UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
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FRANKLIN STRATEGIC SERIES
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area Code: (650) 312-2000
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Date of fiscal year end: 4/30
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Date of reporting period: 4/30/10
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ITEM 1. REPORTS TO STOCKHOLDERS.
APRIL 30, 2010
ANNUAL REPORT
AND SHAREHOLDER LETTER
Franklin Flex Cap Growth Fund
Franklin Focused Core Equity Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
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FRANKLIN STRATEGIC SERIES
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager structure
combines the specialized expertise of three
world-class investment management groups--Franklin,
Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and staying
true to the unique investment disciplines that
underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as arbitrage
situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be used
to build truly diversified allocation plans covering
every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
(GRAPHIC)
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................ 1
ANNUAL REPORT
Economic and Market Overview .............................. 3
Franklin Flex Cap Growth Fund ............................. 5
Franklin Focused Core Equity Fund ......................... 15
Franklin Growth Opportunities Fund ........................ 25
Franklin Small Cap Growth Fund ............................ 35
Franklin Small-Mid Cap Growth Fund ........................ 45
Financial Highlights and Statements of Investments ........ 55
Financial Statements ...................................... 95
Notes to Financial Statements ............................. 104
Report of Independent Registered Public Accounting Firm ... 124
Tax Designation ........................................... 125
Board Members and Officers ................................ 126
Shareholder Information ................................... 131
Shareholder Letter
Dear Shareholder:
During the year ended April 30, 2010, the U.S. economy showed signs of an
increasingly broad-based expansion while interest rates remained near all-time
lows and inflation was muted. Although corporate and global economic data
underscored some weak spots amid short-term improvements, by fourth quarter 2009
and into 2010, most companies beat consensus earnings estimates, aided by
government incentives and a wave of restructuring and cost-cutting initiatives.
U.S. equity markets enjoyed an unusually strong rally until first quarter 2010,
when volatility returned as investors began to heed signs of overvaluation. In
addition, concerns about some European countries' creditworthiness contributed
to significant market uncertainty. Investors also questioned the global
recovery's sustainability as some government stimulus measures began to wind
down. During the reporting period, U.S. Treasury yields rose and fell in
response to wavering investor sentiment. The yield curve reached historically
steep levels during the first quarter of 2010 and flattened only slightly by
period-end.
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. Although conditions remain challenging, our experience gives us
reason to be optimistic about the potential for future market stabilization and
economic recovery.
Franklin Strategic Series' annual report goes into greater detail about
prevailing conditions during the period under review. In addition, you will find
performance data, financial information and discussions about investment
management decisions. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
If you would like more frequent updates, franklintempleton.com provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Funds, keeping in mind the trust you have
placed in us. As always, we recommend investors consult their financial advisors
and review their portfolios to design a long-term strategy and portfolio
allocation that meet their individual needs, goals and risk tolerance. We firmly
believe that most people benefit from professional advice, and that advice is
invaluable as investors navigate current market conditions.
We thank you for investing with Franklin Templeton, welcome your questions and
comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Edward B. Jamieson
Edward B. Jamieson
President and Chief Executive
Officer - Investment Management
Franklin Strategic Series
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2010. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
2 | Not part of the annual report
Annual Report
Economic and Market Overview
The U.S. economy ended the fiscal year under review in much better shape than it
began and showed signs of broad-based improvements. In the latter half of the
period, U.S. manufacturing and exports posted gains, consumer spending and
confidence rebounded from recessionary lows, and the services sector expanded
for the first time in more than two years. However, challenges remained as mixed
economic reports, elevated debt concerns surrounding the U.S. budget deficit and
lack of job prospects for the unemployed hindered the economy's advance. Fourth
quarter 2009 and first quarter 2010 corporate profit growth largely surpassed
consensus estimates, which allowed businesses to begin restocking inventories
that were depleted during the recession. Prices for new and previously occupied
homes rose in most regions due to lower interest rates, a first-time homebuyer
tax credit program, and prices dipping to levels that lured bargain hunters.
Unfortunately, the housing sector overall remained weak as the pace of home
sales and housing starts failed to gain traction.
The U.S. economy expanded at its fastest pace in six years during 2009's fourth
quarter, led by large inventory adjustments, government spending, a revival of
business investment and rising exports. U.S. economic output as measured by
gross domestic product grew at an annualized rate of 5.6% in the fourth quarter,
followed by an estimated annualized 3.0% advance in 2010's first quarter.(1) As
renewed signs of a demand-led recovery emerged, oil prices jumped from $51 per
barrel to $86 during the year under review. The April 2010 inflation rate was an
annualized 2.2%.(2) Core inflation, which excludes food and energy costs, rose
at a 0.9% annualized rate(2) and was below the Federal Reserve Board's (Fed's)
informal target range of 1.5% to 2.0%.
Given few inflationary pressures and uncertainty surrounding the economic
recovery, the Federal Open Market Committee (FOMC) announced it intended to hold
the federal funds target rate in the 0% to 0.25% range "for an extended period"
as it laid the groundwork for an eventual tightening of monetary policy. As the
economy improved, the Fed began withdrawing more of the extraordinary support
policies it had provided in response to the 2008 financial crisis. Late in the
reporting period, the labor market improved somewhat as the economy began to add
jobs, and the unemployment rate dropped from a 26-year high of 10.1% in October
2009 to 9.9% in April.(2)
(1.) Source: Bureau of Economic Analysis.
(2.) Source: Bureau of Labor Statistics.
Annual Report | 3
As investor confidence improved amid encouraging economic data, equity markets
generally rallied, though the advance was uneven. On April 12, 2010, the Dow
Jones Industrial Average (the Dow) closed above 11,000, a level it had not
reached in nearly 19 months. The rally was driven in part by investor optimism
about corporate profits, a recovering economy and the announcement of a debt
relief plan for the ailing Greek government. This achievement was largely
symbolic, however, and volatile trading activity soon resumed. The market
plunged after independent credit rating agency Standard & Poor's(R) slashed its
credit ratings for Spain, Greece and Portugal but rebounded after the FOMC
announced it would keep interest rates stable and many companies released upbeat
earnings reports.
