth Index, which had a +19.05% total
return, but underperformed its broad benchmark, the Standard & Poor's 500 Index
(S&P 500), which had a +20.04% total return for the same period.(1) You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 24.
INVESTMENT STRATEGY
We use fundamental, bottom-up research to seek companies meeting our criteria of
growth potential, quality and valuation. In seeking sustainable growth
characteristics, we look for companies we believe can produce sustainable
earnings and cash flow growth, evaluating the long-term market opportunity and
competitive structure of an industry to target leaders and emerging leaders. We
define quality companies as those with strong and improving competitive
positions in attractive markets. We also believe important attributes of quality
are experienced and talented management teams as well as financial strength
reflected in the capital structure, gross and operating margins, free cash flow
generation and returns on capital employed. Our valuation analysis includes
(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, and
an index is not 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 65.
Semiannual Report | 21
PORTFOLIO BREAKDOWN
Franklin Growth Opportunities Fund
Based on Total Net Assets as of 10/31/09
(BAR CHART)
Information Technology* 35.4%
Health Care 20.2%
Consumer Discretionary 10.8%
Energy 9.1%
Industrials 8.5%
Financials 5.1%
Materials 4.4%
Telecommunication Services 4.3%
Consumer Staples 1.2%
Short-Term Investments & Other Net Assets 1.0%
* 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.
a range of potential outcomes based on an assessment of multiple scenarios. In
assessing value, we consider whether security prices fully reflect the balance
of the sustainable growth opportunities relative to business and financial
risks.
MANAGER'S DISCUSSION
The majority of the Fund's holdings contributed to its absolute performance
during the six-month reporting period. Investments in the information
technology, energy and consumer discretionary sectors fared especially well, led
by holdings in the computers and peripherals; oil, gas and consumable fuels; and
specialty retail industries, respectively. Among the most significant
contributors by individual security was our position in computer hardware and
software provider Apple in the information technology sector. NII Holdings, a
wireless telecommunication services provider operating under the Nextel brand
that brings cellular service to more than seven million Latin American
customers, also performed well for the Fund. Global asset management firm
BlackRock, from the financials sector, was another top contributor during the
period.
All sectors in the Fund had positive results except materials, which included
the underperforming chemicals industry. Within chemicals, Monsanto and The
Mosaic Co. fell in value. Other major detractors included biotechnology firm
Myriad Genetics, which produces a range of molecular diagnostic testing
products, forensic financial consulting services provider Huron Consulting Group
(sold by period-end) and photovoltaic module manufacturer First Solar (sold by
period-end).
22 | Semiannual 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 OCTOBER 31, 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
10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Apple Inc. 3.4%
INFORMATION TECHNOLOGY
MasterCard Inc., A 3.2%
INFORMATION TECHNOLOGY
FLIR Systems Inc. 2.6%
INFORMATION TECHNOLOGY
SBA Communications Corp. 2.6%
TELECOMMUNICATION SERVICES
Google Inc., A 2.5%
INFORMATION TECHNOLOGY
Gilead Sciences Inc. 2.3%
HEALTH CARE
Life Technologies Corp. 2.1%
HEALTH CARE
BlackRock Inc. 2.1%
FINANCIALS
QUALCOMM Inc. 2.1%
INFORMATION TECHNOLOGY
Guess? Inc. 2.0%
CONSUMER DISCRETIONARY
Semiannual Report | 23
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FGRAX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$2.59 $16.47 $13.88
CLASS B (SYMBOL: FKABX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$2.38 $15.40 $13.02
CLASS C (SYMBOL: FKACX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$2.37 $15.36 $12.99
CLASS R (SYMBOL: FKARX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$2.53 $16.20 $13.67
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 10/31/09 4/30/09
- ----------------------------- ------ -------- -------
Net Asset Value (NAV) +$2.70 $17.00 $14.30
24 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) +18.66% +19.96% +23.19% +2.96%
Average Annual Total Return(2) +11.81% +13.04% +3.02% -0.30%
Value of $10,000 Investment(3) $11,181 $11,304 $11,607 $9,703
Avg. Ann. Total Return (9/30/09)(4) -1.28% +4.35% +1.60%
Total Annual Operating Expenses(5) 1.34%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) +18.28% +19.20% +18.92% -2.49%
Average Annual Total Return(2) +14.28% +15.20% +3.18% -0.25%
Value of $10,000 Investment(3) $11,428 $11,520 $11,692 $9,751
Avg. Ann. Total Return (9/30/09)(4) -0.01% +4.51% +1.68%
Total Annual Operating Expenses(5) 2.04%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- -------
Cumulative Total Return(1) +18.24% +19.16% +18.89% -4.00%
Average Annual Total Return(2) +17.24% +18.16% +3.52% -0.41%
Value of $10,000 Investment(3) $11,724 $11,816 $11,889 $9,600
Avg. Ann. Total Return (9/30/09)(4) +3.00% +4.83% +1.50%
Total Annual Operating Expenses(5) 2.05%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) +18.51% +19.73% +21.99% +17.82%
Average Annual Total Return(2) +18.51% +19.73% +4.06% +2.12%
Value of $10,000 Investment(3) $11,851 $11,973 $12,199 $11,782
Avg. Ann. Total Return (9/30/09)(4) +4.50% +5.37% +2.56%
Total Annual Operating Expenses(5) 1.56%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- ------- -------
Cumulative Total Return(1) +18.88% +20.31% +25.00% +6.12%
Average Annual Total Return(2) +18.88% +20.31% +4.56% +0.60%
Value of $10,000 Investment(3) $11,888 $12,031 $12,500 $10,612
Avg. Ann. Total Return (9/30/09)(4) +5.03% +5.89% +2.52%
Total Annual Operating Expenses(5) 1.06%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236.
Semiannual Report | 25
Performance Summary (CONTINUED)
ENDNOTES
THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO ARE COMFORTABLE WITH SHORT-TERM
FLUCTUATIONS IN SHARE PRICE. THE FUND'S INVESTMENTS IN SMALLER AND MIDSIZE
COMPANY STOCKS INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER REVENUES,
LIMITED PRODUCT LINES AND SMALLER MARKET SHARE. SMALLER AND MIDSIZE COMPANY
STOCKS HISTORICALLY HAVE EXHIBITED GREATER PRICE VOLATILITY THAN LARGER COMPANY
STOCKS, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES
TECHNOLOGY STOCKS, A SECTOR THAT 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. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) 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.
26 | Semiannual 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.
Semiannual Report | 27
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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 5/1/09 VALUE 10/31/09 ACTUAL 5/1/09-10/31/09
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $1,186.60 $ 6.83
Hypothetical (5% return before expenses) $1,000 $1,018.95 $ 6.31
CLASS B
Actual $1,000 $1,182.80 $10.78
Hypothetical (5% return before expenses) $1,000 $1,015.32 $ 9.96
CLASS C
Actual $1,000 $1,182.40 $10.84
Hypothetical (5% return before expenses) $1,000 $1,015.27 $10.01
CLASS R
Actual $1,000 $1,185.10 $ 8.10
Hypothetical (5% return before expenses) $1,000 $1,017.80 $ 7.48
ADVISOR CLASS
Actual $1,000 $1,188.80 $ 5.35
Hypothetical (5% return before expenses) $1,000 $1,020.32 $ 4.94
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.24%; B: 1.96%; C:
1.97%; R: 1.47%; and Advisor: 0.97%), multiplied by the average account
value over the period, multiplied by 184/365 to reflect the one-half year
period.
28 | Semiannual Report
Franklin Small 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.
We are pleased to bring you Franklin Small Cap Growth Fund's semiannual report
for the period ended October 31, 2009.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Small Cap Growth Fund - Class A posted
a +19.97% cumulative total return. The Fund outperformed its narrow benchmark,
the Russell 2000 Growth Index, which had a +16.21% total return, and performed
comparably to its broad benchmark, the Standard & Poor's 500 Index (S&P 500),
which had a +20.04% total return for the same period.(2) You can find the Fund's
long-term performance data in the Performance Summary beginning on page 32.
INVESTMENT STRATEGY
We use fundamental, bottom-up research to seek companies meeting our criteria of
growth potential, quality and valuation. In seeking sustainable growth
characteristics, we look for companies we believe can produce sustainable
earnings and cash flow growth, evaluating the long-term market opportunity and
competitive structure of an industry to target leaders and emerging leaders. We
define quality companies as those with strong and improving competitive
(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, and
an index is not 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 73.
Semiannual Report | 29
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets as of 10/31/09
Information Technology* 38.7%
Health Care 18.9%
Consumer Discretionary 15.3%
Industrials 11.9%
Financials 4.9%
Energy 4.0%
Consumer Staples 3.1%
Telecommunication Services 1.7%
Materials 0.2%
Short-Term Investments & Other Net Assets 1.3%
* 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.
positions in attractive markets. We also believe important attributes of quality
are experienced and talented management teams as well as financial strength
reflected in the capital structure, gross and operating margins, free cash flow
generation and returns on capital employed. Our valuation analysis includes a
range of potential outcomes based on an assessment of multiple scenarios. In
assessing value, we consider whether security prices fully reflect the balance
of the sustainable growth opportunities relative to business and financial
risks.
MANAGER'S DISCUSSION
During the six months under review, some of the largest contributors to the
Fund's performance relative to the Russell 2000 Growth Index included gaming
equipment maker Shuffle Master, financial resource management software developer
Bottomline Technologies, and auto parts company Tenneco.(3)
From a sector perspective, stock selection in information technology, consumer
discretionary and financials had a positive impact on relative Fund performance.
Also supporting Fund results was an overweighting in the information technology
sector, where technology consulting services provider Sapient and PC storage
systems designer Xyratex were additional key contributors. In addition,
industrials sector holding BE Aerospace,(3) an aircraft cabin component maker,
which we sold during the period, aided the Fund's performance.
In contrast, Huron Consulting Group, FTI Consulting(3) and Allegiant Travel were
among the most significant detractors from the Fund's relative performance for
the reporting period. All three holdings are from the industrials sector. Huron
Consulting Group offers financial consulting services to companies in financial
distress or under litigation, while FTI Consulting provides forensic accounting
and litigation support services. Allegiant Travel is a leisure passenger
airline.
Stock selection in the industrials, health care and materials sectors
constrained relative Fund performance. Molecular diagnostic tests designer
Myriad Genetics in the health care sector hurt Fund results, as did an
underweighted position in the materials sector. Major detractors in other
sectors included speech and digital imaging software developer Nuance
Communications(3) in the information technology sector and beverages company
Hansen Natural(3) in the consumer staples sector.
(3.) This holding is not an index component.
30 | Semiannual 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 OCTOBER 31, 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 10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Bottomline Technologies Inc. 2.4%
INFORMATION TECHNOLOGY
ViaSat Inc. 2.1%
INFORMATION TECHNOLOGY
Silicon Laboratories Inc. 1.8%
INFORMATION TECHNOLOGY
Nuance Communications Inc. 1.8%
INFORMATION TECHNOLOGY
American Medical Systems Holdings Inc. 1.8%
HEALTH CARE
ANSYS Inc. 1.7%
INFORMATION TECHNOLOGY
SBA Communications Corp. 1.7%
TELECOMMUNICATION SERVICES
Netlogic Microsystems Inc. 1.7%
INFORMATION TECHNOLOGY
Varian Semiconductor Equipment
Associates Inc. 1.6%
INFORMATION TECHNOLOGY
Sapient Corp. 1.6%
INFORMATION TECHNOLOGY
Semiannual Report | 31
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FSGRX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$1.28 $7.69 $6.41
CLASS B (SYMBOL: FBSGX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$1.15 $7.04 $5.89
CLASS C (SYMBOL: FCSGX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$1.16 $7.05 $5.89
CLASS R (SYMBOL: FSSRX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$1.25 $7.51 $6.26
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 10/31/09 4/30/09
- ----------------------------- ------ -------- -------
Net Asset Value (NAV) +$1.33 $7.96 $6.63
32 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------- ------- ------- ------ ------------------
Cumulative Total Return(1) +19.97% +19.53% -2.39% +5.71%
Average Annual Total Return(2) +13.09% +12.62% -1.65% -0.04%
Value of $10,000 Investment(3) $11,309 $11,262 $9,200 $9,963
Avg. Ann. Total Return (9/30/09)(4) -4.18% -0.18% +0.59%
Total Annual Operating Expenses(5) 1.36%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------- ------- ------- ------ ------------------
Cumulative Total Return(1) +19.52% +18.65% -5.95% -0.19%
Average Annual Total Return(2) +15.52% +14.65% -1.50% -0.02%
Value of $10,000 Investment(3) $11,552 $11,465 $9,271 $9,981
Avg. Ann. Total Return (9/30/09)(4) -3.06% -0.04% +0.61%
Total Annual Operating Expenses(5) 2.06%
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------- ------- ------- ------ ------------------
Cumulative Total Return(1) +19.69% +18.82% -5.84% -1.14%
Average Annual Total Return(2) +18.69% +17.82% -1.20% -0.12%
Value of $10,000 Investment(3) $11,869 $11,782 $9,416 $9,886
Avg. Ann. Total Return (9/30/09)(4) -0.08% +0.25% +0.51%
Total Annual Operating Expenses(5) 2.06%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------ ------------------
Cumulative Total Return(1) +19.97% +19.33% -3.45% +5.05%
Average Annual Total Return(2) +19.97% +19.33% -0.70% +0.63%
Value of $10,000 Investment(3) $11,997 $11,933 $9,655 $10,505
Avg. Ann. Total Return (9/30/09)(4) +1.50% +0.77% +1.41%
Total Annual Operating Expenses(5) 1.56%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/00)
- ------------- ------- ------- ------ ------------------
Cumulative Total Return(1) +20.06% +19.81% -1.12% +8.57%
Average Annual Total Return(2) +20.06% +19.81% -0.22% +0.87%
Value of $10,000 Investment(3) $12,006 $11,981 $9,888 $10,857
Avg. Ann. Total Return (9/30/09)(4) +2.02% +1.27% +1.52%
Total Annual Operating Expenses(5) 1.06%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236.
Semiannual Report | 33
Performance Summary (CONTINUED)
ENDNOTES
SMALLER AND 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. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) 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.
34 | Semiannual 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.
Semiannual Report | 35
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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,199.70 $ 7.93
Hypothetical (5% return before expenses) $1,000 $1,018.00 $ 7.27
CLASS B
Actual $1,000 $1,195.20 $11.95
Hypothetical (5% return before expenses) $1,000 $1,014.32 $10.97
CLASS C
Actual $1,000 $1,196.90 $11.96
Hypothetical (5% return before expenses) $1,000 $1,014.32 $10.97
CLASS R
Actual $1,000 $1,199.70 $ 9.20
Hypothetical (5% return before expenses) $1,000 $1,016.84 $ 8.44
ADVISOR CLASS
Actual $1,000 $1,200.60 $ 6.43
Hypothetical (5% return before expenses) $1,000 $1,019.36 $ 5.90
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.43%; B: 2.16%; C:
2.16%; R: 1.66%; and Advisor: 1.16%), multiplied by the average account
value over the period, multiplied by 184/365 to reflect the one-half year
period.
36 | Semiannual Report
Franklin Small-Mid Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks
long-term capital growth by investing at least 80% of its net assets in equity
securities of small-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 semiannual report for Franklin Small-Mid Cap Growth Fund covers the period
ended October 31, 2009.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Small-Mid Cap Growth Fund - Class A
posted a +17.77% cumulative total return. The Fund underperformed its
benchmarks, the Russell Midcap Growth Index and the Standard & Poor's 500 Index
(S&P 500), which had total returns of +19.25% and +20.04% for the same
period.(2) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 40.
INVESTMENT STRATEGY
We use fundamental, bottom-up research to seek companies meeting our criteria of
growth potential, quality and valuation. In seeking sustainable growth
characteristics, we look for companies we believe can produce sustainable
earnings and cash flow growth, evaluating the long-term market opportunity and
competitive structure of an industry to target leaders and emerging leaders. We
define quality companies as those with strong and improving competitive
positions in attractive markets. We also believe important attributes of quality
(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 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, and
an index is not 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 81.
Semiannual Report | 37
PORTFOLIO BREAKDOWN
Franklin Small-Mid Cap Growth Fund
Based on Total Net Assets as of 10/31/09
Information Technology* 27.8%
Health Care 22.2%
Consumer Discretionary 15.8%
Industrials 12.7%
Energy 8.6%
Financials 5.3%
Consumer Staples 2.6%
Telecommunication Services 2.6%
Materials 2.3%
Short-Term Investments & Other Net Assets 0.1%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio. There are specific
risks to investing in technology company stocks, which can be subject to
abrupt or erratic price movements and have been volatile, especially over
the short term.
are experienced and talented management teams as well as financial strength
reflected in the capital structure, gross and operating margins, free cash flow
generation and returns on capital employed. Our valuation analysis includes a
range of potential outcomes based on an assessment of multiple scenarios. In
assessing value, we consider whether security prices fully reflect the balance
of the sustainable growth opportunities relative to business and financial
risks.
MANAGER'S DISCUSSION
During the six months under review, some of the largest contributors to the
Fund's performance relative to the Russell Midcap Growth Index were
video-conferencing systems provider Tandberg,(3) apparel retailer Urban
Outfitters, and subsea oil and gas equipment maker FMC Technologies.
From a sector perspective, stock selection in consumer discretionary, utilities
and telecommunication services supported the Fund's relative performance. An
underweighted allocation to the consumer discretionary sector, where apparel
retailer Guess? was a key contributor, also helped Fund results. Outside of
these sectors, a major contributor was health care holding Community Health
Systems, an operator of hospitals in rural areas and small cities.
In contrast, key detractors from the Fund's relative performance included Myriad
Genetics, a molecular diagnostic tests designer, Nuance Communications, a speech
and digital imaging software developer, and Allegiant Travel,(3) a leisure
passenger airline.
Stock selection in the information technology, consumer staples and industrials
sectors weighed on relative Fund results. A major detractor in the information
technology sector was government services contractor SAIC, which provides
technical support and project management services to federal and state agencies.
Beverages company Hansen Natural in the consumer staples sector had a negative
impact on relative Fund performance, as did brokerage services provider Charles
Schwab(3) in the financials sector.
3. This holding is not an index component.
38 | Semiannual 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 OCTOBER 31, 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 10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
MasterCard Inc., A 2.0%
INFORMATION TECHNOLOGY
Express Scripts Inc. 1.9%
HEALTH CARE
Nuance Communications Inc. 1.8%
INFORMATION TECHNOLOGY
Silicon Laboratories Inc. 1.8%
INFORMATION TECHNOLOGY
Tandberg ASA (Norway) 1.8%
INFORMATION TECHNOLOGY
Waters Corp. 1.6%
HEALTH CARE
SBA Communications Corp. 1.6%
TELECOMMUNICATION SERVICES
FLIR Systems Inc. 1.6%
INFORMATION TECHNOLOGY
Community Health Systems Inc. 1.6%
HEALTH CARE
Guess? Inc. 1.6%
CONSUMER DISCRETIONARY
Semiannual Report | 39
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FRSGX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$3.97 $26.31 $22.34
CLASS B (SYMBOL: FBSMX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$3.64 $24.65 $21.01
CLASS C (SYMBOL: FRSIX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$3.51 $23.80 $20.29
CLASS R (SYMBOL: FSMRX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$3.84 $25.69 $21.85
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 10/31/09 4/30/09
- ----------------------------- ------ -------- -------
Net Asset Value (NAV) +$4.10 $27.00 $22.90
40 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) +17.77% +18.79% +8.08% +11.17%
Average Annual Total Return(2) +11.01% +11.94% +0.37% +0.47%
Value of $10,000 Investment(3) $11,101 $11,194 $10,186 $10,477
Avg. Ann. Total Return (9/30/09)(4) -7.01% +1.71% +1.91%
Total Annual Operating Expenses(5) 1.11%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (7/1/02)
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) +17.33% +17.90% +4.10% +31.44%
Average Annual Total Return(2) +13.33% +13.90% +0.49% +3.80%
Value of $10,000 Investment(3) $11,333 $11,390 $10,249 $13,144
Avg. Ann. Total Return (9/30/09)(4) -6.02% +1.82% +4.30%
Total Annual Operating Expenses(5) 1.86%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) +17.30% +17.95% +4.05% +3.16%
Average Annual Total Return(2) +16.30% +16.95% +0.80% +0.31%
Value of $10,000 Investment(3) $11,630 $11,695 $10,405 $10,316
Avg. Ann. Total Return (9/30/09)(4) -3.05% +2.13% +1.75%
Total Annual Operating Expenses(5) 1.86%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------- ------------------
Cumulative Total Return(1) +17.57% +18.51% +6.70% +6.29%
Average Annual Total Return(2) +17.57% +18.51% +1.31% +0.78%
Value of $10,000 Investment(3) $11,757 $11,851 $10,670 $10,629
Avg. Ann. Total Return (9/30/09)(4) -1.60% +2.66% +1.21%
Total Annual Operating Expenses(5) 1.36%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- ------- ------------------
Cumulative Total Return(1) +17.90% +19.11% +9.44% +13.93%
Average Annual Total Return(2) +17.90% +19.11% +1.82% +1.31%
Value of $10,000 Investment(3) $11,790 $11,911 $10,944 $11,393
Avg. Ann. Total Return (9/30/09)(4) -1.10% +3.18% +2.77%
Total Annual Operating Expenses(5) 0.86%
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.
Semiannual Report | 41
Performance Summary (CONTINUED)
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. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) 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.
42 | Semiannual 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.
Semiannual 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,177.70 $5.82
Hypothetical (5% return before expenses) $1,000 $1,019.86 $5.40
CLASS B
Actual $1,000 $1,173.30 $9.92
Hypothetical (5% return before expenses) $1,000 $1,016.08 $9.20
CLASS C
Actual $1,000 $1,173.00 $9.91
Hypothetical (5% return before expenses) $1,000 $1,016.08 $9.20
CLASS R
Actual $1,000 $1,175.70 $7.18
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.67
ADVISOR CLASS
Actual $1,000 $1,179.00 $4.45
Hypothetical (5% return before expenses) $1,000 $1,021.12 $4.13
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.06%; B: 1.81%; C: 1.81%; R: 1.31%; and
Advisor: 0.81%), multiplied by the average account value over the period,
multiplied by 184/365 to reflect the one-half year period.
44 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ------------------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 32.46 $ 45.77 $ 45.15 $ 42.45 $ 35.26 $ 33.76
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.03) (0.03) (0.05) 0.06 0.11 (0.10)
Net realized and unrealized gains
(losses) ...................... 5.35 (13.28) 1.43 2.70 7.08 1.60
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations .... 5.32 (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) --(d) --(d) --(d) --(d)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period ...... $ 37.78 $ 32.46 $ 45.77 $ 45.15 $ 42.45 $ 35.26
========== ========== ========== ========== ========== ==========
Total return(e) ..................... 16.39% (29.08)% 2.98% 6.50% 20.39% 4.44%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.00% 1.00% 0.94% 0.96% 0.93% 0.96%
Expenses net of waiver and payments
by affiliates(g) ................. 0.99% 1.00% 0.93% 0.96% 0.93% 0.96%
Net investment income (loss) ........ (0.14)% (0.08)% (0.10)% 0.15% 0.27% (0.29)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $1,667,494 $1,370,025 $2,011,348 $1,977,605 $2,070,364 $1,505,342
Portfolio turnover rate ............. 18.98% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 45
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ------------------------------------------------------
CLASS B (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 30.04 $ 42.66 $ 42.43 $ 40.14 $ 33.59 $ 32.40
------- ------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.15) (0.29) (0.37) (0.23) (0.19) (0.35)
Net realized and unrealized gains
(losses) ...................... 4.94 (12.33) 1.34 2.52 6.74 1.54
------- ------- ------- -------- -------- --------
Total from investment operations .... 4.79 (12.62) 0.97 2.29 6.55 1.19
------- ------- ------- -------- -------- --------
Less distributions from net realized
gains ............................ -- -- (0.74) -- -- --
------- ------- ------- -------- -------- --------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
------- ------- ------- -------- -------- --------
Net asset value, end of period ...... $ 34.83 $ 30.04 $ 42.66 $ 42.43 $ 40.14 $ 33.59
======= ======= ======= ======== ======== ========
Total return(e) ..................... 15.95% (29.58)% 2.19% 5.71% 19.50% 3.67%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.75% 1.75% 1.69% 1.71% 1.68% 1.70%
Expenses net of waiver and payments
by affiliates(g) ................. 1.74% 1.75% 1.68% 1.71% 1.68% 1.70%
Net investment income (loss) ........ (0.89)% (0.83)% (0.85)% (0.60)% (0.48)% (1.03)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $40,610 $42,485 $95,600 $118,806 $143,477 $136,052
Portfolio turnover rate ............. 18.98% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
46 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 --------------------------------------------------------
CLASS C (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 30.10 $ 42.76 $ 42.52 $ 40.22 $ 33.66 $ 32.47
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.15) (0.28) (0.37) (0.23) (0.18) (0.35)
Net realized and unrealized gains
(losses) ...................... 4.95 (12.38) 1.35 2.53 6.74 1.54
-------- -------- -------- -------- -------- --------
Total from investment operations .... 4.80 (12.66) 0.98 2.30 6.56 1.19
-------- -------- -------- -------- -------- --------
Less distributions from net realized
gains ............................ -- -- (0.74) -- -- --
-------- -------- -------- -------- -------- --------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 34.90 $ 30.10 $ 42.76 $ 42.52 $ 40.22 $ 33.66
======== ======== ======== ======== ======== ========
Total return(e) ..................... 15.95% (29.61)% 2.21% 5.72% 19.49% 3.67%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.75% 1.74% 1.69% 1.69% 1.68% 1.71%
Expenses net of waiver and payments
by affiliates(g) ................. 1.74% 1.74% 1.68% 1.69% 1.68% 1.71%
Net investment income (loss) ........ (0.89)% (0.82)% (0.85)% (0.58)% (0.48)% (1.04)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $283,406 $243,308 $375,822 $371,164 $388,478 $296,868
Portfolio turnover rate ............. 18.98% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 47
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------
CLASS R (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 31.91 $ 45.10 $ 44.61 $ 42.01 $ 34.98 $ 33.57
------- ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.07) (0.12) (0.16) (0.04) 0.01 (0.19)
Net realized and unrealized gains
(losses) ...................... 5.25 (13.07) 1.41 2.66 7.02 1.60
------- ------- ------- ------- ------- -------
Total from investment operations .... 5.18 (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) --(d) --(d) --(d) --(d)
------- ------- ------- ------- ------- -------
Net asset value, end of period ...... $ 37.09 $ 31.91 $ 45.10 $ 44.61 $ 42.01 $ 34.98
======= ======= ======= ======= ======= =======
Total return(e) ..................... 16.23% (29.25)% 2.73% 6.25% 20.07% 4.20%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.25% 1.25% 1.19% 1.21% 1.18% 1.21%
Expenses net of waiver and payments
by affiliates(g) ................. 1.24% 1.25% 1.18% 1.21% 1.18% 1.21%
Net investment income (loss) ........ (0.39)% (0.33)% (0.35)% (0.10)% 0.02% (0.54)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $51,488 $43,940 $66,250 $81,398 $91,229 $69,103
Portfolio turnover rate ............. 18.98% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
48 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 --------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005(a)
- ------------- ---------------- -------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 32.82 $ 46.15 $ 45.41 $ 42.63 $ 35.32 $ 33.35
-------- -------- -------- -------- -------- -------
Income from investment operations(b):
Net investment income (loss)(c) .. 0.02 0.07 0.07 0.16 0.23 (0.01)
Net realized and unrealized gains
(losses) ...................... 5.41 (13.40) 1.43 2.71 7.08 1.98
-------- -------- -------- -------- -------- -------
Total from investment operations .... 5.43 (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) --(e) --(e) --(e) --(e)
-------- -------- -------- -------- -------- -------
Net asset value, end of period ...... $ 38.25 $ 32.82 $ 46.15 $ 45.41 $ 42.63 $ 35.32
======== ======== ======== ======== ======== =======
Total return(f) ..................... 16.54% (28.88)% 3.23% 6.77% 20.67% 5.91%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments
by affiliates .................... 0.75% 0.75% 0.69% 0.71% 0.68% 0.71%
Expenses net of waiver and payments
by affiliates(h) ................. 0.74% 0.75% 0.68% 0.71% 0.68% 0.71%
Net investment income (loss) ........ 0.11% 0.17% 0.15% 0.40% 0.52% (0.04)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $690,592 $364,798 $348,245 $297,856 $209,680 $71,193
Portfolio turnover rate ............. 18.98% 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 49
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
COMMON STOCKS 97.8%
AUTOMOBILES & COMPONENTS 1.3%
Johnson Controls Inc. ...................................................................... 1,500,000 $ 35,879,999
--------------
BANKS 0.8%
Wells Fargo & Co. .......................................................................... 750,000 20,640,000
--------------
CAPITAL GOODS 4.4%
Danaher Corp. .............................................................................. 425,000 28,997,750
Flowserve Corp. ............................................................................ 300,000 29,463,000
(a) Jacobs Engineering Group Inc. .............................................................. 450,000 19,030,500
Precision Castparts Corp. .................................................................. 275,000 26,270,750
United Technologies Corp. .................................................................. 250,000 15,362,500
--------------
119,124,500
--------------
COMMERCIAL & PROFESSIONAL SERVICES 1.4%
(a) Stericycle Inc. ............................................................................ 650,000 34,040,500
(a) Verisk Analytics Inc., A ................................................................... 166,600 4,569,838
--------------
38,610,338
--------------
CONSUMER DURABLES & APPAREL 1.0%
NIKE Inc., B ............................................................................... 450,000 27,981,000
--------------
DIVERSIFIED FINANCIALS 2.5%
BlackRock Inc. ............................................................................. 145,000 31,391,050
JPMorgan Chase & Co. ....................................................................... 331,700 13,855,109
T. Rowe Price Group Inc. ................................................................... 500,000 24,365,000
--------------
69,611,159
--------------
ENERGY 7.0%
(a) Concho Resources Inc. ...................................................................... 587,600 22,393,436
(a) FMC Technologies Inc. ...................................................................... 675,000 35,505,000
Occidental Petroleum Corp. ................................................................. 450,000 34,146,000
(a) Petrohawk Energy Corp. ..................................................................... 1,150,000 27,048,000
Range Resources Corp. ...................................................................... 450,000 22,522,500
Smith International Inc. ................................................................... 750,000 20,797,500
XTO Energy Inc. ............................................................................ 675,000 28,053,000
--------------
190,465,436
--------------
FOOD & STAPLES RETAILING 2.2%
CVS Caremark Corp. ......................................................................... 1,700,000 60,010,000
--------------
FOOD, BEVERAGE & TOBACCO 2.1%
(a) Hansen Natural Corp. ....................................................................... 750,000 27,112,500
PepsiCo Inc. ............................................................................... 500,000 30,275,000
--------------
57,387,500
--------------
HEALTH CARE EQUIPMENT & SERVICES 8.7%
Aetna Inc. ................................................................................. 450,000 11,713,500
Baxter International Inc. .................................................................. 450,000 24,327,000
C. R. Bard Inc. ............................................................................ 330,000 24,773,100
(a) DaVita Inc. ................................................................................ 400,000 21,212,000
(a) Express Scripts Inc. ....................................................................... 550,000 43,956,000
(a) Intuitive Surgical Inc. .................................................................... 140,000 34,489,000
Stryker Corp. .............................................................................. 450,000 20,700,000
50 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES (CONTINUED)
(a) Varian Medical Systems Inc. ................................................................ 500,000 $ 20,490,000
(a) VCA Antech Inc. ............................................................................ 1,500,000 35,730,000
--------------
237,390,600
--------------
HOUSEHOLD & PERSONAL PRODUCTS 1.6%
Clorox Co. ................................................................................. 240,000 14,215,200
The Procter & Gamble Co. ................................................................... 500,000 29,000,000
--------------
43,215,200
--------------
INSURANCE 2.3%
Aflac Inc. ................................................................................. 1,000,000 41,490,000
Assurant Inc. .............................................................................. 700,000 20,951,000
--------------
62,441,000
--------------
MATERIALS 5.1%
Celanese Corp., A .......................................................................... 1,000,000 27,450,000
Ecolab Inc. ................................................................................ 1,100,000 48,356,000
Praxair Inc. ............................................................................... 800,000 63,552,000
--------------
139,358,000
--------------
MEDIA 1.0%
(a) The DIRECTV Group Inc. ..................................................................... 500,000 13,150,000
The Walt Disney Co. ........................................................................ 500,000 13,685,000
--------------
26,835,000
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 10.0%
Abbott Laboratories ........................................................................ 450,000 22,756,500
(a) Celgene Corp. .............................................................................. 825,000 42,116,250
(a) Gilead Sciences Inc. ....................................................................... 800,000 34,040,000
Johnson & Johnson .......................................................................... 450,000 26,572,500
(a) Life Technologies Corp. .................................................................... 475,000 22,405,750
(a) Onyx Pharmaceuticals Inc. .................................................................. 600,000 15,960,000
Schering-Plough Corp. ...................................................................... 2,400,000 67,680,000
(a) Talecris Biotherapeutics Holdings Corp. .................................................... 697,700 13,995,862
(a) Waters Corp. ............................................................................... 500,000 28,715,000
--------------
274,241,862
--------------
RETAILING 2.6%
(a) Amazon.com Inc. ............................................................................ 300,000 35,643,000
(a) Kohl's Corp. ............................................................................... 260,000 14,877,200
(a) Priceline.com Inc. ......................................................................... 135,000 21,301,650
--------------
71,821,850
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.4%
Altera Corp. ............................................................................... 1,050,000 20,779,500
Analog Devices Inc. ........................................................................ 800,000 20,504,000
Intel Corp. ................................................................................ 1,050,000 20,065,500
(a) Lam Research Corp. ......................................................................... 900,000 30,348,000
Microchip Technology Inc. .................................................................. 1,250,000 29,950,000
--------------
121,647,000
--------------
Semiannual Report | 51
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
SOFTWARE & SERVICES 18.7%
(a) Activision Blizzard Inc. ................................................................... 2,300,000 $ 24,909,000
(a) Adobe Systems Inc. ......................................................................... 950,000 31,293,000
(a) Alliance Data Systems Corp. ................................................................ 475,000 26,115,500
(a) Autodesk Inc. .............................................................................. 600,000 14,958,000
(a) Concur Technologies Inc. ................................................................... 550,000 19,602,000
FactSet Research Systems Inc. .............................................................. 350,000 22,417,500
(a) Google Inc., A ............................................................................. 140,000 75,056,800
MasterCard Inc., A ......................................................................... 300,000 65,706,000
(a) McAfee Inc. ................................................................................ 750,000 31,410,000
(a) Nuance Communications Inc. ................................................................. 1,900,000 24,909,000
Oracle Corp. ............................................................................... 2,000,000 42,200,000
Paychex Inc. ............................................................................... 750,000 21,307,500
(a) SAIC Inc. .................................................................................. 700,000 12,397,000
(a) Salesforce.com Inc. ........................................................................ 300,000 17,025,000
(a) Sybase Inc. ................................................................................ 700,000 27,692,000
Visa Inc., A ............................................................................... 700,000 53,032,000
--------------
510,030,300
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 16.1%
(a) Apple Inc. ................................................................................. 460,000 86,710,000
(a) Cisco Systems Inc. ......................................................................... 3,400,000 77,690,000
(a) FLIR Systems Inc. .......................................................................... 1,450,000 40,324,500
Hewlett-Packard Co. ........................................................................ 1,225,000 58,138,500
(a) Juniper Networks Inc. ...................................................................... 850,000 21,683,500
National Instruments Corp. ................................................................. 750,000 20,025,000
(a) NetApp Inc. ................................................................................ 1,750,000 47,337,500
QUALCOMM Inc. .............................................................................. 1,850,000 76,608,500
(a) Trimble Navigation Ltd. .................................................................... 600,000 12,582,000
--------------
441,099,500
--------------
TELECOMMUNICATION SERVICES 2.4%
(a) American Tower Corp., A .................................................................... 1,350,000 49,707,000
(a,b) Anda Networks .............................................................................. 36,443 28,061
(a) NII Holdings Inc. .......................................................................... 600,000 16,158,000
--------------
65,893,061
--------------
TRANSPORTATION 2.2%
C.H. Robinson Worldwide Inc. ............................................................... 500,000 27,555,000
Expeditors International of Washington Inc. ................................................ 1,000,000 32,220,000
--------------
59,775,000
--------------
TOTAL COMMON STOCKS (COST $2,222,150,589) 2,673,458,305
--------------
PREFERRED STOCKS (COST $9,999,998) 0.4%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.4%
(a,b) FibroGen Inc., pfd., E ..................................................................... 2,227,171 10,155,900
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,232,150,587) 2,683,614,205
--------------
52 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
SHORT TERM INVESTMENTS (COST $38,455,621) 1.4%
MONEY MARKET FUNDS 1.4%
(c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................................ 38,455,621 $ 38,455,621
--------------
TOTAL INVESTMENTS (COST $2,270,606,208) 99.6% .............................................. 2,722,069,826
OTHER ASSETS, LESS LIABILITIES 0.4% ........................................................ 11,520,933
--------------
NET ASSETS 100.0% .......................................................................... $2,733,590,759
==============
(a) Non-income producing.
(b) See Note 8 regarding restricted securities.
(c) See Note 7 regarding investments in the 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.