For the 12 months under review, the blue chip stocks of the Dow delivered a
+38.69% total return, while the broader Standard & Poor's 500 Index (S&P 500(R))
posted a +38.84% total return and the technology-heavy NASDAQ Composite Index
returned +44.63%.(3) All major industry groups posted gains for the period, with
the strongest returns from the cyclical industrials, consumer discretionary and
financials sectors.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30,
2010. 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.
(3.) Source: (C) 2010 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 is price-weighted based on the average market price of 30 blue chip
stocks that are generally industry leaders. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The NASDAQ Composite Index is a broad-based,
market capitalization-weighted index designed to measure all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market.
4 | Annual Report
Franklin Flex Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Flex Cap Growth Fund seeks
capital appreciation. The Fund normally 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.
This annual report for Franklin Flex Cap Growth Fund covers the fiscal year
ended April 30, 2010.
PERFORMANCE OVERVIEW
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.
For the 12 months under review, Franklin Flex Cap Growth Fund - Class A
delivered a +34.17% cumulative total return. The Fund underperformed its narrow
benchmarks, the Russell 3000(R) Growth Index, which posted a +38.69% total
return, and the Russell 1000(R) Growth Index, which generated a +38.16% total
return, as well as its broad benchmark, the Standard & Poor's 500 Index (S&P
500), which posted a +38.84% total return for the same period.(1) The Fund also
underperformed the +39.42% 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) 2010 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 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market 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 12-month period ended 4/30/10, there were 456 funds in this
category. Lipper calculations do not include sales charges but include
reinvestment of any income or distributions. The Fund's performance
relative to the average may have differed if these or other factors had
been considered. One cannot invest directly in the 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 60.
Annual Report | 5
PORTFOLIO BREAKDOWN
Franklin Flex Cap Growth Fund
Based on Total Net Assets as of 4/30/10
(BAR CHART)
Technology Hardware & Equipment* 16.1%
Software & Services* 12.2%
Health Care Equipment & Services 8.9%
Pharmaceuticals, Biotechnology & Life Sciences 8.2%
Capital Goods 7.2%
Energy 6.4%
Retailing 5.4%
Materials 4.6%
Semiconductors & Semiconductor Equipment* 3.7%
Diversified Financials 3.6%
Transportation 2.9%
Telecommunication Services 2.5%
Consumer Durables & Apparel 2.1%
Other 13.2%
Short-Term Investments & Other Net Assets 3.0%
* 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.
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 12 months under review, key contributors to Fund performance relative
to the Russell 3000 Growth Index included FMC Technologies, a subsea oil and gas
equipment manufacturer, NII Holdings, a mobile telecommunication services
provider, and a new position in Intuitive Surgical, a robotic surgical systems
maker.
On a sector basis, the energy, telecommunication services and financials sectors
helped the Fund's relative performance.(3) Besides FMC Technologies, independent
oil and natural gas company Concho Resources, a new holding, was another key
contributor in the energy sector. The Fund's overweighting of supplemental
insurance provider Aflac in the financials sector also helped performance.
Among the holdings that detracted most from the Fund's relative performance were
QUALCOMM, a developer of wireless telecommunication equipment, Gilead Sciences,
a biopharmaceutical company, and Praxair, which manufactures industrial gases.
For the reporting period, although our information technology, industrials and
health care sector holdings in aggregate generated positive absolute returns,
each sector underperformed the index and weighed on relative performance.(4) In
(3.) The financials sector comprises banks, diversified financials and insurance
in the SOI.
(4.) The information technology sector comprises semiconductors and
semiconductor equipment, software and services, and technology hardware and
equipment in the SOI. The industrials sector comprises capital goods,
commercial and professional services, and transportation in the SOI. The
health care sector comprises health care equipment and services; and
pharmaceuticals, biotechnology and life sciences in the SOI.
6 | Annual Report
addition to QUALCOMM, Blackberry smartphone maker Research In Motion(5) in the
information technology sector lost value. The Fund's overweighting of freight
and logistics company Expeditors International of Washington under-performed the
industrials sector and detracted from relative results as well. Likewise,
underperformance from animal hospital chain operator VCA Antech in the health
care sector hampered relative Fund performance.
Thank you for your continued participation in Franklin Flex Cap Growth Fund. We
look forward to serving your future investment needs.
(PHOTO OF CONRAD B. HERRMANN)
/s/ Conrad B. Herrmann
Conrad B. Herrmann, CFA
Portfolio Manager
Franklin Flex Cap Growth Fund
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
(5.) This holding is not an index component; sold by period-end.
TOP 10 HOLDINGS
Franklin Flex Cap Growth Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Apple Inc. 3.8%
TECHNOLOGY HARDWARE & EQUIPMENT
Cisco Systems Inc. 2.9%
TECHNOLOGY HARDWARE & EQUIPMENT
Hewlett-Packard Co. 2.3%
TECHNOLOGY HARDWARE & EQUIPMENT
Praxair Inc. 2.0%
MATERIALS
CVS Caremark Corp. 1.8%
FOOD & STAPLES RETAILING
Google Inc., A 1.8%
SOFTWARE & SERVICES
Johnson Controls Inc. 1.8%
AUTOMOBILES & COMPONENTS
MasterCard Inc., A 1.7%
SOFTWARE & SERVICES
Visa Inc., A 1.7%
SOFTWARE & SERVICES
Precision Castparts Corp. 1.6%
CAPITAL GOODS
Annual Report | 7
Performance Summary as of 4/30/10
FRANKLIN FLEX CAP GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FKCGX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$11.09 $43.55 $32.46
CLASS B (SYMBOL: FKCBX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$9.96 $40.00 $30.04
CLASS C (SYMBOL: FCIIX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$9.98 $40.08 $30.10
CLASS R (SYMBOL: FRCGX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$10.79 $42.70 $31.91
ADVISOR CLASS (SYMBOL: FKCAX) CHANGE 4/30/10 4/30/09
- ----------------------------- ------- ------- -------
Net Asset Value (NAV) +$11.32 $44.14 $32.82
8 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- -------- -------- ------------------
Cumulative Total Return(1) +34.17% +25.63% -6.12%
Average Annual Total Return(2) +26.45% +3.44% -1.22%
Value of $10,000 Investment(3) $12,645 $11,841 $8,848
Avg. Ann. Total Return (3/31/10)(4) +38.67% +2.67% -2.45%
Total Annual Operating Expenses(5) 1.02%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- -------- -------- ------------------
Cumulative Total Return(1) +33.16% +21.04% -11.58%
Average Annual Total Return(2) +29.16% +3.55% -1.22%
Value of $10,000 Investment(3) $12,916 $11,904 $8,842
Avg. Ann. Total Return (3/31/10)(4) +42.09% +2.76% -2.45%
Total Annual Operating Expenses(5) 1.77%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- -------- -------- ------------------
Cumulative Total Return(1) +33.16% +21.02% -12.93%
Average Annual Total Return(2) +32.16% +3.89% -1.37%
Value of $10,000 Investment(3) $13,216 $12,102 $8,707
Avg. Ann. Total Return (3/31/10)(4) +45.07% +3.12% -2.60%
Total Annual Operating Expenses(5) 1.77%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- -------- -------- ------------------
Cumulative Total Return(1) +33.81% +24.08% +36.32%
Average Annual Total Return(2) +33.81% +4.41% +3.79%
Value of $10,000 Investment(3) $13,381 $12,408 $13,632
Avg. Ann. Total Return (3/31/10)(4) +46.81% +3.64% +3.72%
Total Annual Operating Expenses(5) 1.27%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- ---------------- -------- -------- ------------------
Cumulative Total Return(1) +34.49% +27.21% -4.78%
Average Annual Total Return(2) +34.49% +4.93% -0.49%
Value of $10,000 Investment(3) $13,449 $12,721 $9,522
Avg. Ann. Total Return (3/31/10)(4) +47.50% +4.16% -1.73%
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, GO TO
franklintempleton.com OR CALL (800) 342-5236.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +26.45%
5-Year +3.44%
10-Year -1.22%
CLASS A (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN
FLEX CAP
GROWTH FUND S&P 500 RUSSELL 3000 RUSSELL 1000
DATE - CLASS A INDEX GROWTH INDEX GROWTH INDEX
- ---- ----------- ------- ------------ ------------
5/1/2000 $ 9,425 $10,000 $10,000 $10,000
5/31/2000 $ 8,807 $ 9,795 $ 9,471 $ 9,496
6/30/2000 $10,122 $10,036 $10,222 $10,216
7/31/2000 $ 9,853 $ 9,879 $ 9,765 $ 9,790