Semiannual Report | 53
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED
SIX MONTHS ENDED APRIL 30,
OCTOBER 31, 2009 --------------------
CLASS A (UNAUDITED) 2009 2008(a)
- ------- ---------------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 6.27 $ 8.69 $ 10.00
------ ------- -------
Income from investment operations(b):
Net investment income (loss)(c) ................... --(d) 0.06 0.03
Net realized and unrealized gains (losses) ........ 1.47 (2.36) (1.34)
------ ------- -------
Total from investment operations ..................... 1.47 (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 period ....................... $ 7.74 $ 6.27 $ 8.69
====== ======= =======
Total return(e) ...................................... 23.44% (26.07)% (13.10)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates .... 2.37% 3.99% 5.48%
Expenses net of waiver and payments by affiliates .... 1.22%(g) 1.17%(g) 1.22%
Net investment income (loss) ......................... (0.09)% 0.91% 0.91%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $8,169 $ 4,889 $ 4,652
Portfolio turnover rate .............................. 17.62% 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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
54 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED
SIX MONTHS ENDED APRIL 30,
OCTOBER 31, 2009 --------------------
CLASS C (UNAUDITED) 2009 2008(a)
- ------- ---------------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 6.24 $ 8.67 $ 10.00
------ ------- -------
Income from investment operations(b):
Net investment income (loss)(c) ................... (0.03) --(d) 0.01
Net realized and unrealized gains (losses) ........ 1.46 (2.33) (1.34)
------ ------- -------
Total from investment operations ..................... 1.43 (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 period ....................... $ 7.67 $ 6.24 $ 8.67
====== ======= =======
Total return(e) ...................................... 22.92% (26.56)% (13.30)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates .... 3.04% 4.67% 6.11%
Expenses net of waiver and payments by affiliates .... 1.89%(g) 1.85%(g) 1.85%
Net investment income (loss) ......................... (0.76)% 0.23% 0.28%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 904 $ 106 $ 41
Portfolio turnover rate .............................. 17.62% 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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 55
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED
SIX MONTHS ENDED APRIL 30,
OCTOBER 31, 2009 -------------------
CLASS R (UNAUDITED) 2009 2008(a)
- ------- ---------------- ------ -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 6.27 $ 8.68 $10.00
------ ------ ------
Income from investment operations(b):
Net investment income (loss)(c) ................... (0.01) 0.05 0.03
Net realized and unrealized gains (losses) ........ 1.47 (2.36) (1.35)
------ ------ ------
Total from investment operations ..................... 1.46 (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 period ....................... $ 7.73 $ 6.27 $ 8.68
====== ====== ======
Total return(d) ...................................... 23.29% (26.30)% (13.20)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates .... 2.54% 4.21% 5.65%
Expenses net of waiver and payments by affiliates .... 1.39%(f) 1.39%(f) 1.39%
Net investment income (loss) ......................... (0.26)% 0.69% 0.74%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 10 $ 6 $ 9
Portfolio turnover rate .............................. 17.62% 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
56 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED
SIX MONTHS ENDED APRIL 30,
OCTOBER 31, 2009 -------------------
ADVISOR CLASS (UNAUDITED) 2009 2008(a)
- ------------- ---------------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 6.28 $ 8.70 $ 10.00
------ ------- -------
Income from investment operations(b):
Net investment income(c) .......................... 0.01 0.08 0.04
Net realized and unrealized gains (losses) ........ 1.47 (2.37) (1.34)
------ ------- -------
Total from investment operations ..................... 1.48 (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 period ....................... $ 7.76 $ 6.28 $ 8.70
====== ======= =======
Total return(d) ...................................... 23.57% (25.93)% (13.00)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates .... 2.04% 3.71% 5.15%
Expenses net of waiver and payments by affiliates .... 0.89%(f) 0.89%(f) 0.89%
Net investment income ................................ 0.24% 1.19% 1.24%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 702 $ 167 $ 171
Portfolio turnover rate .............................. 17.62% 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 57
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
--------------------------------- ------------- ----------- --------------
COMMON STOCKS 92.8%
CONSUMER DISCRETIONARY 11.9%
(a) Apollo Group Inc., A ....................................................... United States 4,050 $ 231,255
CBS Corp., B ............................................................... United States 4,920 57,908
Harman International Industries Inc. ....................................... United States 4,400 165,484
The Sherwin-Williams Co. ................................................... United States 6,060 345,663
Target Corp. ............................................................... United States 5,110 247,477
Weight Watchers International Inc. ......................................... United States 4,420 117,174
--------------
1,164,961
--------------
CONSUMER STAPLES 8.5%
Corn Products International Inc. ........................................... United States 4,090 115,256
CVS Caremark Corp. ......................................................... United States 13,000 458,900
(a) Hansen Natural Corp. ....................................................... United States 7,030 254,135
--------------
828,291
--------------
ENERGY 9.6%
Marathon Oil Corp. ......................................................... United States 10,810 345,596
(a) Petrohawk Energy Corp. ..................................................... United States 8,880 208,858
Petroplus Holdings AG ...................................................... Switzerland 15,223 333,244
(a) SEACOR Holdings Inc. ....................................................... United States 660 53,638
--------------
941,336
--------------
FINANCIALS 10.4%
(a) Berkshire Hathaway Inc., B ................................................. United States 150 492,450
CapitalSource Inc. ......................................................... United States 14,100 50,196
Legg Mason Inc. ............................................................ United States 3,280 95,481
U.S. Bancorp ............................................................... United States 16,480 382,665
--------------
1,020,792
--------------
HEALTH CARE 19.7%
Aetna Inc. ................................................................. United States 11,950 311,059
Alcon Inc. ................................................................. Switzerland 870 124,227
Merck & Co. Inc. ........................................................... United States 9,980 308,681
Pharmaceutical Product Development Inc. .................................... United States 8,910 192,011
Roche Holding AG ........................................................... Switzerland 3,120 500,842
Schering-Plough Corp. ...................................................... United States 17,400 490,680
--------------
1,927,500
--------------
INDUSTRIALS 11.4%
3M Co. ..................................................................... United States 2,760 203,053
Precision Castparts Corp. .................................................. United States 3,310 316,205
Republic Services Inc. ..................................................... United States 7,500 194,325
Rockwell Collins Inc. ...................................................... United States 4,350 219,153
(a) Ryanair Holdings PLC, ADR .................................................. Ireland 6,686 182,327
--------------
1,115,063
--------------
58 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
--------------------------------- ------------- ----------- --------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY 14.4%
(a) Apple Inc. ................................................................. United States 420 $ 79,170
(a) Autodesk Inc. .............................................................. United States 5,860 146,090
Corning Inc. ............................................................... United States 27,373 399,920
MasterCard Inc., A ......................................................... United States 1,760 385,475
Maxim Integrated Products Inc. ............................................. United States 23,850 397,579
--------------
1,408,234
--------------
MATERIALS 4.2%
Celanese Corp., A .......................................................... United States 15,010 412,024
--------------
TELECOMMUNICATION SERVICES 2.7%
(a) NII Holdings Inc. .......................................................... United States 9,950 267,954
--------------
TOTAL COMMON STOCKS (COST $8,412,984) ...................................... 9,086,155
--------------
CONVERTIBLE PREFERRED STOCKS (COST $84,854) 1.5%
HEALTH CARE 1.5%
Mylan Inc., 6.50%, cvt. pfd. ............................................... United States 140 144,235
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $8,497,838) .......... 9,230,390
--------------
SHORT TERM INVESTMENTS (COST $1,000,807) 10.2%
MONEY MARKET FUNDS 10.2%
(b) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................ United States 1,000,807 1,000,807
--------------
TOTAL INVESTMENTS (COST $9,498,645) 104.5% ................................. 10,231,197
OTHER ASSETS, LESS LIABILITIES (4.5)% ...................................... (445,574)
--------------
NET ASSETS 100.0% .......................................................... $ 9,785,623
==============
See Abbreviations on page 112.
(a) Non-income producing.
(b) See Note 7 regarding investments in the 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.
Semiannual Report | 59
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 13.88 $ 20.06 $ 18.54 $ 18.30 $ 13.33 $ 12.57
-------- ------- -------- -------- -------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.06) (0.14) (0.15) (0.12) (0.15) (0.14)
Net realized and unrealized gains
(losses) ...................... 2.65 (6.04) 1.67 0.36 5.12 0.90
-------- ------- -------- -------- -------- -------
Total from investment operations .... 2.59 (6.18) 1.52 0.24 4.97 0.76
-------- ------- -------- -------- -------- -------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
-------- ------- -------- -------- -------- -------
Net asset value, end of period ...... $ 16.47 $ 13.88 $ 20.06 $ 18.54 $ 18.30 $ 13.33
======== ======= ======== ======== ======== =======
Total return(e) ..................... 18.66% (30.81)% 8.20% 1.31% 37.28% 6.05%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.31% 1.32% 1.27% 1.38% 1.39% 1.51%
Expenses net of waiver and payments
by affiliates(g) ................. 1.24% 1.32% 1.27% 1.38% 1.39% 1.51%
Net investment income (loss) ........ (0.79)% (0.89)% (0.77)% (0.70)% (0.92)% (1.05)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $146,076 $99,939 $137,313 $105,407 $113,713 $80,611
Portfolio turnover rate ............. 37.22% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
60 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------
CLASS B (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $13.02 $ 18.95 $ 17.64 $ 17.53 $ 12.87 $ 12.22
------ ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.11) (0.24) (0.28) (0.23) (0.26) (0.23)
Net realized and unrealized gains
(losses) ...................... 2.49 (5.69) 1.59 0.34 4.92 0.88
------ ------- ------- ------- ------- -------
Total from investment operations .... 2.38 (5.93) 1.31 0.11 4.66 0.65
------ ------- ------- ------- ------- -------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
------ ------- ------- ------- ------- -------
Net asset value, end of period ...... $15.40 $ 13.02 $ 18.95 $ 17.64 $ 17.53 $ 12.87
====== ======= ======= ======= ======= =======
Total return(e) ..................... 18.28% (31.29)% 7.43% 0.63% 36.21% 5.32%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 2.03% 2.02% 1.99% 2.08% 2.13% 2.21%
Expenses net of waiver and payments
by affiliates(g) ................. 1.96% 2.02% 1.99% 2.08% 2.13% 2.21%
Net investment income (loss) ........ (1.51)% (1.59)% (1.49)% (1.40)% (1.66)% (1.75)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $5,726 $ 5,124 $11,528 $15,638 $19,508 $17,017
Portfolio turnover rate ............. 37.22% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 61
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------
CLASS C (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 12.99 $ 18.91 $ 17.61 $ 17.49 $ 12.84 $ 12.19
------- ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.11) (0.23) (0.28) (0.23) (0.26) (0.23)
Net realized and unrealized gains
(losses) ...................... 2.48 (5.69) 1.58 0.35 4.91 0.88
------- ------- ------- ------- ------- -------
Total from investment operations .... 2.37 (5.92) 1.30 0.12 4.65 0.65
------- ------- ------- ------- ------- -------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
------- ------- ------- ------- ------- -------
Net asset value, end of period ...... $ 15.36 $ 12.99 $ 18.91 $ 17.61 $ 17.49 $ 12.84
======= ======= ======= ======= ======= =======
Total return(e) ..................... 18.24% (31.31)% 7.38% 0.69% 36.21% 5.33%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 2.04% 2.03% 1.99% 2.09% 2.14% 2.22%
Expenses net of waiver and payments
by affiliates(g) ................. 1.97% 2.03% 1.99% 2.09% 2.14% 2.22%
Net investment income (loss) ........ (1.52)% (1.60)% (1.49)% (1.41)% (1.67)% (1.76)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $38,258 $27,519 $40,253 $31,518 $31,167 $24,450
Portfolio turnover rate ............. 37.22% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
62 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------
CLASS R (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 13.67 $ 19.80 $ 18.33 $ 18.12 $ 13.24 $ 12.51
------- ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.08) (0.17) (0.20) (0.16) (0.19) (0.17)
Net realized and unrealized gains
(losses) ......................... 2.61 (5.96) 1.67 0.37 5.07 0.90
------- ------- ------- ------- ------- -------
Total from investment operations .... 2.53 (6.13) 1.47 0.21 4.88 0.73
------- ------- ------- ------- ------- -------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
------- ------- ------- ------- ------- -------
Net asset value, end of period ...... $ 16.20 $ 13.67 $ 19.80 $ 18.33 $ 18.12 $ 13.24
======= ======= ======= ======= ======= =======
Total return(e) ..................... 18.51% (30.96)% 8.02% 1.16% 36.86% 5.84%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.54% 1.54% 1.49% 1.59% 1.64% 1.72%
Expenses net of waiver and payments
by affiliates(g) ................. 1.47% 1.54% 1.49% 1.59% 1.64% 1.72%
Net investment income (loss) ........ (1.02)% (1.11)% (0.99)% (0.91)% (1.17)% (1.26)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $11,361 $ 7,320 $ 7,863 $ 7,413 $ 5,171 $ 3,041
Portfolio turnover rate ............. 37.22% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -----------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005
- ------------- ---------------- -------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 14.30 $ 20.60 $ 18.99 $ 18.68 $ 13.58 $ 12.77
-------- -------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.04) (0.10) (0.10) (0.07) (0.11) (0.10)
Net realized and unrealized gains
(losses) ...................... 2.74 (6.20) 1.71 0.38 5.21 0.91
-------- -------- -------- ------- ------- -------
Total from investment operations .... 2.70 (6.30) 1.61 0.31 5.10 0.81
-------- -------- -------- ------- ------- -------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- ------- ------- -------
Net asset value, end of period ...... $ 17.00 $ 14.30 $ 20.60 $ 18.99 $ 18.68 $ 13.58
======== ======== ======== ======= ======= =======
Total return(e) ..................... 18.88% (30.58)% 8.48% 1.66% 37.56% 6.34%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.04% 1.04% 0.99% 1.09% 1.14% 1.22%
Expenses net of waiver and payments
by affiliates(g) ................. 0.97% 1.04% 0.99% 1.09% 1.14% 1.22%
Net investment income (loss) ........ (0.52)% (0.61)% (0.49)% (0.41)% (0.67)% (0.76)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $186,001 $141,010 $101,885 $85,486 $36,744 $22,731
Portfolio turnover rate ............. 37.22% 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) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
64 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
SHARES/
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY WARRANTS VALUE
---------------------------------- ------------- ----------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 99.0%
CONSUMER DISCRETIONARY 10.8%
(a) Amazon.com Inc. ............................................................ United States 42,500 $ 5,049,425
(a) Capella Education Co. ...................................................... United States 27,700 1,908,530
Guess? Inc. ................................................................ United States 211,500 7,730,325
(a) Kohl's Corp. ............................................................... United States 68,300 3,908,126
NIKE Inc., B ............................................................... United States 41,800 2,599,124
(a) Priceline.com Inc. ......................................................... United States 38,200 6,027,578
Strayer Education Inc. .................................................... United States 20,100 4,079,697
(a) Urban Outfitters Inc. ...................................................... United States 228,400 7,167,192
(a) WMS Industries Inc. ........................................................ United States 85,700 3,426,286
--------------
41,896,283
--------------
CONSUMER STAPLES 1.2%
(a) Hansen Natural Corp. ....................................................... United States 132,300 4,782,645
--------------
ENERGY 9.1%
(a) Concho Resources Inc. ...................................................... United States 155,700 5,933,727
(a) Continental Resources Inc. ................................................. United States 144,400 5,373,124
(a) FMC Technologies Inc. ...................................................... United States 124,680 6,558,168
(a) Petrohawk Energy Corp. ..................................................... United States 247,800 5,828,256
Schlumberger Ltd. .......................................................... United States 91,780 5,708,716
(a) Weatherford International Ltd. ............................................. United States 326,000 5,714,780
--------------
35,116,771
--------------
FINANCIALS 5.1%
BlackRock Inc. ............................................................. United States 37,580 8,135,694
The Charles Schwab Corp. ................................................... United States 159,700 2,769,198
Lazard Ltd., LP ............................................................ United States 74,800 2,823,700
(a) MSCI Inc., A ............................................................... United States 99,300 3,018,720
W. R. Berkley Corp. ........................................................ United States 122,200 3,020,784
--------------
19,768,096
--------------
HEALTH CARE 20.2%
Aetna Inc. ................................................................. United States 192,700 5,015,981
Allergan Inc. .............................................................. United States 66,100 3,718,125
(a) Athenahealth Inc. .......................................................... United States 76,000 2,858,360
Baxter International Inc. .................................................. United States 36,300 1,962,378
(a) BioMarin Pharmaceutical Inc. ............................................... United States 235,700 3,667,492
(a) Celgene Corp. .............................................................. United States 136,500 6,968,325
(a) Express Scripts Inc. ....................................................... United States 38,100 3,044,952
(a) Gilead Sciences Inc. ....................................................... United States 207,160 8,814,658
(a) Illumina Inc. .............................................................. United States 120,500 3,868,050
(a) Intuitive Surgical Inc. .................................................... United States 25,200 6,208,020
(a) Life Technologies Corp. .................................................... United States 174,400 8,226,448
(a) Myriad Genetics Inc. ....................................................... United States 198,380 4,816,666
(a) Onyx Pharmaceuticals Inc. .................................................. United States 74,753 1,988,430
Perrigo Co. ................................................................ United States 184,666 6,867,729
Pharmaceutical Product Development Inc. .................................... United States 209,200 4,508,260
(a) Talecris Biotherapeutics Holdings Corp. .................................... United States 147,700 2,962,862
(a) Varian Medical Systems Inc. ................................................ United States 64,800 2,655,504
--------------
78,152,240
--------------
Semiannual Report | 65
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
SHARES/
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY WARRANTS VALUE
---------------------------------- ------------- ----------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INDUSTRIALS 8.5%
ABB Ltd., ADR .............................................................. Switzerland 302,200 $ 5,599,766
AMETEK Inc. ................................................................ United States 55,700 1,943,373
C.H. Robinson Worldwide Inc. ............................................... United States 112,530 6,201,528
(a) Digitalglobe Inc. .......................................................... United States 48,100 1,074,073
Expeditors International of Washington Inc. ................................ United States 126,100 4,062,942
Flowserve Corp. ............................................................ United States 55,100 5,411,371
Precision Castparts Corp. .................................................. United States 61,030 5,830,196
(a) Ryanair Holdings PLC, ADR .................................................. Ireland 64,300 1,753,461
(a) Verisk Analytics Inc., A ................................................... United States 38,200 1,047,826
--------------
32,924,536
--------------
INFORMATION TECHNOLOGY 35.4%
(a) Activision Blizzard Inc. ................................................... United States 22,000 238,260
(a) Adobe Systems Inc. ......................................................... United States 119,900 3,949,506
(a) Alliance Data Systems Corp. ................................................ United States 95,300 5,239,594
(a) ANSYS Inc. ................................................................. United States 102,000 4,139,160
(a) Apple Inc. ................................................................. United States 70,400 13,270,400
(a) Cavium Networks Inc. ....................................................... United States 147,600 2,798,496
(a) Cisco Systems Inc. ......................................................... United States 203,700 4,654,545
(a) Concur Technologies Inc. ................................................... United States 153,650 5,476,086
(a,b) Dilithium Networks Inc., wts., 12/31/09 .................................... United States 12,447 30
(a) Dolby Laboratories Inc., A ................................................. United States 53,100 2,227,014
(a) F5 Networks Inc. ........................................................... United States 92,700 4,161,303
(a) FLIR Systems Inc. .......................................................... United States 362,600 10,083,906
(a) FormFactor Inc. ............................................................ United States 113,600 1,930,064
(a) Google Inc., A ............................................................. United States 17,990 9,644,798
(a) Juniper Networks Inc. ...................................................... United States 200,900 5,124,959
MasterCard Inc., A ......................................................... United States 57,000 12,484,140
National Instruments Corp. ................................................. United States 72,200 1,927,740
(a) NetApp Inc. ................................................................ United States 141,300 3,822,165
(a) Netlogic Microsystems Inc. ................................................. United States 44,500 1,691,445
(a) Palm Inc. .................................................................. United States 195,900 2,274,399
QUALCOMM Inc. .............................................................. United States 195,480 8,094,827
(a) Research In Motion Ltd. .................................................... Canada 32,500 1,908,725
(a) Salesforce.com Inc. ........................................................ United States 103,600 5,879,300
(a) Silicon Laboratories Inc. .................................................. United States 87,200 3,653,680
(a) Solarwinds Inc. ............................................................ United States 85,801 1,527,258
(a) Sybase Inc. ................................................................ United States 49,900 1,974,044
Tandberg ASA .............................................................. Norway 256,700 6,886,253
(a) Trimble Navigation Ltd. .................................................... United States 230,640 4,836,521
(a) ViaSat Inc. ................................................................ United States 111,400 3,247,310
Visa Inc., A ............................................................... United States 54,000 4,091,040
--------------
137,236,968
--------------
MATERIALS 4.4%
Celanese Corp., A .......................................................... United States 145,600 3,996,720
Ecolab Inc. ................................................................ United States 80,000 3,516,800
Monsanto Co. ............................................................... United States 48,500 3,258,230
66 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
SHARES/
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY WARRANTS VALUE
---------------------------------- ------------- ----------- --------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MATERIALS (CONTINUED)
The Mosaic Co. ............................................................. United States 51,700 $ 2,415,941
Praxair Inc. ............................................................... United States 49,000 3,892,560
--------------
17,080,251
--------------
TELECOMMUNICATION SERVICES 4.3%
(a) NII Holdings Inc. .......................................................... United States 245,880 6,621,548
(a) SBA Communications Corp. ................................................... United States 353,560 9,973,928
--------------
16,595,476
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $309,377,982) ...................................................... 383,553,266
--------------
PREFERRED STOCKS (COST $873,300) 0.0%(c)
INFORMATION TECHNOLOGY 0.0% (c)
(a,b) Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ......... United States 374,806 --
--------------
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 29,002
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $310,265,783) ...................................................... 383,582,268
--------------
SHARES
-----------
SHORT TERM INVESTMENTS (COST $8,671,192) 2.2%
MONEY MARKET FUNDS 2.2%
(d) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................ United States 8,671,192 8,671,192
--------------
TOTAL INVESTMENTS (COST $318,936,975) 101.2% ............................... 392,253,460
OTHER ASSETS, LESS LIABILITIES (1.2)% ...................................... (4,831,874)
--------------
NET ASSETS 100.0% .......................................................... $ 387,421,586
==============
See Abbreviations on page 112.
(a) Non-income producing.
(b) See Note 8 regarding restricted securities.
(c) Rounds to less than 0.1% of net assets.
(d) See Note 7 regarding investments in the 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.
Semiannual Report | 67
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ------------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 6.41 $ 9.09 $ 13.05 $ 13.90 $ 10.63 $ 10.55
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.05) (0.08) (0.09) (0.10) (0.08) (0.09)
Net realized and unrealized gains
(losses) ...................... 1.33 (2.53) (1.59) 0.58 3.35 0.17
-------- -------- -------- -------- -------- --------
Total from investment operations .... 1.28 (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) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 7.69 $ 6.41 $ 9.09 $ 13.05 $ 13.90 $ 10.63
======== ======== ======== ======== ======== ========
Total return(e) ..................... 19.97% (28.54)% (14.73)% 4.02% 30.76% 0.76%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.45% 1.34% 1.17% 1.20% 1.16% 1.15%
Expenses net of waiver and payments
by affiliates .................... 1.43% 1.34%(g) 1.17%(g) 1.20%(g) 1.16%(g) 1.15%(g)
Net investment income (loss) ........ (1.32)% (1.07)% (0.72)% (0.77)% (0.61)% (0.84)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $149,591 $123,037 $274,142 $549,733 $693,084 $765,216
Portfolio turnover rate ............. 32.16% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
68 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------------
CLASS B (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 5.89 $ 8.43 $ 12.35 $ 13.32 $ 10.26 $ 10.27
------ ------- ------- ------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.07) (0.12) (0.16) (0.18) (0.16) (0.17)
Net realized and unrealized gains
(losses) ...................... 1.22 (2.35) (1.48) 0.54 3.22 0.16
------ ------- ------- ------- -------- --------
Total from investment operations .... 1.15 (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) --(d) --(d) --(d) --(d)
------ ------- ------- ------- -------- --------
Net asset value, end of period ...... $ 7.04 $ 5.89 $ 8.43 $ 12.35 $ 13.32 $ 10.26
====== ======= ======= ======= ======== ========
Total return(e) ..................... 19.52% (29.11)% (15.27)% 3.27% 29.82% (0.10)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 2.18% 2.04% 1.92% 1.96% 1.91% 1.91%
Expenses net of waiver and payments
by affiliates .................... 2.16% 2.04%(g) 1.92%(g) 1.96%(g) 1.91%(g) 1.91%(g)
Net investment income (loss) ........ (2.05)% (1.77)% (1.47)% (1.53)% (1.36)% (1.60)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $9,743 $15,159 $52,465 $85,684 $111,458 $105,070
Portfolio turnover rate ............. 32.16% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 69
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ----------------------------------------------------------
CLASS C (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 5.89 $ 8.43 $ 12.36 $ 13.33 $ 10.27 $ 10.27
------- ------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.07) (0.12) (0.16) (0.18) (0.16) (0.17)
Net realized and unrealized gains
(losses) ...................... 1.23 (2.35) (1.49) 0.54 3.22 0.17
------- ------- ------- -------- -------- --------
Total from investment operations .... 1.16 (2.47) (1.65) 0.36 3.06 --
------- ------- ------- -------- -------- --------
Less distributions from net realized
gains ............................ -- (0.07) (2.28) (1.33) -- --
------- ------- ------- -------- -------- --------
Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) --(d)
------- ------- ------- -------- -------- --------
Net asset value, end of period ...... $ 7.05 $ 5.89 $ 8.43 $ 12.36 $ 13.33 $ 10.27
======= ======= ======= ======== ======== ========
Total return(e) ..................... 19.69% (29.11)% (15.35)% 3.27% 29.80% --%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 2.18% 2.04% 1.92% 1.95% 1.92% 1.91%
Expenses net of waiver and payments
by affiliates .................... 2.16% 2.04%(g) 1.92%(g) 1.95%(g) 1.92%(g) 1.91%(g)
Net investment income (loss) ........ (2.05)% (1.77)% (1.47)% (1.52)% (1.37)% (1.60)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $45,758 $40,180 $75,846 $120,900 $170,159 $164,117
Portfolio turnover rate ............. 32.16% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
70 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ----------------------------------------------------
CLASS R (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------ ------ ------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 6.26 $ 8.91 $ 12.86 $13.75 $10.54 $10.49
------ ------- ------- ------ ------ ------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.06) (0.09) (0.11) (0.13) (0.11) (0.12)
Net realized and unrealized gains
(losses) ...................... 1.31 (2.49) (1.56) 0.57 3.32 0.17
------ ------- ------- ------ ------ ------
Total from investment operations .... 1.25 (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) --(d) --(d) --(d) --(d)
------ ------- ------- ------ ------ ------
Net asset value, end of period ...... $ 7.51 $ 6.26 $ 8.91 $12.86 $13.75 $10.54
====== ======= ======= ====== ====== ======
Total return(e) ..................... 19.97% (28.78)% (14.87)% 3.77% 30.46% 0.48%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.68% 1.54% 1.42% 1.46% 1.42% 1.41%
Expenses net of waiver and payments
by affiliates .................... 1.66% 1.54%(g) 1.42%(g) 1.46%(g) 1.42%(g) 1.41%(g)
Net investment income (loss) ........ (1.55)% (1.27)% (0.97)% (1.03)% (0.87)% (1.10)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $2,109 $ 1,912 $ 3,166 $5,759 $6,328 $4,392
Portfolio turnover rate ............. 32.16% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 71
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -----------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005
- ------------- ---------------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 6.63 $ 9.37 $ 13.34 $ 14.15 $ 10.79 $ 10.69
------- ------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.04) (0.06) (0.05) (0.07) (0.05) (0.07)
Net realized and unrealized gains
(losses) ...................... 1.37 (2.61) (1.64) 0.59 3.41 0.17
------- ------- -------- -------- -------- --------
Total from investment operations .... 1.33 (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) --(d) --(d) --(d) --(d)
------- ------- -------- -------- -------- --------
Net asset value, end of period ...... $ 7.96 $ 6.63 $ 9.37 $ 13.34 $ 14.15 $ 10.79
======= ======= ======== ======== ======== ========
Total return(e) ..................... 20.06% (28.32)% (14.46)% 4.24% 31.14% 0.94%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments
by affiliates .................... 1.18% 1.04% 0.92% 0.96% 0.92% 0.91%
Expenses net of waiver and payments
by affiliates .................... 1.16% 1.04%(g) 0.92%(g) 0.96%(g) 0.92%(g) 0.91%(g)
Net investment income (loss) ........ (1.05)% (0.77)% (0.47)% (0.53)% (0.37)% (0.60)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $79,088 $57,957 $220,857 $325,425 $326,475 $235,101
Portfolio turnover rate ............. 32.16% 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) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
72 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ ----------- --------------
COMMON STOCKS 98.7%
CONSUMER DISCRETIONARY 15.3%
(a) Buffalo Wild Wings Inc. .................................................................... 71,300 $ 2,924,013
(a) Capella Education Co. ...................................................................... 61,100 4,209,790
(a) Carter's Inc. .............................................................................. 69,200 1,633,120
(a) Chipotle Mexican Grill Inc., B ............................................................. 26,500 2,117,615
(a) Drew Industries Inc. ....................................................................... 100,800 1,929,312
(a) FGX International Holdings Ltd. (Virgin Islands (British)) ................................. 279,124 3,681,646
(a) Gaiam Inc., A .............................................................................. 390,732 2,551,480
Guess? Inc. ................................................................................ 40,100 1,465,655
(a) Iconix Brand Group Inc. .................................................................... 266,500 3,107,390
(a) K12 Inc. ................................................................................... 126,700 2,029,734
(a) Lions Gate Entertainment Corp. ............................................................. 666,200 3,457,578
(a) Panera Bread Co. ........................................................................... 25,600 1,535,488
(a) Shuffle Master Inc. ........................................................................ 550,000 4,295,500
(a) Tenneco Inc. ............................................................................... 148,600 2,023,932
(a) Tractor Supply Co. ......................................................................... 40,600 1,814,820
(a) Under Armour Inc., A ....................................................................... 110,800 2,974,980
(a,b) Vitamin Shoppe Inc. ........................................................................ 115,600 2,031,092
--------------
43,783,145
--------------
CONSUMER STAPLES 3.1%
(a) Hain Celestial Group Inc. .................................................................. 181,200 3,178,248
(a) Hansen Natural Corp. ....................................................................... 76,500 2,765,475
(a) TreeHouse Foods Inc. ....................................................................... 76,700 2,868,580
--------------
8,812,303
--------------
ENERGY 4.0%
(a) Bill Barrett Corp. ......................................................................... 59,900 1,855,702
(a) Dril-Quip Inc. ............................................................................. 46,100 2,239,999
(a) Helix Energy Solutions Group Inc. .......................................................... 136,000 1,867,280
(a) Mariner Energy Inc. ........................................................................ 174,000 2,216,760
(a) Superior Energy Services Inc. .............................................................. 155,500 3,360,355
--------------
11,540,096
--------------
FINANCIALS 4.9%
(a) Affiliated Managers Group Inc. ............................................................. 52,900 3,358,621
Evercore Partners Inc. ..................................................................... 63,000 2,056,320
(a) FelCor Lodging Trust Inc. .................................................................. 387,000 1,219,050
(a) iStar Financial Inc. ....................................................................... 383,600 801,724
(a) MSCI Inc., A ............................................................................... 50,500 1,535,200
(a) Stifel Financial Corp. ..................................................................... 56,200 2,920,152
Waddell & Reed Financial Inc., A ........................................................... 74,900 2,101,694
--------------
13,992,761
--------------
HEALTH CARE 18.9%
(a) American Medical Systems Holdings Inc. ..................................................... 326,700 5,037,714
(a) Ardea Biosciences Inc. ..................................................................... 44,100 595,350
(a) Athenahealth Inc. .......................................................................... 58,500 2,200,185
(a) BioMarin Pharmaceutical Inc. ............................................................... 183,300 2,852,148
(a) Cadence Pharmaceuticals Inc. ............................................................... 239,700 2,164,491
(a) Community Health Systems Inc. .............................................................. 133,600 4,179,008
(a) Dendreon Corp. ............................................................................. 57,400 1,450,498
Semiannual Report | 73
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ ----------- --------------
COMMON STOCKS (CONTINUED)
HEALTH CARE (CONTINUED)
(a) Dexcom Inc. ................................................................................ 489,300 $ 3,356,598
(a) IDEXX Laboratories Inc. .................................................................... 44,400 2,269,728
(a) Impax Laboratories Inc. .................................................................... 131,700 1,169,496
(a) Map Pharmaceuticals Inc. ................................................................... 78,400 644,448
(a) Masimo Corp. ............................................................................... 125,400 3,331,878
(a) Medidata Solutions Inc. .................................................................... 142,300 2,248,340
(a) MWI Veterinary Supply Inc. ................................................................. 45,800 1,621,320
(a) Myriad Genetics Inc. ....................................................................... 70,200 1,704,456
(a) Onyx Pharmaceuticals Inc. .................................................................. 57,500 1,529,500
(a) OSI Pharmaceuticals Inc. ................................................................... 36,700 1,182,474
(a) PAREXEL International Corp. ................................................................ 316,700 3,965,084
(a) Penwest Pharmaceuticals Co. ................................................................ 354,000 764,640
(a) Phase Forward Inc. ......................................................................... 207,500 2,720,325
(a) Psychiatric Solutions Inc. ................................................................. 139,200 2,873,088
Quality Systems Inc. ....................................................................... 27,500 1,678,050
(a) Savient Pharmaceuticals Inc. ............................................................... 55,800 703,080
(a,c) Sequenom Inc. .............................................................................. 196,900 543,444
(a) Transcept Pharmaceuticals Inc. ............................................................. 65,100 357,399
(a) VCA Antech Inc. ............................................................................ 120,200 2,863,164
--------------
54,005,906
--------------
INDUSTRIALS 11.9%
(a) Aerovironment Inc. ......................................................................... 134,300 3,580,438
(a) Allegiant Travel Co. ....................................................................... 76,600 2,888,586
(a) Clean Harbors Inc. ......................................................................... 61,400 3,466,030
(a) Digitalglobe Inc. .......................................................................... 108,400 2,420,572
(a) FTI Consulting Inc. ........................................................................ 86,200 3,517,822
Heico Corp. ................................................................................ 78,000 2,966,340
(a) Huron Consulting Group Inc. ................................................................ 61,100 1,417,520
(a) ICF International Inc. ..................................................................... 75,900 2,174,535
Kaydon Corp. ............................................................................... 71,100 2,487,789
Knight Transportation Inc. ................................................................. 134,000 2,149,360
(a) Mobile Mini Inc. ........................................................................... 175,600 2,546,200
(a) Railamerica Inc. ........................................................................... 111,800 1,315,886
(a) Tetra Tech Inc. ............................................................................ 42,100 1,083,233
Wabtec Corp. ............................................................................... 53,700 1,974,012
--------------
33,988,323
--------------
INFORMATION TECHNOLOGY 38.7%
(a) ANSYS Inc. ................................................................................. 121,500 4,930,470
(a) Art Technology Group Inc. .................................................................. 894,700 3,686,164
(a) Atheros Communications ..................................................................... 134,100 3,301,542
(a) Bottomline Technologies Inc. ............................................................... 468,204 6,873,235
(a) Coherent Inc. .............................................................................. 132,400 3,327,212
(a) Concur Technologies Inc. ................................................................... 63,000 2,245,320
(a) CyberSource Corp. .......................................................................... 143,600 2,352,168
(a) DealerTrack Holdings Inc. .................................................................. 202,500 3,337,200
(a) DivX Inc. .................................................................................. 344,300 1,656,083
(a) Echo Global Logistics Inc. ................................................................. 100,900 1,316,745
(a) FARO Technologies Inc. ..................................................................... 226,900 3,507,874
74 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ ----------- --------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
(a) FLIR Systems Inc. .......................................................................... 135,100 $ 3,757,131
(a) FormFactor Inc. ............................................................................ 198,400 3,370,816
Global Payments Inc. ....................................................................... 44,800 2,205,504
(a) GSI Commerce Inc. .......................................................................... 160,100 3,037,097
(a) Ixia ....................................................................................... 532,000 3,537,800
(a) Microsemi Corp. . .......................................................................... 223,800 2,978,778
National Instruments Corp. ................................................................. 101,200 2,702,040
(a) Netezza Corp. .............................................................................. 233,300 2,155,692
(a) Netlogic Microsystems Inc. ................................................................. 126,800 4,819,668
(a) Nuance Communications Inc. ................................................................. 390,300 5,116,833
(a) Palm Inc. .................................................................................. 102,900 1,194,669
(a) Polycom Inc. ............................................................................... 142,800 3,065,916
Power Integrations Inc. .................................................................... 109,600 3,419,520
(a) Quest Software Inc. ........................................................................ 229,900 3,855,423
(a) Riverbed Technology Inc. ................................................................... 72,900 1,493,721
(a) Sapient Corp. .............................................................................. 563,820 4,589,495
(a) Silicon Laboratories Inc. .................................................................. 125,400 5,254,260
Tandberg ASA (Norway) ...................................................................... 96,200 2,580,668
(a) Trimble Navigation Ltd. .................................................................... 175,600 3,682,332
(a) Varian Semiconductor Equipment Associates Inc. ............................................. 161,875 4,595,631
(a) ViaSat Inc. ................................................................................ 205,000 5,975,750
(a) Xyratex Ltd. (Bermuda) ..................................................................... 98,200 1,026,190
--------------
110,948,947
--------------
MATERIALS 0.2%
FMC Corp. .................................................................................. 14,000 715,400
--------------
TELECOMMUNICATION SERVICES 1.7%
(a) SBA Communications Corp. ................................................................... 171,800 4,846,478
--------------
TOTAL COMMON STOCKS (COST $ 258,678,466) 282,633,359
--------------
SHORT TERM INVESTMENTS 2.9%
MONEY MARKET FUNDS (COST $7,606,572) 2.7%
(d) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................................ 7,606,572 7,606,572
--------------
(e) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.2%
MONEY MARKET FUNDS (COST $ 640,000) 0.2%
(f) Bank of New York Institutional Cash Reserve Fund, Series A, 0.05% .......................... 640,000 640,000
--------------
TOTAL INVESTMENTS (COST $266,925,038) 101.6% ............................................... 290,879,931
OTHER ASSETS, LESS LIABILITIES (1.6)% ...................................................... (4,590,830)
--------------
NET ASSETS 100.0% .......................................................................... $ 286,289,101
==============
(a) Non-income producing.
(b) Security purchased on a delayed delivery basis. See Note 1(c).
(c) A portion or all of the security is on loan at October 31, 2009. See Note
1(d).
(d) See Note 7 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
(e) See Note 1(d) regarding securities on loan.