8/31/2000 $11,295 $10,493 $10,658 $10,677
9/30/2000 $10,944 $ 9,939 $ 9,682 $ 9,667
10/31/2000 $ 9,991 $ 9,897 $ 9,201 $ 9,209
11/30/2000 $ 7,859 $ 9,117 $ 7,824 $ 7,852
12/31/2000 $ 8,263 $ 9,161 $ 7,623 $ 7,603
1/31/2001 $ 8,409 $ 9,486 $ 8,156 $ 8,129
2/28/2001 $ 6,853 $ 8,621 $ 6,790 $ 6,749
3/31/2001 $ 6,116 $ 8,075 $ 6,060 $ 6,014
4/30/2001 $ 6,801 $ 8,703 $ 6,825 $ 6,775
5/31/2001 $ 6,803 $ 8,761 $ 6,743 $ 6,675
6/30/2001 $ 6,761 $ 8,548 $ 6,613 $ 6,521
7/31/2001 $ 6,508 $ 8,464 $ 6,420 $ 6,358
8/31/2001 $ 6,178 $ 7,934 $ 5,903 $ 5,838
9/30/2001 $ 5,323 $ 7,293 $ 5,290 $ 5,255
10/31/2001 $ 5,691 $ 7,432 $ 5,582 $ 5,531
11/30/2001 $ 6,224 $ 8,002 $ 6,113 $ 6,062
12/31/2001 $ 6,344 $ 8,072 $ 6,127 $ 6,051
1/31/2002 $ 6,208 $ 7,955 $ 6,011 $ 5,944
2/28/2002 $ 5,970 $ 7,801 $ 5,752 $ 5,697
3/31/2002 $ 6,430 $ 8,095 $ 5,971 $ 5,894
4/30/2002 $ 6,132 $ 7,604 $ 5,509 $ 5,413
5/31/2002 $ 5,996 $ 7,548 $ 5,361 $ 5,282
6/30/2002 $ 5,513 $ 7,010 $ 4,868 $ 4,793
7/31/2002 $ 4,942 $ 6,464 $ 4,568 $ 4,530
8/31/2002 $ 4,916 $ 6,506 $ 4,580 $ 4,543
9/30/2002 $ 4,546 $ 5,799 $ 4,114 $ 4,072
10/31/2002 $ 4,794 $ 6,310 $ 4,481 $ 4,446
11/30/2002 $ 5,090 $ 6,681 $ 4,736 $ 4,687
12/31/2002 $ 4,762 $ 6,288 $ 4,409 $ 4,363
1/31/2003 $ 4,770 $ 6,124 $ 4,301 $ 4,257
2/28/2003 $ 4,746 $ 6,032 $ 4,276 $ 4,238
3/31/2003 $ 4,788 $ 6,090 $ 4,354 $ 4,317
4/30/2003 $ 5,106 $ 6,592 $ 4,682 $ 4,636
5/31/2003 $ 5,489 $ 6,939 $ 4,934 $ 4,867
6/30/2003 $ 5,523 $ 7,028 $ 5,004 $ 4,934
7/31/2003 $ 5,749 $ 7,152 $ 5,146 $ 5,057
8/31/2003 $ 6,028 $ 7,291 $ 5,285 $ 5,183
9/30/2003 $ 5,851 $ 7,214 $ 5,222 $ 5,127
10/31/2003 $ 6,360 $ 7,622 $ 5,527 $ 5,415
11/30/2003 $ 6,562 $ 7,689 $ 5,594 $ 5,472
12/31/2003 $ 6,689 $ 8,092 $ 5,775 $ 5,661
1/31/2004 $ 6,795 $ 8,241 $ 5,907 $ 5,777
2/29/2004 $ 6,853 $ 8,355 $ 5,941 $ 5,814
3/31/2004 $ 6,883 $ 8,229 $ 5,841 $ 5,706
4/30/2004 $ 6,743 $ 8,100 $ 5,755 $ 5,639
5/31/2004 $ 6,945 $ 8,211 $ 5,863 $ 5,745
6/30/2004 $ 7,067 $ 8,371 $ 5,946 $ 5,816
7/31/2004 $ 6,640 $ 8,094 $ 5,593 $ 5,488
8/31/2004 $ 6,604 $ 8,127 $ 5,558 $ 5,460
9/30/2004 $ 6,829 $ 8,215 $ 5,631 $ 5,512
10/31/2004 $ 6,987 $ 8,340 $ 5,723 $ 5,598
11/30/2004 $ 7,283 $ 8,678 $ 5,944 $ 5,791
12/31/2004 $ 7,556 $ 8,973 $ 6,175 $ 6,018
1/31/2005 $ 7,281 $ 8,754 $ 5,963 $ 5,817
2/28/2005 $ 7,413 $ 8,938 $ 6,028 $ 5,879
3/31/2005 $ 7,241 $ 8,780 $ 5,908 $ 5,772
4/30/2005 $ 7,043 $ 8,614 $ 5,773 $ 5,662
5/31/2005 $ 7,391 $ 8,888 $ 6,063 $ 5,936
6/30/2005 $ 7,339 $ 8,900 $ 6,059 $ 5,914
7/31/2005 $ 7,668 $ 9,231 $ 6,366 $ 6,203
8/31/2005 $ 7,612 $ 9,147 $ 6,283 $ 6,123
9/30/2005 $ 7,694 $ 9,221 $ 6,314 $ 6,152
10/31/2005 $ 7,574 $ 9,067 $ 6,237 $ 6,092
11/30/2005 $ 8,014 $ 9,410 $ 6,514 $ 6,355
12/31/2005 $ 8,026 $ 9,414 $ 6,494 $ 6,335
1/31/2006 $ 8,425 $ 9,663 $ 6,653 $ 6,446
2/28/2006 $ 8,435 $ 9,689 $ 6,640 $ 6,436
3/31/2006 $ 8,519 $ 9,810 $ 6,759 $ 6,531
4/30/2006 $ 8,479 $ 9,941 $ 6,749 $ 6,522
5/31/2006 $ 7,982 $ 9,655 $ 6,496 $ 6,301
6/30/2006 $ 8,078 $ 9,668 $ 6,473 $ 6,276
7/31/2006 $ 7,908 $ 9,728 $ 6,331 $ 6,156
8/31/2006 $ 8,046 $ 9,959 $ 6,528 $ 6,348
9/30/2006 $ 8,204 $10,216 $ 6,696 $ 6,523
10/31/2006 $ 8,401 $10,549 $ 6,948 $ 6,752
11/30/2006 $ 8,599 $10,750 $ 7,088 $ 6,886
12/31/2006 $ 8,488 $10,900 $ 7,108 $ 6,910
1/31/2007 $ 8,756 $11,065 $ 7,287 $ 7,087
2/28/2007 $ 8,598 $10,849 $ 7,159 $ 6,954
3/31/2007 $ 8,674 $10,970 $ 7,200 $ 6,992
4/30/2007 $ 9,030 $11,456 $ 7,527 $ 7,321
5/31/2007 $ 9,314 $11,856 $ 7,803 $ 7,584