(f) The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 75
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ----------------------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 22.34 $ 32.70 $ 41.54 $ 40.42 $ 31.31 $ 29.69
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.06) (0.11) (0.19) (0.13) --(c) (0.08)
Net realized and unrealized gains
(losses) ...................... 4.03 (10.19) (1.93) 4.09 9.15 1.70
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations .... 3.97 (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(d) .................. -- --(c) --(c) --(c) --(c) --(c)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period ...... $ 26.31 $ 22.34 $ 32.70 $ 41.54 $ 40.42 $ 31.31
========== ========== ========== ========== ========== ==========
Total return(e) ..................... 17.77% (31.46)% (6.24)% 10.38% 29.21% 5.46%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ......................... 1.06% 1.08% 1.02% 0.98% 0.96% 0.97%
Net investment income (loss) ........ (0.52)% (0.45)% (0.50)% (0.33)% -- %(h) (0.27)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $2,240,297 $2,195,975 $4,331,657 $5,619,694 $6,532,284 $6,636,792
Portfolio turnover rate ............. 35.83% 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, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
76 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------
CLASS B (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 21.01 $ 31.00 $ 40.00 $ 39.31 $ 30.65 $ 29.28
------- ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.15) (0.29) (0.46) (0.40) (0.27) (0.31)
Net realized and unrealized gains
(losses) ...................... 3.79 (9.64) (1.82) 3.93 8.93 1.68
------- ------- ------- ------- ------- -------
Total from investment operations .... 3.64 (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) --(d) --(d) --(d) --(d)
------- ------- ------- ------- ------- -------
Net asset value, end of period ...... $ 24.65 $ 21.01 $ 31.00 $ 40.00 $ 39.31 $ 30.65
======= ======= ======= ======= ======= =======
Total return(e) ..................... 17.33% (31.99)% (6.92)% 9.53% 28.25% 4.68%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ......................... 1.81% 1.83% 1.77% 1.73% 1.71% 1.72%
Net investment income (loss) ........ (1.27)% (1.20)% (1.25)% (1.08)% (0.75)% (1.02)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $14,709 $13,399 $25,457 $32,570 $36,911 $31,733
Portfolio turnover rate ............. 35.83% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 77
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 --------------------------------------------------------
CLASS C (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 20.29 $ 29.92 $ 38.85 $ 38.25 $ 29.82 $ 28.49
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.14) (0.27) (0.45) (0.39) (0.26) (0.31)
Net realized and unrealized gains
(losses) ...................... 3.65 (9.30) (1.76) 3.83 8.69 1.64
-------- -------- -------- -------- -------- --------
Total from investment operations .... 3.51 (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) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 23.80 $ 20.29 $ 29.92 $ 38.85 $ 38.25 $ 29.82
======== ======== ======== ======== ======== ========
Total return(e) ..................... 17.30% (31.94)% (6.94)% 9.56% 28.27% 4.67%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ......................... 1.81% 1.83% 1.77% 1.72% 1.71% 1.72%
Net investment income (loss) ........ (1.27)% (1.20)% (1.25)% (1.07)% (0.75)% (1.02)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $318,193 $285,597 $523,040 $653,529 $728,710 $654,549
Portfolio turnover rate ............. 35.83% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
78 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -----------------------------------------------------
CLASS R (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- ------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 21.85 $ 32.06 $ 40.96 $ 39.98 $ 31.04 $ 29.50
------- ------- ------- -------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.10) (0.17) (0.29) (0.23) (0.08) (0.15)
Net realized and unrealized gains
(losses) ...................... 3.94 (9.98) (1.89) 4.05 9.04 1.69
------- ------- ------- -------- ------- -------
Total from investment operations .... 3.84 (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) --(d) --(d) --(d) --(d)
------- ------- ------- -------- ------- -------
Net asset value, end of period ...... $ 25.69 $ 21.85 $ 32.06 $ 40.96 $ 39.98 $ 31.04
======= ======= ======= ======== ======= =======
Total return(e) ..................... 17.57% (31.62)% (6.48)% 10.11% 28.88% 5.22%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ......................... 1.31% 1.33% 1.27% 1.23% 1.21% 1.22%
Net investment income (loss) ........ (0.77)% (0.70)% (0.75)% (0.58)% (0.25)% (0.52)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $65,538 $54,180 $94,334 $118,387 $93,916 $54,139
Portfolio turnover rate ............. 35.83% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 79
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 --------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005
- ------------- ---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 22.90 $ 33.43 $ 42.22 $ 40.93 $ 31.71 $ 29.99
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .. (0.04) (0.05) (0.10) (0.03) 0.10 --(c)
Net realized and unrealized gains
(losses) ...................... 4.14 (10.42) (1.97) 4.16 9.26 1.72
-------- -------- -------- -------- -------- --------
Total from investment operations .... 4.10 (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(d) .................. -- --(c) --(c) --(c) --(c) --(c)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 27.00 $ 22.90 $ 33.43 $ 42.22 $ 40.93 $ 31.71
======== ======== ======== ======== ======== ========
Total return(e) ..................... 17.90% (31.28)% (6.00)% 10.65% 29.55% 5.74%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ......................... 0.81% 0.83% 0.77% 0.73% 0.71% 0.72%
Net investment income (loss) ........ (0.27)% (0.20)% (0.25)% (0.08)% 0.25% (0.02)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $607,370 $498,207 $812,503 $803,365 $794,395 $347,518
Portfolio turnover rate ............. 35.83% 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 is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
80 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ----------- --------------
COMMON STOCKS 99.8%
CONSUMER DISCRETIONARY 15.8%
Advance Auto Parts Inc. .................................................................... 655,000 $ 24,405,302
(a) Apollo Group Inc., A ....................................................................... 458,800 26,197,480
BorgWarner Inc. ............................................................................ 1,062,200 32,205,904
(a) Buffalo Wild Wings Inc. .................................................................... 650,000 26,656,500
(a) Capella Education Co. ...................................................................... 243,700 16,790,930
(a) Chipotle Mexican Grill Inc., A ............................................................. 273,100 22,254,919
(a) Chipotle Mexican Grill Inc., B ............................................................. 120,000 9,589,200
(a) Dick's Sporting Goods Inc. ................................................................. 1,254,550 28,465,739
Guess? Inc. ................................................................................ 1,400,000 51,170,000
Jarden Corp. ............................................................................... 723,000 19,802,970
Johnson Controls Inc. ...................................................................... 1,675,000 40,066,000
(a) Kohl's Corp. ............................................................................... 500,000 28,610,000
NIKE Inc., B ............................................................................... 400,000 24,872,000
(a) Priceline.com Inc. ......................................................................... 155,000 24,457,450
Starwood Hotels & Resorts Worldwide Inc. ................................................... 450,000 13,077,000
(a) Under Armour Inc., A ....................................................................... 758,335 20,361,295
(a) Urban Outfitters Inc. ...................................................................... 1,523,700 47,813,706
(a) WMS Industries Inc. ........................................................................ 580,000 23,188,400
Wolverine World Wide Inc. .................................................................. 1,316,300 33,670,954
--------------
513,655,749
--------------
CONSUMER STAPLES 2.6%
Clorox Co. ................................................................................. 439,500 26,031,585
(a) Hansen Natural Corp. ....................................................................... 700,000 25,305,000
Mead Johnson Nutrition Co., A .............................................................. 800,000 33,632,000
--------------
84,968,585
--------------
ENERGY 8.6%
(a) Cameron International Corp. ................................................................ 921,500 34,067,855
(a) Concho Resources Inc. ...................................................................... 1,300,000 49,543,000
(a) FMC Technologies Inc. ...................................................................... 853,456 44,891,786
Noble Corp. ................................................................................ 425,000 17,314,500
Peabody Energy Corp. ....................................................................... 650,000 25,733,500
(a) Petrohawk Energy Corp. ..................................................................... 1,541,900 36,265,488
Range Resources Corp. ...................................................................... 509,800 25,515,490
Smith International Inc. ................................................................... 820,100 22,741,373
(a) Weatherford International Ltd. ............................................................. 1,297,900 22,752,187
--------------
278,825,179
--------------
FINANCIALS 5.3%
(a) Affiliated Managers Group Inc. ............................................................. 600,300 38,113,047
BlackRock Inc. ............................................................................. 100,000 21,649,000
The Charles Schwab Corp. ................................................................... 1,383,400 23,988,156
(a) FelCor Lodging Trust Inc. .................................................................. 1,546,910 4,872,767
(a,b) iStar Financial Inc. ....................................................................... 3,968,090 8,293,308
Lazard Ltd., LP ............................................................................ 450,000 16,987,500
T. Rowe Price Group Inc. ................................................................... 755,100 36,796,023
W. R. Berkley Corp. ........................................................................ 900,000 22,248,000
--------------
172,947,801
--------------
Semiannual Report | 81
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
HEALTH CARE 22.2%
Aetna Inc. ................................................................................. 1,175,000 $ 30,585,250
(a) Allscripts-Misys Healthcare Solutions Inc. ................................................. 1,098,700 21,424,650
(a) BioMarin Pharmaceutical Inc. ............................................................... 1,000,000 15,560,000
C. R. Bard Inc. ............................................................................ 473,200 35,523,124
(a) Cerner Corp. ............................................................................... 483,600 36,772,944
(a) Community Health Systems Inc. .............................................................. 1,636,986 51,204,922
(a) DaVita Inc. ................................................................................ 496,800 26,345,304
(a) Dendreon Corp. ............................................................................. 325,000 8,212,750
(a) Edwards Lifesciences Corp. ................................................................. 350,000 26,929,000
(a) Express Scripts Inc. ....................................................................... 791,000 63,216,720
(a) Intuitive Surgical Inc. .................................................................... 185,100 45,599,385
(a) Life Technologies Corp. .................................................................... 747,100 35,240,707
(a) Masimo Corp. ............................................................................... 804,100 21,364,937
(a) Mettler-Toledo International Inc. .......................................................... 380,327 37,081,882
(a) Myriad Genetics Inc. ....................................................................... 1,001,900 24,326,132
(a) Onyx Pharmaceuticals Inc. .................................................................. 312,800 8,320,480
(a) OSI Pharmaceuticals Inc. ................................................................... 170,900 5,506,398
Perrigo Co. ................................................................................ 788,900 29,339,191
Pharmaceutical Product Development Inc. .................................................... 1,300,000 28,015,000
(a) QIAGEN NV (Netherlands) .................................................................... 1,500,000 31,245,000
(a) Savient Pharmaceuticals Inc. ............................................................... 680,000 8,568,000
(a,b) Sequenom Inc. .............................................................................. 1,156,000 3,190,560
(a) Stereotaxis Inc. ........................................................................... 1,463,200 5,282,152
(a) Talecris Biotherapeutics Holdings Corp. .................................................... 1,173,600 23,542,416
(a) Varian Medical Systems Inc. ................................................................ 1,140,000 46,717,200
(a) Waters Corp. ............................................................................... 919,100 52,783,913
--------------
721,898,017
--------------
INDUSTRIALS 12.7%
(a) Allegiant Travel Co. ....................................................................... 481,852 18,170,639
AMETEK Inc. ................................................................................ 872,000 30,424,080
C.H. Robinson Worldwide Inc. ............................................................... 435,000 23,972,850
(a) Copart Inc. ................................................................................ 560,000 18,015,200
Danaher Corp. .............................................................................. 398,400 27,182,832
Expeditors International of Washington Inc. ................................................ 520,000 16,754,400
Flowserve Corp. ............................................................................ 486,800 47,808,628
Fluor Corp. ................................................................................ 350,000 15,547,000
J.B. Hunt Transport Services Inc. .......................................................... 575,000 17,284,500
(a) Jacobs Engineering Group Inc. .............................................................. 564,900 23,889,621
Knight Transportation Inc. ................................................................. 500,000 8,020,000
Precision Castparts Corp. .................................................................. 507,110 48,444,218
Robert Half International Inc. ............................................................. 939,800 21,803,360
Rockwell Collins Inc. ...................................................................... 764,300 38,505,434
(a) Ryanair Holdings PLC, ADR (Ireland) ........................................................ 1,256,600 34,267,482
(a) Tetra Tech Inc. ............................................................................ 500,000 12,865,000
(a) Verisk Analytics Inc., A ................................................................... 275,200 7,548,736
--------------
410,503,980
--------------
82 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY 27.7%
(a) Activision Blizzard Inc. ................................................................... 2,106,700 $ 22,815,561
(a) Alliance Data Systems Corp. ................................................................ 877,400 48,239,452
Analog Devices Inc. ........................................................................ 550,000 14,096,500
(a) ANSYS Inc. ................................................................................. 1,122,200 45,538,876
(a) Avago Technologies Ltd. (Singapore) ........................................................ 700,000 10,500,000
(a) Citrix Systems Inc. ........................................................................ 835,000 30,694,600
(a) Concur Technologies Inc. ................................................................... 559,600 19,944,144
FactSet Research Systems Inc. .............................................................. 730,000 46,756,500
(a) FLIR Systems Inc. .......................................................................... 1,850,000 51,448,500
(a) FormFactor Inc. ............................................................................ 1,467,524 24,933,233
(a) Hittite Microwave Corp. .................................................................... 719,300 26,470,240
(a) Juniper Networks Inc. ...................................................................... 925,000 23,596,750
(a) Lam Research Corp. ......................................................................... 1,000,000 33,720,000
MasterCard Inc., A ......................................................................... 300,000 65,706,000
(a) McAfee Inc. ................................................................................ 730,200 30,580,776
(a) NetApp Inc. ................................................................................ 1,675,100 45,311,455
(a) Nuance Communications Inc. ................................................................. 4,504,500 59,053,995
(a) Polycom Inc. ............................................................................... 700,000 15,029,000
(a) SAIC Inc. .................................................................................. 1,979,700 35,060,487
(a) Silicon Laboratories Inc. .................................................................. 1,380,400 57,838,760
(a) Sybase Inc. ................................................................................ 825,000 32,637,000
Tandberg ASA (Norway) ...................................................................... 2,150,000 57,676,062
(a) Trimble Navigation Ltd. .................................................................... 1,391,660 29,183,110
(a) Varian Semiconductor Equipment Associates Inc. ............................................. 1,069,938 30,375,540
(a) ViaSat Inc. ................................................................................ 562,567 16,398,828
Xilinx Inc. ................................................................................ 1,150,000 25,012,500
--------------
898,617,869
--------------
MATERIALS 2.3%
Celanese Corp., A .......................................................................... 1,500,000 41,175,000
Ecolab Inc. ................................................................................ 746,300 32,807,348
--------------
73,982,348
--------------
TELECOMMUNICATION SERVICES 2.6%
(a) American Tower Corp., A .................................................................... 838,100 30,858,842
(a,c) Anda Networks .............................................................................. 91,107 70,152
(a) SBA Communications Corp. ................................................................... 1,844,000 52,019,240
--------------
82,948,234
--------------
TOTAL COMMON STOCKS (COST $2,776,108,153) .................................................. 3,238,347,762
--------------
PRINCIPAL
AMOUNT
-----------
CONVERTIBLE BONDS (COST $3,282,534) 0.1%
INFORMATION TECHNOLOGY 0.1%
(d) Alliance Data Systems Corp., cvt., senior note, 144A, 4.75%, 5/15/14 ....................... $ 3,243,000 4,467,232
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,779,390,687) ...................... 3,242,814,994
--------------
Semiannual Report | 83
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ----------- --------------
SHORT TERM INVESTMENTS 1.2%
MONEY MARKET FUNDS (COST $31,073,014) 0.9%
(a) Bank of New York Institutional Cash Reserve Fund, Series B ................................. 836,763 $ 669,411
(e) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................................ 30,236,251 30,236,251
--------------
30,905,662
--------------
(f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.3%
MONEY MARKET FUNDS (COST $9,367,000) 0.3%
(g) Bank of New York Institutional Cash Reserve Fund, Series A, 0.05% .......................... 9,367,000 9,367,000
--------------
TOTAL INVESTMENTS (COST $2,819,830,701) 101.1% ............................................. 3,283,087,656
OTHER ASSETS, LESS LIABILITIES (1.1)% ...................................................... (36,979,788)
--------------
NET ASSETS 100.0% .......................................................................... $3,246,107,868
==============
See Abbreviations on page 112.
(a) Non-income producing.
(b) A portion or all of the security is on loan at October 31, 2009. See Note
1(d).
(c) See Note 8 regarding restricted securities.
(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. This security has been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2009,
the value of this security was $4,467,232, representing 0.14% of net
assets.
(e) See Note 7 regarding investments in the 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.
84 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2009 (unaudited)
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................................... $2,232,150,587 $ 8,497,838 $ 310,265,783
Cost - Sweep Money Fund (Note 7) ..................................... 38,455,621 1,000,807 8,671,192
-------------- ----------- -------------
Total cost of investments ............................................ $2,270,606,208 $ 9,498,645 $ 318,936,975
-------------- ----------- -------------
Value - Unaffiliated issuers ......................................... $2,683,614,205 $ 9,230,390 $ 383,582,268
Value - Sweep Money Fund (Note 7) .................................... 38,455,621 1,000,807 8,671,192
-------------- ----------- -------------
Total value of investments ........................................... 2,722,069,826 10,231,197 392,253,460
Receivables:
Investment securities sold ........................................... 29,766,669 -- 9,306,361
Capital shares sold .................................................. 3,687,221 106,437 848,805
Dividends ............................................................ 1,260,810 8,591 8,550
Affiliates ........................................................... -- 6,235 --
Other assets ............................................................ 1,121 2 119
-------------- ----------- -------------
Total assets ...................................................... 2,756,785,647 10,352,462 402,417,295
-------------- ----------- -------------
Liabilities:
Payables:
Investment securities purchased ...................................... 16,799,179 541,184 12,886,896
Capital shares redeemed .............................................. 3,952,111 9,758 1,768,565
Affiliates ........................................................... 2,111,319 -- 242,356
Allocator Funds (Note 10) ............................................ 79,187 -- 26,441
Accrued expenses and other liabilities .................................. 253,092 15,897 71,451
-------------- ----------- -------------
Total liabilities ................................................. 23,194,888 566,839 14,995,709
-------------- ----------- -------------
Net assets, at value ........................................... $2,733,590,759 $ 9,785,623 $ 387,421,586
============== =========== =============
Net assets consist of:
Paid-in capital ......................................................... $2,464,961,073 $10,385,510 $ 503,031,878
Undistributed net investment income (loss) .............................. (2,280,985) (2,524) (1,306,598)
Net unrealized appreciation (depreciation) .............................. 451,463,618 732,768 73,316,485
Accumulated net realized gain (loss) .................................... (180,552,947) (1,330,131) (187,620,179)
-------------- ----------- -------------
Net assets, at value ........................................... $2,733,590,759 $ 9,785,623 $ 387,421,586
============== =========== =============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 85
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2009 (unaudited)
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
CLASS A:
Net assets, at value .................................................... $1,667,494,216 $8,169,194 $146,076,275
============== ========== ============
Shares outstanding ...................................................... 44,136,946 1,055,340 8,867,286
============== ========== ============
Net asset value per share(a) ............................................ $ 37.78 $ 7.74 $ 16.47
============== ========== ============
Maximum offering price per share (net asset value per share / 94.25%) ... $ 40.08 $ 8.21 $ 17.47
============== ========== ============
CLASS B:
Net assets, at value .................................................... $ 40,610,204 -- $ 5,725,601
============== ========== ============
Shares outstanding ...................................................... 1,166,103 -- 371,811
============== ========== ============
Net asset value and maximum offering price per share(a) ................. $ 34.83 -- $ 15.40
============== ========== ============
CLASS C:
Net assets, at value .................................................... $ 283,406,080 $ 903,549 $ 38,258,293
============== ========== ============
Shares outstanding ...................................................... 8,120,622 117,876 2,490,670
============== ========== ============
Net asset value and maximum offering price per share(a) ................. $ 34.90 $ 7.67 $ 15.36
============== ========== ============
CLASS R:
Net assets, at value .................................................... $ 51,487,768 $ 10,479 $ 11,360,884
============== ========== ============
Shares outstanding ...................................................... 1,388,189 1,356 701,166
============== ========== ============
Net asset value and maximum offering price per share .................... $ 37.09 $ 7.73 $ 16.20
============== ========== ============
ADVISOR CLASS:
Net assets, at value .................................................... $ 690,592,491 $ 702,401 $186,000,533
============== ========== ============
Shares outstanding ...................................................... 18,056,002 90,479 10,943,638
============== ========== ============
Net asset value and maximum offering price per share .................... $ 38.25 $ 7.76 $ 17.00
============== ========== ============
(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.
86 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2009 (unaudited)
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------- --------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................................... $ 259,318,466 $2,789,594,450
Cost - Sweep Money Fund (Note 7) ..................................... 7,606,572 30,236,251
------------- --------------
Total cost of investments ............................................ $ 266,925,038 $2,819,830,701
============= ==============
Value - Unaffiliated issuers ......................................... $ 283,273,359 $3,252,851,405
Value - Sweep Money Fund (Note 7) .................................... 7,606,572 30,236,251
------------- --------------
Total value of investments(a) ........................................ 290,879,931 3,283,087,656
Receivables:
Investment securities sold ........................................... 6,139,138 2,122,869
Capital shares sold .................................................. 270,073 2,591,725
Dividends and interest ............................................... 20,635 691,101
Other assets ............................................................ 186 1,703
------------- --------------
Total assets ...................................................... 297,309,963 3,288,495,054
------------- --------------
Liabilities:
Payables:
Investment securities purchased ...................................... 8,305,966 19,699,773
Capital shares redeemed .............................................. 1,586,418 8,172,191
Affiliates ........................................................... 329,257 2,660,195
Allocator Funds (Note 10) ............................................ 10,967 --
Funds advanced by custodian ............................................. -- 836,763
Payable upon return of securities loaned ................................ 640,000 9,367,000
Accrued expenses and other liabilities .................................. 148,254 1,651,264
------------- --------------
Total liabilities ................................................. 11,020,862 42,387,186
------------- --------------
Net assets, at value ........................................... $ 286,289,101 $3,246,107,868
============= ==============
Net assets consist of:
Paid-in capital ......................................................... $ 381,398,693 $3,340,572,370
Undistributed net investment income (loss) .............................. (1,960,257) (9,442,380)
Net unrealized appreciation (depreciation) .............................. 23,954,893 463,256,955
Accumulated net realized gain (loss) .................................... (117,104,228) (548,279,077)
------------- --------------
Net assets, at value ........................................... $ 286,289,101 $3,246,107,868
============= ==============
(a) Includes securities loaned $ 543,179 $ 7,947,400
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 87
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2009 (unaudited)
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ --------------
CLASS A:
Net assets, at value ................................................... $149,590,533 $2,240,297,068
============ ==============
Shares outstanding ..................................................... 19,456,847 85,159,058
============ ==============
Net asset value per share(a) ........................................... $ 7.69 $ 26.31
============ ==============
Maximum offering price per share (net asset value per share / 94.25%) .. $ 8.16 $ 27.92
============ ==============
CLASS B:
Net assets, at value ................................................... $ 9,743,428 $ 14,708,721
============ ==============
Shares outstanding ..................................................... 1,384,620 596,802
============ ==============
Net asset value and maximum offering price per share(a) ................ $ 7.04 $ 24.65
============ ==============
CLASS C:
Net assets, at value ................................................... $ 45,757,860 $ 318,193,408
============ ==============
Shares outstanding ..................................................... 6,494,161 13,371,537
============ ==============
Net asset value and maximum offering price per share(a) ................ $ 7.05 $ 23.80
============ ==============
CLASS R:
Net assets, at value ................................................... $ 2,109,467 $ 65,538,467
============ ==============
Shares outstanding ..................................................... 280,975 2,550,923
============ ==============
Net asset value and maximum offering price per share ................... $ 7.51 $ 25.69
============ ==============
ADVISOR CLASS:
Net assets, at value ................................................... $ 79,087,813 $ 607,370,204
============ ==============
Shares outstanding ..................................................... 9,931,277 22,491,975
============ ==============
Net asset value and maximum offering price per share ................... $ 7.96 $ 27.00
============ ==============
(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.
88 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended October 31, 2009 (unaudited)
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
------------ ------------ -------------
Investment income:
Dividends:
Unaffiliated issuers ........................................................... $ 10,788,712 $ 42,622 $ 808,249
Sweep Money Fund (Note 7) ...................................................... 4,832 12 552
Income from securities loaned ..................................................... 25,752 -- --
------------ ---------- -----------
Total investment income .................................................... 10,819,296 42,634 808,801
------------ ---------- -----------
Expenses:
Management fees (Note 3a) ......................................................... 5,719,101 27,447 858,798
Administrative fees (Note 3b) ..................................................... -- 7,512 349,745
Distribution fees: (Note 3c)
Class A ........................................................................ 1,951,483 10,990 177,434
Class B ........................................................................ 213,436 -- 28,843
Class C ........................................................................ 1,356,038 2,565 172,761
Class R ........................................................................ 122,778 21 25,040
Transfer agent fees (Note 3e) ..................................................... 3,105,725 2,481 362,454
Special servicing agreement fees (Note 10) ........................................ 449,256 -- 150,816
Custodian fees (Note 4) ........................................................... 16,527 70 2,896
Reports to shareholders ........................................................... 187,712 1,416 32,649
Registration and filing fees ...................................................... 64,242 21,157 41,638
Professional fees ................................................................. 24,106 15,246 17,635
Trustees' fees and expenses ....................................................... 26,400 55 3,630
Other ............................................................................. 53,970 1,759 7,068
------------ ---------- -----------
Total expenses .............................................................. 13,290,774 90,719 2,231,407
Expense reductions (Note 4) ................................................. (187) (1) --
Expenses waived/paid by affiliates (Note 3f) ................................ (194,746) (43,424) (116,008)
------------ ---------- -----------
Net expenses ............................................................. 13,095,841 47,294 2,115,399
------------ ---------- -----------
Net investment income (loss) .......................................... (2,276,545) (4,660) (1,306,598)
------------ ---------- -----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................................................... (84,004,650) (642,260) 19,849,133
Foreign currency transactions .................................................. -- (259) (122,123)
------------ ---------- -----------
Net realized gain (loss) .............................................. (84,004,650) (642,519) 19,727,010
------------ ---------- -----------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... 459,503,386 2,088,039 38,876,528
Translation of other assets and liabilities denominated in foreign currencies .. -- 341 (170)
------------ ---------- -----------
Net change in unrealized appreciation (depreciation) .................. 459,503,386 2,088,380 38,876,358
------------ ---------- -----------
Net realized and unrealized gain (loss) .............................................. 375,498,736 1,445,861 58,603,368
------------ ---------- -----------
Net increase (decrease) in net assets resulting from operations ...................... $373,222,191 $1,441,201 $57,296,770
============ ========== ===========
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 89
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended October 31, 2009 (unaudited)
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
----------- -------------
Investment income:
Dividends:
Unaffiliated issuers ........................................................... $ 106,112 $ 7,652,474
Sweep Money Fund (Note 7) ...................................................... 284 5,530
Interest .......................................................................... -- 195,058
Income from securities loaned ..................................................... 44,418 1,122,446
----------- ------------
Total investment income ................................................. 150,814 8,975,508
----------- ------------
Expenses:
Management fees (Note 3a) ......................................................... 754,763 7,386,778
Administrative fees (Note 3b) ..................................................... 278,862 --
Distribution fees: (Note 3c)
Class A ........................................................................ 194,900 2,903,828
Class B ........................................................................ 65,513 72,581
Class C ........................................................................ 229,639 1,557,731
Class R ........................................................................ 5,527 158,884
Transfer agent fees (Note 3e) ..................................................... 453,117 5,292,511
Special servicing agreement fees (Note 10) ........................................ 61,762 --
Custodian fees (Note 4) ........................................................... 4,064 29,176
Reports to shareholders ........................................................... 39,878 289,817
Registration and filing fees ...................................................... 28,315 55,892
Professional fees ................................................................. 15,888 31,006
Trustees' fees and expenses ....................................................... 4,431 40,258
Other ............................................................................. 8,310 314,111
----------- ------------
Total expenses ........................................................... 2,144,969 18,132,573
Expense reductions (Note 4) .............................................. -- (111)
Expenses waived/paid by affiliates (Note 3f) ............................. (33,898) --
----------- ------------
Net expenses .......................................................... 2,111,071 18,132,462
----------- ------------
Net investment income (loss) ....................................... (1,960,257) (9,156,954)
----------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ........................................................ 4,273,787 134,448,828
Non-controlled affiliated issuers (Note 9) .................................. -- (9,418,193)
Foreign currency transactions .................................................. (8,752) 65,968
----------- ------------
Net realized gain (loss) ........................................... 4,265,035 125,096,603
----------- ------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... 45,439,948 412,873,367
Translation of other assets and liabilities denominated in foreign currencies .. (112) (2,617)
----------- ------------
Net change in unrealized appreciation (depreciation) ............... 45,439,836 412,870,750
----------- ------------
Net realized and unrealized gain (loss) .............................................. 49,704,871 537,967,353
----------- ------------
Net increase (decrease) in net assets resulting from operations ...................... $47,744,614 $528,810,399
=========== ============
The accompanying notes are an integral part of these financial statements.
90 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE
GROWTH FUND EQUITY FUND
--------------------------------- ---------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2009 YEAR ENDED OCTOBER 31, 2009 PERIOD ENDED
(UNAUDITED) APRIL 30, 2009 (UNAUDITED) APRIL 30, 2009
---------------- -------------- ---------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................ $ (2,276,545) $ (3,677,869) $ (4,660) $ 41,035
Net realized gain (loss) from investments and
foreign currency transactions .................... (84,004,650) (87,232,126) (642,519) (683,456)
Net change in unrealized appreciation
(depreciation) on investments and translation of
other assets and liabilities denominated in
foreign currencies ............................... 459,503,386 (764,613,305) 2,088,380 (644,799)
-------------- -------------- ---------- -----------
Net increase (decrease) in net assets
resulting from operations .................. 373,222,191 (855,523,300) 1,441,201 (1,287,220)
-------------- -------------- ---------- -----------
Distributions to shareholders from:
Net investment income:
Class A .......................................... -- -- -- (74,501)
Class C .......................................... -- -- -- (1,612)
Class R .......................................... -- -- -- (83)
Advisor Class .................................... -- -- -- (2,076)
Net realized gains:
Class A .......................................... -- -- -- (16,497)
Class C .......................................... -- -- -- (426)
Class R .......................................... -- -- -- (22)
Advisor Class .................................... -- -- -- (403)
-------------- -------------- ---------- -----------
Total distributions to shareholders .................... -- -- -- (95,620)
-------------- -------------- ---------- -----------
Capital share transactions: (Note 2)
Class A .......................................... 66,413,514 (51,271,229) 1,965,232 1,542,220
Class B .......................................... (8,123,498) (26,638,743) -- --
Class C .......................................... 867,049 (19,089,342) 716,113 97,423
Class R .......................................... 341,963 (3,859,450) 2,573 --
Advisor Class .................................... 236,313,326 123,671,368 492,829 38,570
-------------- -------------- ---------- -----------
Total capital share transactions ....................... 295,812,354 22,812,604 3,176,747 1,678,213
-------------- -------------- ---------- -----------
Redemption fees ........................................ -- 2,260 -- --
-------------- -------------- ---------- -----------
Net increase (decrease) in net assets ......... 669,034,545 (832,708,436) 4,617,948 295,373
Net assets:
Beginning of period .................................... 2,064,556,214 2,897,264,650 5,167,675 4,872,302
-------------- -------------- ---------- -----------
End of period .......................................... $2,733,590,759 $2,064,556,214 $9,785,623 $ 5,167,675
============== ============== ========== ===========
Undistributed net investment income (loss) included in
net assets:
End of period ....................................... $ (2,280,985) $ (4,440) $ (2,524) $ 2,136
============== ============== ========== ===========
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 91
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN GROWTH FRANKLIN SMALL CAP
OPPORTUNITIES FUND GROWTH FUND
--------------------------------- ---------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2009 YEAR ENDED OCTOBER 31, 2009 YEAR ENDED
(UNAUDITED) APRIL 30, 2009 (UNAUDITED) APRIL 30, 2009
---------------- -------------- ---------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................ $ (1,306,598) $ (2,317,619) $ (1,960,257) $ (4,544,515)
Net realized gain (loss) from investments and
foreign currency transactions .................... 19,727,010 (73,192,892) 4,265,035 (100,903,807)
Net change in unrealized appreciation
(depreciation) on investments and translation of
other assets and liabilities denominated in
foreign currencies ............................... 38,876,358 (18,030,525) 45,439,836 (67,036,715)
------------ ------------ ------------ -------------
Net increase (decrease) in net assets
resulting from operations .................. 57,296,770 (93,541,036) 47,744,614 (172,485,037)
------------ ------------ ------------ -------------
Distributions to shareholders from net realized gains:
Class A ............................................. -- -- -- (1,831,877)
Class B ............................................. -- -- -- (287,838)
Class C ............................................. -- -- -- (552,458)
Class R ............................................. -- -- -- (22,400)
Advisor Class ....................................... -- -- -- (1,312,092)
------------ ------------ ------------ -------------
Total distributions to shareholders .................... -- -- -- (4,006,665)
------------ ------------ ------------ -------------
Capital share transactions: (Note 2)
Class A ............................................. 25,131,674 10,380,355 1,830,393 (75,656,594)
Class B ............................................. (384,871) (2,912,763) (7,939,737) (24,020,660)
Class C ............................................. 5,228,033 1,204,624 (2,268,547) (14,625,680)
Class R ............................................. 2,413,800 1,865,922 (200,323) (472,497)
Advisor Class ....................................... 16,824,127 65,072,564 8,877,730 (96,965,191)
------------ ------------ ------------ -------------
Total capital share transactions ....................... 49,212,763 75,610,702 299,516 (211,740,622)
------------ ------------ ------------ -------------
Redemption fees ........................................ -- 966 -- 1,057
------------ ------------ ------------ -------------
Net increase (decrease) in net assets ......... 106,509,533 (17,929,368) 48,044,130 (388,231,267)
Net assets:
Beginning of period .................................... 280,912,053 298,841,421 238,244,971 626,476,238
------------ ------------ ------------ -------------
End of period .......................................... $387,421,586 $280,912,053 $286,289,101 $ 238,244,971
============ ============ ============ =============
Undistributed net investment income (loss) included in
net assets:
End of period ....................................... $ (1,306,598) $ -- $ (1,960,257) $ --
============ ============ ============ =============
The accompanying notes are an integral part of these financial statements.
92 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
----------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2009 YEAR ENDED
(UNAUDITED) APRIL 30, 2009
---------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ......................................................... $ (9,156,954) $ (19,042,195)
Net realized gain (loss) from investments and foreign currency transactions .......... 125,096,603 (669,896,804)
Net change in unrealized appreciation (depreciation) on investments and translation of
other assets and liabilities denominated in foreign currencies .................... 412,870,750 (976,775,522)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ................ 528,810,399 (1,665,714,521)
--------------- ---------------
Distributions to shareholders from net realized gains:
Class A .............................................................................. -- (6,612,344)
Class B .............................................................................. -- (42,726)
Class C .............................................................................. -- (939,029)
Class R .............................................................................. -- (162,759)
Advisor Class ........................................................................ -- (1,349,787)
--------------- ---------------
Total distributions to shareholders ..................................................... -- (9,106,645)
--------------- ---------------
Capital share transactions: (Note 2)
Class A .............................................................................. (331,585,404) (895,592,567)
Class B .............................................................................. (939,813) (4,302,513)
Class C .............................................................................. (15,865,619) (75,422,060)
Class R .............................................................................. 1,010,730 (11,231,755)
Advisor Class ........................................................................ 17,319,742 (78,299,057)
--------------- ---------------
Total capital share transactions ........................................................ (330,060,364) (1,064,847,952)
--------------- ---------------
Redemption fees ......................................................................... -- 35,916
--------------- ---------------
Net increase (decrease) in net assets .......................................... 198,750,035 (2,739,633,202)
Net assets:
Beginning of period ..................................................................... 3,047,357,833 5,786,991,035
--------------- ---------------
End of period ........................................................................... $ 3,246,107,868 $ 3,047,357,833
=============== ===============
Undistributed net investment income (loss) included in net assets:
End of period ........................................................................... $ (9,442,380) $ (285,426)
=============== ===============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 93
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
Equity and other 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. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities. Investments
in open-end mutual funds and non-registered money funds are valued at the
closing net asset value.
Foreign equity 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 equity 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 security is determined.
The Funds have 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 based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, 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
94 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
call into question the availability (including the reliability) of the value of
a portfolio security held by the fund. The investment manager monitors price
movements following the close of trading in foreign stock markets through a
series of country specific market proxies (such as baskets of American
Depository Receipts, futures contracts and exchange traded funds). These price
movements are measured against established trigger thresholds for each specific
market proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Funds' 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 Funds' 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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Funds may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Funds will generally
purchase these securities with the intention of holding the securities, they may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
Semiannual Report | 95
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 fund (BNY Institutional Cash Reserve Fund or ICRF)
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. At October 31, 2009, the Franklin Flex
Cap Growth Fund had no securities on loan.
In September of 2008, the Bank of New York Mellon (BNYM) advised the funds that
the ICRF had exposure to certain defaulted debt obligations of Lehman Brothers
Holdings, Inc. and that they had created a separate sleeve (Series B) of the
ICRF to hold these securities apart from the main investments. Each investor in
the ICRF was allocated its pro-rata portion of Series B. The Franklin Small-Mid
Cap Growth Fund's position in Series B is disclosed on the Statement of
Investments at fair value and any unrealized loss attributable to the position
is included in net assets.
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 October 31, 2009, and has
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
96 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
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.
Semiannual Report | 97
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 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:
Six Months ended October 31, 2009
Shares sold .................... 6,112,804 $ 215,421,731 316,624 $2,238,691
Shares redeemed ................ (4,176,929) (149,008,217) (40,542) (273,459)
---------- ------------- ------- ----------
Net increase (decrease) ........ 1,935,875 $ 66,413,514 276,082 $1,965,232
========== ============= ======= ==========
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
========== ============= ======= ==========
CLASS B SHARES:
Six Months ended October 31, 2009
Shares sold .................... 37,911 $ 1,218,136
Shares redeemed ................ (286,129) (9,341,634)
---------- -------------
Net increase (decrease) ........ (248,218) $ (8,123,498)
========== =============
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)
========== =============
CLASS C SHARES:
Six Months ended October 31, 2009
Shares sold .................... 760,795 $ 24,827,334 115,487 $ 817,802
Shares redeemed ................ (722,904) (23,960,285) (14,534) (101,689)
---------- ------------- ------- ----------
Net increase (decrease) ........ 37,891 $ 867,049 100,953 $ 716,113
========== ============= ======= ==========
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
========== ============= ======= ==========
CLASS R SHARES:
Six Months ended October 31, 2009
Shares sold .................... 244,143 $ 8,555,907 356 $ 2,573
Shares redeemed ................ (232,916) (8,213,944) -- --
---------- ------------- ------- ----------
Net increase (decrease) ........ 11,227 $ 341,963 356 $ 2,573
========== ============= ======= ==========
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) -- $ --
========== ============= ======= ==========
98 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED
FLEX CAP GROWTH FUND CORE EQUITY FUND
-------------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ------ --------
ADVISOR CLASS SHARES:
Six Months ended October 31, 2009
Shares sold .................... 7,593,030 $261,623,408 68,638 $529,768
Shares redeemed ................ (650,766) (25,310,082) (4,758) (36,939)
---------- ------------ ------ --------
Net increase (decrease) ........ 6,942,264 $236,313,326 63,880 $492,829
========== ============ ====== ========
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
========== ============ ====== ========
FRANKLIN GROWTH FRANKLIN
OPPORTUNITIES FUND SMALL CAP GROWTH FUND
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS A SHARES:
Six Months ended October 31, 2009
Shares sold .................... 2,770,850 $ 42,476,344 2,925,615 $ 21,708,505
Shares redeemed ................ (1,103,924) (17,344,670) (2,667,239) (19,878,112)
---------- ------------ ----------- -------------
Net increase (decrease) ........ 1,666,926 $ 25,131,674 258,376 $ 1,830,393
========== ============ =========== =============
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)
========== ============ =========== =============
CLASS B SHARES:
Six Months ended October 31, 2009
Shares sold .................... 68,927 $ 975,731 75,221 $ 513,038
Shares redeemed ................ (90,647) (1,360,602) (1,265,745) (8,452,775)
---------- ------------ ----------- -------------
Net increase (decrease) ........ (21,720) $ (384,871) (1,190,524) $ (7,939,737)
========== ============ =========== =============
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)
========== ============ =========== =============
Semiannual Report | 99
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN GROWTH FRANKLIN
OPPORTUNITIES FUND SMALL CAP GROWTH FUND
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ----------- ------------
CLASS C SHARES:
Six Months ended October 31, 2009
Shares sold .................... 654,526 $ 9,327,389 407,106 $ 2,751,369
Shares redeemed ................ (282,468) (4,099,356) (729,371) (5,019,916)
--------- ------------ ----------- -------------
Net increase (decrease) ........ 372,058 $ 5,228,033 (322,265) $ (2,268,547)
========= ============ =========== =============
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)
========= ============ =========== =============
CLASS R SHARES:
Six Months ended October 31, 2009
Shares sold .................... 357,109 $ 5,453,888 40,016 $ 284,378
Shares redeemed ................ (191,487) (3,040,088) (64,216) (484,701)
--------- ------------ ----------- -------------
Net increase (decrease) ........ 165,622 $ 2,413,800 (24,200) $ (200,323)
========= ============ =========== =============
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)
========= ============ =========== =============
ADVISOR CLASS SHARES:
Six Months ended October 31, 2009
Shares sold .................... 1,210,233 $ 18,862,497 1,446,428 $ 10,886,921
Shares redeemed ................ (125,460) (2,038,370) (258,336) (2,009,191)
--------- ------------ ----------- -------------
Net increase (decrease) ........ 1,084,773 $ 16,824,127 1,188,092 $ 8,877,730
========= ============ =========== =============
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)
========= ============ =========== =============
FRANKLIN SMALL-MID CAP
GROWTH FUND
-----------------------------
SHARES AMOUNT
----------- ---------------
CLASS A SHARES:
Six Months ended October 31, 2009
Shares sold ..................................... 6,959,077 $ 170,334,102
Shares redeemed ................................. (20,090,160) (501,919,506)
----------- ---------------
Net increase (decrease) ......................... (13,131,083) $ (331,585,404)
=========== ===============
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)
=========== ===============
100 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
--------------------------
SHARES AMOUNT
---------- -------------
CLASS B SHARES:
Six Months ended October 31, 2009
Shares sold ..................................... 39,492 $ 915,273
Shares redeemed ................................. (80,439) (1,855,086)
---------- -------------
Net increase (decrease) ......................... (40,947) $ (939,813)
========== =============
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)
========== =============
CLASS C SHARES:
Six Months ended October 31, 2009
Shares sold ..................................... 491,729 $ 11,020,178
Shares redeemed ................................. (1,199,106) (26,885,797)
---------- -------------
Net increase (decrease) ......................... (707,377) $ (15,865,619)
========== =============
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)
========== =============
CLASS R SHARES:
Six Months ended October 31, 2009
Shares sold ..................................... 547,369 $ 12,852,921
Shares redeemed ................................. (476,419) (11,842,191)
---------- -------------
Net increase (decrease) ......................... 70,950 $ 1,010,730
========== =============
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)
========== =============
ADVISOR CLASS SHARES:
Six Months ended October 31, 2009
Shares sold ..................................... 2,537,227 $ 64,623,565
Shares redeemed ................................. (1,796,869) (47,303,823)
---------- -------------
Net increase (decrease) ......................... 740,358 $ 17,319,742
========== =============
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)
========== =============
Semiannual Report | 101
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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
The Franklin Focused Core Equity Fund pays an investment management fee to
Advisers based on the average daily net assets of the fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.750% Up to and including $500 million
0.650% 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
102 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Growth Opportunities Fund pays an investment management fee to
Advisers based on the average daily net assets of the fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.500% Up to and including $500 million
0.400% Over $500 million, up to and including $1 billion
0.350% Over $1 billion, up to and including $1.5 billion
0.300% Over $1.5 billion, up to and including $6.5 billion
0.275% Over $6.5 billion, up to and including $11.5 billion
0.250% Over $11.5 billion, up to and including $16.5 billion
0.240% Over $16.5 billion, up to and including $19 billion
0.230% Over $19 billion, up to and including $21.5 billion
0.220% In excess of $21.5 billion
The Franklin Small Cap Growth Fund pays an investment management fee to Advisers
based on the average daily net assets of the fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.550% Up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin 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. Under the Funds' Class A reimbursement distribution plans, 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
Semiannual Report | 103
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
plan rate. 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 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%
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 period:
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 ..... $416,334 $4,468 $64,891 $23,925
Contingent deferred sales charges retained .. $ 15,600 $ 54 $ 2,493 $ 1,720
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ..... $ 100,558
Contingent deferred sales charges retained .. $ 6,296
104 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
For the period ended October 31, 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 .. $2,138,701 $3,181 $246,949 $249,686 $3,043,920
F. WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Focused Core Equity Fund, FT Services and Advisers have
contractually agreed in advance to waive or limit their respective fees and to
assume as their own expense certain expenses otherwise payable by the fund so
that the common expenses (i.e. a combination of management fees, administrative
fees, and other expenses, but excluding distribution 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 August 31, 2010.
For the Franklin Flex Cap Growth Fund, the Franklin Growth Opportunities Fund,
and the Franklin Small Cap Growth Fund, FT Services and Advisers have
voluntarily agreed to limit the increase in the funds' net annual operating
expense ratio that results from the implementation of the Special Servicing
Agreement (SSA) at 0.02% through April 30, 2010. See Note 10 regarding the SSA.
G. OTHER AFFILIATED TRANSACTIONS
At October 31, 2009, Advisers owned 39.37% of the Franklin Focused Core Equity
Fund's outstanding shares.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended October 31, 2009, the
custodian fees were reduced as noted in the Statements of Operations.
Semiannual Report | 105
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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
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 ................... $92,579,802 $573,978 $31,691,418 $75,605,864
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-------------
Realized capital losses ................... $594,863,011
Realized currency losses .................. $ 99,563
At October 31, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
Cost of investments .......................... $2,271,696,339 $9,584,081 $327,843,781
============== ========== ============
Unrealized appreciation ...................... $ 530,408,109 $1,159,451 $ 73,302,591
Unrealized depreciation ...................... (80,034,622) (512,335) (8,892,912)
-------------- ---------- ------------
Net unrealized appreciation (depreciation) ... $ 450,373,487 $ 647,116 $ 64,409,679
============== ========== ============
106 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ --------------
Cost of investments .......................... $276,695,329 $2,820,136,549
============ ==============
Unrealized appreciation ...................... $ 55,577,284 $ 738,628,370
Unrealized depreciation ...................... (41,392,682) (275,677,263)
------------ --------------
Net un realized appreciation (depreciation) .. $ 14,184,602 $ 462,951,107
============ ==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
corporate actions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 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 ... $760,888,154 $4,191,690 $180,991,041 $85,516,508 $1,127,481,355
Sales ....... $459,828,608 $1,212,172 $125,387,306 $85,877,884 $1,338,786,604
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the 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 Fund(s) may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Semiannual Report | 107
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At October 31, 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 10,155,900
-----------
TOTAL RESTRICTED SECURITIES (0.37% of Net Assets) ..... $10,183,961
===========
FRANKLIN GROWTH OPPORTUNITIES FUND
14,501 Dilithium Networks Inc., 11.00%,
12/31/09 ................................................. 10/30/08 $ 14,501 $ 29,002
374,806 Dilithium Networks Inc., depository
receipt, D, pfd., 144A, PIPES ............................ 7/13/06 873,300 --
12,447 Dilithium Networks Inc., wts.,
12/31/09 ................................................. 10/30/08 -- 30
-----------
TOTAL RESTRICTED SECURITIES (0.01% of Net Assets) $ 29,032
===========
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 period ended October 31, 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 PERIOD ADDITIONS REDUCTIONS PERIOD END OF PERIOD INCOME GAIN (LOSS)
- -------------- --------- --------- ---------- --------- ------------- ---------- -----------
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
FormFactor Inc. ..................... 2,717,524 -- 1,250,000 1,467,524 $--(a) $-- $(9,418,193)
=== === ===========
(a) As of October 31, 2009, no longer an affiliate.
108 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. SPECIAL SERVICING AGREEMENT
On May 1, 2009, the Franklin Flex Cap Growth Fund, the Franklin Growth
Opportunities Fund, the Franklin Small Cap Growth Fund, and the Franklin
Small-Mid Cap Growth Fund, which are eligible underlying investments of one or
more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds),
entered into a SSA with the Allocator Funds and certain service providers of the
funds and the Allocator Funds. Under the SSA, the funds pay a portion of the
Allocator Funds' expenses (other than any asset allocation, administrative and
distribution fees), to the extent such payments are less than the amount of the
benefits realized or expected to be realized by the funds from the investment in
the funds by the Allocator Funds. The Allocator Funds and the funds are either
managed by Advisers or administered by FT Services, affiliates of the funds. For
the period ended October 31, 2009, the Franklin Flex Cap Growth Fund, the
Franklin Growth Opportunities Fund, and the Franklin Small Cap Growth Fund were
held by one or more of the Allocator Funds and were allocated expenses as noted
in the Statements of Operations.
At October 31, 2009, one or more of the Allocator Funds owned a percentage of
the funds' outstanding shares as follows:
FRANKLIN FRANKLIN GROWTH FRANKLIN
FLEX CAP OPPORTUNITIES SMALL CAP
GROWTH FUND FUND GROWTH FUND
- ----------- --------------- -----------
14.98% 37.33% 19.56%
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 their pro
rata portion of the Global Credit Facility, which is reflected in other expenses
on the Statements of Operations. During the period ended October 31, 2009, the
Funds did not utilize the Global Credit Facility.
Semiannual Report | 109
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
11. CREDIT FACILITY (CONTINUED)
The commitment fees the Funds incurred for the period 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
----------- ------------ ------------- ----------- -------------
Commitment fees .. $2,528 $6 $269 $420 $3,835
12. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Funds' 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.
The following is a summary of the inputs used as of October 31, 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:
Equity Investments:(a)
Pharmaceuticals,
Biotechnology
& Life Sciences $ 274,241,862 $-- $10,155,900 $ 284,397,762
Telecommunication Services 65,865,000 -- 28,061 65,893,061
Other Equity Investments(b) 2,333,323,382 -- -- 2,333,323,382
Short Term Investments 38,455,621 -- -- 38,455,621
-------------- --- ----------- --------------
Total Investments in
Securities $2,711,885,865 $-- $10,183,961 $2,722,069,826
============== === =========== ==============
110 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ---------- -------- ---------------
FRANKLIN FOCUSED CORE EQUITY FUND
ASSETS:
Investments in Securities:
Equity Investments:(a)
Health Care $ 1,927,500 $ 144,235 $ -- $ 2,071,735
Other Equity Investments(b) 7,158,655 -- -- 7,158,655
Short Term Investments 1,000,807 -- -- 1,000,807
-------------- ---------- ------- --------------
Total Investments in
Securities $ 10,086,962 $ 144,235 $ -- $ 10,231,197
============== ========== ======= ==============
FRANKLIN GROWTH OPPORTUNITIES FUND
ASSETS:
Investments in Securities:
Equity Investments:(a)
Information Technology $ 137,236,938 $ -- $ 30(c) $ 137,236,968
Other Equity Investments(b) 246,316,298 -- -- 246,316,298
Notes -- -- 29,002 29,002
Short Term Investments 8,671,192 -- -- 8,671,192
-------------- ---------- ------- --------------
Total Investments in
Securities $ 392,224,428 $ -- $29,032 $ 392,253,460
============== ========== ======= ==============
FRANKLIN SMALL CAP GROWTH FUND
ASSETS:
Investments in Securities:
Equity Investments(a, b) $ 282,633,359 $ -- $ -- $ 282,633,359
Short Term Investments 8,246,572 -- -- 8,246,572
-------------- ---------- ------- --------------
Total Investments in
Securities $ 290,879,931 $ -- $ -- $ 290,879,931
============== ========== ======= ==============
FRANKLIN SMALL-MID CAP GROWTH FUND
ASSETS:
Investments in Securities:
Equity Investments:
Telecommunication Services $ 82,878,082 $ -- $70,152 $ 82,948,234
Other Equity Investments(b) 3,155,399,528 -- -- 3,155,399,528
Convertible Bonds -- 4,467,232 -- 4,467,232
Short Term Investments 39,603,251 669,411 -- 40,272,662
-------------- ---------- ------- --------------
Total Investments in
Securities $3,277,880,861 $5,136,643 $70,152 $3,283,087,656
============== ========== ======= ==============
(a) Includes common and preferred stock as well as other equity investments.
(b) For detailed industry descriptions, see the accompanying Statements of
Investments.
(c) Includes a security determined to have no value at October 31, 2009.
Semiannual Report | 111
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
At October 31, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Funds' fair value,
were as follows:
NET CHANGE IN
NET CHANGE UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE AT (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF END OF ON ASSETS HELD
OF PERIOD GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 PERIOD AT PERIOD END
----------- ----------- -------------- --------- ----------- ----------- --------------
FRANKLIN FLEX CAP GROWTH FUND
ASSETS
Equity Investments:(a)
Pharmaceuticals,
Biotechnology &
Life Sciences ........ $11,224,942 $-- $(1,069,042) $-- $-- $10,155,900 $(1,069,042)
Telecommunication
Services ............. 28,061 -- -- -- -- 28,061 --
----------- --- ----------- --- --- ----------- -----------
Total ............. $11,253,003 $-- $(1,069,042) $-- $-- $10,183,961 $(1,069,042)
=========== === =========== === === =========== ===========
FRANKLIN GROWTH OPPORTUNITIES FUND
ASSETS
Equity Investments:(a)
Information
Technology ........... $ 487,248 $-- $ (487,218) $-- $-- $ 30(b) $ (487,218)
Notes ...................... 14,501 -- 14,501 -- -- 29,002 14,501
----------- --- ----------- --- --- ----------- -----------
Total ................... $ 501,749 $-- $ (472,717) $-- $-- $ 29,032 $ (472,717)
=========== === =========== === === =========== ===========
FRANKLIN SMALL-MID CAP GROWTH FUND
ASSETS
Equity Investments:
Telecommunication
Services ............. $ 70,152 $-- $ -- $-- $-- $ 70,152 $ --
----------- --- ----------- --- --- ----------- -----------
(a) Includes common and preferred stock as well as other equity investments.
(b) Includes a security determined to have no value at October 31, 2009.
13. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through December 17, 2009, the
issuance date of the financial statements and determined that no events have
occurred that require disclosure.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
PIPES - Private Investment in Public Equity Security
112 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
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.
Semiannual Report | 113
This page intentionally left blank.
This page intentionally left blank.
This page intentionally left blank.
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 semiannual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com
SEMIANNUAL 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 S2009 12/09
OCTOBER 31, 2009
SEMIANNUAL REPORT
AND SHAREHOLDER LETTER
Franklin Biotechnology Discovery Fund
Franklin Natural Resources Fund
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
(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 semiannual report
Contents
SHAREHOLDER LETTER ........................................................ 1
SEMIANNUAL REPORT
Economic and Market Overview .............................................. 3
Franklin Biotechnology Discovery Fund ..................................... 5
Franklin Natural Resources Fund ........................................... 12
Financial Highlights and Statements of Investments ........................ 19
Financial Statements ...................................................... 31
Notes to Financial Statements ............................................. 35
Shareholder Information ................................................... 48
Shareholder Letter
Dear Shareholder:
During the six-month period ended October 31, 2009, economic activity showed
signs of stabilization. In early 2009, deteriorating economic conditions and
investor uncertainty contributed to market woes until some indicators offered a
better economic outlook, and markets rallied beginning in March 2009. At
period-end, although some observers thought the worst of the economic crises was
behind us, others believed significant challenges remained.
We think it is important to put short-term market developments in perspective.
Keep in mind we have navigated through past periods of high market volatility by
remaining committed to our long-term perspective and disciplined investment
philosophy. During such times, we search for bargains we believe may be well
positioned to become eventual winners. Although conditions remain challenging,
our experience gives us reason to be optimistic about future market
stabilization and economic recovery.
Franklin Strategic Series' semiannual report goes into greater detail about
prevailing conditions during the period under review. In addition, you will find
performance data, financial information and discussions from the portfolio
managers. Please remember that all securities markets fluctuate, as do mutual
fund share prices.
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.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the semiannual report | 1
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Funds. 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
remain focused on serving your investment needs.
Sincerely,
/s/ Rupert H. Johnson
Rupert H. Johnson, Jr.
President and Chief Executive Officer - Investment Management
Franklin Strategic Series
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 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 semiannual report
Semiannual Report
Economic and Market Overview
During the six months under review, signs emerged of improving economic
conditions and hopes ran high for a sustainable and broadening recovery.
Although the pace of job losses subsided somewhat, the U.S. employment market
remained troubled as the unemployment rate continued to climb, hitting 10.2% at
period-end.(1) The real estate market stabilized at low levels across the
country, with the government's tax credit for first-time homebuyers partly
supporting home sales and prices. Industrial production picked up, as exports
and orders rose for big-ticket items. Consumer spending overall improved mainly
due to the temporary boost from the month-long cash-for-clunkers program.
Many commodities' prices rose during the six months under review but remained
well below highs hit in 2008, helping to mute inflationary pressures. October's
inflation rate was an annualized -0.2%, while core inflation, which excludes
food and energy costs, was an annualized 1.7%.(1) The Federal Reserve Board
(Fed) maintained the federal funds target rate in a range of 0% to 0.25%
throughout the period, but given better credit and economic conditions, the Fed
began to move away from crisis mode by allowing some of its government support
measures to expire or shrink. Economic activity, as measured by U.S. gross
domestic product (GDP), fell at an annualized rate of 0.7% in the second quarter
of 2009 and rose at an annualized 2.8% rate in the third quarter. After a
yearlong contraction, GDP returned to stronger-than-expected growth on improved
consumer spending and homebuilding, yet much of the expansion was tied to
federal government spending.
U.S. equity markets rose and were fueled by renewed optimism and aggregate
corporate earnings that beat consensus expectations. Skepticism about the sus-
(1.) Source: Bureau of Labor Statistics.
Semiannual Report | 3
tainability of positive trends led to market volatility near period-end. For the
six months under review, the Dow Jones Industrial Average, Standard & Poor's 500
Index (S&P 500) and NASDAQ Composite Index posted total returns of +20.73%,
+20.04% and +19.62%, respectively.(2) All sectors made gains, and the
financials, information technology and energy sectors had the strongest returns.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
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 | Semiannual Report
Franklin Biotechnology Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund
seeks capital appreciation by investing at least 80% of its net assets in
securities of biotechnology companies and discovery research firms located in
the U.S. and other countries.
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.
PORTFOLIO BREAKDOWN
Franklin Biotechnology Discovery Fund
Based on Total Net Assets as of 10/31/09
(BAR CHART)
Biotechnology 73.2%
Pharmaceutical 17.3%
Life Sciences Tools & Services 8.6%
Short-Term Investments & Other Net Assets 0.9%
This semiannual report for Franklin Biotechnology Discovery Fund covers the
period ended October 31, 2009.
PERFORMANCE OVERVIEW
Franklin Biotechnology Discovery Fund - Class A posted a cumulative total return
of +8.95% for the six months under review. The Fund underperformed its narrow
benchmark, the NASDAQ Biotechnology Index, and its broad benchmark, the Standard
& Poor's 500 Index (S&P 500), which had +12.17% and +20.04% total returns for
the same period.(1) For comparison, the NASDAQ Composite Index had a six-month
return of +19.62%.(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
(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.
(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 indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, and an index is not 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 21.
Semiannual Report | 5
TOP 10 HOLDINGS
Franklin Biotechnology Discovery Fund
10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Celgene Corp. 10.0%
BIOTECHNOLOGY
Gilead Sciences Inc. 9.4%
BIOTECHNOLOGY
Genzyme Corp. 8.6%
BIOTECHNOLOGY
Amgen Inc. 8.4%
BIOTECHNOLOGY
Life Technologies Corp. 4.7%
LIFE SCIENCES TOOLS & SERVICES
Roche Holding AG (Switzerland) 4.6%
PHARMACEUTICALS
Cephalon Inc. 3.7%
BIOTECHNOLOGY
Biogen Idec Inc. 3.5%
BIOTECHNOLOGY
BioMarin Pharmaceutical Inc. 3.2%
BIOTECHNOLOGY
Teva Pharmaceutical Industries Ltd., ADR (Israel) 2.6%
PHARMACEUTICALS
review of medical literature, consultation of community and academic physicians,
and attendance at scientific meetings and symposia. Additionally, we favor
companies with excellent management, strong financial characteristics and
attractive valuations.
MANAGER'S DISCUSSION
During the six months under review, some of the most significant contributors to
the Fund's absolute performance included Celgene, Amgen and BioForm Medical. In
the biotechnology industry, Celgene develops and markets therapeutic and
molecular diagnostic products, whereas Amgen is one of the largest U.S.
biotechnology firms that uses cellular biology and medicinal chemistry to target
cancers, kidney ailments, inflammatory disorders and metabolic diseases. In the
pharmaceuticals industry, BioForm Medical makes a dermal filler product used
mainly for cosmetic purposes. Additional key contributors included Life
Technologies in the life sciences tools and services industry and Roche Holding
in the pharmaceuticals industry.
In contrast, major detractors from absolute Fund results during the reporting
period included biotechnology holdings Cephalon, Gilead Sciences and Myriad
Genetics. Cephalon designs treatments for narcolepsy, cancer pain and epilepsy,
while Gilead Sciences focuses on infectious diseases such as hepatitis, HIV and
infections related to AIDS. Myriad Genetics produces drugs and diagnostic
testing systems aimed at finding and treating specific cancers. Other large
detractors included Fund positions in biotechnology companies Genzyme and Biogen
Idec.
6 | Semiannual Report
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 OCTOBER 31, 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.
Semiannual Report | 7
Performance Summary as of 10/31/09
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 of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FBDIX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$4.45 $54.18 $49.73
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/09 9/1/09
- --------------------------- ------ -------- ------
Net Asset Value (NAV) -$2.81 $54.20 $57.01
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; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------- --------
Cumulative Total Return(1) +8.95% +2.26% +8.73% +72.21%
Average Annual Total Return(2) +2.71% -3.61% +0.49% +4.96%
Value of $10,000 Investment(3) $10,271 $9,639 $10,248 $16,230
Avg. Ann. Total Return (9/30/09)(4) -6.74% +1.70% +6.13%
Total Annual Operating Expenses(5) 1.37%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- ------- --------
Cumulative Total Return(1) +9.01% +2.30% +8.77% +72.28%
Average Annual Total Return(2) +9.01% +2.30% +1.70% +5.59%
Value of $10,000 Investment(3) $10,901 $10,230 $10,877 $17,228
Avg. Ann. Total Return (9/30/09)(4) -1.03% +2.92% +6.76%
Total Annual Operating Expenses(5) 1.12%
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 | Semiannual Report
Performance Summary (CONTINUED)
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.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) 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 9/1/09, 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 9/1/09, 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 8/31/09, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 9/1/09
(commencement of sales), the cumulative total return of Advisor Class
shares was -4.93%.
Semiannual 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 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,089.70 $7.27
Hypothetical (5% return before expenses) $1,000 $1,018.25 $7.02
ADVISOR CLASS
Actual (9/1/09-10/31/09) $1,000 $ 950.90 $1.83
Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.82
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.38% and Advisor: 1.12%), multiplied by the
average account value over the period, multiplied by 184/365 (Hypothetical
for each share class; Actual for Class A) to reflect the one-half year
period. For Actual Advisor Class expenses, the multiplier is 61/365 to
reflect the number of days since inception.
Semiannual 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 10/31/09
(BAR CHART)
North America 77.9%
Europe 6.2%
Australia & New Zealand 4.5%
Latin America & Caribbean 2.8%
Middle East & Africa 1.6%
Asia 0.2%
Short-Term Investments & Other Net Assets 6.8%
We are pleased to bring you Franklin Natural Resources Fund's semiannual report
for the period ended October 31, 2009.
PERFORMANCE OVERVIEW
Franklin Natural Resources Fund - Class A posted a +29.67% cumulative total
return for the six months under review. The Fund outperformed its narrow
benchmark, the Standard & Poor's (S&P) North American Natural Resources Index,
which had a +26.99% total return.(1) It also outperformed its broad benchmark,
the S&P 500 Index (S&P 500), which had a +20.04% total return for the same
period.(2) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 15.
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 can include investments in the metals and mining, chemicals,
paper and forest products, and other related sectors.
(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 S&P 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. 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, and an index is not 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 27.
12 | Semiannual Report
MANAGER'S DISCUSSION
During the six months under review, the Fund's holdings benefited from emerging
signs of an economic recovery, rising commodity prices, and a general
improvement in the fundamental backdrop for commodity-driven sectors. Although
the second half of 2008 and early 2009 presented many challenges, we sought to
take advantage of the numerous opportunities we found to invest in quality
companies at attractive valuations, which generally benefited Fund performance.
On an industry basis, the biggest contributors to absolute performance were
investments in oil and gas exploration and production and in oil and gas
equipment and services.
The largest individual contributors to the Fund's absolute performance included
Addax Petroleum, Occidental Petroleum, Halliburton and Devon Energy. Addax
Petroleum was a Canada-based exploration and production company acquired by
Chinese concern Sinopec in an all-cash transaction in early October. Occidental
Petroleum engages in oil and gas exploration and production and makes basic
chemicals, plastics and petrochemicals. The company released information
regarding an oil and natural gas discovery in California during the third
quarter of 2009, which, in addition to positive earnings results and rising oil
prices, helped lift the company's shares. Halliburton, one of the world's
largest oilfield services companies, also announced better-than-expected
earnings results during the period and benefited from investors' views that
higher oil prices could lead to healthy levels of spending on exploration and
development activities. Devon Energy is an independent oil and gas exploration
and production company that similarly benefited from the implications of rising
oil prices and positive operational results. Additional key contributors
included FMC Technologies and Southwestern Energy.
In contrast, among the most significant detractors for the reporting period were
First Uranium and Tesco. First Uranium operates two mining facilities with gold
and uranium deposits in South Africa. Although the company's assets still
appeared to hold significant value, increased costs and project delays hampered
the shares' performance. Tesco is an oil and gas drilling equipment manufacturer
that possesses unique well completion technology. Although the Canada-based
company's technology continued to hold significant long-term promise, its core
operations faced significant headwinds from the decline in U.S. natural gas
prices from 2008 levels and a reduction in drilling activity in North America.
Other detractors included Mosaic and General Maritime.
PORTFOLIO BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 10/31/09
(BAR CHART)
Oil & Gas Exploration & Production 27.1%
Oil & Gas Equipment & Services 17.9%
Integrated Oil & Gas 17.6%
Diversified Metals & Mining 8.1%
Gold 7.9%
Oil & Gas Drilling 3.8%
Oil & Gas Refining & Marketing 3.0%
Coal & Consumable Fuels 2.9%
Precious Metals & Minerals 1.3%
Other 3.6%
Short-Term Investments & Other Net Assets 6.8%
Semiannual Report | 13
TOP 10 HOLDINGS
Franklin Natural Resources Fund
10/31/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Occidental Petroleum Corp. 4.0%
INTEGRATED OIL & GAS, U.S.
Devon Energy Corp. 3.6%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
XTO Energy Inc. 3.4%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Petrohawk Energy Corp. 2.8%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Noble Energy Inc. 2.8%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Exxon Mobil Corp. 2.7%
INTEGRATED OIL & GAS, U.S.
Range Resources Corp. 2.7%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Chevron Corp. 2.5%
INTEGRATED OIL & GAS, U.S.
Marathon Oil Corp. 2.4%
INTEGRATED OIL & GAS, U.S.
Halliburton Co. 2.3%
OIL & GAS EQUIPMENT & SERVICES, U.S.
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 OCTOBER 31, 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.
14 | Semiannual Report
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FRNRX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- --------
Net Asset Value (NAV) +$6.69 $29.24 $22.55
CLASS C (SYMBOL: FNCRX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- --------
Net Asset Value (NAV) +$6.47 $28.62 $22.15
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 10/31/09 4/30/09
- ----------------------------- ------ -------- --------
Net Asset Value (NAV) +$7.15 $31.09 $23.94
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) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- ------- --------
Cumulative Total Return(2) +29.67% +34.82% +71.44% +199.39%
Average Annual Total Return(3) +22.19% +27.06% +10.08% +10.93%
Value of $10,000 Investment(4) $12,219 $12,706 $16,161 $ 28,210
Avg. Ann. Total Return (9/30/09)(5) -8.88% +10.16% +10.46%
Total Annual Operating Expenses(6) 1.11%
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (9/1/05)
- ------- ------- ------- ------- ---------
Cumulative Total Return(2) +29.21% +33.83% +5.28% +16.21%
Average Annual Total Return(3) +28.16% +32.83% +1.73% +3.67%
Value of $10,000 Investment(4) $12,816 $13,283 $10,528 $11,621
Avg. Ann. Total Return (9/30/09)(5) -4.91% +4.15% +3.87%
Total Annual Operating Expenses(6) 1.84%
ADVISOR CLASS(1) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- ------- --------
Cumulative Total Return(2) +29.87% +35.18% +74.04% +209.58%
Average Annual Total Return(3) +29.87% +35.18% +11.72% +11.96%
Value of $10,000 Investment(4) $12,987 $13,518 $17,404 $30,958
Avg. Ann. Total Return (9/30/09)(5) -3.10% +11.79% +11.49%
Total Annual Operating Expenses(6) 0.84%
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.
Semiannual Report | 15
Performance Summary (CONTINUED)
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. THE FUND'S HOLDINGS IN 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. Six-month return has not been
annualized.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(6.) 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.
16 | Semiannual Report
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.
Semiannual Report | 17
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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,296.70 $ 6.31
Hypothetical (5% return before expenses) $1,000 $1,019.71 $ 5.55
CLASS C
Actual $1,000 $1,292.10 $10.34
Hypothetical (5% return before expenses) $1,000 $1,016.18 $ 9.10
ADVISOR CLASS
Actual $1,000 $1,298.70 $ 4.58
Hypothetical (5% return before expenses) $1,000 $1,021.22 $ 4.02
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.09%; C: 1.79%; and Advisor: 0.79%),
multiplied by the average account value over the period, multiplied by
184/365 to reflect the one-half year period.
18 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -----------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 49.73 $ 54.72 $ 64.53 $ 56.44 $ 46.05 $ 53.26
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.14) (0.21) (0.59) (0.57) (0.59) (0.58)
Net realized and unrealized gains (losses) .. 4.59 (4.78) (9.22) 8.66 10.98 (6.63)
-------- -------- -------- -------- -------- --------
Total from investment operations ............... 4.45 (4.99) (9.81) 8.09 10.39 (7.21)
-------- -------- -------- -------- -------- --------
Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 54.18 $ 49.73 $ 54.72 $ 64.53 $ 56.44 $ 46.05
======== ======== ======== ======== ======== ========
Total return(e) ................................ 8.95% (9.12)% (15.22)% 14.39% 22.50% (13.54)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before expense reduction .............. 1.38% 1.32% 1.24% 1.35% 1.25% 1.29%
Expenses net of expense reduction .............. 1.38%(g) 1.32%(g) 1.23% 1.35%(g) 1.25%(g) 1.29%(g)
Net investment income (loss) ................... (0.51)% (0.38)% (0.98)% (1.01)% (1.06)% (1.17)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $290,827 $274,324 $318,537 $457,390 $510,700 $485,909
Portfolio turnover rate ........................ 17.87% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 19
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
PERIOD ENDED
OCTOBER 31, 2009(a)
ADVISOR CLASS (UNAUDITED)
- ------------- -------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $57.01
------
Income from investment operations(b):
Net investment income (loss)(c) ............. (0.05)
Net realized and unrealized gains (losses) .. (2.76)
------
Total from investment operations ............... (2.81)
------
Net asset value, end of period ................. $54.20
======
Total return(d) ................................ (4.93)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses(f) .................................... 1.12%
Net investment income (loss) ................... (0.25)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $ 821
Portfolio turnover rate ........................ 17.87%
(a) For the period September 1, 2009 (effective date) to October 31, 2009.
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
20 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
SHARES/
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY WARRANTS VALUE
- ------------------------------------- -------------- --------- -------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 97.1%
BIOTECHNOLOGY 71.2%
(a) AEterna Zentaris Inc. ................................................ Canada 1,182,925 $ 1,206,585
(a) AEterna Zentaris Inc., wts., 12/23/11 ................................ Canada 152,329 --
(a) Alexion Pharmaceuticals Inc. ......................................... United States 77,800 3,455,098
(a) Amgen Inc. ........................................................... United States 453,500 24,366,555
(a) Anadys Pharmaceuticals Inc. .......................................... United States 349,500 681,525
(a) ArQule Inc. .......................................................... United States 508,609 1,703,840
(a) Biogen Idec Inc. ..................................................... United States 243,161 10,244,373
(a) BioMarin Pharmaceutical Inc. ......................................... United States 600,400 9,342,224
(a) Biospecifics Technologies Corp. ...................................... United States 43,600 1,329,800
(a) Celgene Corp. ........................................................ United States 569,400 29,067,870
(a) Cephalon Inc. ........................................................ United States 200,100 10,921,458
(a) Chelsea Therapeutics International Ltd. .............................. United States 305,400 842,904
(a) Clinical Data Inc. ................................................... United States 58,300 919,974
(a) ConjuChem Biotechnologies Inc., wts., 12/31/11 ....................... Canada 2,343,750 --
(a) Curis Inc. ........................................................... United States 967,900 1,926,121
(a) Dendreon Corp. ....................................................... United States 81,100 2,049,397
(a) Facet Biotech Corp. .................................................. United States 230,060 3,940,928
(a) Gentium SpA, ADR ..................................................... Italy 851,600 2,205,644
(a) Genzyme Corp. ........................................................ United States 493,100 24,950,860
(a) Gilead Sciences Inc. ................................................. United States 645,200 27,453,260
(a) Halozyme Therapeutics Inc. ........................................... United States 93,100 564,186
(a) Human Genome Sciences Inc. ........................................... United States 221,800 4,145,442
(a, b) Indevus Pharmaceuticals Inc., Escrow Account ......................... United States 1,006,900 1,100,743
(a) Myriad Genetics Inc. ................................................. United States 144,400 3,506,032
(a) Neurocrine Biosciences Inc. .......................................... United States 335,700 745,254
(a) Onyx Pharmaceuticals Inc. ............................................ United States 238,600 6,346,760
(a) Orexigen Therapeutics Inc. ........................................... United States 478,154 3,088,875
(a) OSI Pharmaceuticals Inc. ............................................. United States 188,800 6,083,136
PDL BioPharma Inc. ................................................... United States 556,400 4,679,324
(a) Pharmasset Inc. ...................................................... United States 149,175 2,801,506
(a) RXi Pharmaceuticals Corp. ............................................ United States 18,744 39,175
(a) Savient Pharmaceuticals Inc. ......................................... United States 141,700 1,785,420
(a) Talecris Biotherapeutics Holdings Corp. .............................. United States 270,900 5,434,254
(a) Transcept Pharmaceuticals Inc. ....................................... United States 95,600 524,844
(a) United Therapeutics Corp. ............................................ United States 61,600 2,620,464
(a) VaxGen Inc. .......................................................... United States 826,000 437,780
(a) Vertex Pharmaceuticals Inc. .......................................... United States 216,100 7,252,316
-------------
207,763,927
-------------
LIFE SCIENCES TOOLS & SERVICES 8.6%
(a) Illumina Inc. ........................................................ United States 151,200 4,853,520
(a) Life Technologies Corp. .............................................. United States 292,400 13,792,508
(a) QIAGEN NV ............................................................ Netherlands 258,900 5,392,887
(a, c) Sequenom Inc. ........................................................ United States 325,720 898,987
-------------
24,937,902
-------------
Semiannual Report | 21
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
SHARES/
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY WARRANTS VALUE
- ------------------------------------- -------------- --------- -------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PHARMACEUTICALS 17.3%
Allergan Inc. ........................................................ United States 67,600 $ 3,802,500
(a) Ardea Biosciences Inc. ............................................... United States 169,012 2,281,662
(a) ARYx Therapeutics Inc. ............................................... United States 273,100 682,750
(a) Biodel Inc. .......................................................... United States 175,900 735,262
(a) BioForm Medical Inc. ................................................. United States 1,394,240 5,047,149
(a) Cadence Pharmaceuticals Inc. ......................................... United States 121,056 1,093,136
(a) Cardiome Pharma Corp. ................................................ Canada 572,928 2,240,149
(a) Cypress Bioscience Inc. .............................................. United States 175,100 1,075,114
(a) Eurand NV ............................................................ Netherlands 159,200 2,117,360
(a) Inspire Pharmaceuticals Inc. ......................................... United States 252,300 1,127,781
(a) Map Pharmaceuticals Inc. ............................................. United States 195,400 1,606,188
(a) Nuvo Research Inc. ................................................... Canada 3,443,000 1,018,592
(a) Nuvo Research Inc. (Legend Shares) ................................... Canada 3,441,200 1,018,059
(a) Penwest Pharmaceuticals Co. .......................................... United States 369,400 797,904
Roche Holding AG ..................................................... Switzerland 84,300 13,532,368
Shire PLC, ADR ....................................................... United Kingdom 89,000 4,743,700
Teva Pharmaceutical Industries Ltd., ADR ............................. Israel 148,200 7,481,136
-------------
50,400,810
-------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $270,983,613) ............................................... 283,102,639
-------------
PREFERRED STOCKS (COST $5,065,937) 1.8%
BIOTECHNOLOGY 1.8%
(a, b) FibroGen Inc., pfd., E ............................................... United States 1,128,271 5,144,916
-------------
PRINCIPAL
AMOUNT(d)
---------
CONVERTIBLE BONDS (COST $1,480,677) 0.2%
BIOTECHNOLOGY 0.2%
(b) ConjuChem Biotechnologies Inc., cvt., sub. note, 144A, 8.00%,
12/31/10 .......................................................... Canada 1,500,000 CAD 736,721
-------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $277,530,227) ............................................... 288,984,276
-------------
SHARES
---------
SHORT TERM INVESTMENTS 2.8%
MONEY MARKET FUNDS (COST $7,047,443) 2.4%
(e) Institutional Fiduciary Trust Money Market Portfolio, 0.00% .......... United States 7,047,443 7,047,443
-------------
(f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.4%
MONEY MARKET FUNDS (COST $1,059,000) 0.4%
(g) Bank of New York Institutional Cash Reserve Fund, Series A, 0.05% .... United States 1,059,000 1,059,000
-------------
TOTAL INVESTMENTS (COST $285,636,670) 101.9% ......................... 297,090,719
OTHER ASSETS, LESS LIABILITIES (1.9)% ................................ (5,442,707)
-------------
NET ASSETS 100.0% .................................................... $ 291,648,012
=============
22 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
See Abbreviations on page 47.
(a) Non-income producing.
(b) See Note 8 regarding restricted securities.
(c) A portion or all of the security is on loan at October 31, 2009. See Note
1(c).
(d) The principal amount is stated in U.S. dollars unless otherwise indicated.
(e) See Note 7 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
(f) See Note 1(c) 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.
Semiannual Report | 23
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN NATURAL RESOURCES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ------------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ---------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 22.55 $ 45.78 $ 37.84 $ 35.92 $ 24.32 $ 18.80
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ................... 0.02 0.05 0.05 0.09 0.13 0.04
Net realized and unrealized gains
(losses) ................................ 6.67 (21.78) 11.11 4.29 12.64 5.48
-------- -------- -------- -------- -------- --------
Total from investment operations .............. 6.69 (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) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................ $ 29.24 $ 22.55 $ 45.78 $ 37.84 $ 35.92 $ 24.32
======== ======== ======== ======== ======== ========
Total return(e) ............................... 29.67% (46.81)% 30.37% 12.86% 53.11% 29.36%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ................................... 1.09% 1.09% 0.97% 1.03% 1.02% 1.08%
Net investment income ......................... 0.11% 0.18% 0.13% 0.26% 0.44% 0.17%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $552,917 $393,713 $752,051 $475,912 $440,475 $211,327
Portfolio turnover rate ....................... 18.92% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
24 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -------------------------------------------
CLASS C (UNAUDITED) 2009 2008 2007 2006(a)
- ------- ---------------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 22.15 $ 45.35 $ 37.58 $ 35.79 $ 31.56
------- ------- ------- ------- -------
Income from investment operations(b):
Net investment income (loss)(c) ............ (0.08) (0.16) (0.25) (0.17) (0.01)
Net realized and unrealized gains
(losses) ................................ 6.55 (21.54) 11.04 4.25 5.39
------- ------- ------- ------- -------
Total from investment operations .............. 6.47 (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) --(e) --(e) --(e)
------- ------- ------- ------- -------
Net asset value, end of period ................ $ 28.62 $ 22.15 $ 45.35 $ 37.58 $ 35.79
======= ======= ======= ======= =======
Total return(f) ............................... 29.21% (47.19)% 29.47% 12.01% 17.47%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) ................................... 1.79% 1.82% 1.68% 1.76% 1.67%
Net investment income (loss) .................. (0.59)% (0.55)% (0.58)% (0.47)% (0.21)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $95,363 $61,360 $85,387 $33,723 $18,485
Portfolio turnover rate ....................... 18.92% 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(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.