6/30/2007 $ 9,269 $11,659 $ 7,693 $ 7,471
7/31/2007 $ 9,207 $11,297 $ 7,549 $ 7,355
8/31/2007 $ 9,505 $11,467 $ 7,676 $ 7,472
9/30/2007 $10,108 $11,896 $ 7,989 $ 7,785
10/31/2007 $10,394 $12,085 $ 8,268 $ 8,050
11/30/2007 $ 9,917 $11,580 $ 7,941 $ 7,754
12/31/2007 $ 9,848 $11,499 $ 7,919 $ 7,726
1/31/2008 $ 8,879 $10,810 $ 7,292 $ 7,123
2/29/2008 $ 8,609 $10,458 $ 7,139 $ 6,982
3/31/2008 $ 8,639 $10,413 $ 7,096 $ 6,939
4/30/2008 $ 9,300 $10,920 $ 7,468 $ 7,304
5/31/2008 $ 9,698 $11,062 $ 7,753 $ 7,571
6/30/2008 $ 9,005 $10,129 $ 7,202 $ 7,026
7/31/2008 $ 8,960 $10,044 $ 7,088 $ 6,892
8/31/2008 $ 9,096 $10,189 $ 7,172 $ 6,967
9/30/2008 $ 8,076 $ 9,281 $ 6,343 $ 6,160
10/31/2008 $ 6,760 $ 7,723 $ 5,206 $ 5,075
11/30/2008 $ 6,264 $ 7,169 $ 4,776 $ 4,672
12/31/2008 $ 6,276 $ 7,245 $ 4,874 $ 4,756
1/31/2009 $ 5,937 $ 6,634 $ 4,630 $ 4,527
2/28/2009 $ 5,490 $ 5,928 $ 4,272 $ 4,187
3/31/2009 $ 5,957 $ 6,447 $ 4,653 $ 4,560
4/30/2009 $ 6,595 $ 7,064 $ 5,118 $ 4,998
5/31/2009 $ 6,768 $ 7,459 $ 5,368 $ 5,246
6/30/2009 $ 6,825 $ 7,474 $ 5,436 $ 5,305
7/31/2009 $ 7,298 $ 8,039 $ 5,825 $ 5,681
8/31/2009 $ 7,386 $ 8,330 $ 5,941 $ 5,799
9/30/2009 $ 7,814 $ 8,640 $ 6,204 $ 6,046
10/31/2009 $ 7,676 $ 8,480 $ 6,093 $ 5,964
11/30/2009 $ 8,091 $ 8,988 $ 6,454 $ 6,330
12/31/2009 $ 8,422 $ 9,162 $ 6,678 $ 6,526
1/31/2010 $ 8,030 $ 8,832 $ 6,386 $ 6,241
2/28/2010 $ 8,251 $ 9,106 $ 6,610 $ 6,456
3/31/2010 $ 8,765 $ 9,656 $ 7,003 $ 6,829
4/30/2010 $ 8,848 $ 9,808 $ 7,098 $ 6,905
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/10
- ------- -------
1-Year +29.16%
5-Year +3.55%
10-Year -1.22%
CLASS B (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN RUSSELL RUSSELL
FLEX CAP 3000 1000
GROWTH FUND S&P 500 GROWTH GROWTH
DATE - CLASS B INDEX INDEX INDEX
- ---- ----------- ------- ------- -------
5/1/2000 $10,000 $10,000 $10,000 $10,000
5/31/2000 $ 9,337 $ 9,795 $ 9,471 $ 9,496
6/30/2000 $10,725 $10,036 $10,222 $10,216
7/31/2000 $10,435 $ 9,879 $ 9,765 $ 9,790
8/31/2000 $11,954 $10,493 $10,658 $10,677
9/30/2000 $11,573 $ 9,939 $ 9,682 $ 9,667
10/31/2000 $10,558 $ 9,897 $ 9,201 $ 9,209
11/30/2000 $ 8,300 $ 9,117 $ 7,824 $ 7,852
12/31/2000 $ 8,723 $ 9,161 $ 7,623 $ 7,603
1/31/2001 $ 8,870 $ 9,486 $ 8,156 $ 8,129
2/28/2001 $ 7,227 $ 8,621 $ 6,790 $ 6,749
3/31/2001 $ 6,444 $ 8,075 $ 6,060 $ 6,014
4/30/2001 $ 7,164 $ 8,703 $ 6,825 $ 6,775
5/31/2001 $ 7,160 $ 8,761 $ 6,743 $ 6,675
6/30/2001 $ 7,111 $ 8,548 $ 6,613 $ 6,521
7/31/2001 $ 6,841 $ 8,464 $ 6,420 $ 6,358
8/31/2001 $ 6,492 $ 7,934 $ 5,903 $ 5,838
9/30/2001 $ 5,587 $ 7,293 $ 5,290 $ 5,255
10/31/2001 $ 5,969 $ 7,432 $ 5,582 $ 5,531
11/30/2001 $ 6,526 $ 8,002 $ 6,113 $ 6,062
12/31/2001 $ 6,648 $ 8,072 $ 6,127 $ 6,051
1/31/2002 $ 6,502 $ 7,955 $ 6,011 $ 5,944
2/28/2002 $ 6,249 $ 7,801 $ 5,752 $ 5,697
3/31/2002 $ 6,725 $ 8,095 $ 5,971 $ 5,894
4/30/2002 $ 6,410 $ 7,604 $ 5,509 $ 5,413
5/31/2002 $ 6,264 $ 7,548 $ 5,361 $ 5,282
6/30/2002 $ 5,756 $ 7,010 $ 4,868 $ 4,793
7/31/2002 $ 5,156 $ 6,464 $ 4,568 $ 4,530
8/31/2002 $ 5,126 $ 6,506 $ 4,580 $ 4,543
9/30/2002 $ 4,738 $ 5,799 $ 4,114 $ 4,072
10/31/2002 $ 4,991 $ 6,310 $ 4,481 $ 4,446
11/30/2002 $ 5,298 $ 6,681 $ 4,736 $ 4,687
12/31/2002 $ 4,953 $ 6,288 $ 4,409 $ 4,363
1/31/2003 $ 4,957 $ 6,124 $ 4,301 $ 4,257
2/28/2003 $ 4,929 $ 6,032 $ 4,276 $ 4,238
3/31/2003 $ 4,970 $ 6,090 $ 4,354 $ 4,317
4/30/2003 $ 5,298 $ 6,592 $ 4,682 $ 4,636
5/31/2003 $ 5,690 $ 6,939 $ 4,934 $ 4,867
6/30/2003 $ 5,724 $ 7,028 $ 5,004 $ 4,934
7/31/2003 $ 5,954 $ 7,152 $ 5,146 $ 5,057
8/31/2003 $ 6,239 $ 7,291 $ 5,285 $ 5,183
9/30/2003 $ 6,050 $ 7,214 $ 5,222 $ 5,127
10/31/2003 $ 6,573 $ 7,622 $ 5,527 $ 5,415
11/30/2003 $ 6,777 $ 7,689 $ 5,594 $ 5,472
12/31/2003 $ 6,905 $ 8,092 $ 5,775 $ 5,661
1/31/2004 $ 7,012 $ 8,241 $ 5,907 $ 5,777
2/29/2004 $ 7,066 $ 8,355 $ 5,941 $ 5,814
3/31/2004 $ 7,094 $ 8,229 $ 5,841 $ 5,706
4/30/2004 $ 6,944 $ 8,100 $ 5,755 $ 5,639
5/31/2004 $ 7,147 $ 8,211 $ 5,863 $ 5,745
6/30/2004 $ 7,269 $ 8,371 $ 5,946 $ 5,816
7/31/2004 $ 6,824 $ 8,094 $ 5,593 $ 5,488
8/31/2004 $ 6,783 $ 8,127 $ 5,558 $ 5,460
9/30/2004 $ 7,012 $ 8,215 $ 5,631 $ 5,512
10/31/2004 $ 7,169 $ 8,340 $ 5,723 $ 5,598
11/30/2004 $ 7,467 $ 8,678 $ 5,944 $ 5,791
12/31/2004 $ 7,743 $ 8,973 $ 6,175 $ 6,018
1/31/2005 $ 7,456 $ 8,754 $ 5,963 $ 5,817
2/28/2005 $ 7,587 $ 8,938 $ 6,028 $ 5,879
3/31/2005 $ 7,407 $ 8,780 $ 5,908 $ 5,772
4/30/2005 $ 7,199 $ 8,614 $ 5,773 $ 5,662
5/31/2005 $ 7,548 $ 8,888 $ 6,063 $ 5,936
6/30/2005 $ 7,492 $ 8,900 $ 6,059 $ 5,914
7/31/2005 $ 7,822 $ 9,231 $ 6,366 $ 6,203
8/31/2005 $ 7,762 $ 9,147 $ 6,283 $ 6,123
9/30/2005 $ 7,842 $ 9,221 $ 6,314 $ 6,152
10/31/2005 $ 7,713 $ 9,067 $ 6,237 $ 6,092
11/30/2005 $ 8,157 $ 9,410 $ 6,514 $ 6,355
12/31/2005 $ 8,161 $ 9,414 $ 6,494 $ 6,335
1/31/2006 $ 8,562 $ 9,663 $ 6,653 $ 6,446
2/28/2006 $ 8,568 $ 9,689 $ 6,640 $ 6,436
3/31/2006 $ 8,648 $ 9,810 $ 6,759 $ 6,531
4/30/2006 $ 8,602 $ 9,941 $ 6,749 $ 6,522
5/31/2006 $ 8,092 $ 9,655 $ 6,496 $ 6,301
6/30/2006 $ 8,185 $ 9,668 $ 6,473 $ 6,276
7/31/2006 $ 8,007 $ 9,728 $ 6,331 $ 6,156
8/31/2006 $ 8,142 $ 9,959 $ 6,528 $ 6,348
9/30/2006 $ 8,296 $10,216 $ 6,696 $ 6,523
10/31/2006 $ 8,491 $10,549 $ 6,948 $ 6,752
11/30/2006 $ 8,684 $10,750 $ 7,088 $ 6,886
12/31/2006 $ 8,568 $10,900 $ 7,108 $ 6,910
1/31/2007 $ 8,834 $11,065 $ 7,287 $ 7,087
2/28/2007 $ 8,669 $10,849 $ 7,159 $ 6,954
3/31/2007 $ 8,740 $10,970 $ 7,200 $ 6,992
4/30/2007 $ 9,093 $11,456 $ 7,527 $ 7,321
5/31/2007 $ 9,374 $11,856 $ 7,803 $ 7,584
6/30/2007 $ 9,320 $11,659 $ 7,693 $ 7,471
7/31/2007 $ 9,254 $11,297 $ 7,549 $ 7,355
8/31/2007 $ 9,545 $11,467 $ 7,676 $ 7,472
9/30/2007 $10,146 $11,896 $ 7,989 $ 7,785
10/31/2007 $10,426 $12,085 $ 8,268 $ 8,050
11/30/2007 $ 9,944 $11,580 $ 7,941 $ 7,754
12/31/2007 $ 9,868 $11,499 $ 7,919 $ 7,726
1/31/2008 $ 8,890 $10,810 $ 7,292 $ 7,123
2/29/2008 $ 8,615 $10,458 $ 7,139 $ 6,982
3/31/2008 $ 8,639 $10,413 $ 7,096 $ 6,939
4/30/2008 $ 9,293 $10,920 $ 7,468 $ 7,304
5/31/2008 $ 9,691 $11,062 $ 7,753 $ 7,571
6/30/2008 $ 8,998 $10,129 $ 7,202 $ 7,026
7/31/2008 $ 8,954 $10,044 $ 7,088 $ 6,892
8/31/2008 $ 9,090 $10,189 $ 7,172 $ 6,967
9/30/2008 $ 8,070 $ 9,281 $ 6,343 $ 6,160
10/31/2008 $ 6,755 $ 7,723 $ 5,206 $ 5,075
11/30/2008 $ 6,259 $ 7,169 $ 4,776 $ 4,672
12/31/2008 $ 6,272 $ 7,245 $ 4,874 $ 4,756
1/31/2009 $ 5,932 $ 6,634 $ 4,630 $ 4,527
2/28/2009 $ 5,486 $ 5,928 $ 4,272 $ 4,187
3/31/2009 $ 5,953 $ 6,447 $ 4,653 $ 4,560
4/30/2009 $ 6,590 $ 7,064 $ 5,118 $ 4,998
5/31/2009 $ 6,763 $ 7,459 $ 5,368 $ 5,246
6/30/2009 $ 6,820 $ 7,474 $ 5,436 $ 5,305
7/31/2009 $ 7,293 $ 8,039 $ 5,825 $ 5,681
8/31/2009 $ 7,380 $ 8,330 $ 5,941 $ 5,799
9/30/2009 $ 7,808 $ 8,640 $ 6,204 $ 6,046
10/31/2009 $ 7,670 $ 8,480 $ 6,093 $ 5,964
11/30/2009 $ 8,085 $ 8,988 $ 6,454 $ 6,330
12/31/2009 $ 8,415 $ 9,162 $ 6,678 $ 6,526
1/31/2010 $ 8,024 $ 8,832 $ 6,386 $ 6,241
2/28/2010 $ 8,245 $ 9,106 $ 6,610 $ 6,456
3/31/2010 $ 8,759 $ 9,656 $ 7,003 $ 6,829
4/30/2010 $ 8,842 $ 9,808 $ 7,098 $ 6,905
10 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +32.16%
5-Year +3.89%