Semiannual Report | 25
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005
- ------------- ---------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 23.94 $ 48.27 $ 39.71 $ 37.57 $ 25.35 $ 19.53
------- ------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ................... 0.06 0.14 0.19 0.18 0.25 0.13
Net realized and unrealized gains
(losses) ................................ 7.09 (22.97) 11.69 4.52 13.18 5.69
------- ------- ------- ------- ------- -------
Total from investment operations .............. 7.15 (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) --(d) --(d) --(d) --(d)
------- ------- ------- ------- ------- -------
Net asset value, end of period ................ $ 31.09 $ 23.94 $ 48.27 $ 39.71 $ 37.57 $ 25.35
======= ======= ======= ======= ======= =======
Total return(e) ............................... 29.87% (46.66)% 30.74% 13.20% 53.55% 29.80%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ................................... 0.79% 0.82% 0.68% 0.76% 0.69% 0.73%
Net investment income ......................... 0.41% 0.45% 0.42% 0.53% 0.77% 0.52%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $75,293 $52,402 $77,361 $52,103 $43,874 $33,048
Portfolio turnover rate ....................... 18.92% 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) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
26 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
-------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 89.7%
AGRICULTURAL PRODUCTS 0.8%
Bunge Ltd. ................................................... United States 107,000 $ 6,105,420
------------
COAL & CONSUMABLE FUELS 2.9%
(a) Alpha Natural Resources Inc. ................................. United States 135,000 4,585,950
(a, b) Energy Coal Resources, 144A .................................. United States 199,375 --
Peabody Energy Corp. ......................................... United States 300,000 11,877,000
(a) Uranium One Inc. ............................................. Canada 1,690,000 4,796,653
------------
21,259,603
------------
CONSTRUCTION & ENGINEERING 0.5%
Boart Longyear Group ......................................... Australia 3,798,152 914,597
(c) Boart Longyear Group, 144A ................................... Australia 11,406,000 2,746,572
------------
3,661,169
------------
DIVERSIFIED METALS & MINING 7.1%
(a) Anatolia Minerals Development Ltd. ........................... Canada 400,000 791,384
BHP Billiton PLC, ADR ........................................ United Kingdom 197,000 10,677,400
(a) First Uranium Corp. .......................................... South Africa 390,000 973,513
(a, c) First Uranium Corp., 144A .................................... Canada 205,200 512,217
(a) Freeport-McMoRan Copper & Gold Inc., B ....................... United States 60,000 4,401,600
(a) Ivanhoe Australia Ltd. ....................................... Australia 987,284 3,165,781
(a) Ivanhoe Mines Ltd. ........................................... Canada 450,000 4,846,500
(a) Mineral Deposits Ltd. ........................................ Australia 2,500,000 2,169,970
(a) Mirabela Nickel Ltd. ......................................... Australia 180,000 434,336
(a, c) Mirabela Nickel Ltd., 144A ................................... Australia 845,850 2,041,019
(a) Nautilus Minerals Inc. ....................................... Canada 817,000 891,287
(a, c) Nautilus Minerals Inc., 144A ................................. Canada 474,000 517,099
(a) OZ Minerals Ltd. ............................................. Australia 2,700,000 2,821,274
(a) PanAust Ltd. ................................................. Australia 2,663,435 1,087,697
(a ,c) PanAust Ltd., 144A ........................................... Australia 5,767,586 2,355,375
Rio Tinto PLC, ADR ........................................... United Kingdom 42,900 7,637,487
(a) Xstrata PLC .................................................. Switzerland 420,000 6,088,965
------------
51,412,904
------------
FERTILIZERS & AGRICULTURAL CHEMICALS 0.7%
The Mosaic Co. ............................................... United States 115,000 5,373,950
------------
GOLD 7.9%
AngloGold Ashanti Ltd., ADR .................................. South Africa 115,000 4,317,100
Barrick Gold Corp. ........................................... Canada 165,000 5,928,450
(a, c) Centamin Egypt Ltd., 144A .................................... Australia 2,000,000 3,993,898
(a) Centerra Gold Inc. ........................................... Canada 330,000 2,532,242
Gold Fields Ltd., ADR ........................................ South Africa 260,000 3,315,000
(a) Great Basin Gold Ltd. ........................................ Canada 2,000,000 2,939,953
(a) Great Basin Gold Ltd., wts., 10/15/10 ........................ Canada 1,000,000 314,335
(a) Guyana Goldfields Inc. ....................................... Canada 500,000 2,584,015
(a, c) Jinshan Gold Mines Inc., 144A ................................ Canada 1,241,000 2,019,285
(a) Nevsun Resources Ltd. ........................................ Canada 1,300,000 3,461,379
(a, b) Nevsun Resources Ltd., 144A .................................. Canada 500,000 1,264,734
Newcrest Mining Ltd. ......................................... Australia 340,000 9,766,161
Semiannual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
-------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
GOLD (CONTINUED)
(a, c) Osisko Mining Corp., 144A .................................... Canada 642,200 $ 4,334,175
(a, c) Osisko Mining Corp., wts., 144A, 11/17/09 .................... Canada 321,100 629,346
Randgold Resources Ltd., ADR ................................. United Kingdom 120,000 8,005,200
(a) St. Barbara Ltd. ............................................. Australia 5,000,000 1,352,072
------------
56,757,345
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.2%
(a, c) Magma Energy Corp., 144A ..................................... Canada 799,800 1,345,755
------------
INTEGRATED OIL & GAS 16.2%
Chevron Corp. ................................................ United States 240,000 18,369,600
ConocoPhillips ............................................... United States 147,000 7,376,460
Exxon Mobil Corp. ............................................ United States 275,000 19,709,250
Hess Corp. ................................................... United States 160,000 8,758,400
Marathon Oil Corp. ........................................... United States 537,000 17,167,890
Murphy Oil Corp. ............................................. United States 125,000 7,642,500
Occidental Petroleum Corp. ................................... United States 382,000 28,986,160
Petroleo Brasileiro SA, ADR .................................. Brazil 68,000 3,142,960
Total SA, B, ADR ............................................. France 100,000 6,007,000
------------
117,160,220
------------
MARINE 0.3%
(a) Aries Maritime Transport Ltd. ................................ Bermuda 387,850 383,972
Genco Shipping & Trading Ltd. ................................ United States 103,000 2,048,670
------------
2,432,642
------------
OIL & GAS DRILLING 3.8%
(a) Nabors Industries Ltd. ....................................... United States 270,000 5,624,100
Noble Corp. .................................................. United States 94,000 3,829,560
Rowan Cos. Inc. .............................................. United States 140,000 3,255,000
(a) Transocean Ltd. .............................................. United States 173,000 14,516,430
------------
27,225,090
------------
OIL & GAS EQUIPMENT & SERVICES 17.9%
Baker Hughes Inc. ............................................ United States 81,000 3,407,670
(a) Cameron International Corp. .................................. United States 275,000 10,166,750
(a) Dresser-Rand Group Inc. ...................................... United States 112,000 3,300,640
(a) Dril-Quip Inc. ............................................... United States 195,000 9,475,050
(a) FMC Technologies Inc. ........................................ United States 230,000 12,098,000
(a) Global Industries Ltd. ....................................... United States 470,000 3,426,300
Halliburton Co. .............................................. United States 560,000 16,357,600
(a) Helix Energy Solutions Group Inc. ............................ United States 300,000 4,119,000
(a) Hornbeck Offshore Services Inc. .............................. United States 126,000 3,063,060
(a) National Oilwell Varco Inc. .................................. United States 230,000 9,427,700
(a) Oil States International Inc. ................................ United States 140,000 4,821,600
(a) PHI Inc., non-voting ......................................... United States 74,000 1,271,320
Schlumberger Ltd. ............................................ United States 205,000 12,751,000
Smith International Inc. ..................................... United States 450,000 12,478,500
(a) Superior Energy Services Inc. ................................ United States 260,000 5,618,600
(a) T-3 Energy Services Inc. ..................................... United States 180,000 3,603,600
28 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
-------------------------------- -------------- --------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
OIL & GAS EQUIPMENT & SERVICES (CONTINUED)
(a) Tesco Corp. .................................................. Canada 255,000 $ 2,213,400
(a) Weatherford International Ltd. ............................... United States 690,000 12,095,700
------------
129,695,490
------------
OIL & GAS EXPLORATION & PRODUCTION 26.0%
Anadarko Petroleum Corp. ..................................... United States 105,000 6,397,650
(a) Bill Barrett Corp. ........................................... United States 150,000 4,647,000
(a) Brigham Exploration Co. ...................................... United States 400,000 3,800,000
(a) Concho Resources Inc. ........................................ United States 285,000 10,861,350
(a) Continental Resources Inc. ................................... United States 255,000 9,488,550
Devon Energy Corp. ........................................... United States 400,000 25,884,000
EOG Resources Inc. ........................................... United States 165,000 13,473,900
(a) Gran Tierra Energy Inc. ...................................... Canada 1,400,000 6,664,000
(a) Mariner Energy Inc. .......................................... United States 370,000 4,713,800
Noble Energy Inc. ............................................ United States 305,000 20,017,150
(a) Northern Oil & Gas Inc. ...................................... United States 317,000 2,891,040
(a) Petrohawk Energy Corp. ....................................... United States 860,000 20,227,200
Range Resources Corp. ........................................ United States 385,000 19,269,250
(a) Southwestern Energy Co. ...................................... United States 325,000 14,163,500
(a) Westernzagros Resources Ltd. ................................. Canada 380,000 467,249
XTO Energy Inc. .............................................. United States 600,000 24,936,000
------------
187,901,639
------------
OIL & GAS REFINING & MARKETING 3.0%
Aegean Marine Petroleum Network Inc. ......................... United States 185,000 4,347,500
(a) CVR Energy Inc. .............................................. United States 317,000 3,334,840
Holly Corp. .................................................. United States 220,000 6,382,200
Petroplus Holdings AG ........................................ Switzerland 117,500 2,572,174
Valero Energy Corp. .......................................... United States 273,000 4,941,300
------------
21,578,014
------------
OIL & GAS STORAGE & TRANSPORTATION 0.3%
DHT Maritime Inc. ............................................ Jersey Islands 370,600 1,267,452
General Maritime Corp. ....................................... United States 177,000 1,219,530
------------
2,486,982
------------
PRECIOUS METALS & MINERALS 1.3%
(c) Fresnillo PLC, 144A .......................................... United Kingdom 300,000 3,652,296
(a, c) G-Resources Group Ltd., 144A ................................. Hong Kong 22,034,900 1,393,165
Impala Platinum Holdings Ltd. ................................ South Africa 130,000 2,901,429
(a) MAG Silver Corp. ............................................. Canada 250,000 1,315,120
------------
9,262,010
------------
SPECIALTY CHEMICALS 0.1%
(a) Flotek Industries Inc. ....................................... United States 293,000 471,730
------------
STEEL 0.7%
Cliffs Natural Resources Inc. ................................ United States 145,000 5,157,650
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $575,047,530) ....................................... 649,287,613
------------
Semiannual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES/WARRANTS VALUE
-------------------------------- -------------- --------------- ------------
CONVERTIBLE PREFERRED STOCKS 1.1%
OIL & GAS EXPLORATION & PRODUCTION 1.1%
McMoRan Exploration Co., 8.00%, cvt. pfd. .................... United States 2,400 $ 3,171,840
(c) SandRidge Energy Inc., 8.50%, cvt. pfd., 144A ................ United States 31,900 4,669,362
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,431,776) 7,841,202
------------
PREFERRED STOCKS 2.4%
COAL & CONSUMABLE FUELS 0.0%
(a, b) Energy Coal Resources, 144A, pfd. ............................ United States 29,847 --
------------
DIVERSIFIED METALS & MINING 1.0%
Vale SA, ADR, pfd., A ........................................ Brazil 298,000 6,883,800
------------
INTEGRATED OIL & GAS 1.4%
Petroleo Brasileiro SA, ADR, pfd. ............................ Brazil 260,000 10,431,200
------------
TOTAL PREFERRED STOCKS (COST $11,456,542) .................... 17,315,000
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $591,935,848) ....................................... 674,443,815
------------
SHORT TERM INVESTMENTS (COST $52,708,618) 7.3%
MONEY MARKET FUNDS 7.3%
(d) Institutional Fiduciary Trust Money Market Portfolio, 0.00% .. United States 52,708,618 52,708,618
------------
TOTAL INVESTMENTS (COST $644,644,466) 100.5% ................. 727,152,433
OTHER ASSETS, LESS LIABILITIES (0.5)% ........................ (3,579,479)
------------
NET ASSETS 100.0% ............................................ $723,572,954
============
See Abbreviations on page 47.
(a) Non-income producing.
(b) See Note 8 regarding restricted securities.
(c) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under the
Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2009,
the aggregate value of these securities was $30,209,564, representing 4.18%
of net assets.
(d) See Note 7 regarding investments in the 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.
30 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2009 (unaudited)
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................. $ 278,589,227 $591,935,848
Cost - Sweep Money Fund (Note 7) ........................ 7,047,443 52,708,618
------------- ------------
Total cost of investments ............................... $ 285,636,670 $644,644,466
============= ============
Value - Unaffiliated issuers ............................ $ 290,043,276 $674,443,815
Value - Sweep Money Fund (Note 7) ....................... 7,047,443 52,708,618
------------- ------------
Total value of investments* ............................. 297,090,719 727,152,433
Foreign currency, at value (cost $4,963) ................... -- 3,743
Receivables:
Investment securities sold .............................. 3,860,716 1,109,798
Capital shares sold ..................................... 264,851 3,468,652
Dividends and interest .................................. 127,293 394,869
Other assets ............................................... 166 246
------------- ------------
Total assets ......................................... 301,343,745 732,129,741
------------- ------------
Liabilities:
Payables:
Investment securities purchased ......................... 7,240,251 4,417,134
Capital shares redeemed ................................. 872,909 3,159,397
Affiliates .............................................. 374,247 610,145
Allocator Funds (Note 9) ................................ -- 11,444
Payable upon return of securities loaned ................... 1,059,000 --
Accrued expenses and other liabilities ..................... 149,326 358,667
------------- ------------
Total liabilities .................................... 9,695,733 8,556,787
------------- ------------
Net assets, at value .............................. $ 291,648,012 $723,572,954
============= ============
Net assets consist of:
Paid-in capital ............................................ $ 534,453,539 $716,423,365
Undistributed net investment income (loss) ................. (1,581,877) (2,732,738)
Net unrealized appreciation (depreciation) ................. 11,465,688 82,501,751
Accumulated net realized gain (loss) ....................... (252,689,338) (72,619,424)
------------- ------------
Net assets, at value .............................. $ 291,648,012 $723,572,954
============= ============
* The Franklin Biotechnology Discovery Fund includes $898,987 of securities
loaned.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 31
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2009 (unaudited)
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
CLASS A:
Net assets, at value ..................................................... $290,827,069 $552,916,648
------------ ------------
Shares outstanding ....................................................... 5,367,695 18,911,446
------------ ------------
Net asset value per share(a) ............................................. $ 54.18 $ 29.24
------------ ------------
Maximum offering price per share (net asset value per share / 94.25%) .... $ 57.49 $ 31.02
------------ ------------
CLASS C:
Net assets, at value ..................................................... $ 95,363,352
------------
Shares outstanding ....................................................... 3,332,625
------------
Net asset value and maximum offering price per share(a) .................. $ 28.62
------------
ADVISOR CLASS:
Net assets, at value ..................................................... $ 820,943 $ 75,292,954
------------ ------------
Shares outstanding ....................................................... 15,146 2,422,061
------------ ------------
Net asset value and maximum offering price per share ..................... $ 54.20 $ 31.09
------------ ------------
(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.
32 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended October 31, 2009 (unaudited)
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Investment income:
Dividends:
Unaffiliated issuers ........................................................... $ 956,646 $ 3,907,125
Sweep Money Fund (Note 7) ...................................................... 285,908 1,738
Interest .......................................................................... 54,640 --
Income from securities loaned ..................................................... 25,590 --
----------- ------------
Total investment income ..................................................... 1,322,784 3,908,863
----------- ------------
Expenses:
Management fees (Note 3a) ......................................................... 797,483 1,527,971
Administrative fees (Note 3b) ..................................................... 220,762 --
Distribution fees: (Note 3c)
Class A ........................................................................ 409,295 748,927
Class C ........................................................................ -- 416,216
Transfer agent fees (Note 3e) ..................................................... 571,385 765,592
Special servicing agreement fees (Note 9) ......................................... -- 63,094
Custodian fees (Note 4) ........................................................... 2,601 19,329
Reports to shareholders ........................................................... 55,334 76,496
Registration and filing fees ...................................................... 18,902 66,055
Professional fees ................................................................. 13,404 19,486
Trustees' fees and expenses ....................................................... 5,453 10,577
Other ............................................................................. 20,853 16,674
----------- ------------
Total expenses .............................................................. 2,115,472 3,730,417
Expense reductions (Note 4) ................................................. (118) (20)
----------- ------------
Net expenses ............................................................. 2,115,354 3,730,397
----------- ------------
Net investment income (loss) .......................................... (792,570) 178,466
----------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................................................... 6,321,208 (5,191,374)
Foreign currency transactions .................................................. (49,434) (150,044)
----------- ------------
Net realized gain (loss) .............................................. 6,271,774 (5,341,418)
----------- ------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... 19,734,399 158,009,575
Translation of other assets and liabilities denominated in foreign currencies .. 8,841 (2,536)
----------- ------------
Net change in unrealized appreciation (depreciation) .................. 19,743,240 158,007,039
----------- ------------
Net realized and unrealized gain (loss) .............................................. 26,015,014 152,665,621
----------- ------------
Net increase (decrease) in net assets resulting from operations ...................... $25,222,444 $152,844,087
=========== ============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 33
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FRANKLIN
BIOTECHNOLOGY DISCOVERY FUND NATURAL RESOURCES FUND
-------------------------------- --------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 2009 YEAR ENDED OCTOBER 31, 2009 YEAR ENDED
(UNAUDITED) APRIL 30, 2009 (UNAUDITED) APRIL 30, 2009
---------------- -------------- ---------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ...................... $ (792,570) $ (1,178,040) $ 178,466 $ 789,378
Net realized gain (loss) from investments and
foreign currency transactions .................. 6,271,774 15,091,375 (5,341,418) (63,673,070)
Net change in unrealized appreciation
(depreciation) on investments and translation of
other assets and liabilities denominated in
foreign currencies ............................. 19,743,240 (43,153,718) 158,007,039 (381,791,650)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................ 25,222,444 (29,240,383) 152,844,087 (444,675,342)
------------ ------------ ------------ ------------
Distributions to shareholders from net realized gains:
Class A ........................................... -- -- -- (23,435,904)
Class C ........................................... -- -- -- (3,211,358)
Advisor Class ..................................... -- -- -- (2,857,267)
------------ ------------ ------------ ------------
Total distributions to shareholders .................. -- -- -- (29,504,529)
------------ ------------ ------------ ------------
Capital share transactions: (Note 2)
Class A ........................................... (8,782,561) (14,973,617) 41,966,094 24,773,813
Class C ........................................... -- -- 15,010,823 26,255,441
Advisor Class ..................................... 884,510 -- 6,277,565 15,817,345
------------ ------------ ------------ ------------
Total capital share transactions ..................... (7,898,051) (14,973,617) 63,254,482 66,846,599
------------ ------------ ------------ ------------
Redemption fees ...................................... -- 245 -- 9,119
------------ ------------ ------------ ------------
Net increase (decrease) in net assets ....... 17,324,393 (44,213,755) 216,098,569 (407,324,153)
Net assets:
Beginning of period .................................. 274,323,619 318,537,374 507,474,385 914,798,538
------------ ------------ ------------ ------------
End of period ........................................ $291,648,012 $274,323,619 $723,572,954 $ 507,474,385
============ ============ ============ =============
Undistributed net investment income (loss) included
in net assets:
End of period ........................................ $ (1,581,877) $ (789,307) $ (2,732,738) $ (2,911,204)
============ ============ ============ =============
The accompanying notes are an integral part of these financial statements.
34 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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. Effective September 1, 2009, the Franklin Biotechnology Discovery Fund
began offering a new class of shares, 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.
CLASS A & ADVISOR CLASS 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
Equity and other 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. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities.
Investments in open-end mutual funds and non-registered money funds are valued
at the closing net asset value.
Corporate debt securities generally trade in the over-the-counter market rather
than on a securities exchange. The Funds 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 Funds' 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. Debt
securities denominated in a foreign currency are converted into their U.S.
dollar equivalent at the foreign exchange rate in effect at the close of the
NYSE on the date that the values of the foreign debt securities are determined.
Foreign equity 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 equity 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 security is determined.
Semiannual Report | 35
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Funds have 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 based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, matrix pricing, discounts from market prices of similar securities,
or discounts applied due to the nature and duration of restrictions on the
disposition of the securities. Due to the inherent uncertainty of valuations of
such securities, the fair values may differ significantly from the values that
would have been used had a ready market for such investments existed.
Occasionally, events occur between the time at which trading in a security is
completed and the close of the NYSE that might call into question the
availability (including the reliability) of the value of a portfolio security
held by the fund. The investment manager monitors price movements following the
close of trading in foreign stock markets through a series of country specific
market proxies (such as baskets of American Depository Receipts, futures
contracts and exchange traded funds). These price movements are measured against
established trigger thresholds for each specific market proxy to assist in
determining if an event has occurred. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. At October 31, 2009, a market event occurred
resulting in a portion of the securities held by the Funds being fair valued.
All security valuation procedures are approved by the Funds' 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 Funds' 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.
36 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. 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 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 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. At
October 31, 2009, the Franklin Natural Resources Fund had no securities on loan.
D. 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 October 31, 2009, and have
determined that no provision for income tax is required in the Funds' financial
statements.
E. 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
Semiannual Report | 37
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
assets of each class. Differences in per share distributions, by class, are
generally due to differences in class specific expenses.
F. 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.
G. 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.
H. 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 October 31, 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:
Six Months ended October 31, 2009
Shares sold ............................. 663,630 $ 36,462,659 4,485,893 $ 121,367,044
Shares redeemed ......................... (811,661) (45,245,220) (3,032,919) (79,400,950)
---------- ------------ ---------- -------------
Net increase (decrease) ................. (148,031) $ (8,782,561) 1,452,974 $ 41,966,094
========== ============ ========== =============
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
========== ============ ========== =============
38 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -------------
CLASS C SHARES:
Six Months ended October 31, 2009
Shares sold ............................. 1,086,777 $ 28,793,027
Shares redeemed ......................... (524,204) (13,782,204)
---------- -------------
Net increase (decrease) ................. 562,573 $ 15,010,823
========== =============
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
========== =============
ADVISOR CLASS SHARES:
Six Months ended October 31, 2009(a)
Shares sold ............................. 15,223 $ 888,944 624,091 $ 17,393,736
Shares redeemed ......................... (77) (4,434) (390,608) (11,116,171)
-------- ------------ ---------- -------------
Net increase (decrease) ................. 15,146 $ 884,510 233,483 $ 6,277,565
======== ============ ========== =============
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
========== =============
(a) For the period September 1, 2009 (effective date) to October 31, 2009 for
the Franklin Biotechnology Discovery 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
Semiannual Report | 39
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 reimburse 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 each fund's shares up to the
maximum annual plan rate.
40 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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%
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 period:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Sales charges retained net of commissions paid to unaffiliated
broker/dealers .................................................... $32,323 $289,426
Contingent deferred sales charges retained ........................... $ 106 $ 15,758
E. TRANSFER AGENT FEES
For the period ended October 31, 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 ..... $347,894 $509,957
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended October 31, 2009, the
custodian fees were reduced as noted in the Statements of Operations.
Semiannual Report | 41
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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
============ ==========
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.
At October 31, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Cost of investments ......................... $288,897,359 $674,624,614
============ ============
Unrealized appreciation ..................... $ 52,907,518 $140,400,050
Unrealized depreciation ..................... (44,714,158) (87,872,231)
------------ ------------
Net unrealized appreciation
(depreciation) ........................... $ 8,193,360 $ 52,527,819
============ ============
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.
42 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended October 31, 2009, were as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Purchases .......... $54,204,628 $152,952,062
Sales .............. $51,983,097 $111,378,061
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the 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.
At October 31, 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/PRINCIPAL ACQUISITION
AMOUNT ISSUER DATES COST VALUE
- ---------------- ---------------------------------------------------- ---------------- ---------- ----------
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
1,500,000(a) CAD ConjuChem Biotechnologies Inc., cvt.,
sub. note, 144A, 8.00%, 12/31/10 ................ 12/12/07 $1,480,677 $ 736,721
1,128,271 FibroGen Inc., pfd., E ............................. 05/19/00 5,065,937 5,144,916
1,006,900 Indevus Pharmaceuticals Inc.,
Escrow Account .................................. 02/20/09 1,107,590 1,100,743
----------
TOTAL RESTRICTED SECURITIES (2.39% of Net Assets) ............................... $6,982,380
==========
Semiannual Report | 43
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
SHARES/PRINCIPAL ACQUISITION
AMOUNT ISSUER DATES COST VALUE
- ---------------- ---------------------------------------------------- ---------------- ---------- ----------
FRANKLIN NATURAL RESOURCES FUND
199,375 Energy Coal Resources, 144A ........................ 11/16/05-5/05/06 $ 741,939 $ --
29,847 Energy Coal Resources, 144A, pfd.................... 3/17/09 2,376,164 --
500,000(b) Nevsun Resources Ltd., 144A......................... 10/20/09 1,357,789 1,264,734
----------
TOTAL RESTRICTED SECURITIES (0.17% of Net Assets)................................ $1,264,734
==========
(a) The fund also invests in unrestricted securities of the issuer, valued at
$0 as of October 31, 2009.
(b) The fund also invests in unrestricted securities of the issuer, valued at
$3,461,379 as of October 31, 2009.
See Abbreviations on page 47.
9. SPECIAL SERVICING AGREEMENT
On May 1, 2009, the Franklin Natural Resources Fund, which is an eligible
underlying investments of one or more of the Franklin Templeton Fund Allocator
Series Funds (Allocator Funds), entered into a Special Servicing Agreement (SSA)
with the Allocator Funds and certain service providers of the fund and the
Allocator Funds. Under the SSA, the fund pays a portion of the Allocator Funds'
expenses (other than any asset allocation, administrative and distribution
fees), to the extent such payments are less than the amount of the benefits
realized or expected to be realized by the fund from the investment in the fund
by the Allocator Funds. The Allocator Funds are either managed by Franklin
Advisers, Inc. or administered by FT Services. For the period ended October 31,
2009, the fund was held by one or more of the Allocator Funds and was allocated
expenses as noted in the Statements of Operations. At October 31, 2009, 8.32% of
the fund's outstanding shares was held by one or more of the Allocator Funds.
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 their share of fees and expenses incurred in connection with the
implementation and maintenance of the Global
44 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. CREDIT FACILITY (CONTINUED)
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 ended October 31, 2009,
the Funds did not utilize the Global Credit Facility.
The commitment fees the Funds incurred for the period were as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
- -------------- ----------------
$441 $528
11. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Funds' 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.
The following is a summary of the inputs used as of October 31, 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
Equity Investments:(a)
Biotechnology .................. $206,663,184 $ -- $6,245,659 $212,908,843
Other Equity Investments(b) .... 75,338,712 -- -- 75,338,712
Convertible Bonds ................. -- -- 736,721 736,721
Short Term Investments ............ 7,047,443 1,059,000 -- 8,106,443
------------ ----------- ---------- ------------
Total Investments in
Securities .................. $289,049,339 $ 1,059,000 $6,982,380 $297,090,719
============ =========== ========== ============
Semiannual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
11. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------ ----------- ---------- ------------
FRANKLIN NATURAL RESOURCES FUND
ASSETS:
Investments in Securities
Equity Investments:(a)
Coal & Consumable Fuels ........ $ 21,259,603 $ -- $ --(c) $ 21,259,603
Construction & Engineering ..... -- 3,661,169 -- 3,661,169
Diversified Metals & Mining .... 46,696,607 11,600,097 -- 58,296,704
Gold ........................... 44,374,378 11,118,233 1,264,734 56,757,345
Oil & Gas Exploration &
Production .................. 187,901,639 7,841,202 -- 195,742,841
Other Equity Investments(b) .... 338,726,153 -- -- 338,726,153
Short Term Investments ............ 52,708,618 -- -- 52,708,618
------------ ----------- ---------- ------------
Total Investments in
Securities .................. $691,666,998 $34,220,701 $1,264,734 $727,152,433
============ =========== ========== ============
(a) Includes common and preferred stock as well as other equity investments.
(b) For detailed industry descriptions, see the accompanying Statement of
Investments.
(c) Includes securities determined to have no value at October 31, 2009.
At October 31, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Funds' fair value,
was as follows:
NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE AT (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF END OF ON ASSETS HELD
OF PERIOD GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 PERIOD AT PERIOD END
---------- ----------- -------------- --------- ----------- ---------- --------------
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
ASSETS
Equity Investments:(a)
Biotechnology ...... $6,787,229 $-- $(541,570) $-- $-- $6,245,659 $(541,570)
Convertible Bonds ..... 785,900 -- (49,179) -- -- 736,721 (49,179)
---------- --- --------- --- --- ---------- ---------
Total .............. $7,573,129 $-- $(590,749) $-- $-- $6,982,380 $(590,749)
========== === ========= === === ========== =========
46 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
11. FAIR VALUE MEASUREMENTS (CONTINUED)
NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) AT END OF ON ASSETS HELD
OF PERIOD GAIN (LOSS) (DEPRECIATION) (SALES) OF LEVEL 3 PERIOD AT PERIOD END
---------- ----------- -------------- ---------- ---------- ---------- --------------
FRANKLIN NATURAL RESOURCES FUND
ASSETS
Equity Investments:(a)
Coal & Consumable
Fuels................. $399,194 $-- $(399,194) $ -- $-- $ --(b) $(399,194)
Gold.................. -- -- (93,055) 1,357,789 -- 1,264,734 (93,055)
-------- --- --------- ---------- --- ---------- ---------
Total.............. $399,194 $-- $(492,249) $1,357,789 $-- $1,264,734 $(492,249)
======== === ========= ========== === ========== =========
(a) Includes common and preferred stock as well as other equity investments.
(b) Includes securities determined to have no value at October 31, 2009.
12. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through December 18, 2009, the
issuance date of the financial statements and determined that no events have
occurred that require disclosure.
ABBREVIATIONS
CURRENCY
CAD - Canadian Dollar
SELECTED PORTFOLIO
ADR - American Depository Receipt
Semiannual Report | 47
Franklin Strategic Series
SHAREHOLDER INFORMATION
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.
48 | Semiannual Report
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 semiannual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
SEMIANNUAL 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 S2009 12/09
OCTOBER 31, 2009
SEMIANNUAL REPORT
AND SHAREHOLDER LETTER
A series of Franklin Strategic Series
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
(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 semiannual report
Contents
SHAREHOLDER LETTER ................................. 1
SEMIANNUAL REPORT
Franklin Strategic Income Fund ..................... 3
Performance Summary ................................ 9
Your Fund's Expenses ............................... 12
Financial Highlights and Statement of Investments .. 14
Financial Statements .............................. 43
Notes to Financial Statements ..................... 47
Shareholder Information ............................ 61
Shareholder Letter
Dear Shareholder:
During the six-month period ended October 31, 2009, economic activity showed
signs of stabilization. In early 2009, deteriorating economic conditions and
investor uncertainty contributed to market woes until some indicators offered a
better economic outlook, and markets rallied beginning in March 2009. At
period-end, although some observers thought the worst of the economic crises was
behind us, others believed significant challenges remained.
We think it is important to put short-term market developments in perspective.
Keep in mind we have navigated through past periods of high market volatility by
remaining committed to our long-term perspective and disciplined investment
philosophy. During such times, we search for bargains we believe may be well
positioned to become eventual winners. Although conditions remain challenging,
our experience gives us reason to be optimistic about future market
stabilization and economic recovery.
Franklin Strategic Income Fund's semiannual 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 from the
portfolio managers. Please remember that all securities markets fluctuate, as do
mutual fund share prices.
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.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the semiannual report | 1
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 OCTOBER 31, 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 semiannual report
Semiannual Report
Franklin Strategic Income Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Strategic Income Fund seeks a
high level of current income, with capital appreciation over the long term as a
secondary objective. The Fund uses an active asset allocation process and under
normal market conditions invests at least 65% of its assets in U.S. and foreign
debt securities, including those in emerging markets, which consist of all
varieties of fixed and floating rate income securities, such as 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.
We are pleased to bring you Franklin Strategic Income Fund's semiannual report
for the period ended October 31, 2009.
PERFORMANCE OVERVIEW
Franklin Strategic Income Fund - Class A posted a +14.21% cumulative total
return for the six months under review. The Fund outperformed its benchmark, the
Barclays Capital (BC) U.S. Aggregate Index, which had a +5.61% total return for
the same period.(1) The Fund underperformed its peers as measured by the Lipper
Multi-Sector Income Funds Classification Average's +17.90% 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 higher) by Moody's, Standard & Poor's, or Fitch,
respectively. The index is unmanaged and includes reinvestment of any
income or distributions. One cannot invest directly in an index, and an
index is not representative of the Fund's portfolio.
(2.) Source: Lipper Inc. The Lipper Multi-Sector Income Funds Classification
Average is calculated by averaging the total returns of all funds within
the Lipper Multi-Sector Income Funds classification in the Lipper Open-End
underlying funds universe. Lipper Multi-Sector Income Funds are defined as
funds that seek current income by allocating assets among different fixed
income securities sectors (not primarily in one sector except for defensive
purposes), including U.S. and foreign governments, with a significant
portion rated below investment grade. For the six-month period ended
10/31/09, there were 157 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, and the average is not representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 19.
Semiannual Report | 3
ECONOMIC AND MARKET OVERVIEW
During the six-month period ended October 31, 2009, economic activity showed
signs of recovery as many of the forces that had hindered the economy
dissipated. Financial markets stabilized in response to federal stimulus
packages and the Federal Reserve Board's (Fed's) interventions, and investor
risk appetite improved. In 2009's third quarter, a number of blue-chip companies
released reports that showed better-than-expected profits resulting from
cost-cutting measures. Economic activity as measured by gross domestic product
(GDP) improved from earlier in 2009. GDP registered an annualized -0.7% in
2009's second quarter and an annualized 2.8% in the third quarter. These
positive signs, however, were constrained by a rising unemployment rate, which
reached 10.2% by period-end, a 26-year high.(3) Despite improving economic data,
most industries eliminated jobs.
As economic conditions improved, oil prices increased from $53 per barrel in May
to $77 in October, still well below 2008 highs. October's inflation rate was an
annualized -0.2%.(3) Core inflation, which excludes food and energy costs, rose
at a 1.7% annualized rate, which was within the Fed's informal target range of
1.5% to 2.0%.(3) The core personal consumption expenditures price index reported
a 12-month increase of 1.4%.(4)
During the period under review, an improving economy and decelerating inflation
prompted policymakers to maintain low interest rates and discontinue certain
stimulus plans. Noting it now believes the recession has ended, the Fed left the
federal funds target rate unchanged at a range of 0% to 0.25% for an extended
period and began to lay the groundwork for an eventual tightening of monetary
policy. Near period-end, the Fed assessed which support programs it created or
expanded could be phased out.
The spread between two-year and 10-year Treasury yields rose to 251 basis points
(100 basis points equal one percentage point) at the end of October from 225
basis points at the beginning of the reporting period. The two-year Treasury
bill yield slightly fell from 0.91% to 0.90% over the six-month period, while
the 10-year Treasury note yield rose from 3.16% to 3.41%.
Globally, the coordinated response to the financial crisis and frozen credit
markets began to improve investor confidence, which gradually benefited economic
activity through the increased flow of credit, especially in interbank
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Bureau of Economic Analysis.
4 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
5/1/09-10/31/09
DIVIDEND PER SHARE
----------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- --------- ---------- ----------- ----------- ----------- --------------
May 3.80 cents 3.52 cents 3.52 cents 3.63 cents 3.98 cents
June 3.80 cents 3.50 cents 3.52 cents 3.62 cents 3.98 cents
July 3.80 cents 3.50 cents 3.52 cents 3.62 cents 3.98 cents
August 3.80 cents 3.50 cents 3.52 cents 3.62 cents 3.98 cents
September 4.88 cents 4.24 cents 4.27 cents 4.50 cents 5.25 cents
October 4.79 cents 4.44 cents 4.46 cents 4.59 cents 5.00 cents
----------- ----------- ----------- ----------- -----------
TOTAL 24.87 CENTS 22.70 CENTS 22.81 CENTS 23.58 CENTS 26.17 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
lending and trade financing. Strong economic activity in China, thawing credit
markets and the G20 meeting in April also boosted investor confidence.(5) The
turnaround led to a more favorable outlook that benefited the global economy
through a shift in the inventory adjustment cycle and better corporate bond and
equity market performance. By period-end, many observers believed the worst of
the financial crisis was over, and there was substantial evidence that an
economic recovery was under way. Greater risk appetite during the review period
benefited non-U.S. dollar currencies as investors' economic outlook improved.
However, although financial markets and economic activity rebounded
significantly from very low levels, economic activity remained weak as
deleveraging continued, global trade contracted and unemployment rose.
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, floating and
variable rate debt 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.
(5.) The G20 is an informal forum that promotes open and constructive discussion
between industrial and emerging market countries on key issues related to
global economic stability. It is made up of the finance ministers and
central bank governors of 19 countries and the European Union.
Semiannual Report | 5
PORTFOLIO BREAKDOWN
Based on Total Net Assets
10/31/09 4/30/09
-------- -------
High Yield Corporate Bonds & Preferred Stocks 26.7% 22.1%
Investment Grade Corporate Bonds 15.8% 18.2%
Floating Rate Bank Loans 12.9% 9.6%
Mortgages & Other Asset-Backed Bonds 11.8% 17.8%
Other International Bonds (non-$US) 10.5% 8.3%
Emerging Market Bonds ($US) 6.8% 6.0%
U.S. Government & Agency Bonds* 5.9% 8.9%
International Developed Country Bonds (non-$US) 4.5% 2.2%
Municipal Bonds 2.3% 2.8%
Convertible Securities 0.2% 0.4%
Short-Term Investments & Other Net Assets 2.6% 3.7%
* Includes 3.0% Treasury Inflation Protected Securities as of 10/31/09 and
2.9% as of 4/30/09. Also includes agency preferred stock.
MANAGER'S DISCUSSION
During the six months ended October 31, 2009, many of the performance trends
that had affected financial and fixed income markets during 2008 and into early
2009 experienced a substantial reversal. In 2008's second half, the unfolding
global economic recession and a breakdown in credit markets pressured the fixed
income market's spread sectors. Largely as a result, only certain
developed-country government securities experienced strong performance during
that time. Although the economic backdrop remained unclear as we entered 2009,
historically cheap valuations attracted investors into many of these same spread
sectors and away from government bonds, largely reversing the 2008 declines. In
this environment, Franklin Strategic Income Fund outperformed the BC U.S.
Aggregate Index and lagged the Lipper Multi-Sector Income Funds Classification
Average. The Fund's higher spread sector exposure and lower weightings to more
U.S. interest-rate sensitive fixed income sectors (i.e., U.S. Treasury
securities, agency bonds and mortgage-backed securities) aided performance
compared with the index. Compared with the peer average, the Fund's lower
exposure in certain higher beta sectors (such as high yield corporate bonds) and
securities (including distressed bonds) hindered relative results.
Overall, high-quality U.S. government securities suffered during the period
under review given a modest rise in longer term interest rates. Consequently,
U.S. Treasury securities had generally flat returns, while agency debentures and
agency mortgage-backed securities delivered moderately positive results given
some spread tightening in these sectors. Although the Fund's exposure
6 | Semiannual Report
varied throughout the period, in general the Fund reduced its exposure to these
more interest rate-sensitive sectors, although we maintained some exposure to
Treasury Inflation Protected Securities (TIPS), which provided stronger returns
given the market's increasing long-term inflation expectations. Our exposure to
asset-backed securities and commercial mortgage-backed securities, while
generally in AAA-rated tranches, helped Fund performance. Despite growing
concerns regarding rising delinquencies for these securitized issuers, the
sectors rebounded significantly during the six months under review from their
early 2009 lows, aided in part by government programs designed to improve
liquidity and refinancing for these sectors. Given the seniority of the Fund's
holdings, we maintained holdings in these sectors following the partial price
rebounds.
The corporate bond sector continued the rebound that began in early 2009. On a
calendar year-to-date basis, the investment-grade and noninvestment-grade
corporate bond indexes posted some of their historically strongest returns, with
high yield corporate bonds returning 47.82%, as measured by the Credit Suisse
(CS) High Yield Index.(6) In addition, although year-over-year earnings were
down through 2009's third quarter, many analysts thought the outlook for 2010
appeared more positive given easing credit market conditions for refinancing and
the significant cost cuts many companies implemented over the past year. We
maintained positions in investment-grade and noninvestment-grade securities. In
particular, we added exposure to the bank loan sector due to the loans' floating
rate nature and what we viewed as still attractive valuations. Overall, the
corporate bond sector contributed significantly to Fund performance during the
reporting period, and the Fund maintained relatively large exposure at
period-end given valuations that we believed still offered long-term value.
After experiencing strong appreciation amid a flight to quality in 2008's second
half, the U.S. dollar weakened versus a basket of foreign currencies during the
six months under review. As a result, the Fund's non-U.S. dollar bond and
currency positions, such as Brazilian and Indonesian local government bonds,
benefited performance. Also, the Fund's peripheral European exposure in Sweden,
Poland and Norway, which we proxy hedged by selling the euro against the
exposures, performed well given the outperformance of those currencies relative
to the euro. Although we took a short position in the Japanese yen, we
maintained and added to certain Asian currency and bond positions during the
period, including those of Malaysia, South Korea and the
(6.) Source: (C) 2009 Morningstar. The CS High Yield Index is designed to
mirror the investible universe of the U.S. dollar denominated high yield
debt market.
Semiannual Report | 7
Philippines, based on our assessment of those countries' relative growth and
interest rate prospects compared with those of the U.S. The Fund's hard
currency, U.S. dollar-denominated, emerging market sovereign positions, which we
added to in 2008's second half, generally performed well as spread valuations
tightened for sovereign bonds of countries such as Russia, Indonesia and South
Africa.
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 OCTOBER 31, 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 | Semiannual Report
Performance Summary as of 10/31/09
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 does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSTX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$0.99 $9.82 $8.83
DISTRIBUTIONS (5/1/09-10/31/09)
Dividend Income $0.2487
CLASS B (SYMBOL: FKSBX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$1.00 $9.87 $8.87
DISTRIBUTIONS (5/1/09-10/31/09)
Dividend Income $0.2270
CLASS C (SYMBOL: FSGCX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$0.99 $9.82 $8.83
DISTRIBUTIONS (5/1/09-10/31/09)
Dividend Income $0.2281
CLASS R (SYMBOL: FKSRX) CHANGE 10/31/09 4/30/09
- ----------------------- ------ -------- -------
Net Asset Value (NAV) +$0.99 $9.80 $8.81
DISTRIBUTIONS (5/1/09-10/31/09)
Dividend Income $0.2358
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 10/31/09 4/30/09
- ----------------------------- ------ -------- -------
Net Asset Value (NAV) +$0.99 $9.83 $8.84
DISTRIBUTIONS (5/1/09-10/31/09)
Dividend Income $0.2617
Semiannual Report | 9
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS
R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ ------ -------
Cumulative Total Return(2) +14.21% +26.87% +30.92% +97.82%
Average Annual Total Return(3) +9.38% +21.53% +4.63% +6.59%
Avg. Ann. Total Return (9/30/09)(4) +10.07% +4.84% +6.55%
Distribution Rate(5) 6.95%
30-Day Standardized Yield(6) 4.95%
Total Annual Operating Expenses(7) 0.91%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ ------ -------
Cumulative Total Return(2) +14.00% +26.31% +28.37% +91.65%
Average Annual Total Return(3) +10.00% +22.31% +4.81% +6.72%
Avg. Ann. Total Return (9/30/09)(4) +10.49% +5.04% +6.67%
Distribution Rate(5) 6.83%
30-Day Standardized Yield(6) 4.77%
Total Annual Operating Expenses(7) 1.31%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ ------ -------
Cumulative Total Return(2) +13.96% +26.34% +28.33% +90.11%
Average Annual Total Return(3) +12.96% +25.34% +5.11% +6.64%
Avg. Ann. Total Return (9/30/09)(4) +13.46% +5.34% +6.59%
Distribution Rate(5) 6.88%
30-Day Standardized Yield(6) 4.77%
Total Annual Operating Expenses(7) 1.31%
INCEPTION
CLASS R 6-MONTH 1-YEAR 5-YEAR (1/1/02)
- ------- ------- ------ ------ ---------
Cumulative Total Return(2) +14.09% +26.61% +29.37% +74.75%
Average Annual Total Return(3) +14.09% +26.61% +5.29% +7.39%
Avg. Ann. Total Return (9/30/09)(4) +14.68% +5.51% +7.35%
Distribution Rate(5) 7.03%
30-Day Standardized Yield(6) 4.92%
Total Annual Operating Expenses(7) 1.16%
ADVISOR CLASS(8) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------- ------- ------ ------ -------
Cumulative Total Return(2) +14.36% +27.17% +32.67% +102.96%
Average Annual Total Return(3) +14.36% +27.17% +5.82% +7.33%
Avg. Ann. Total Return (9/30/09)(4) +15.23% +6.02% +7.28%
Distribution Rate(5) 7.49%
30-Day Standardized Yield(6) 5.43%
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 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. HIGH YIELDS REFLECT THE HIGHER CREDIT RISKS ASSOCIATED WITH
CERTAIN LOWER-RATED SECURITIES HELD IN THE PORTFOLIO. FLOATING-RATE 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
MAY 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. Six-month return has not been
annualized.
(4). In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5). Distribution rate is based on the sum of the respective class's last 12
months' dividend distributions and the maximum offering price (NAV for
Classes B, C, R and Advisor) per share on 10/31/09.
(6). The 30-day standardized yield for the 30 days ended 10/31/09 reflects an
estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund's rate of
investment income, and it may not equal the Fund's actual income
distribution rate (which reflects the Fund's past dividends paid to
shareholders) or the income reported in the Fund's financial statements.
(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.
Semiannual Report | 11
Your Fund's Expenses
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.
12 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,142.10 $4.64
Hypothetical (5% return before expenses) $1,000 $1,020.87 $4.38
CLASS B
Actual $1,000 $1,140.00 $6.80
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.41
CLASS C
Actual $1,000 $1,139.60 $6.80
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.41
CLASS R
Actual $1,000 $1,140.90 $5.99
Hypothetical (5% return before expenses) $1,000 $1,019.61 $5.65
ADVISOR CLASS
Actual $1,000 $1,143.60 $3.30
Hypothetical (5% return before expenses) $1,000 $1,022.13 $3.11
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.86%; B: 1.26%; C: 1.26%; R: 1.11%; and
Advisor: 0.61%), multiplied by the average account value over the period,
multiplied by 184/365 to reflect the one-half year period.
Semiannual Report | 13
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ------------------------------------------------------------------
CLASS A (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ---------- ---------- ---------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 8.83 $ 10.28 $ 10.48 $ 10.20 $ 10.24 $ 10.09
---------- ---------- ---------- ---------- -------- --------
Income from investment operationsa:
Net investment income(b) ........... 0.28 0.51 0.56 0.53 0.51 0.53
Net realized and unrealized gains
(losses) ........................ 0.96 (1.20) (0.07) 0.35 0.05 0.27
---------- ---------- ---------- ---------- -------- --------
Total from investment operations ...... 1.24 (0.69) 0.49 0.88 0.56 0.80
---------- ---------- ---------- ---------- -------- --------
Less distributions from net investment
income and net foreign currency
gains .............................. (0.25) (0.76) (0.69) (0.60) (0.60) (0.65)
---------- ---------- ---------- ---------- -------- --------
Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d)
---------- ---------- ---------- ---------- -------- --------
Net asset value, end of period ........ $ 9.82 $ 8.83 $ 10.28 $ 10.48 $ 10.20 $ 10.24
========== ========== ========== ========== ======== ========
Total return(e) ....................... 14.21% (6.32)% 4.80% 9.09% 5.69% 8.10%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................... 0.86% 0.89% 0.89% 0.92% 0.91% 0.91%(h)
Net investment income ................. 5.86% 5.67% 5.44% 5.22% 5.05% 5.18%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $2,531,169 $2,060,179 $2,123,947 $1,521,459 $998,182 $696,198
Portfolio turnover rate ............... 29.13% 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding
mortgage dollar rolls(i) ........... 29.13% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Ratio of expenses to average net assets, before waiver and payments by
affiliates, was 0.92%.
(i) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
14 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -----------------------------------------------------------
CLASS B (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 8.87 $ 10.32 $ 10.52 $ 10.24 $ 10.27 $ 10.12
------- ------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ........... 0.26 0.48 0.52 0.49 0.47 0.49
Net realized and unrealized gains
(losses) ........................ 0.97 (1.20) (0.07) 0.35 0.06 0.27
------- ------- -------- -------- -------- --------
Total from investment operations ...... 1.23 (0.72) 0.45 0.84 0.53 0.76
------- ------- -------- -------- -------- --------
Less distributions from net investment
income and net foreign currency
gains .............................. (0.23) (0.73) (0.65) (0.56) (0.56) (0.61)
------- ------- -------- -------- -------- --------
Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d)
------- ------- -------- -------- -------- --------
Net asset value, end of period ........ $ 9.87 $ 8.87 $ 10.32 $ 10.52 $ 10.24 $ 10.27
======= ======= ======== ======== ======== ========
Total return(e) ....................... 14.00% (6.68)% 4.35% 8.62% 5.34% 7.65%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................... 1.26% 1.29% 1.29% 1.32% 1.31% 1.31%(h)
Net investment income ................. 5.46% 5.27% 5.04% 4.82% 4.65% 4.78%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $79,726 $79,959 $105,620 $104,523 $104,477 $110,502
Portfolio turnover rate ............... 29.13% 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding
mortgage dollar rolls(i) ........... 29.13% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Ratio of expenses to average net assets, before waiver and payments by
affiliates, was 1.32%.
(i) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 15
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 -------------------------------------------------------------
CLASS C (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .. $ 8.83 $ 10.27 $ 10.48 $ 10.20 $ 10.24 $ 10.09
-------- -------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ........... 0.26 0.48 0.52 0.49 0.47 0.49
Net realized and unrealized gains
(losses) ........................ 0.96 (1.19) (0.08) 0.35 0.05 0.27
-------- -------- -------- -------- -------- --------
Total from investment operations ...... 1.22 (0.71) 0.44 0.84 0.52 0.76
-------- -------- -------- -------- -------- --------
Less distributions from net investment
income and net foreign currency
gains .............................. (0.23) (0.73) (0.65) (0.56) (0.56) (0.61)
-------- -------- -------- -------- -------- --------
Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........ $ 9.82 $ 8.83 $ 10.27 $ 10.48 $ 10.20 $ 10.24
======== ======== ======== ======== ======== ========
Total return(e) ....................... 13.96% (6.60)% 4.28% 8.67% 5.27% 7.67%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................... 1.26% 1.29% 1.29% 1.32% 1.31% 1.31%(h)
Net investment income ................. 5.46% 5.27% 5.04% 4.82% 4.65% 4.78%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $986,956 $773,337 $733,071 $437,026 $294,412 $213,741
Portfolio turnover rate ............... 29.13% 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding
mortgage dollar rolls(i) ........... 29.13% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Ratio of expenses to average net assets, before waiver and payments by
affiliates, was 1.32%.
(i) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
16 | Semiannual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------------
CLASS R (UNAUDITED) 2009 2008 2007 2006 2005
- ------- ---------------- -------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .. $ 8.81 $ 10.25 $ 10.46 $ 10.18 $ 10.22 $ 10.07
-------- -------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ........... 0.27 0.49 0.53 0.51 0.49 0.51
Net realized and unrealized gains
(losses) ........................ 0.96 (1.19) (0.08) 0.35 0.05 0.26
-------- -------- -------- ------- ------- -------
Total from investment operations ...... 1.23 (0.70) 0.45 0.86 0.54 0.77
-------- -------- -------- ------- ------- -------
Less distributions from net investment
income and net foreign currency
gains .............................. (0.24) (0.74) (0.66) (0.58) (0.58) (0.62)
-------- -------- -------- ------- ------- -------
Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- ------- ------- -------
Net asset value, end of period ........ $ 9.80 $ 8.81 $ 10.25 $ 10.46 $ 10.18 $ 10.22
======== ======== ======== ======= ======= =======
Total returne ......................... 14.09% (6.47)% 4.55% 8.74% 5.44% 7.86%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................... 1.11% 1.14% 1.14% 1.17% 1.16% 1.16%(h)
Net investment income ................. 5.61% 5.42% 5.19% 4.97% 4.80% 4.93%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $159,002 $115,811 $108,020 $65,527 $32,971 $17,859
Portfolio turnover rate ............... 29.13% 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding
mortgage dollar rolls(i) ........... 29.13% 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) Effective September 1, 2008, the redemption fee was eliminated.
(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.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Ratio of expenses to average net assets, before waiver and payments by
affiliates, was 1.17%.
(i) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 17
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 2009 ---------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2009 2008 2007 2006 2005
- ------------- ---------------- -------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .. $ 8.84 $ 10.28 $ 10.49 $ 10.21 $ 10.24 $ 10.09
-------- -------- -------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ........... 0.29 0.53 0.58 0.56 0.54 0.56
Net realized and unrealized gains
(losses) ........................ 0.96 (1.18) (0.07) 0.35 0.06 0.26
-------- -------- -------- ------- ------- -------
Total from investment operations ...... 1.25 (0.65) 0.51 0.91 0.60 0.82
-------- -------- -------- ------- ------- -------
Less distributions from net
investment income and net foreign
currency gains ..................... (0.26) (0.79) (0.72) (0.63) (0.63) (0.67)
-------- -------- -------- ------- ------- -------
Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d)
-------- -------- -------- ------- ------- -------
Net asset value, end of period ........ $ 9.83 $ 8.84 $ 10.28 $ 10.49 $ 10.21 $ 10.24
======== ======== ======== ======= ======= =======
Total return(e) ....................... 14.36% (5.98)% 5.05% 9.25% 6.05% 8.37%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ........................... 0.61% 0.64% 0.64% 0.67% 0.66% 0.66%(h)
Net investment income ................. 6.11% 5.92% 5.69% 5.47% 5.30% 5.43%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $276,000 $166,821 $111,346 $66,745 $57,367 $60,489
Portfolio turnover rate ............... 29.13% 49.48% 31.71% 42.24% 34.10% 48.57%
Portfolio turnover rate excluding
mortgage dollar rolls(i) ........... 29.13% 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) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) Ratio of expenses to average net assets, before waiver and payments by
affiliates, was 0.67%.
(i) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
18 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/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 (COST $6,060,000) 0.0%(c)
BANKS 0.0%(c)
(a) Fannie Mae, 8.75%, cvt. pfd .......................... United States 121,200 193,920
--------------
PREFERRED STOCKS 0.0%(c)
BANKS 0.0%(c)
(a) Freddie Mac, 8.375%, pfd., Z ......................... United States 200,000 220,000
--------------
DIVERSIFIED FINANCIALS 0.0%(c)
(d) Preferred Blocker Inc., 7.00%, pfd., 144A ............ United States 2,081 1,270,906
--------------
TOTAL PREFERRED STOCKS (COST $5,738,755) ............. 1,490,906
--------------
PRINCIPAL
AMOUNT(e)
---------------
(f, g) SENIOR FLOATING RATE INTERESTS 12.9%
AUTOMOBILES & COMPONENTS 0.4%
Federal-Mogul Corp.,
Term Loan B, 2.188%, 12/27/14 ..................... United States 16,299,728 12,560,978
Term Loan C, 4.188%, 12/27/15 ..................... United States 3,200,000 2,466,000
--------------
15,026,978
--------------
CAPITAL GOODS 0.6%
RBS Global Inc. (Rexnord),
Incremental Tranche B-2, 2.50%, 7/22/13 ........... United States 6,229,627 5,975,253
Tranche B-1 Term Loan B, 2.75% - 2.813%, 7/22/13 .. United States 12,734,198 12,267,274
TransDigm Inc., Term Loan B, 2.289%, 6/23/13 ......... United States 6,819,422 6,557,604
--------------
24,800,131
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.9%
ARAMARK Corp.,
Synthetic L/C, 2.14%, 1/26/14 ..................... United States 1,164,131 1,070,515
Term Loan B, 2.118% - 2.158%, 1/26/14 ............. United States 17,611,170 16,194,932
Duratek Inc. (EnergySolutions), Term Loan B, 4.05%,
6/07/13 ........................................... United States 3,292,222 3,279,877
EnergySolutions LLC,
Synthetic L/C, 4.00%, 6/07/13 ..................... United States 489,021 487,798
Synthetic L/C (Add-On), 4.00%, 6/07/13 ............ United States 126,535 126,219
Term Loan B, 4.05%, 6/07/13 ....................... United States 6,862,010 6,836,278
(h) EnviroSolutions Inc., Initial Term Loan, PIK, 11.00%,
7/07/12 ........................................... United States 4,104,152 3,088,374
JohnsonDiversey Inc.,
Delay Draw, Term Loan, 2.483%, 12/16/10 ........... United States 677,967 675,213
Term Loan B, 2.483%, 12/16/11 ..................... United States 3,043,840 3,031,476
--------------
34,790,682
--------------
Semiannual Report | 19
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
(f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
CONSUMER DURABLES & APPAREL 0.3%
Jarden Corp.,
Term Loan B1, 2.033%, 1/24/12 ..................... United States 1,200,822 $ 1,161,495
Term Loan B2, 2.033%, 1/24/12 ..................... United States 1,933,992 1,866,302
Term Loan B4, 3.533%, 1/26/15 ..................... United States 5,676,580 5,652,454
Jostens IH Corp. (Visant Holding Corp.), Term Loan C,
2.322%, 10/04/11 .................................. United States 4,558,727 4,520,740
--------------
13,200,991
--------------
CONSUMER SERVICES 0.9%
Education Management LLC, Term Loan C, 2.063%,
6/01/13 ........................................... United States 15,202,311 14,287,801
(h, i) Kuilima Resort Co. (Turtle Bay), First Lien Term Loan,
PIK, 9.00%, 9/30/10 ............................... United States 37,979,689 11,014,110
Penn National Gaming Inc., Term Loan B, 1.99% - 2.21%,
10/03/12 .......................................... United States 10,629,305 10,302,124
--------------
35,604,035
--------------
DIVERSIFIED FINANCIALS 0.1%
TD Ameritrade Holding Corp., Term Loan B, 1.75%,
12/31/12 .......................................... United States 5,308,980 5,162,957
--------------
FOOD & STAPLES RETAILING 0.3%
SUPERVALU Inc., Term Loan B, 1.504% - 1.531%,
6/02/12 ........................................... United States 11,910,678 11,405,224
--------------
FOOD, BEVERAGE & TOBACCO 0.7%
Constellation Brands Inc., Term Loan B, 1.75%,
6/05/13 ........................................... United States 3,286,619 3,168,850
Dean Foods Co., Term Loan B, 1.625% - 1.665%,
4/02/14 ........................................... United States 5,130,009 4,806,177
(j) Wm. Wrigley Jr. Co., Term Loan B, 6.50%, 10/06/14 .... United States 19,266,430 19,542,287
--------------
27,517,314
--------------
HEALTH CARE EQUIPMENT & SERVICES 1.9%
Community Health Systems Inc.,
Delayed Draw Term Loan,2.493%, 7/25/14 ............ United States 1,147,610 1,071,653
Term Loan, 2.493% - 2.622%, 7/25/14 ............... United States 22,491,809 21,003,143
DaVita Inc., Term Loan B-1, 1.75% - 1.79%, 10/05/12 .. United States 5,174,307 4,977,394
DJO Finance LLC, Term Loan B, 3.243% - 3.283%,
5/20/14 ........................................... United States 14,920,659 14,417,087
Fresenius Medical Care Holdings Inc., Term Loan B,
1.658% - 1.667%, 3/31/13 .......................... Germany 4,076,161 3,925,004
HCA Inc.,
Term Loan A-1, 1.783%, 11/19/12 ................... United States 4,070,790 3,803,010
Term Loan B-1, 2.533%, 11/18/13 ................... United States 19,227,645 17,944,469
LifePoint Hospitals Inc., Term Loan B, 2.015%,
4/15/12 ........................................... United States 9,727,968 9,448,289
--------------
76,590,049
--------------
INSURANCE 0.4%
(j) Conseco Inc., Term Loan, 6.50%, 10/10/13 ............. United States 17,325,080 15,693,629
--------------
MATERIALS 2.0%
(j) Ashland Inc., Term Loan B, 6.65%, 5/13/14 ............ United States 7,190,623 7,319,457
Celanese U.S. Holdings LLC, Dollar Term Loan, 2.037%,
4/02/14 ........................................... United States 16,133,982 15,132,949
20 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
(f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
MATERIALS (CONTINUED)
Georgia-Pacific LLC,
Term Loan B, 2.283% - 2.464%, 12/20/12 ............ United States 4,525,873 $ 4,368,712
Term Loan C, 3.533% - 3.714%, 12/23/14 ............ United States 4,830,032 4,807,089
Hexion Specialty Chemicals BV, Term Loan C-2, 2.563%,
5/03/13 ........................................... Netherlands 3,269,374 2,599,152
Hexion Specialty Chemicals Inc., Term Loan C-1, 2.563%,
5/03/13 ........................................... United States 15,050,394 11,965,063
Nalco Co.,
Term Loan B, 2.063%, 11/04/10 ..................... United States 812,771 813,089
(j) Term Loan, 6.50%, 5/13/16 ..................... United States 5,241,763 5,340,046
Novelis Corp., U.S. Term Loan, 2.25% - 2.29%,
7/07/14 ........................................... United States 7,065,992 6,380,987
(j) Rockwood Specialties Group Inc., Term Loan H, 6.00%,
5/15/14 ........................................... United States 20,485,122 20,774,474
--------------
79,501,018
--------------
MEDIA 2.3%
Cinemark USA Inc., Term Loan, 2.00% - 2.21%,
10/05/13 .......................................... United States 5,132,730 4,881,591
CSC Holdings Inc. (Cablevision), Incremental Term Loan
B-2, 2.049% - 2.194%, 3/29/16 ..................... United States 20,996,993 20,361,729
DIRECTV Holdings LLC, Term Loan B, 1.743%, 4/13/13 ... United States 2,367,805 2,324,043
Discovery Communications Inc., Term Loan B, 2.283%,
5/14/14 ........................................... United States 2,940,293 2,860,170
(i, j) Metro-Goldwyn-Mayer Inc., Term Loan B, 20.50%,
4/08/12 ........................................... United States 21,570,197 12,413,648
(j) R.H. Donnelley Inc.,
Term Loan D-1, 3.75%, 6/30/11 ..................... United States 5,563,452 4,872,655
Term Loan D-2, 4.00%, 6/30/11 ..................... United States 10,256,864 8,857,521
Regal Cinemas Corp., Term Loan, 4.033%, 10/27/13 ..... United States 6,134,473 6,093,575
(i, j) Tribune Co., Incremental Term Loan, 5.25%, 5/14/14 ... United States 29,519,740 13,336,605
Univision Communications Inc., Initial Term Loan,
2.533%, 9/29/14 ................................... United States 11,890,606 9,614,400
UPC Financing Partnership,
Term Loan N, 1.996%, 12/31/14 ..................... Netherlands 1,030,954 966,949
(j) Term Loan T, 3.746%, 12/31/16 ..................... Netherlands 8,303,412 7,992,034
--------------
94,574,920
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.5%
Mylan Inc., Term Loan B, 3.50% - 3.563%, 10/02/14 .... United States 20,569,076 20,054,849
--------------
RETAILING 0.0%(c)
Dollar General Corp., Tranche B-1 Term Loan, 2.993% -
3.031%, 7/07/14 ................................... United States 1,797,527 1,722,376
--------------
SOFTWARE & SERVICES 0.3%
Affiliated Computer Services Inc., Additional Term
Loan, 2.243% - 2.244%, 3/20/13 .................... United States 4,053,662 4,011,143
Lender Processing Services Inc., Term Loan B, 2.743%,
7/02/14 ........................................... United States 1,087,315 1,081,199
SunGard Data Systems Inc., Tranche A U.S. Term Loan,
1.994%, 2/28/14 ................................... United States 6,617,083 6,230,401
--------------
11,322,743
--------------
Semiannual Report | 21
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
(f, g) SENIOR FLOATING RATE INTERESTS (CONTINUED)
TELECOMMUNICATION SERVICES 0.6%
Intelsat Corp. (Panamsat),
Incremental Term Loan B-2-A, 2.746%, 1/03/14 ...... United States 274,909 $ 260,347
Incremental Term Loan B-2-B, 2.746%, 1/03/14 ...... United States 274,825 260,268
Incremental Term Loan B-2-C, 2.746%, 1/03/14 ...... United States 274,825 260,268
(j) Tranche B-2-A, 2.746%, 1/03/14 .................... United States 5,469,711 5,179,986
(j) Tranche B-2-B, 2.746%, 1/03/14 .................... United States 5,468,037 5,178,401
(j) Tranche B-2-C, 2.746%, 1/03/14 .................... United States 5,468,037 5,178,401
(j) NTELOS Inc., Term Loan B, 5.75%, 8/07/15 ............. United States 4,455,656 4,487,215
Windstream Corp., Tranche B-2 Term Loan, 3.00% -
3.04%, 12/17/15 ................................... United States 3,653,688 3,553,851
--------------
24,358,737
--------------
UTILITIES 0.7%
NRG Energy Inc.,
Credit Link, 2.033%, 2/01/13 ...................... United States 6,462,141 6,095,951
Term Loan, 1.993% - 2.033%, 2/01/13 ............... United States 12,027,085 11,345,546
Texas Competitive Electric Holdings Co. LLC, Term Loan
B-2, 5.75%, 10/10/14 .............................. United States 11,728,993 9,117,462
--------------
26,558,959
--------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $512,726,272) 517,885,592
--------------
CORPORATE BONDS 42.5%
AUTOMOBILES & COMPONENTS 0.7%
Ford Motor Credit Co. LLC, senior note,
9.75%, 9/15/10 .................................... United States 5,000,000 5,126,710
9.875%, 8/10/11 ................................... United States 11,000,000 11,275,000
7.50%, 8/01/12 .................................... United States 2,000,000 1,948,890
(d) TRW Automotive Inc., senior note, 144A, 7.25%,
3/15/17 ........................................... United States 9,000,000 8,235,000
--------------
26,585,600
--------------
BANKS 2.1%
BB&T Capital Trust IV, junior sub. bond, 6.82%,
6/12/77 ........................................... United States 9,800,000 8,773,929
(d, k) BNP Paribas, 144A, 7.195%, Perpetual ................. France 10,000,000 9,250,000
(d) Commonwealth Bank of Australia, senior note, 144A,
5.00%, 10/15/19 ................................... Australia 12,000,000 12,002,038
HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 ......... United Kingdom 10,000,000 10,999,157
Royal Bank of Scotland Group PLC, senior note, 6.40%,
10/21/19 .......................................... United Kingdom 11,600,000 11,820,284
Svensk Exportkredit AB, senior note, 7.625%,
6/30/14 ........................................... Sweden 3,780,000 NZD 2,835,978
UBS AG Stamford, senior note, 5.875%, 12/20/17 ....... United States 10,000,000 10,280,640
Wells Fargo & Co., senior note, 5.625%, 12/11/17 ..... United States 5,000,000 5,205,580
(k) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ..... United States 8,000,000 7,480,000
(k) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ....... United States 6,700,000 7,236,000
--------------
85,883,606
--------------
22 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
CAPITAL GOODS 1.2%
(d) Allison Transmission Inc., senior note, 144A, 11.00%,
11/01/15 .......................................... United States 9,000,000 $ 9,225,000
Case New Holland Inc., senior note,
7.125%, 3/01/14 ................................... United States 9,350,000 9,303,250
(d) 144A, 7.75%, 9/01/13 .............................. United States 2,000,000 1,995,000
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ................................... United States 4,500,000 4,398,750
6.375%, 10/15/15 .................................. United States 4,000,000 3,970,000
RBS Global & Rexnord Corp., senior note, 9.50%,
8/01/14 ........................................... United States 11,000,000 10,945,000
RSC Equipment Rental Inc., senior note, 9.50%,
12/01/14 .......................................... United States 10,000,000 9,925,000
--------------
49,762,000
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.9%
(d) ACCO Brands Corp., senior secured note, 144A, 10.625%,
3/15/15 ........................................... United States 3,350,000 3,601,250
ARAMARK Corp., senior note, 8.50%, 2/01/15 ........... United States 10,000,000 10,150,000
(d) Casella Waste Systems Inc., senior secured note, 144A,
11.00%, 7/15/14 ................................... United States 4,050,000 4,303,125
(d) Clean Harbors Inc., senior secured note, 144A, 7.625%,
8/15/16 ........................................... United States 2,300,000 2,369,000
Iron Mountain Inc., senior sub. note, 8.75%,
7/15/18 ........................................... United States 2,600,000 2,723,500
JohnsonDiversey Holdings Inc., senior disc. note,
10.67%, 5/15/13 ................................... United States 7,000,000 7,140,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%,
5/15/12 ........................................... United States 4,000,000 4,080,000
--------------
34,366,875
--------------
CONSUMER DURABLES & APPAREL 0.7%
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ....... United States 10,000,000 9,900,000
Jostens IH Corp., senior sub. note, 7.625%,
10/01/12 .......................................... United States 10,000,000 10,112,500
KB Home, senior note,
6.25%, 6/15/15 .................................... United States 6,000,000 5,670,000
7.25%, 6/15/18 .................................... United States 1,000,000 940,000
--------------
26,622,500
--------------
CONSUMER SERVICES 2.0%
(d, i) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ....... United States 8,000,000 320,000
(d) Harrah's Operating Co. Inc., senior secured note,
144A, 11.25%, 6/01/17 ............................. United States 2,000,000 2,050,000
(d) Harrah's Operating Escrow, senior secured note, 144A,
11.25%, 6/01/17 ................................... United States 12,000,000 12,330,000
Host Hotels & Resorts LP, senior note,
K, 7.125%, 11/01/13 ............................... United States 6,900,000 6,900,000
M, 7.00%, 8/15/12 ................................. United States 2,000,000 2,017,500
S, 6.875%, 11/01/14 ............................... United States 1,000,000 982,500
MGM MIRAGE, senior note,
6.625%, 7/15/15 ................................... United States 15,000,000 11,437,500
7.50%, 6/01/16 .................................... United States 1,000,000 770,000
(d) New York City IDA, 144A, 11.00%, 3/01/29 ............. United States 1,800,000 1,927,278
Semiannual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
Pinnacle Entertainment Inc.,
(d) senior note, 144A, 8.625%, 8/01/17 ................ United States 5,000,000 $ 5,000,000
senior sub. note, 8.25%, 3/15/12 .................. United States 2,132,000 2,142,660
senior sub. note, 7.50%, 6/15/15 .................. United States 3,000,000 2,715,000
Royal Caribbean Cruises Ltd.,
senior deb., 7.25%, 3/15/18 ....................... United States 10,000,000 9,150,000
senior note, 11.875%, 7/15/15 ..................... United States 1,000,000 1,127,500
Starwood Hotels & Resorts Worldwide Inc., senior note,
6.75%, 5/15/18 .................................... United States 10,000,000 9,675,000
(i) Station Casinos Inc.,
senior note, 6.00%, 4/01/12 ....................... United States 1,200,000 277,500
senior note, 7.75%, 8/15/16 ....................... United States 3,800,000 940,500
senior sub. note, 6.50%, 2/01/14 .................. United States 500,000 22,500
senior sub. note, 6.875%, 3/01/16 ................. United States 3,800,000 171,000
(d, j) Universal City Development,
senior note, 144A, 8.875%, 11/15/15 ............... United States 2,600,000 2,587,000
senior sub. note, 144A, 10.875%, 11/15/16 ......... United States 1,000,000 1,005,000
Yum! Brands Inc., senior note, 5.30%, 9/15/19 ........ United States 7,200,000 7,295,746
--------------
80,844,184
--------------
DIVERSIFIED FINANCIALS 4.5%
American Express Co., senior note, 7.00%, 3/19/18 .... United States 6,000,000 6,637,662
American Express Credit Corp., senior note, C, 7.30%,
8/20/13 ........................................... United States 4,000,000 4,495,472
Bank of America Corp.,
(k) pfd., sub. bond, M, 8.125%, Perpetual ............. United States 14,000,000 12,607,420
senior note, 5.65%, 5/01/18 ....................... United States 5,000,000 5,058,725
(d) Cantor Fitzgerald LP, 144A, 7.875%, 10/15/19 ......... United States 7,500,000 7,559,857
Capital One Capital V, pfd., 10.25%, 8/15/39 ......... United States 4,800,000 5,491,944
Capital One Financial Corp., senior note, 7.375%,
5/23/14 ........................................... United States 7,000,000 7,952,665
Citigroup Inc.,
senior note, 6.125%, 11/21/17 ..................... United States 5,000,000 5,107,500
senior note, 8.125%, 7/15/39 ...................... United States 5,000,000 5,873,634
sub. note, 5.00%, 9/15/14 ......................... United States 10,000,000 9,870,500
The Export-Import Bank of Korea, senior note, 8.125%,
1/21/14 ........................................... South Korea 7,905,000 9,068,102
General Electric Capital Corp., senior note, A, 8.50%,
4/06/18 ........................................... United States 170,000,000 MXN 11,655,431
(d) GMAC LLC, senior note, 144A,
7.25%, 3/02/11 .................................... United States 2,849,000 2,827,633
6.875%, 9/15/11 ................................... United States 8,000,000 7,760,000
6.875%, 8/28/12 ................................... United States 5,000,000 4,775,000
The Goldman Sachs Group Inc.,
senior note, 6.00%, 5/01/14 ....................... United States 900,000 990,409
sub. note, 6.75%, 10/01/37 ........................ United States 11,000,000 11,623,216
Jefferies Group Inc., senior bond, 8.50%, 7/15/19 .... United States 12,000,000 13,044,732
JPMorgan Chase & Co.,
6.00%, 1/15/18 .................................... United States 5,000,000 5,358,505
(k) junior sub. note, 1, 7.90%, Perpetual ............. United States 5,000,000 5,043,690
24 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED)(CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION 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 $ 12,902,316
(i) Lehman Brothers Holdings Inc., senior note, 6.20%,
9/26/14 ........................................... United States 16,000,000 2,600,000
Merrill Lynch & Co. Inc., senior note, 6.40%,
8/28/17 ........................................... United States 10,000,000 10,533,982
Morgan Stanley, senior note, 6.00%, 4/28/15 .......... United States 12,000,000 12,855,384
--------------
181,693,779
--------------
ENERGY 5.7%
Anadarko Petroleum Corp., senior note, 6.95%,
6/15/19 ........................................... United States 6,500,000 7,312,273
(d) Arch Coal Inc., senior note, 144A, 8.75%, 8/01/16 .... United States 1,800,000 1,854,000
Berry Petroleum Co., senior note, 10.25%, 6/01/14 .... United States 6,600,000 7,095,000
Bill Barrett Corp., senior note, 9.875%, 7/17/16 ..... United States 1,700,000 1,810,500
Canadian Natural Resources Ltd., 5.90%, 2/01/18 ...... Canada 10,000,000 10,780,860
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ................................... United States 1,500,000 1,552,500
9.50%, 2/15/15 .................................... United States 1,000,000 1,087,500
6.625%, 1/15/16 ................................... United States 3,500,000 3,381,876
6.25%, 1/15/18 .................................... United States 8,000,000 7,360,000
7.25%, 12/15/18 ................................... United States 1,000,000 972,500
Compagnie Generale de Geophysique-Veritas,
senior note,
7.50%, 5/15/15 .................................... France 7,000,000 6,982,500
7.75%, 5/15/17 .................................... France 1,800,000 1,791,000
(d) 144A, 9.50%, 5/15/16 .............................. France 600,000 630,000
Concho Resources Inc., senior note, 8.625%,
10/01/17 .......................................... United States 3,250,000 3,363,750
Copano Energy LLC, senior note,
8.125%, 3/01/16 ................................... United States 8,000,000 7,860,000
7.75%, 6/01/18 .................................... United States 2,000,000 1,935,000
El Paso Corp., senior note,
12.00%, 12/12/13 .................................. United States 9,000,000 10,350,000
7.00%, 6/15/17 .................................... United States 2,000,000 2,010,020
Enterprise Products Operating LLC,
5.25%, 1/31/20 .................................... United States 4,000,000 4,055,496
(f) junior sub. note, FRN, 7.034%, 1/15/68 ............ United States 10,000,000 9,213,880
(d) Holly Corp., senior note, 144A, 9.875%, 6/15/17 ...... United States 3,100,000 3,224,000
Mariner Energy Inc., senior note,
7.50%, 4/15/13 .................................... United States 9,000,000 8,820,000
11.75%, 6/30/16 ................................... United States 1,000,000 1,102,500
MarkWest Energy Partners LP, senior note,
6.875%, 11/01/14 .................................. United States 8,000,000 7,640,000
8.75%, 4/15/18 .................................... United States 800,000 822,000
(d) 144A, 6.875%, 11/01/14 ............................ United States 700,000 661,500
Peabody Energy Corp., senior note, B, 6.875%,
3/15/13 ........................................... United States 10,000,000 10,150,000
Petrohawk Energy Corp., senior note, 10.50%,
8/01/14 ........................................... United States 9,500,000 10,402,500
(d) Petroplus Finance Ltd., senior note, 144A, 6.75%,
5/01/14 ........................................... Switzerland 8,000,000 7,515,889
Plains All American Pipeline LP, senior note, 5.75%,
1/15/20 ........................................... United States 10,000,000 10,291,360
Plains Exploration & Production Co., senior note,
10.00%, 3/01/16 ................................... United States 1,000,000 1,075,000
7.625%, 6/01/18 ................................... United States 9,000,000 8,786,250
8.625%, 10/15/19 .................................. United States 1,000,000 1,007,500
Semiannual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Quicksilver Resources Inc., senior note,
8.25%, 8/01/15 .................................... United States 9,000,000 $ 8,842,500
11.75%, 1/01/16 ................................... United States 500,000 557,500
9.125%, 8/15/19 ................................... United States 1,000,000 1,015,000
(d) SandRidge Energy Inc., senior note, 144A, 8.00%,
6/01/18 ........................................... United States 10,000,000 9,975,000
Smith International Inc., senior note, 9.75%,
3/15/19 ........................................... United States 10,000,000 12,471,630
Tesoro Corp., senior note,
6.25%, 11/01/12 ................................... United States 500,000 493,750
6.50%, 6/01/17 .................................... United States 10,000,000 9,000,000
Weatherford International Ltd., senior note,
6.00%, 3/15/18 .................................... United States 8,000,000 8,202,688
9.625%, 3/01/19 ................................... United States 2,000,000 2,489,076
(d) Woodside Finance Ltd., 144A, 8.75%, 3/01/19 .......... Australia 10,000,000 11,883,290
--------------
227,827,588
--------------
FOOD & STAPLES RETAILING 0.7%
(d) Duane Reade Inc., senior secured note, 144A, 11.75%,