10-Year -1.37%
CLASS C (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN RUSSELL RUSSELL
FLEX CAP 3000 1000
GROWTH FUND S&P 500 GROWTH GROWTH
DATE - CLASS C INDEX INDEX INDEX
- ---- ----------- ------- ------- -------
5/1/2000 $10,000 $10,000 $10,000 $10,000
5/31/2000 $ 9,338 $ 9,795 $ 9,471 $ 9,496
6/30/2000 $10,725 $10,036 $10,222 $10,216
7/31/2000 $10,434 $ 9,879 $ 9,765 $ 9,790
8/31/2000 $11,952 $10,493 $10,658 $10,677
9/30/2000 $11,572 $ 9,939 $ 9,682 $ 9,667
10/31/2000 $10,557 $ 9,897 $ 9,201 $ 9,209
11/30/2000 $ 8,299 $ 9,117 $ 7,824 $ 7,852
12/31/2000 $ 8,723 $ 9,161 $ 7,623 $ 7,603
1/31/2001 $ 8,869 $ 9,486 $ 8,156 $ 8,129
2/28/2001 $ 7,225 $ 8,621 $ 6,790 $ 6,749
3/31/2001 $ 6,442 $ 8,075 $ 6,060 $ 6,014
4/30/2001 $ 7,161 $ 8,703 $ 6,825 $ 6,775
5/31/2001 $ 7,159 $ 8,761 $ 6,743 $ 6,675
6/30/2001 $ 7,107 $ 8,548 $ 6,613 $ 6,521
7/31/2001 $ 6,836 $ 8,464 $ 6,420 $ 6,358
8/31/2001 $ 6,487 $ 7,934 $ 5,903 $ 5,838
9/30/2001 $ 5,585 $ 7,293 $ 5,290 $ 5,255
10/31/2001 $ 5,966 $ 7,432 $ 5,582 $ 5,531
11/30/2001 $ 6,524 $ 8,002 $ 6,113 $ 6,062
12/31/2001 $ 6,643 $ 8,072 $ 6,127 $ 6,051
1/31/2002 $ 6,498 $ 7,955 $ 6,011 $ 5,944
2/28/2002 $ 6,246 $ 7,801 $ 5,752 $ 5,697
3/31/2002 $ 6,722 $ 8,095 $ 5,971 $ 5,894
4/30/2002 $ 6,406 $ 7,604 $ 5,509 $ 5,413
5/31/2002 $ 6,261 $ 7,548 $ 5,361 $ 5,282
6/30/2002 $ 5,754 $ 7,010 $ 4,868 $ 4,793
7/31/2002 $ 5,154 $ 6,464 $ 4,568 $ 4,530
8/31/2002 $ 5,124 $ 6,506 $ 4,580 $ 4,543
9/30/2002 $ 4,737 $ 5,799 $ 4,114 $ 4,072
10/31/2002 $ 4,989 $ 6,310 $ 4,481 $ 4,446
11/30/2002 $ 5,295 $ 6,681 $ 4,736 $ 4,687
12/31/2002 $ 4,950 $ 6,288 $ 4,409 $ 4,363
1/31/2003 $ 4,955 $ 6,124 $ 4,301 $ 4,257
2/28/2003 $ 4,927 $ 6,032 $ 4,276 $ 4,238
3/31/2003 $ 4,968 $ 6,090 $ 4,354 $ 4,317
4/30/2003 $ 5,295 $ 6,592 $ 4,682 $ 4,636
5/31/2003 $ 5,688 $ 6,939 $ 4,934 $ 4,867
6/30/2003 $ 5,720 $ 7,028 $ 5,004 $ 4,934
7/31/2003 $ 5,949 $ 7,152 $ 5,146 $ 5,057
8/31/2003 $ 6,235 $ 7,291 $ 5,285 $ 5,183
9/30/2003 $ 6,047 $ 7,214 $ 5,222 $ 5,127
10/31/2003 $ 6,569 $ 7,622 $ 5,527 $ 5,415
11/30/2003 $ 6,774 $ 7,689 $ 5,594 $ 5,472
12/31/2003 $ 6,902 $ 8,092 $ 5,775 $ 5,661
1/31/2004 $ 7,007 $ 8,241 $ 5,907 $ 5,777
2/29/2004 $ 7,062 $ 8,355 $ 5,941 $ 5,814
3/31/2004 $ 7,090 $ 8,229 $ 5,841 $ 5,706
4/30/2004 $ 6,941 $ 8,100 $ 5,755 $ 5,639
5/31/2004 $ 7,144 $ 8,211 $ 5,863 $ 5,745
6/30/2004 $ 7,265 $ 8,371 $ 5,946 $ 5,816
7/31/2004 $ 6,821 $ 8,094 $ 5,593 $ 5,488
8/31/2004 $ 6,778 $ 8,127 $ 5,558 $ 5,460
9/30/2004 $ 7,007 $ 8,215 $ 5,631 $ 5,512
10/31/2004 $ 7,165 $ 8,340 $ 5,723 $ 5,598
11/30/2004 $ 7,462 $ 8,678 $ 5,944 $ 5,791
12/31/2004 $ 7,738 $ 8,973 $ 6,175 $ 6,018
1/31/2005 $ 7,451 $ 8,754 $ 5,963 $ 5,817
2/28/2005 $ 7,582 $ 8,938 $ 6,028 $ 5,879
3/31/2005 $ 7,402 $ 8,780 $ 5,908 $ 5,772
4/30/2005 $ 7,195 $ 8,614 $ 5,773 $ 5,662
5/31/2005 $ 7,543 $ 8,888 $ 6,063 $ 5,936
6/30/2005 $ 7,488 $ 8,900 $ 6,059 $ 5,914
7/31/2005 $ 7,817 $ 9,231 $ 6,366 $ 6,203
8/31/2005 $ 7,757 $ 9,147 $ 6,283 $ 6,123
9/30/2005 $ 7,836 $ 9,221 $ 6,314 $ 6,152
10/31/2005 $ 7,708 $ 9,067 $ 6,237 $ 6,092
11/30/2005 $ 8,150 $ 9,410 $ 6,514 $ 6,355
12/31/2005 $ 8,157 $ 9,414 $ 6,494 $ 6,335
1/31/2006 $ 8,556 $ 9,663 $ 6,653 $ 6,446
2/28/2006 $ 8,565 $ 9,689 $ 6,640 $ 6,436
3/31/2006 $ 8,642 $ 9,810 $ 6,759 $ 6,531
4/30/2006 $ 8,597 $ 9,941 $ 6,749 $ 6,522
5/31/2006 $ 8,086 $ 9,655 $ 6,496 $ 6,301
6/30/2006 $ 8,180 $ 9,668 $ 6,473 $ 6,276
7/31/2006 $ 8,003 $ 9,728 $ 6,331 $ 6,156
8/31/2006 $ 8,135 $ 9,959 $ 6,528 $ 6,348