8/01/15 ........................................... United States 3,650,000 3,905,500
The Kroger Co.,
6.15%, 1/15/20 .................................... United States 7,500,000 8,222,648
senior note, 7.50%, 1/15/14 ....................... United States 2,500,000 2,887,545
Rite Aid Corp., senior secured note, 9.75%, 6/12/16 .. United States 6,250,000 6,781,250
SUPERVALU Inc., senior note, 8.00%, 5/01/16 .......... United States 8,300,000 8,486,750
--------------
30,283,693
--------------
FOOD, BEVERAGE & TOBACCO 1.6%
(d) Alliance One International Inc., senior note, 144A,
10.00%, 7/15/16 ................................... United States 1,200,000 1,254,000
Altria Group Inc.,
senior bond, 9.25%, 8/06/19 ....................... United States 3,300,000 4,004,976
senior note, 9.70%, 11/10/18 ...................... United States 7,000,000 8,626,331
(d) Anheuser-Busch InBev NV, senior note, 144A, 7.75%,
1/15/19 ........................................... United States 10,000,000 11,664,970
(d) Cargill Inc.,
144A, 5.20%, 1/22/13 .............................. United States 500,000 531,808
144A, 6.00%, 11/27/17 ............................. United States 7,000,000 7,592,459
senior note, 144A, 7.35%, 3/06/19 ................. United States 3,000,000 3,502,353
(d) Dole Food Co. Inc., senior note, 144A, 13.875%,
3/15/14 ........................................... United States 9,500,000 11,162,500
(d) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 ..... United States 9,000,000 10,035,000
Tyson Foods Inc., senior note, 10.50%, 3/01/14 ....... United States 7,000,000 8,015,000
--------------
66,389,397
--------------
HEALTH CARE EQUIPMENT & SERVICES 2.8%
(d) CareFusion Corp., senior note, 144A, 6.375%,
8/01/19 ........................................... United States 10,000,000 10,796,690
Coventry Health Care Inc., senior note,
6.30%, 8/15/14 .................................... United States 5,200,000 5,116,478
5.95%, 3/15/17 .................................... United States 2,800,000 2,506,316
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ........ United States 10,000,000 9,925,000
FMC Finance III SA, senior note, 6.875%, 7/15/17 ..... Germany 7,500,000 7,406,250
26 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES (CONTINUED)
Fresenius Medical Care Capital Trust IV, 7.875%,
6/15/11 ........................................... Germany 2,500,000 $ 2,556,250
(d) Fresenius US Finance II, senior note, 144A, 9.00%,
7/15/15 ........................................... Germany 7,000,000 7,735,000
HCA Inc.,
senior note, 6.50%, 2/15/16 ....................... United States 3,000,000 2,812,500
senior secured note, 9.125%, 11/15/14 ............. United States 10,000,000 10,375,000
(h) senior secured note, PIK, 9.625%, 11/15/16 ........ United States 4,207,000 4,475,196
Medco Health Solutions Inc., 7.125%, 3/15/18 ......... United States 10,000,000 11,331,240
(d) Tenet Healthcare Corp.,
senior note, 144A, 9.00%, 5/01/15 ................. United States 2,500,000 2,656,250
senior note, 144A, 10.00%, 5/01/18 ................ United States 3,000,000 3,322,500
senior secured note, 144A, 8.875%, 7/01/19 ........ United States 4,500,000 4,843,125
(h) United Surgical Partners International Inc.,
senior sub. note, PIK, 9.25%, 5/01/17 ............. United States 9,000,000 8,977,500
(f, h) US Oncology Holdings Inc., senior note, PIK, FRN,
6.248%, 3/15/12 ................................... United States 9,797,000 8,670,345
(d) US Oncology Inc., senior secured note, 144A, 9.125%,
8/15/17 ........................................... United States 800,000 848,000
Vanguard Health Holding Co. II LLC, senior sub. note,
9.00%, 10/01/14 ................................... United States 10,000,000 10,450,000
--------------
114,803,640
--------------
INSURANCE 1.3%
Aflac Inc., senior note, 8.50%, 5/15/19 .............. United States 10,000,000 11,716,331
American International Group Inc., senior note, 5.60%,
10/18/16 .......................................... United States 12,000,000 9,146,250
Lincoln National Corp., senior note, 8.75%, 7/01/19 .. United States 10,000,000 11,654,850
(d, f) MetLife Capital Trust X, secured bond, 144A, FRN,
9.25%, 4/08/68 .................................... United States 1,900,000 2,076,502
MetLife Inc.,
7.717%, 2/15/19 ................................... United States 3,000,000 3,556,065
(f) junior sub. note, FRN, 6.40%, 12/15/66 ............ United States 8,000,000 6,914,071
senior note, A, 6.817%, 8/15/18 ................... United States 2,000,000 2,241,802
Willis North America Inc., senior note, 7.00%,
9/29/19 ........................................... United States 4,400,000 4,470,462
--------------
51,776,333
--------------
MATERIALS 3.4%
(d) Anglo American Capital PLC, senior note, 144A, 9.375%,
4/08/14 ........................................... United Kingdom 9,000,000 10,518,858
(d, j) Associated Materials LLC, senior secured note, 144A,
9.875%, 11/15/16 .................................. United States 3,350,000 3,450,500
Ball Corp., senior note,
7.125%, 9/01/16 ................................... United States 1,500,000 1,541,250
7.375%, 9/01/19 ................................... United States 1,500,000 1,541,250
(d) Clearwater Paper Corp., senior note, 144A, 10.625%,
6/15/16 ........................................... United States 7,950,000 8,705,250
Crown Americas Inc., senior note, 7.75%, 11/15/15 .... United States 8,900,000 9,122,500
(d) Crown Americas LLC and Crown Americas Capital
Corp. II, senior note, 144A, 7.625%, 5/15/17 ...... United States 800,000 824,000
Semiannual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
MATERIALS (CONTINUED)
Freeport-McMoRan Copper & Gold Inc., senior note,
8.375%, 4/01/17 ................................... United States 9,000,000 $ 9,688,419
Huntsman International LLC,
(d) senior note, 144A, 5.50%, 6/30/16 .............. United States 600,000 522,000
senior sub. note, 7.875%, 11/15/14 ................ United States 10,000,000 9,500,000
(d) Ineos Group Holdings PLC, senior secured note, 144A,
8.50%, 2/15/16 .................................... United Kingdom 8,000,000 4,520,000
(d) MacDermid Inc., senior sub. note, 144A, 9.50%,
4/15/17 ........................................... United States 9,600,000 9,168,000
Nalco Co.,
(d) senior note, 144A, 8.25%, 5/15/17 ................. United States 1,000,000 1,055,000
senior sub. note, 8.875%, 11/15/13 ................ United States 9,000,000 9,315,000
NewPage Corp., senior secured note,
10.00%, 5/01/12 ................................... United States 6,900,000 4,554,000
(d) 144A, 11.375%, 12/31/14 ........................... United States 4,300,000 4,310,750
Novelis Inc., senior note,
7.25%, 2/15/15 .................................... Canada 2,000,000 1,805,000
(d) 144A, 11.50%, 2/15/15 ............................. Canada 1,000,000 1,045,000
Owens-Brockway Glass Container Inc., senior note,
6.75%, 12/01/14 ................................... United States 8,000,000 8,020,000
7.375%, 5/15/16 ................................... United States 1,000,000 1,015,000
Owens-Illinois Inc., senior note, 7.80%, 5/15/18 ..... United States 1,000,000 1,015,000
Solo Cup Co.,
(d) senior secured note, 144A, 10.50%, 11/01/13 ....... United States 1,700,000 1,819,000
senior sub. note, 8.50%, 2/15/14 .................. United States 7,300,000 7,135,750
Solutia Inc., senior note, 8.75%, 11/01/17 ........... United States 2,750,000 2,846,250
Teck Resources Ltd., senior secured note, 10.75%,
5/15/19 ........................................... Canada 7,300,000 8,541,000
Weyerhaeuser Co., senior note, 7.375%, 10/01/19 ...... United States 6,500,000 6,707,376
(d) Xstrata Finance Canada Ltd., 144A, 5.80%, 11/15/16 ... United Kingdom 10,000,000 9,929,860
--------------
138,216,013
--------------
MEDIA 4.3%
(d) British Sky Broadcasting Group PLC, senior note, 144A,
6.10%, 2/15/18 .................................... United Kingdom 10,000,000 10,700,410
(d) Cablevision Systems Corp., senior note, 144A, 8.625%,
9/15/17 ........................................... United States 2,000,000 2,080,000
(i, l) CCH(I) LLC, senior secured note, 11.00%, 10/01/15 ... United States 4,000,000 820,000
(i, l) CCH II LLC, senior note, 10.25%, 9/15/10 ............. United States 10,000,000 12,150,000
(i, l) CCO Holdings LLC, senior note, 8.75%, 11/15/13 ....... United States 4,000,000 4,390,000
Comcast Corp., senior note, 6.30%, 11/15/17 .......... United States 10,000,000 10,835,180
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 ...................... United States 6,000,000 6,180,000
senior note, 6.75%, 4/15/12 ....................... United States 600,000 627,000
(d) senior note, 144A, 8.50%, 4/15/14 ................. United States 3,000,000 3,183,750
(i, l) Dex Media Inc.,
senior disc. note, 9.00%, 11/15/13 ................ United States 2,000,000 370,000
senior note, B, 8.00%, 11/15/13 ................... United States 6,000,000 1,110,000
(i, l) Dex Media West Finance, senior sub. note, 9.875%,
8/15/13 ........................................... United States 4,000,000 810,000
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ... United States 7,500,000 8,148,022
28 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
EchoStar DBS Corp., senior note,
6.375%, 10/01/11 .................................. United States 5,500,000 $ 5,637,500
7.75%, 5/31/15 .................................... United States 2,000,000 2,055,000
7.125%, 2/01/16 ................................... United States 5,000,000 5,025,000
(i) Idearc Inc., senior note, 8.00%, 11/15/16 ............ United States 6,400,000 352,000
Lamar Media Corp.,
senior note, 9.75%, 4/01/14 ....................... United States 1,000,000 1,105,000
senior sub. note, 7.25%, 1/01/13 .................. United States 7,500,000 7,406,250
senior sub. note, B, 6.625%, 8/15/15 .............. United States 1,500,000 1,425,000
Liberty Media Corp., senior note, 5.70%, 5/15/13 ..... United States 10,000,000 9,450,000
LIN Television Corp., senior sub. note, 6.50%,
5/15/13 ........................................... United States 11,000,000 10,367,500
Quebecor Media Inc., senior note, 7.75%, 3/15/16 ..... Canada 10,000,000 9,925,000
Radio One Inc., senior sub. note, 6.375%, 2/15/13 .... United States 8,000,000 4,040,000
Reed Elsevier PLC, senior note, 8.625%, 1/15/19 ...... United Kingdom 10,000,000 12,415,190
(d) Sinclair Television Group Inc., senior sec. note,
144A, 9.25%, 11/01/17 ............................. United States 8,800,000 8,800,000
Time Warner Inc., 7.625%, 4/15/31 .................... United States 9,000,000 10,090,143
(d) UPC Holding BV, senior note, 144A, 9.875%, 4/15/18 ... Netherlands 2,500,000 2,650,000
Viacom Inc., senior note, 6.875%, 4/30/36 ............ United States 10,000,000 10,583,600
(d) WMG Acquisition Corp., senior secured note, 144A,
9.50%, 6/15/16 .................................... United States 10,000,000 10,725,000
--------------
173,456,545
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.1%
(d) Talecris Biotherapeutics Holdings Corp., senior note,
144A, 7.75%, 11/15/16 ............................. United States 2,200,000 2,249,500
--------------
REAL ESTATE 1.9%
(d) Dexus Finance Property Ltd., 144A, 7.125%, 10/15/14 .. Australia 12,000,000 12,021,098
Duke Realty LP, senior note, 8.25%, 8/15/19 .......... United States 12,000,000 12,795,288
ERP Operating LP, 5.75%, 6/15/17 ..................... United States 3,300,000 3,329,090
(d) FelCor Lodging Trust Inc., senior secured note, 144A,
10.00%, 10/01/14 .................................. United States 9,300,000 9,230,250
Forest City Enterprises Inc., senior note, 7.625%,
6/01/15 ........................................... United States 7,200,000 6,192,000
Kimco Realty Corp., senior note, 6.875%, 10/01/19 .... United States 9,700,000 9,982,862
Simon Property Group LP, senior note, 10.35%,
4/01/19 ........................................... United States 10,000,000 12,637,046
(d) WEA Finance/WT Finance Australia, senior note, 144A,
6.75%, 9/02/19 .................................... United States 10,000,000 10,197,910
--------------
76,385,544
--------------
RETAILING 0.6%
Dollar General Corp., senior note, 10.625%, 7/15/15 .. United States 9,000,000 9,900,000
Michaels Stores Inc., senior note, 10.00%, 11/01/14 .. United States 10,000,000 10,050,000
(d) QVC Inc., senior secured note, 144A, 7.50%,
10/01/19 .......................................... United States 4,400,000 4,378,000
--------------
24,328,000
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.2%
Freescale Semiconductor Inc., senior note, 8.875%,
12/15/14 .......................................... United States 10,300,000 8,420,250
--------------
Semiannual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
SOFTWARE & SERVICES 0.4%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ...................... United States 6,000,000 $ 6,135,000
senior sub. note, 10.25%, 8/15/15 ................. United States 8,000,000 8,290,000
--------------
14,425,000
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.4%
Jabil Circuit Inc., senior note, 7.75%, 7/15/16 ...... United States 5,200,000 5,421,000
Sanmina-SCI Corp.,
(d, f) senior note, 144A, FRN, 3.049%, 6/15/14 ........... United States 2,000,000 1,810,000
senior sub. note, 6.75%, 3/01/13 .................. United States 4,300,000 4,106,500
senior sub. note, 8.125%, 3/01/16 ................. United States 2,000,000 1,920,000
(d) ViaSat Inc., senior note, 144A, 8.875%, 9/15/16 ...... United States 2,100,000 2,139,375
--------------
15,396,875
--------------
TELECOMMUNICATION SERVICES 3.1%
(d) CC Holdings GS V LLC, senior secured note, 144A,
7.75%, 5/01/17 .................................... United States 1,400,000 1,477,000
Crown Castle International Corp.,
senior bond, 7.125%, 11/01/19 ..................... United States 400,000 396,000
senior note, 9.00%, 1/15/15 ....................... United States 8,000,000 8,480,000
(d) Digicel Group Ltd., senior note, 144A, 8.875%,
1/15/15 ........................................... Jamaica 10,000,000 9,612,500
Inmarsat Finance PLC, senior note, 10.375%,
11/15/12 .......................................... United Kingdom 10,000,000 10,375,000
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 .. Bermuda 8,000,000 8,560,000
Intelsat Subsidiary Holding Co. Ltd., senior note,
8.50%, 1/15/13 .................................... Bermuda 10,000,000 10,087,500
MetroPCS Wireless Inc., senior note, 9.25%,
11/01/14 .......................................... United States 10,500,000 10,631,250
Millicom International Cellular SA, senior note,
10.00%, 12/01/13 .................................. Luxembourg 10,000,000 10,387,500
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 .................................... United States 10,000,000 9,850,000
(d) Qwest Corp., senior note, 144A, 8.375%, 5/01/16 ...... United States 5,000,000 5,187,500
(d) SBA Telecommunications Inc., senior note, 144A, 8.25%,
8/15/19 ........................................... United States 3,900,000 4,095,000
Sprint Nextel Corp., senior note, 8.375%, 8/15/17 .... United States 1,300,000 1,261,000
Telecom Italia Capital SA, senior note,
4.95%, 9/30/14 .................................... Italy 9,000,000 9,334,147
6.999%, 6/04/18 ................................... Italy 1,500,000 1,649,631
7.175%, 6/18/19 ................................... Italy 2,000,000 2,226,730
Verizon New York Inc., senior deb.,
A, 6.875%, 4/01/12 ................................ United States 5,000,000 5,460,765
B, 7.375%, 4/01/32 ................................ United States 1,500,000 1,623,067
(d) Wind Acquisition Finance SA, senior note, 144A,
10.75%, 12/01/15 .................................. Italy 10,000,000 10,850,000
11.75%, 7/15/17 ................................... Italy 900,000 1,012,500
(d) Windstream Corp., senior note, 144A, 7.875%,
11/01/17 .......................................... United States 3,900,000 3,958,500
--------------
126,515,590
--------------
30 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
CORPORATE BONDS (CONTINUED)
TRANSPORTATION 0.3%
(d) Ceva Group PLC, senior secured note, 144A,
10.00%, 9/01/14 ................................... United Kingdom 9,100,000 $ 8,554,000
11.625%, 10/01/16 ................................. United Kingdom 300,000 306,000
(d) Delta Air Lines Inc., senior secured note, 144A,
9.50%, 9/15/14 .................................... United States 3,300,000 3,390,750
--------------
12,250,750
--------------
UTILITIES 3.6%
The AES Corp., senior note, 8.00%,
10/15/17 .......................................... United States 8,000,000 8,080,000
6/01/20 ........................................... United States 2,000,000 2,010,000
Ameren Corp., senior note, 8.875%, 5/15/14 ........... United States 10,000,000 11,222,170
(d) Cenovus Energy Inc., senior note, 144A, 6.75%,
11/15/39 .......................................... Canada 10,000,000 10,957,620
CenterPoint Energy Inc., senior note,
6.125%, 11/01/17 .................................. United States 7,500,000 7,837,747
6.50%, 5/01/18 .................................... United States 1,500,000 1,517,228
CMS Energy Corp., senior note, 8.75%, 6/15/19 ........ United States 5,400,000 5,969,117
Dominion Resources Inc., 6.40%, 6/15/18 .............. United States 8,000,000 8,939,952
Duke Energy Corp., senior note,
6.30%, 2/01/14 .................................... United States 8,000,000 8,852,064
5.05%, 9/15/19 .................................... United States 2,000,000 2,019,538
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ... United States 11,400,000 10,687,500
Edison Mission Energy, senior note, 7.00%, 5/15/17 ... United States 8,000,000 6,500,000
(d) Intergen NV, senior secured note, 144A, 9.00%,
6/30/17 ........................................... Netherlands 10,000,000 10,450,000
Mirant North America LLC, senior note, 7.375%,
12/31/13 .......................................... United States 10,000,000 9,900,000
NRG Energy Inc., senior note,
7.25%, 2/01/14 .................................... United States 2,500,000 2,487,500
7.375%, 2/01/16 ................................... United States 10,000,000 9,962,500
7.375%, 1/15/17 ................................... United States 2,500,000 2,481,250
Sempra Energy, senior note, 9.80%, 2/15/19 ........... United States 9,450,000 12,074,539
Texas Competitive Electric Holdings Co. LLC, senior
note, A, 10.25%, 11/01/15 ......................... United States 17,500,000 12,512,500
--------------
144,461,225
--------------
TOTAL CORPORATE BONDS (COST $ 1,627,197,406).......... 1,712,944,487
--------------
CONVERTIBLE BONDS (COST $5,358,366) 0.2%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2%
Mylan Inc., cvt., senior note, 1.25%, 3/15/12 ........ United States 6,000,000 5,940,000
--------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES 6.7%
BANKS 4.2%
(f) Banc of America Commercial Mortgage Inc., 2005-6, A4,
FRN, 5.179%, 9/10/47 .............................. United States 8,000,000 8,068,204
(f) Citibank Credit Card Issuance Trust, 2005-A3, A3,
FRN, 0.314%, 4/24/14 .............................. United States 13,000,000 12,843,291
Citigroup/Deutsche Bank Commercial Mortgage Trust,
(f) 2005-CD1, A4, FRN, 5.225%, 7/15/44 ................ United States 8,940,000 9,088,096
2006-CD3, A5, 5.617%, 10/15/48 .................... United States 22,000,000 21,979,846
Semiannual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (CONTINUED)
BANKS (CONTINUED)
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ...................... United States 22,749 $ 22,689
2005-11, AF4, 5.21%, 3/25/34 ...................... United States 2,800,000 1,269,421
GE Capital Commercial Mortgage Corp., 2003-C1, A4,
4.819%, 1/10/38 ................................... United States 1,827,831 1,886,746
Greenwich Capital Commercial Funding Corp.,
2004-GG1, A7, 5.317%, 6/10/36 ..................... United States 15,546,036 15,909,885
2005-GG5, A5, 5.224%, 4/10/37 ..................... United States 20,380,000 19,732,900
(f) 2006-GG7, A4, FRN, 5.918%, 7/10/38 ................ United States 12,000,000 11,532,070
GS Mortgage Securities Corp. II,
2003-C1, A3, 4.608%, 1/10/40 ...................... United States 3,965,000 4,056,981
(f) 2006-GG6, A4, FRN, 5.553%, 4/10/38 ................ United States 10,000,000 9,418,647
2006-GG8, A4, 5.56%, 11/10/39 ..................... United States 5,000,000 4,595,346
LB-UBS Commercial Mortgage Trust,
(f) 2002-C2, A4, FRN, 5.594%, 6/15/31 ................. United States 5,000,000 5,263,070
2005-C5, A4, 4.954%, 9/15/30 ...................... United States 13,000,000 12,869,640
2006-C1, A4, 5.156%, 2/15/31 ...................... United States 13,250,000 12,999,904
(f) Morgan Stanley Capital I Trust, 2004-IQ7, A4, FRN,
5.402%, 6/15/38 ................................... United States 7,000,000 7,012,973
(d, f) Schiller Park CLO Ltd., 2007-1A, A2, 144A, FRN,
0.744%, 4/25/21 ................................... United States 12,300,000 10,557,151
--------------
169,106,860
--------------
DIVERSIFIED FINANCIALS 2.5%
(f) Advanta Business Card Master Trust, 2007-A4, A4,
FRN, 0.275%, 4/22/13 .............................. United States 7,264,189 7,066,246
(f) American Express Credit Account Master Trust, 2008-1,
A, FRN, 0.695%, 8/15/13 ........................... United States 8,200,000 8,190,911
(f) Chase Issuance Trust,
2007-A9, A9, FRN, 0.275%, 6/16/14 ................. United States 12,000,000 11,842,086
sub. note, 2006-A7, A, FRN, 0.255%, 2/15/13 ....... United States 4,000,000 3,986,120
Citigroup Commercial Mortgage Trust,
(f) 2007-C6, AM, FRN, 5.70%, 6/10/17 .................. United States 3,500,000 2,573,502
2008-C7, A4, 6.299%, 12/10/49 ..................... United States 19,150,000 17,917,270
JPMorgan Chase Commercial Mortgage Securities Corp.,
(f) 2004-CB9, A4, FRN, 5.377%, 6/12/41 ................ United States 8,871,306 8,948,808
2004-LN2, A2, 5.115%, 7/15/41 ..................... United States 807,292 799,787
2005-LDP2, AM, 4.78%, 7/15/42 ..................... United States 2,200,000 1,913,145
(f) 2005-LDP5, A4, FRN, 5.179%, 12/15/44 .............. United States 15,700,000 15,790,160
(f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN,
0.285%, 11/15/12 .................................. United States 6,000,000 5,980,676
(f) MBNA Master Credit Card Trust II, 1997-B, A, FRN,
0.405%, 8/15/14 ................................... United States 15,000,000 14,748,460
Residential Asset Securities Corp., 2004-KS1, AI4,
4.213%, 4/25/32 ................................... United States 180,760 167,636
--------------
99,924,807
--------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $264,505,639) .... 269,031,667
--------------
32 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
MORTGAGE-BACKED SECURITIES 5.1%
(f) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE
RATE 0.0%(c)
FHLMC, 4.057%, 1/01/33 ............................... United States 279,174 $ 281,937
--------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED
RATE 2.2%
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ........ United States 4,537,871 4,799,656
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ........ United States 6,572,688 7,001,145
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 ......... United States 711,299 766,673
FHLMC Gold 15 Year, 6.50%, 4/01/11 ................... United States 205 216
FHLMC Gold 15 Year, 7.00%, 9/01/11 ................... United States 289 302
FHLMC Gold 30 Year, 5.00%, 3/01/34 - 9/01/38 ......... United States 23,001,031 23,888,812
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/37 ......... United States 19,659,896 20,746,140
(j) FHLMC Gold 30 Year, 6.00%, 6/01/33 - 11/01/39 ........ United States 27,147,188 28,926,544
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 9/01/37 ........ United States 3,615,787 3,886,911
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 ......... United States 198,616 219,930
FHLMC Gold 30 Year, 7.50%, 4/01/24 - 1/01/31 ......... United States 33,551 37,828
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ........ United States 763 870
FHLMC Gold 30 Year, 9.00%, 12/01/24 .................. United States 317 364
--------------
90,275,391
--------------
(f) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
ADJUSTABLE RATE 0.0%(c)
FNMA, 4.196%, 12/01/34 ............................... United States 1,164,219 1,193,808
FNMA, 4.242%, 4/01/20 ................................ United States 232,297 236,410
--------------
1,430,218
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED
RATE 2.6%
FNMA 15 Year, 4.50%, 3/01/20 ......................... United States 987,890 1,038,679
FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ............... United States 1,314,839 1,404,225
FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 ............... United States 4,454,279 4,753,237
FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 .............. United States 145,819 157,477
FNMA 15 Year, 6.50%, 4/01/11 - 6/01/13 ............... United States 10,099 10,859
FNMA 15 Year, 7.50%, 10/01/14 ........................ United States 10,139 11,039
FNMA 30 Year, 4.50%, 4/01/39 ......................... United States 16,175,124 16,371,005
FNMA 30 Year, 5.00%, 4/01/34 - 6/01/38 ............... United States 28,450,044 29,547,213
FNMA 30 Year, 5.50%, 9/01/33 - 1/01/37 ............... United States 17,111,750 18,081,396
(j) FNMA 30 Year, 6.00%, 6/01/34 - 11/01/39 .............. United States 22,695,709 24,211,777
FNMA 30 Year, 6.50%, 1/01/24 - 10/01/37 .............. United States 9,127,891 9,830,398
FNMA 30 Year, 7.50%, 12/01/28 - 10/01/29 ............. United States 31,438 35,576
FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 ............... United States 15,807 18,029
FNMA 30 Year, 8.50%, 7/01/25 ......................... United States 715 819
--------------
105,471,729
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED
RATE 0.3%
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 .......... United States 1,177,285 1,231,576
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 .......... United States 3,581,553 3,804,223
GNMA I SF 30 Year, 6.00%, 8/15/36 .................... United States 489,498 521,176
GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 .......... United States 262,024 282,997
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 ......... United States 51,609 56,977
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 .......... United States 13,391 15,185
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 .......... United States 12,956 14,856
Semiannual Report | 33
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED
RATE (CONTINUED)
GNMA I SF 30 Year, 8.50%, 8/15/24 ....................... United States 133 $ 153
GNMA I SF 30 Year, 9.00%, 1/15/25 ....................... United States 463 534
GNMA I SF 30 Year, 9.50%, 6/15/25 ....................... United States 698 812
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ........... United States 1,658,292 1,735,257
GNMA II SF 30 Year, 5.50%, 6/20/34 ...................... United States 834,840 886,866
GNMA II SF 30 Year, 6.00%, 11/20/34 ..................... United States 706,592 757,035
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ........... United States 318,485 344,957
GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 ............ United States 184,720 204,688
--------------
9,857,292
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $196,361,693) .................................. 207,316,567
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES 5.9%
FHLMC,
5.625%, 3/15/11 ...................................... United States 8,000,000 8,542,952
senior note, 4.75%, 3/05/12 .......................... United States 9,000,000 9,752,418
FNMA,
1.375%, 4/28/11 ...................................... United States 15,500,000 15,638,275
4.125%, 4/15/14 ...................................... United States 2,000,000 2,150,196
U.S. Treasury Bond,
4.50%, 2/15/16 ....................................... United States 13,100,000 14,434,576
4.50%, 5/15/17 ....................................... United States 16,000,000 17,526,256
5.25%, 2/15/29 ....................................... United States 1,750,000 1,989,806
6.25%, 8/15/23 ....................................... United States 4,000,000 4,960,004
6.88%, 8/15/25 ....................................... United States 1,000,000 1,325,313
7.125%, 2/15/23 ...................................... United States 3,000,000 3,990,471
7.875%, 2/15/21 ...................................... United States 7,200,000 9,987,754
U.S. Treasury Note,
3.375%, 6/30/13 ...................................... United States 2,000,000 2,115,782
3.50%, 12/15/09 ...................................... United States 4,500,000 4,519,161
4.00%, 4/15/10 ....................................... United States 1,100,000 1,119,251
4.00%, 11/15/12 ...................................... United States 1,850,000 1,993,954
4.125%, 8/15/10 ...................................... United States 2,900,000 2,987,116
4.25%, 8/15/13 ....................................... United States 1,000,000 1,089,922
4.25%, 11/15/14 ...................................... United States 700,000 764,368
4.375%, 8/15/12 ...................................... United States 1,000,000 1,085,313
4.50%, 9/30/11 ....................................... United States 1,500,000 1,604,123
4.75%, 8/15/17 ....................................... United States 7,000,000 7,780,941
5.00%, 8/15/11 ....................................... United States 2,100,000 2,260,043
(m) Index Linked, 1.625%, 1/15/15 ........................ United States 24,864,010 25,724,529
(m) Index Linked, 1.875%, 7/15/15 ........................ United States 21,079,948 22,114,172
(m) Index Linked, 2.00%, 1/15/14 ......................... United States 23,825,719 25,033,754
(m) Index Linked, 2.00%, 7/15/14 ......................... United States 12,364,512 13,049,395
(m) Index Linked, 2.00%, 1/15/16 ......................... United States 11,960,208 12,586,253
(m) Index Linked, 2.50%, 7/15/16 ......................... United States 20,837,444 22,647,697
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $227,808,200) .................................. 238,773,795
--------------
34 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 21.6%
Corporacion Andina De Fomento, 8.125%, 6/04/19 ....... Supranational(n) 11,440,000 $ 13,317,876
(d) Emirate of Abu Dhabi, 144A, 6.75%, 4/08/19 ........... United Arab Emirates 9,640,000 11,053,205
European Investment Bank, senior note, 1612/37, 6.50%,
9/10/14 ........................................... Supranational(n) 12,905,000 NZD 9,614,659
(f, o) Government of Argentina, senior bond, FRN, 0.943%,
8/03/12 ........................................... Argentina 106,878,000 33,773,448
Government of Hungary,
3.50%, 7/18/16 .................................... Hungary 180,000 EUR 241,808
4.375%, 7/04/17 ................................... Hungary 695,000 EUR 970,266
5.75%, 6/11/18 .................................... Hungary 505,000 EUR 767,474
senior note, 3.875%, 2/24/20 Hungary 290,000 EUR 371,353
Government of Indonesia,
FR10, 13.15%, 3/15/10 ............................. Indonesia 7,125,000,000 IDR 763,606
FR19, 14.25%, 6/15/13 ............................. Indonesia 63,035,000,000 IDR 7,623,604
FR20, 14.275%, 12/15/13 ........................... Indonesia 28,415,000,000 IDR 3,481,210
FR26, 11.00%, 10/15/14 ............................ Indonesia 4,500,000,000 IDR 503,010
FR28, 10.00%, 7/15/17 ............................. Indonesia 10,200,000,000 IDR 1,084,084
FR34, 12.80%, 6/15/21 ............................. Indonesia 108,710,000,000 IDR 13,261,479
FR39, 11.75%, 8/15/23 ............................. Indonesia 29,150,000,000 IDR 3,311,807
FR42, 10.25%, 7/15/27 ............................. Indonesia 86,000,000,000 IDR 8,690,051
FR44, 10.00%, 9/15/24 ............................. Indonesia 92,490,000,000 IDR 9,249,000
FR47, 10.00%, 2/15/28 ............................. Indonesia 28,000,000,000 IDR 2,770,681
(d) senior bond, 144A, 6.625%, 2/17/37 ................ Indonesia 940,000 916,108
(d) senior bond, 144A, 7.75%, 1/17/38 ................. Indonesia 11,270,000 12,331,258
(d) senior bond, 144A, 8.50%, 10/12/35 ................ Indonesia 945,000 1,122,525
(d) senior note, 144A, 11.625%, 3/04/19 ............... Indonesia 2,655,000 3,670,537
Government of Israel, 2680, 7.00%, 4/29/11 ........... Israel 38,745,000 ILS 11,069,253
(d) Government of Lithuania, 144A, 6.75%, 1/15/15 ........ Lithuania 6,980,000 6,977,906
Government of Malaysia,
3.461%, 7/31/13 ................................... Malaysia 28,900,000 MYR 8,486,971
3.756%, 4/28/11 ................................... Malaysia 104,670,000 MYR 31,294,382
3.833%, 9/28/11 ................................... Malaysia 77,350,000 MYR 23,208,264
4.24%, 2/07/18 .................................... Malaysia 64,800,000 MYR 19,056,118
Government of Mexico,
M 10, 8.00%, 12/17/15 ............................. Mexico 725,000(p) MXN 5,591,997
M 20, 10.00%, 12/05/24 ............................ Mexico 4,945,000(p) MXN 43,128,049
Government of Norway, 6.00%, 5/16/11 ................. Norway 207,340,000 NOK 38,135,071
Government of Poland,
4.25%, 5/24/11 .................................... Poland 3,685,000 PLN 1,267,344
4.75%, 4/25/12 .................................... Poland 108,930,000 PLN 37,462,612
5.75%, 4/25/14 .................................... Poland 24,040,000 PLN 8,326,826
5.75%, 9/23/22 .................................... Poland 38,200,000 PLN 12,726,074
6.25%, 10/24/15 ................................... Poland 44,475,000 PLN 15,728,848
senior note, 6.375%, 7/15/19 ...................... Poland 18,000,000 19,896,534
Government of Russia,
(d) 144A, 7.50%, 3/31/30 .............................. Russia 58,936,120 65,539,912
(q) senior bond, Reg S, 7.50%, 3/31/30 ................ Russia 10,434,000 11,603,130
Government of South Africa,
6.875%, 5/27/19 ................................... South Africa 10,820,000 12,064,300
senior note, 5.875%, 5/30/22 ...................... South Africa 10,000,000 10,293,750
Semiannual Report | 35
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Sri Lanka, A,
8.50%, 1/15/13 ....................................... Sri Lanka 152,900,000 LKR $ 1,273,637
11.00%, 8/01/15 ...................................... Sri Lanka 601,300,000 LKR 5,405,544
11.25%, 7/15/14 ...................................... Sri Lanka 528,200,000 LKR 4,769,638
13.50%, 2/01/13 ...................................... Sri Lanka 178,300,000 LKR 1,694,699
Government of Sweden,
5.25%, 3/15/11 ....................................... Sweden 549,960,000 SEK 82,360,489
5.50%, 10/08/12 ...................................... Sweden 24,960,000 SEK 3,870,421
Government of Venezuela,
10.75%, 9/19/13 ...................................... Venezuela 23,150,000 22,166,125
(q) senior bond, Reg S, 5.375%, 8/07/10 .................. Venezuela 7,755,000 7,533,982
KfW Bankengruppe, senior note, 6.50%, 11/15/11 .......... Germany 10,164,000 NZD 7,544,231
Korea Development Bank, senior note, 8.00%, 1/23/14 ..... South Korea 11,695,000 13,361,923
Korea Treasury Bond,
0400-1206, 4.00%, 6/10/12 ............................ South Korea 48,058,140,000 KRW 40,063,952
0475-1112, 4.75%, 12/10/11 ........................... South Korea 38,168,700,000 KRW 32,316,992
0525-1209, 5.25%, 9/10/12 ............................ South Korea 21,000,000,000 KRW 17,952,627
0525-1303, 5.25%, 3/10/13 ............................ South Korea 767,400,000 KRW 655,558
0550-1106, 5.50%, 6/10/11 ............................ South Korea 7,842,350,000 KRW 6,728,114
senior note, 7.125%, 4/16/19 ......................... South Korea 5,300,000 6,214,870
New South Wales Treasury Corp., senior note, 5.50%,
3/01/17 .............................................. Australia 12,025,000 AUD 10,465,579
Nota Do Tesouro Nacional,
(j) 9.609%, 1/01/12 ...................................... Brazil 17,580(r) BRL 9,692,662
9.609%, 1/01/14 ...................................... Brazil 5,200(r) BRL 2,718,786
9.609%, 1/01/17 ...................................... Brazil 60,650(r) BRL 29,639,400
(s) Index Linked, 6.00%, 5/15/15 ......................... Brazil 17,930(r) BRL 18,243,728
(s) Index Linked, 6.00%, 5/15/45 ......................... Brazil 3,570(r) BRL 3,444,491
Province of Manitoba, 6.375%, 9/01/15 ................... Canada 3,000,000 NZD 2,125,720
Province of Ontario, 6.25%, 6/16/15 ..................... Canada 2,826,000 NZD 2,032,538
Queensland Treasury Corp.,
11, 6.00%, 6/14/11 ................................... Australia 2,145,000 AUD 1,962,392
13, 6.00%, 8/14/13 ................................... Australia 2,045,000 AUD 1,863,326
17, 6.00%, 9/14/17 ................................... Australia 4,090,000 AUD 3,664,409
(d) 144A, 7.125%, 9/18/17 ................................ Australia 15,990,000 NZD 11,965,709
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $829,489,823) .................................. 872,477,932
--------------
MUNICIPAL BONDS 2.3%
Bay Area Toll Authority Toll Bridge Revenue, San
Francisco Bay Area, Refunding, Series F1, 5.00%,
4/01/39 .............................................. United States 880,000 896,289
California State GO,
Refunding, 5.00%, 4/01/38 ............................ United States 35,000,000 32,093,600
Various Purpose, 6.00%, 4/01/38 ...................... United States 20,000,000 21,269,400
Various Purpose, Refunding, 5.25%, 3/01/38 ........... United States 7,220,000 6,971,849
Clovis USD, GO, Capital Appreciation, Election of 2004,
Series A,
FGIC Insured, zero cpn., 8/01/27 ..................... United States 5,315,000 1,998,493
NATL Insured, zero cpn., 8/01/25 ..................... United States 7,720,000 3,311,417
NATL Insured, zero cpn., 8/01/26 ..................... United States 3,985,000 1,601,452
NATL Insured, zero cpn., 8/01/29 ..................... United States 5,315,000 1,745,712
36 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION AMOUNT(e) VALUE
- ------------------------------ -------------------- --------------- --------------
MUNICIPAL BONDS (CONTINUED)
District of Columbia University Revenue, Georgetown
University, Refunding, Series D, BHAC Insured,, 5.50%,
4/01/36 .............................................. United States 2,240,000 $ 2,464,941
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 3,595,822
Las Vegas Valley Water District GO, Refunding, Series A,
NATL Insured, 5.00%, 6/01/26 ......................... United States 570,000 582,483
Lewisville ISD, GO, School Building, 5.00%, 8/15/26 ..... United States 790,000 848,800
Los Angeles USD, GO, Series I, 5.00%,
7/01/26 .............................................. United States 265,000 278,025
7/01/27 .............................................. United States 280,000 292,191
MTA Revenue,
Series B, Assured Guaranty, 5.25%, 11/15/20 .......... United States 1,120,000 1,226,064
Transportation, Series A, FSA Insured, 5.50%,
11/15/21 .......................................... United States 1,060,000 1,192,288
Palomar Pomerado Health GO, Election of 2004, Series A ,
NATL Insured, 5.125%, 8/01/37 ........................ United States 3,015,000 2,892,048
Placentia-Yorba Linda USD, GO, 2008 Election, Series A,
5.25%, 8/01/32 ....................................... United States 3,480,000 3,613,110
Poway USD, GO, Election of 2008, ID 07-1-A, zero cpn.,
8/01/27 .............................................. United States 1,025,000 372,331
8/01/30 .............................................. United States 1,025,000 297,127
8/01/32 .............................................. United States 1,280,000 318,566
8/01/33 .............................................. United States 675,000 156,222
Regional Transportation District Sales Tax Revenue,
Fastracks Project, Series A, AMBAC Insured, 5.00%,
11/01/27 ............................................. United States 850,000 898,739
San Bernardino Community College District GO, Election of
2002, Series A,
6.375%, 8/01/26 ...................................... United States 580,000 675,149
6.50%, 8/01/27 ....................................... United States 840,000 987,470
6.50%, 8/01/28 ....................................... United States 350,000 410,882
San Mateo County Community College District GO, Election
of 2001, Series C, NATL Insured, zero cpn.,
9/01/30 .............................................. United States 2,475,000 758,563
3/01/31 .............................................. United States 675,000 197,370
--------------
TOTAL MUNICIPAL BONDS (COST $ 90,001,310) ............... 91,946,403
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $ 3,765,312,130) ............................... 3,918,001,269
--------------
SHORT TERM INVESTMENTS 2.0%
FOREIGN GOVERNMENT AND AGENCY SECURITIES 0.2%
Government of Malaysia, 3.869%, 4/13/10 ................. Malaysia 17,480,000 MYR 5,164,286
(t) Israel Treasury Bill, 10/06/10 .......................... Israel 10,830,000 ILS 2,845,671
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $ 7,838,143) ................................... 8,009,957
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $ 3,773,150,273) ............................... 3,926,011,226
--------------
Semiannual Report | 37
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND COUNTRY/ORGANIZATION SHARES VALUE
- ------------------------------ -------------------- --------------- --------------
SHORT TERM INVESTMENTS (CONTINUED)
MONEY MARKET FUNDS (COST $74,234,948) 1.8%
(u) Institutional Fiduciary Trust Money Market Portfolio,
0.00% ................................................ United States 74,234,948 $ 74,234,948
--------------
TOTAL INVESTMENTS (COST $3,847,385,221) 99.2% ........... 4,000,246,174
OTHER ASSETS, LESS LIABILITIES 0.8% ..................... 32,607,146
--------------
NET ASSETS 100.0% ....................................... $4,032,853,320
==============
See Abbreviations on page 60.
(a) Non-income producing.
(b) See Note 9 regarding restricted 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 October 31, 2009,
the aggregate value of these securities was $548,082,616, representing
13.60% 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) Income may be received in additional securities and/or cash.
(i) See Note 8 regarding defaulted securities.
(j) A portion or all of the security purchased on a when-issued, delayed
delivery, or TBA basis. See Note 1(c).
(k) Perpetual security with no stated maturity date.
(l) See Note 11 regarding other considerations.
(m) Principal amount of security is adjusted for inflation. See Note 1(h).
(n) A supranational organization is an entity formed by two or more central
governments through international treaties.
(o) The principal amount is stated in original face, and scheduled paydowns are
reflected in the market price on ex-date.
(p) Principal amount is stated in 100 Mexican Peso Units.
(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 October 31, 2009, the aggregate value of
these securities was $19,137,112, representing 0.47% of net assets.
(r) Principal amount is stated in 1000 Brazilian Real Units.
(s) Redemption price at maturity is adjusted for inflation. See Note 1(h).
(t) The security is traded on a discount basis with no stated coupon rate.
(u) See Note 7 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
38 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
At October 31, 2009, the Fund had the following forward exchange contracts
outstanding. See Note 1(d).
FORWARD EXCHANGE CONTRACTS
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
New Zealand Dollar .... CITI Sell 4,842,580 2,976,438 11/30/09 $ -- $ (486,500)
New Zealand Dollar .... UBSW Sell 1,573,470 965,560 11/30/09 -- (159,632)
New Zealand Dollar .... DBAB Sell 1,563,991 962,402 11/30/09 -- (156,011)
New Zealand Dollar .... CITI Buy 4,842,580 3,589,804 11/30/09 -- (126,866)
New Zealand Dollar .... DBAB Buy 1,563,991 1,164,297 11/30/09 -- (45,884)
New Zealand Dollar .... UBSW Buy 1,573,470 1,164,761 11/30/09 -- (39,570)
Euro .................. UBSW Sell 5,950,000 8,287,160 12/01/09 -- (465,763)
Mexican Peso .......... CITI Sell 12,522,000 924,303 12/01/09 -- (19,903)
New Zealand Dollar .... DBAB Sell 3,669,964 2,232,329 12/02/09 -- (391,659)
New Zealand Dollar .... BZWS Sell 2,608,522 1,612,067 12/02/09 -- (253,001)
New Zealand Dollar .... FBCO Sell 1,211,093 749,025 12/02/09 -- (116,895)
New Zealand Dollar .... DBAB Buy 3,669,964 2,731,664 12/02/09 -- (107,677)
New Zealand Dollar .... BZWS Buy 2,608,522 1,933,958 12/02/09 -- (68,891)
New Zealand Dollar .... FBCO Buy 1,211,093 897,662 12/02/09 -- (31,743)
Euro .................. CITI Sell 10,316,000 14,448,899 12/16/09 -- (725,699)
Euro .................. UBSW Sell 3,226,000 4,517,755 12/16/09 -- (227,617)
Mexican Peso .......... DBAB Sell 96,600,000 7,002,791 12/17/09 -- (264,848)
Mexican Peso .......... DBAB Sell 85,260,000 6,295,503 1/04/10 -- (102,669)
Euro .................. DBAB Sell 7,289,000 9,902,107 1/12/10 -- (818,635)
Philippine Peso ....... JPHQ Buy 124,082,000 2,661,203 1/13/10 -- (68,559)
United States Dollar .. JPHQ Buy 5,000,000 3,585,129 EUR 1/13/10 -- (273,027)
Euro .................. BZWS Sell 7,281,540 10,271,850 1/20/10 -- (437,599)
Mexican Peso .......... CITI Sell 12,642,000 927,377 1/29/10 -- (17,926)
New Zealand Dollar .... UBSW Sell 1,052,968 685,377 1/29/10 -- (64,246)
New Zealand Dollar .... UBSW Buy 1,052,968 776,038 1/29/10 -- (26,414)
Euro .................. DBAB Sell 9,257,000 13,101,988 2/04/10 -- (511,921)
Euro .................. UBSW Sell 6,497,000 9,216,579 2/11/10 -- (337,902)
Singapore Dollar ...... HSBC Sell 22,605,000 15,000,000 2/17/10 -- (1,115,220)
Singapore Dollar ...... BZWS Sell 22,582,500 15,000,000 2/17/10 -- (1,099,180)
Singapore Dollar ...... BZWS Buy 22,582,500 15,879,685 2/17/10 219,495 --
Singapore Dollar ...... HSBC Buy 22,605,000 15,895,507 2/17/10 219,713 --
Mexican Peso .......... CITI Sell 10,450,730 772,678 3/22/10 -- (3,055)
Singapore Dollar ...... UBSW Sell 3,797,000 2,499,918 3/23/10 -- (206,618)
Singapore Dollar ...... UBSW Buy 3,797,000 2,669,244 3/23/10 37,292 --
Indian Rupee .......... DBAB Buy 59,919,000 1,157,989 4/09/10 102,000 --
Indian Rupee .......... DBAB Buy 128,487,000 2,481,402 4/12/10 219,711 --
Indian Rupee .......... JPHQ Buy 86,303,000 1,654,265 4/13/10 159,871 --
Indian Rupee .......... JPHQ Buy 84,715,000 1,654,267 4/15/10 126,165 --
Indian Rupee .......... DBAB Buy 29,785,000 580,604 4/19/10 45,151 --
Indian Rupee .......... JPHQ Buy 42,318,000 829,439 4/19/10 59,622 --
Indian Rupee .......... DBAB Buy 60,176,000 1,161,219 4/26/10 102,217 --
Chilean Peso .......... JPHQ Buy 937,202,000 1,601,644 4/27/10 180,052 --
Semiannual Report | 39
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
Chilean Peso .......... CITI Buy 940,566,000 1,601,645 4/27/10 $ 186,446 $ --
Indian Rupee .......... JPHQ Buy 8,585,000 165,894 4/27/10 14,338 --
Chilean Peso .......... CITI Buy 1,510,671,000 2,562,631 4/28/10 309,367 --
Chilean Peso .......... UBSW Buy 189,154,000 320,329 4/28/10 39,280 --
Indian Rupee .......... JPHQ Buy 42,592,000 829,445 4/28/10 64,641 --
Indian Rupee .......... JPHQ Buy 42,633,000 829,436 4/30/10 65,366 --
Indian Rupee .......... DBAB Buy 81,531,000 1,661,220 6/01/10 45,598 --
Indian Rupee .......... HSBC Buy 2,417,000 49,835 6/02/10 760 --
Indian Rupee .......... HSBC Buy 11,961,000 249,188 6/03/10 1,171 --
Indian Rupee .......... HSBC Buy 79,838,000 1,661,215 6/04/10 9,758 --
Indian Rupee .......... DBAB Buy 39,919,000 830,608 6/07/10 4,678 --
Indian Rupee .......... DBAB Buy 20,136,000 417,759 6/08/10 3,543 --
Indian Rupee .......... HSBC Buy 16,031,000 332,249 6/08/10 3,165 --
Indian Rupee .......... DBAB Buy 16,259,000 334,203 6/10/10 5,926 --
Indian Rupee .......... BZWS Buy 24,313,000 501,299 6/11/10 7,276 --
Indian Rupee .......... HSBC Buy 16,292,000 334,195 6/11/10 6,598 --
Indian Rupee .......... DBAB Buy 40,697,000 835,496 6/16/10 15,455 --
Indian Rupee .......... DBAB Buy 37,071,000 751,947 6/21/10 22,875 --
Euro .................. UBSW Sell 9,972,000 13,906,353 6/29/10 -- (744,769)
New Zealand Dollar .... DBAB Sell 29,251,645 18,000,000 7/06/10 -- (2,566,367)
New Zealand Dollar .... DBAB Buy 4,551,645 3,330,439 7/06/10 -- (130,242)
New Zealand Dollar .... DBAB Buy 24,700,000 17,117,100 7/06/10 249,077 --
New Zealand Dollar .... DBAB Sell 2,611,615 1,680,574 7/30/10 -- (151,763)
New Zealand Dollar .... DBAB Buy 2,611,615 1,906,479 7/30/10 -- (74,142)
New Zealand Dollar .... DBAB Sell 2,601,679 1,671,189 8/03/10 -- (153,412)
New Zealand Dollar .... BZWS Sell 1,018,449 653,844 8/03/10 -- (60,411)
New Zealand Dollar .... BZWS Buy 1,018,449 740,005 8/03/10 -- (25,750)
New Zealand Dollar .... DBAB Sell 1,030,760 658,552 8/04/10 -- (64,261)
New Zealand Dollar .... BZWS Sell 1,026,315 658,894 8/04/10 -- (60,802)
New Zealand Dollar .... DBAB Buy 1,030,760 752,145 8/04/10 -- (29,332)
New Zealand Dollar .... HSBC Sell 30,300,000 19,598,040 8/05/10 -- (1,647,403)
New Zealand Dollar .... HSBC Buy 30,300,000 22,094,760 8/05/10 -- (849,317)
New Zealand Dollar .... CITI Sell 2,583,681 1,687,208 8/05/10 -- (124,391)
New Zealand Dollar .... DBAB Sell 1,532,902 999,146 8/05/10 -- (75,679)
Indonesian Rupiah ..... HSBC Buy 144,620,000,000 14,000,000 8/06/10 310,153 --
New Zealand Dollar .... CITI Sell 2,023,648 1,322,484 8/06/10 -- (96,288)
New Zealand Dollar .... FBCO Sell 1,009,952 657,732 8/06/10 -- (50,342)
New Zealand Dollar .... CITI Sell 1,996,763 1,312,792 8/09/10 -- (86,692)
New Zealand Dollar .... DBAB Sell 2,005,773 1,319,398 8/09/10 -- (86,401)
New Zealand Dollar .... FBCO Sell 1,973,988 1,300,759 8/09/10 -- (82,761)
New Zealand Dollar .... FBCO Sell 1,977,450 1,313,284 8/11/10 -- (72,373)
New Zealand Dollar .... DBAB Sell 10,891,433 7,097,928 8/12/10 -- (533,218)
New Zealand Dollar .... DBAB Sell 5,501,000 3,570,699 8/13/10 -- (283,206)
New Zealand Dollar .... DBAB Sell 5,802,000 3,829,900 8/16/10 -- (233,604)
40 | Semiannual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
Brazilian Real ........ DBAB Buy 731,000 35,502,477 JPY 8/17/10 $ -- $ (4,783)
Israeli Shekel ........ CITI Buy 7,916,000 2,088,985 8/17/10 21,580 --
Japanese Yen .......... UBSW Sell 101,506,000 1,070,106 8/17/10 -- (61,568)
Brazilian Real ........ DBAB Buy 540,000 26,001,000 JPY 8/18/10 -- (1,097)
Chilean Peso .......... JPHQ Buy 4,247,280,800 7,760,000 8/18/10 317,064 --
Japanese Yen .......... JPHQ Sell 50,440,000 535,059 8/18/10 -- (27,302)
Brazilian Real ........ DBAB Buy 810,000 38,074,860 JPY 8/19/10 8,575 --
Chilean Peso .......... JPHQ Buy 1,399,090,000 2,530,000 8/19/10 130,675 --
Israeli Shekel ........ CITI Buy 7,920,000 2,086,547 8/19/10 25,078 --
Israeli Shekel ........ DBAB Buy 793,000 208,904 8/19/10 2,525 --
Japanese Yen .......... HSBC Sell 50,206,000 533,652 8/19/10 -- (26,114)
Euro .................. BZWS Sell 5,663,000 8,002,102 8/20/10 -- (314,675)
Euro .................. UBSW Sell 4,900,000 6,907,285 8/20/10 -- (288,937)
Israeli Shekel ........ CITI Buy 3,038,500 794,982 8/20/10 15,140 --
Japanese Yen .......... DBAB Sell 50,397,000 533,652 8/20/10 -- (28,258)
Japanese Yen .......... BZWS Sell 50,333,000 534,445 8/20/10 -- (26,750)
Euro .................. UBSW Sell 4,900,000 6,930,854 8/23/10 -- (265,189)
Israeli Shekel ........ CITI Buy 5,185,400 1,359,855 8/23/10 22,666 --
Japanese Yen .......... CITI Sell 100,563,000 1,068,881 8/23/10 -- (52,445)
Japanese Yen .......... FBCO Sell 99,826,000 1,068,887 8/23/10 -- (44,221)
Japanese Yen .......... JPHQ Sell 100,349,000 1,068,879 8/24/10 -- (50,088)
Japanese Yen .......... BZWS Sell 100,015,000 1,068,879 8/24/10 -- (46,364)
New Zealand Dollar .... FBCO Sell 4,934,741 3,253,870 8/24/10 -- (199,348)
Japanese Yen .......... DBAB Sell 49,740,000 534,436 8/25/10 -- (20,216)
New Zealand Dollar .... DBAB Sell 4,911,000 3,283,004 8/27/10 -- (152,523)
Brazilian Real ........ DBAB Buy 541,000 25,277,143 JPY 8/31/10 6,544 --
Euro .................. DBAB Sell 4,170,000 5,979,780 9/01/10 -- (143,741)
Japanese Yen .......... JPHQ Sell 49,853,000 534,442 9/01/10 -- (21,566)
Mexican Peso .......... DBAB Sell 105,094,654 7,538,531 9/01/10 -- (76,914)
Brazilian Real ........ DBAB Buy 811,000 37,498,207 JPY 9/02/10 13,985 --
Japanese Yen .......... HSBC Sell 49,331,000 534,446 9/02/10 -- (15,753)
Euro .................. BZWS Sell 8,005,000 11,402,322 9/07/10 -- (352,196)
Japanese Yen .......... HSBC Sell 74,296,000 801,657 9/09/10 -- (27,125)
Japanese Yen .......... HSBC Sell 74,042,000 801,667 9/10/10 -- (24,302)
Japanese Yen .......... DBAB Sell 60,895,000 663,373 9/10/10 -- (15,936)
Japanese Yen .......... UBSW Sell 50,584,000 552,806 9/13/10 -- (11,520)
Brazilian Real ........ DBAB Buy 1,217,000 56,745,424 JPY 9/15/10 13,533 --
Japanese Yen .......... HSBC Sell 40,245,000 442,243 9/15/10 -- (6,762)
Japanese Yen .......... UBSW Sell 59,943,000 663,372 9/15/10 -- (5,398)
Japanese Yen .......... BZWS Sell 39,800,000 442,247 9/15/10 -- (1,793)
Japanese Yen .......... HSBC Sell 59,697,000 663,374 9/16/10 -- (2,669)
Japanese Yen .......... DBAB Sell 20,012,000 221,127 9/16/10 -- (2,148)
New Zealand Dollar .... DBAB Sell 2,908,311 1,983,468 9/16/10 -- (46,818)
Japanese Yen .......... DBAB Sell 1,722,350,000 19,000,000 9/17/10 -- (216,826)
Semiannual Report | 41
Franklin Strategic Series
STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
United States Dollar .. UBSW Buy 20,000,000 13,632,336 EUR 9/20/10 $ -- $ (15,517)
Japanese Yen .......... JPHQ Sell 40,023,000 442,243 9/21/10 -- (4,351)
Japanese Yen .......... HSBC Sell 19,844,000 221,128 9/21/10 -- (300)
Japanese Yen .......... JPHQ Sell 9,657,000 106,713 9/24/10 -- (1,052)
Japanese Yen .......... JPHQ Sell 960,000 10,668 9/27/10 -- (46)
Euro .................. UBSW Sell 8,180,000 11,954,252 10/04/10 -- (54,539)
Philippine Peso ....... DBAB Buy 63,030,000 1,306,430 10/04/10 -- (12,047)
Philippine Peso ....... HSBC Buy 50,559,000 1,045,147 10/04/10 -- (6,869)
Philippine Peso ....... DBAB Buy 75,358,000 1,567,705 10/05/10 -- (20,244)
Philippine Peso ....... HSBC Buy 75,377,000 1,567,720 10/05/10 -- (19,869)
Philippine Peso ....... JPHQ Buy 19,908,000 418,060 10/06/10 -- (9,276)
Philippine Peso ....... DBAB Buy 61,862,000 1,306,428 10/07/10 -- (36,250)
Euro .................. BZWS Sell 8,197,000 12,070,083 10/08/10 36,735 --
Philippine Peso ....... DBAB Buy 49,502,000 1,045,140 10/08/10 -- (28,801)
Philippine Peso ....... HSBC Buy 49,596,000 1,045,149 10/08/10 -- (26,880)
Philippine Peso ....... JPHQ Buy 24,697,000 522,566 10/08/10 -- (15,505)
Philippine Peso ....... CITI Buy 24,762,000 522,581 10/08/10 -- (14,186)
Philippine Peso ....... DBAB Buy 14,740,000 313,550 10/12/10 -- (10,988)
Philippine Peso ....... JPHQ Buy 54,934,000 1,173,812 10/13/10 -- (46,269)
Philippine Peso ....... HSBC Buy 24,577,000 522,581 10/13/10 -- (18,128)
Euro .................. DBAB Sell 6,090,000 9,057,048 10/19/10 117,633 --
Japanese Yen .......... DBAB Sell 2,075,980,000 23,000,000 10/19/10 -- (180,618)
Philippine Peso ....... JPHQ Buy 712,650,000 15,000,000 10/22/10 -- (380,084)
Chinese Yuan .......... HSBC Buy 19,992,188 3,036,573 10/25/10 -- (91,131)
Japanese Yen .......... JPHQ Sell 993,630,000 11,000,000 10/25/10 -- (96,618)
Chinese Yuan .......... HSBC Buy 33,924,068 5,138,298 10/26/10 -- (140,089)
Euro .................. BZWS Sell 5,986,000 8,955,655 10/26/10 169,411 --
Chinese Yuan .......... HSBC Buy 20,270,115 3,064,034 10/27/10 -- (77,421)
Euro .................. UBSW Sell 9,398,000 14,073,975 10/27/10 279,716 --
Chinese Yuan .......... HSBC Buy 200,100,000 30,000,000 10/29/10 -- (514,916)
Japanese Yen .......... JPHQ Sell 1,081,080,000 12,000,000 11/02/10 -- (75,614)
------------ ------------
Unrealized appreciation (depreciation) ............................................... 4,017,620 (21,533,009)
------------ ------------
Net unrealized appreciation (depreciation) ........................................ $(17,515,389)
============
(a) In U.S. dollars unless otherwise indicated.
See Abbreviations on page 60.
The accompanying notes are an integral part of these financial statements.
42 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2009 (unaudited)
FRANKLIN
STRATEGIC
INCOME FUND
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ......................... $3,773,150,273
Cost - Sweep Money Fund (Note 7) .................... 74,234,948
--------------
Total cost of investments ........................... $3,847,385,221
==============
Value - Unaffiliated issuers ........................ $3,926,011,226
Value - Sweep Money Fund (Note 7) ................... 74,234,948
--------------
Total value of investments .......................... 4,000,246,174
Cash ................................................... 1,357,949
Cash on deposit with brokers ........................... 3,870,000
Foreign currency, at value (cost $660,852) ............. 685,528
Receivables:
Investment securities sold .......................... 132,256,955
Capital shares sold ................................. 14,817,213
Dividends and interest .............................. 57,851,433
Unrealized appreciation on forward exchange contracts .. 4,017,620
Other assets ........................................... 1,586
--------------
Total assets ..................................... 4,215,104,458
--------------
Liabilities:
Payables:
Investment securities purchased ..................... 141,637,347
Capital shares redeemed ............................. 11,903,467
Affiliates .......................................... 2,990,085
Distributions to shareholders ....................... 3,684,721
Unrealized depreciation on forward exchange contracts .. 21,533,009
Accrued expenses and other liabilities ................. 502,509
--------------
Total liabilities ................................ 182,251,138
--------------
Net assets, at value .......................... $4,032,853,320
==============
Net assets consist of:
Paid-in capital ........................................ $4,115,214,844
Undistributed net investment income .................... 308,202
Net unrealized appreciation (depreciation) ............. 135,780,680
Accumulated net realized gain (loss) ................... (218,450,406)
--------------
Net assets, at value .......................... $4,032,853,320
==============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 43
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2009 (unaudited)
FRANKLIN
STRATEGIC
INCOME FUND
--------------
CLASS A:
Net assets, at value ................................... $2,531,169,428
==============
Shares outstanding ..................................... 257,770,808
==============
Net asset value per share(a) ........................... $ 9.82
==============
Maximum offering price per share (net asset value per
share / 95.75%) ..................................... $ 10.26
==============
CLASS B:
Net assets, at value ................................... $ 79,726,102
==============
Shares outstanding ..................................... 8,079,380
==============
Net asset value and maximum offering price per
share(a) ............................................ $ 9.87
==============
CLASS C:
Net assets, at value ................................... $ 986,956,169
==============
Shares outstanding ..................................... 100,517,378
==============
Net asset value and maximum offering price per
share(a) ............................................ $ 9.82
==============
CLASS R:
Net assets, at value ................................... $ 159,001,836
==============
Shares outstanding ..................................... 16,232,765
==============
Net asset value and maximum offering price per share ... $ 9.80
==============
ADVISOR CLASS:
Net assets, at value ................................... $ 275,999,785
==============
Shares outstanding ..................................... 28,086,008
==============
Net asset value and maximum offering price per share ... $ 9.83
==============
(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.
44 | Semiannual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended October 31, 2009 (unaudited)
FRANKLIN
STRATEGIC
INCOME FUND
------------
Investment income:
Dividends:
Unaffiliated issuers ................................... $ 73,251
Sweep Money Fund (Note 7) .............................. 3,811
Interest .................................................. 123,637,475
------------
Total investment income ............................. 123,714,537
------------
Expenses:
Management fees (Note 3a) ................................. 8,220,412
Distribution fees: (Note 3c)
Class A ................................................ 2,922,535
Class B ................................................ 266,278
Class C ................................................ 2,917,945
Class R ................................................ 346,437
Transfer agent fees (Note 3e) ............................. 2,412,002
Custodian fees (Note 4) ................................... 233,103
Reports to shareholders ................................... 156,804
Registration and filing fees .............................. 88,544
Professional fees ......................................... 61,858
Trustees' fees and expenses ............................... 35,540
Other ..................................................... 77,238
------------
Total expenses ...................................... 17,738,696
Expense reductions (Note 4) ......................... (881)
------------
Net expenses ..................................... 17,737,815
------------
Net investment income ......................... 105,976,722
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................ 12,253,409
Foreign currency transactions .......................... 8,231,157
------------
Net realized gain (loss) ...................... 20,484,566
------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................ 388,101,349
Translation of other assets and liabilities
denominated in foreign currencies ................... (38,890,471)
------------
Net change in unrealized appreciation
(depreciation) ............................. 349,210,878
------------
Net realized and unrealized gain (loss) ...................... 369,695,444
------------
Net increase (decrease) in net assets resulting
from operations ........................................... $475,672,166
============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 45
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND
---------------------------------
SIX MONTHS ENDED
OCTOBER 31, 2009 YEAR ENDED
(UNAUDITED) APRIL 30, 2009
---------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 105,976,722 $ 168,461,244
Net realized gain (loss) from investments
and foreign currency transactions .................... 20,484,566 (170,022,370)
Net change in unrealized appreciation
(depreciation) on investments and translation of
other assets and liabilities denominated in foreign
currencies ........................................ 349,210,878 (219,185,882)
-------------- --------------
Net increase (decrease) in net assets resulting
from operations ................................ 475,672,166 (220,747,008)
-------------- --------------
Distributions to shareholders from net investment income
and net foreign currency gains:
Class A ................................................. (61,162,106) (164,958,880)
Class B ................................................. (1,953,361) (7,067,919)
Class C ................................................. (21,522,397) (57,173,330)
Class R ................................................. (3,434,224) (8,712,653)
Advisor Class ........................................... (6,137,945) (10,950,834)
-------------- --------------
Total distributions to shareholders ........................ (94,210,033) (248,863,616)
-------------- --------------
Capital share transactions: (Note 2)
Class A ................................................. 228,296,466 247,701,680
Class B ................................................. (8,897,120) (10,236,429)
Class C ................................................. 120,494,528 151,132,374
Class R ................................................. 28,913,745 23,995,492
Advisor Class ........................................... 86,476,288 71,110,577
-------------- --------------
Total capital share transactions ........................... 455,283,907 483,703,694
-------------- --------------
Redemption fees ............................................ -- 9,563
Net increase (decrease) in net assets ............. 836,746,040 14,102,633
Net assets:
Beginning of period ........................................ 3,196,107,280 3,182,004,647
-------------- --------------
End of period .............................................. $4,032,853,320 $3,196,107,280
============== ==============
Undistributed net investment income (loss) included in
net assets:
End of period .............................................. $ 308,202 $ (11,458,487)
============== ==============
The accompanying notes are an integral part of these financial statements.
46 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
Equity and other 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. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities. Investments
in open-end mutual funds are valued at the closing net asset value.
Corporate debt securities, government securities, municipal securities, mortgage
backed securities, asset-backed securities, collateralized debt obligations and
other debt securities generally trade in the over-the-counter market rather than
on a securities exchange. The Fund 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 Fund'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. Debt securities
denominated in a foreign currency are converted into their U.S. dollar
equivalent at the foreign exchange rate in effect at the close of the NYSE on
the date that the values of the foreign debt securities are determined.
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 Fund 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 Fund's pricing services use independent market quotations
from loan dealers
Semiannual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
The Fund 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 based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, 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 Fund'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 Fund'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
48 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION (CONTINUED)
the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in foreign
exchange rates on foreign denominated assets and liabilities other than
investments in securities held at the end of the reporting period.
C. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, AND TBA BASIS
The Fund may purchase securities on a when-issued, 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. DERIVATIVE FINANCIAL INSTRUMENTS
The Fund may invest in derivative financial instruments (derivatives) in order
to manage risk or gain exposure to various other investments or markets.
Derivatives are financial contracts based on an underlying or notional amount,
require no initial investment or an initial net investment that is smaller than
would normally be required to have a similar response to changes in market
factors, and require or permit net settlement. Derivatives may contain various
risks including the potential inability of the counterparty to fulfill their
obligations under the terms of the contract, the potential for an illiquid
secondary market, and the potential for market movements which may expose the
Fund to gains or losses in excess of the amounts shown on the Statement of
Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers
or the Fund's independent pricing services and the Fund's net benefit or
obligation under the contract, as measured by the fair market value of the
contract, is included in net assets. Realized gain and loss and unrealized
appreciation and depreciation on these contracts for the period are included in
the Statement of Operations.
The Fund enters into forward exchange contracts generally in order to hedge
against fluctuations in foreign exchange rates or to gain exposure to certain
foreign currencies. A forward exchange contract is an agreement between the Fund
and a counterparty to buy or sell a foreign currency for a specific exchange
rate on a future date. Pursuant to the terms of the forward exchange contacts,
cash or securities may be required to be deposited as collateral.
Semiannual Report | 49
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. MORTGAGE DOLLAR ROLLS
The Fund 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.
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 October 31, 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
50 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
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,
Semiannual Report | 51
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. GUARANTEES AND INDEMNIFICATIONS (CONTINUED)
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.
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2009, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 2009 APRIL 30, 2009
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES:
Shares sold .......................................... 51,960,173 $ 486,979,946 89,966,491 $ 809,736,545
Shares issued in reinvestment of distributions ....... 5,140,642 47,991,310 14,281,669 124,892,924
Shares redeemed ...................................... (32,590,466) (306,674,790) (77,662,451) (686,927,789)
----------- ------------- ----------- -------------
Net increase (decrease) .............................. 24,510,349 $ 228,296,466 26,585,709 $ 247,701,680
=========== ============= =========== =============
CLASS B SHARES:
Shares sold .......................................... 779,188 $ 7,291,610 3,223,884 $ 29,661,456
Shares issued in reinvestment of distributions ....... 149,638 1,399,794 540,736 4,759,007
Shares redeemed ...................................... (1,862,217) (17,588,524) (4,987,063) (44,656,892)
----------- ------------- ----------- -------------
Net increase (decrease) .............................. (933,391) $ (8,897,120) (1,222,443) $ (10,236,429)
=========== ============= =========== =============
CLASS C SHARES:
Shares sold .......................................... 20,905,889 $ 195,608,288 38,790,729 $ 351,484,801
Shares issued in reinvestment of distributions ....... 1,678,447 15,669,344 4,622,193 40,270,851
Shares redeemed ...................................... (9,648,599) (90,783,104) (27,181,977) (240,623,278)
----------- ------------- ----------- -------------
Net increase (decrease) .............................. 12,935,737 $ 120,494,528 16,230,945 $ 151,132,374
=========== ============= =========== =============
CLASS R SHARES:
Shares sold .......................................... 4,589,701 $ 43,175,626 5,861,272 $ 52,624,182
Shares issued in reinvestment of distributions ....... 345,151 3,217,838 927,934 8,059,242
Shares redeemed ...................................... (1,848,138) (17,479,719) (4,178,690) (36,687,932)
----------- ------------- ----------- -------------
Net increase (decrease) .............................. 3,086,714 $ 28,913,745 2,610,516 $ 23,995,492
=========== ============= =========== =============
ADVISOR CLASS SHARES:
Shares sold .......................................... 11,294,781 $ 106,503,020 10,210,308 $ 89,961,976
Shares issued in reinvestment of distributions ....... 529,339 4,954,180 1,093,583 9,458,220
Shares redeemed ...................................... (2,610,480) (24,980,912) (3,258,282) (28,309,619)
----------- ------------- ----------- -------------
Net increase (decrease) .............................. 9,213,640 $ 86,476,288 8,045,609 $ 71,110,577
=========== ============= =========== =============
52 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------- ----------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- -----------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $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.
Semiannual Report | 53
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 period:
Sales charges retained net of commissions paid
to unaffiliated broker/dealers ............... $794,244
Contingent deferred sales charges retained ...... $ 86,334
E. TRANSFER AGENT FEES
For the period ended October 31, 2009, the Fund paid transfer agent fees of
$2,412,002, of which $1,509,576 was retained by Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended October 31, 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
============
54 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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
$12,825,749.
At October 31, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ............................. $3,855,295,245
==============
Unrealized appreciation ......................... $ 238,556,364
Unrealized depreciation ......................... (93,605,435)
--------------
Net unrealized appreciation (depreciation) ...... $ 144,950,929
==============
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
period ended October 31, 2009, aggregated $1,451,550,896 and $1,023,006,470,
respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the 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.
8. CREDIT RISK AND DEFAULTED SECURITIES
At October 31, 2009, the Fund had 42.06% 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.
Semiannual Report | 55
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
8. CREDIT RISK AND DEFAULTED SECURITIES (CONTINUED)
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At October 31, 2009, the aggregate value of these
securities was $61,097,863, representing 1.52% 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.
9. 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
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 October 31, 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 (0.00% of Net Assets) .... $--
===
10. OTHER DERIVATIVE INFORMATION
At October 31, 2009, the Fund has invested in derivative contracts which are
reflected on the Statement of Assets and Liabilities as follows:
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------ --------------------------------------
DERIVATIVE CONTRACTS
NOT ACCOUNTED FOR AS STATEMENT OF ASSETS AND FAIR VALUE STATEMENT OF ASSETS AND FAIR VALUE
HEDGING INSTRUMENTS LIABILITIES LOCATION AMOUNT LIABILITIES LOCATION AMOUNT
- ------------------- ----------------------- ---------- ----------------------- ------------
Foreign exchange
contracts ........... Unrealized appreciation Unrealized depreciation
on forward exchange on forward exchange
contracts 4,017,620 contracts (21,533,009)
56 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
10. OTHER DERIVATIVE INFORMATION (CONTINUED)
For the period ended October 31, 2009, the effect of derivative contracts on the
Fund's Statement of Operations was as follows:
CHANGE IN
UNREALIZED
APPRECIATION AVERAGE
REALIZED GAIN (DEPRECIATION) NOTIONAL
(LOSS) FOR THE FOR THE AMOUNT
DERIVATIVE CONTRACTS PERIOD ENDED PERIOD ENDED OUTSTANDING
NOT ACCOUNTED FOR AS STATEMENT OF OCTOBER 31, OCTOBER 31, DURING THE
HEDGING INSTRUMENTS OPERATIONS LOCATIONS 2009 2009 PERIOD(a)
- -------------------- -------------------------------------- -------------- -------------- -----------
Foreign exchange Net realized gain (loss) from foreign
contracts currency transactions/Net change in
unrealized appreciation (depreciation)
on translation of other assets and
liabilities denominated in foreign
currencies $8,691,014 $(39,119,878) 465,247,232
(a) Notional amount represents the U.S. dollar equivalent based on the foreign
exchange rate at the time of contract entry.
See Note 1(d) regarding derivative financial instruments.
11. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Fund's Investment
Manager may have discussions or enter into agreements with issuers, underwriters
or creditors' committees 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.
12. 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
Semiannual Report | 57
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
12. CREDIT FACILITY (CONTINUED)
the period, the Fund incurred commitment fees of $3,575 of its pro rata portion
of the Global Credit Facility, which is reflected in other expenses on the
Statement of Operations. During the period ended October 31, 2009, the Fund did
not utilize the Global Credit Facility.
13. FAIR VALUE MEASUREMENTS
The Fund follows a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Fund's own market
assumptions (unobservable inputs). These inputs are used in determining the
value of the Fund's 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.
58 | Semiannual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
13. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of October 31, 2009, in valuing
the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- -------------- ------- --------------
ASSETS:
Investments in Securities:
Equity Investments:(a)
Automobiles & Components $ -- $ -- $--(b) $ --
Banks............................. 220,000 193,920 -- 413,920
Commercial & Professional
Services -- -- --(b) --
Diversified Financials............ -- 1,270,906 -- 1,270,906
Senior Floating Rate Interests....... -- 517,885,592 -- 517,885,592
Corporate Bonds...................... -- 1,712,944,487 -- 1,712,944,487
Convertible Bonds.................... -- 5,940,000 -- 5,940,000
Asset-Backed Securities and
Commercial Mortgage-Backed
Securities..................... -- 269,031,667 -- 269,031,667
Mortgage-Backed Securities........... -- 207,316,567 -- 207,316,567
U.S. Government and Agency
Securities........................ -- 238,773,795 -- 238,773,795
Foreign Government and Agency
Securities........................ -- 872,477,932 -- 872,477,932
Municipal Bonds...................... -- 91,946,403 -- 91,946,403
Short Term Investments............... 74,234,948 8,009,957 -- 82,244,905
----------- -------------- --- --------------
Total Investments in
Securities.................. $74,454,948 $3,925,791,226 $-- $4,000,246,174
=========== ============== === ==============
Forward Exchange Contracts.............. -- 4,017,620 -- 4,017,620
LIABILITIES:
Forward Exchange Contracts.............. -- 21,533,009 -- 21,533,009
(a) Includes common and preferred stock as well as other equity investments.
(b) Includes securities determined to have no value at October 31, 2009.
14. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through December 17, 2009, the issuance
date of the financial statements and determined that no events have occurred
that require disclosure.
Semiannual Report | 59
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
ABBREVIATIONS
COUNTERPARTY
BZWS - Barclays Bank PLC
CITI - Citibank N.A.
DBAB - Deutsche Bank AG
FBCO - Credit Suisse Group AG
HSBC - HSBC Bank USA, N.A.
JPHQ - JPMorgan Chase Bank, N.A.
UBSW - UBS AG
CURRENCY
AUD - Australian Dollar
BRL - Brazilian Real
EUR - Euro
IDR - Indonesian Rupiah
ILS - New Israeli Shekel
JPY - Japanese Yen
KRW - South Korean Won
LKR - Sri Lankan Rupee
MXN - Mexican Peso
MYR - Malaysian Ringgit
NOK - Norwegian Krone
NZD - New Zealand Dollar
PLN - Polish Zloty
SEK - Swedish Krona
SELECTED PORTFOLIO
AMBAC - American Municipal Bond Assurance Corp.
BHAC - Berkshire Hathaway Assurance Corp.
FGIC - Financial Guaranty Insurance Co.
FRN - Floating Rate Note
FSA - Financial Security Assurance Inc.
GO - General Obligation
ID - Improvement District
ISD - Independent School District
L/C - Letter of Credit
MTA - Metropolitan Transit Authority
NATL - National Public Financial Guarantee Corp.
PIK - Payment-In-Kind
SF - Single Family
USD - Unified/Union School District
60 | Semiannual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN STRATEGIC INCOME FUND
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.
Semiannual Report | 61
This page intentionally left blank.
This page intentionally left blank.
This page intentionally left blank.
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)
MutualShares 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 semiannual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
SEMIANNUAL 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 S2009 12/09
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. N/A
Item 5. Audit Committee of Listed Registrants. N/A
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. N/A
Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Trustees that would require disclosure
herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) Changes in Internal Controls. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
Item 12. Exhibits.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of 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 December 28, 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 December 28, 2009
By /s/GASTON GARDEY
--------------------
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date December 28, 2009