9/30/2006 $ 8,291 $10,216 $ 6,696 $ 6,523
10/31/2006 $ 8,486 $10,549 $ 6,948 $ 6,752
11/30/2006 $ 8,680 $10,750 $ 7,088 $ 6,886
12/31/2006 $ 8,563 $10,900 $ 7,108 $ 6,910
1/31/2007 $ 8,828 $11,065 $ 7,287 $ 7,087
2/28/2007 $ 8,663 $10,849 $ 7,159 $ 6,954
3/31/2007 $ 8,736 $10,970 $ 7,200 $ 6,992
4/30/2007 $ 9,089 $11,456 $ 7,527 $ 7,321
5/31/2007 $ 9,369 $11,856 $ 7,803 $ 7,584
6/30/2007 $ 9,317 $11,659 $ 7,693 $ 7,471
7/31/2007 $ 9,249 $11,297 $ 7,549 $ 7,355
8/31/2007 $ 9,542 $11,467 $ 7,676 $ 7,472
9/30/2007 $10,140 $11,896 $ 7,989 $ 7,785
10/31/2007 $10,423 $12,085 $ 8,268 $ 8,050
11/30/2007 $ 9,937 $11,580 $ 7,941 $ 7,754
12/31/2007 $ 9,863 $11,499 $ 7,919 $ 7,726
1/31/2008 $ 8,886 $10,810 $ 7,292 $ 7,123
2/29/2008 $ 8,610 $10,458 $ 7,139 $ 6,982
3/31/2008 $ 8,636 $10,413 $ 7,096 $ 6,939
4/30/2008 $ 9,290 $10,920 $ 7,468 $ 7,304
5/31/2008 $ 9,681 $11,062 $ 7,753 $ 7,571
6/30/2008 $ 8,986 $10,129 $ 7,202 $ 7,026
7/31/2008 $ 8,936 $10,044 $ 7,088 $ 6,892
8/31/2008 $ 9,062 $10,189 $ 7,172 $ 6,967
9/30/2008 $ 8,043 $ 9,281 $ 6,343 $ 6,160
10/31/2008 $ 6,728 $ 7,723 $ 5,206 $ 5,075
11/30/2008 $ 6,231 $ 7,169 $ 4,776 $ 4,672
12/31/2008 $ 6,239 $ 7,245 $ 4,874 $ 4,756
1/31/2009 $ 5,896 $ 6,634 $ 4,630 $ 4,527
2/28/2009 $ 5,449 $ 5,928 $ 4,272 $ 4,187
3/31/2009 $ 5,909 $ 6,447 $ 4,653 $ 4,560
4/30/2009 $ 6,539 $ 7,064 $ 5,118 $ 4,998
5/31/2009 $ 6,707 $ 7,459 $ 5,368 $ 5,246
6/30/2009 $ 6,759 $ 7,474 $ 5,436 $ 5,305
7/31/2009 $ 7,221 $ 8,039 $ 5,825 $ 5,681
8/31/2009 $ 7,304 $ 8,330 $ 5,941 $ 5,799
9/30/2009 $ 7,723 $ 8,640 $ 6,204 $ 6,046
10/31/2009 $ 7,582 $ 8,480 $ 6,093 $ 5,964
11/30/2009 $ 7,986 $ 8,988 $ 6,454 $ 6,330
12/31/2009 $ 8,308 $ 9,162 $ 6,678 $ 6,526
1/31/2010 $ 7,917 $ 8,832 $ 6,386 $ 6,241
2/28/2010 $ 8,130 $ 9,106 $ 6,610 $ 6,456
3/31/2010 $ 8,631 $ 9,656 $ 7,003 $ 6,829
4/30/2010 $ 8,707 $ 9,808 $ 7,098 $ 6,905
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/10
- ------- -------
1-Year +33.81%
5-Year +4.41%
Since Inception (1/1/02) +3.79%
CLASS R (1/1/02-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN RUSSELL RUSSELL
FLEX CAP 3000 1000
GROWTH FUND S&P 500 GROWTH GROWTH
Date - Class R Index Index Index
- ---- ----------- ------- ------- -------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $ 9,758 $ 9,854 $ 9,811 $ 9,823
2/28/2002 $ 9,384 $ 9,664 $ 9,389 $ 9,416
3/29/2002 $10,103 $10,027 $ 9,746 $ 9,741
4/30/2002 $ 9,632 $ 9,420 $ 8,991 $ 8,946
5/31/2002 $ 9,416 $ 9,350 $ 8,750 $ 8,730
6/28/2002 $ 8,659 $ 8,684 $ 7,946 $ 7,922
7/31/2002 $ 7,761 $ 8,007 $ 7,455 $ 7,487
8/30/2002 $ 7,720 $ 8,060 $ 7,476 $ 7,509
9/30/2002 $ 7,139 $ 7,184 $ 6,715 $ 6,730
10/31/2002 $ 7,525 $ 7,816 $ 7,313 $ 7,348
11/29/2002 $ 7,987 $ 8,276 $ 7,730 $ 7,747
12/31/2002 $ 7,472 $ 7,790 $ 7,196 $ 7,211
1/31/2003 $ 7,481 $ 7,586 $ 7,021 $ 7,036
2/28/2003 $ 7,443 $ 7,472 $ 6,978 $ 7,004
3/31/2003 $ 7,506 $ 7,545 $ 7,107 $ 7,135
4/30/2003 $ 8,006 $ 8,166 $ 7,641 $ 7,662
5/30/2003 $ 8,602 $ 8,596 $ 8,053 $ 8,044
6/30/2003 $ 8,656 $ 8,706 $ 8,167 $ 8,155
7/31/2003 $ 9,007 $ 8,859 $ 8,399 $ 8,358
8/29/2003 $ 9,444 $ 9,032 $ 8,625 $ 8,566
9/30/2003 $ 9,164 $ 8,936 $ 8,524 $ 8,474
10/31/2003 $ 9,956 $ 9,442 $ 9,021 $ 8,950
11/28/2003 $10,273 $ 9,525 $ 9,131 $ 9,044
12/31/2003 $10,471 $10,024 $ 9,425 $ 9,357
1/30/2004 $10,634 $10,208 $ 9,641 $ 9,548
2/27/2004 $10,722 $10,350 $ 9,696 $ 9,609
3/31/2004 $10,766 $10,194 $ 9,533 $ 9,430
4/30/2004 $10,543 $10,034 $ 9,394 $ 9,321
5/31/2004 $10,857 $10,172 $ 9,570 $ 9,494
6/30/2004 $11,046 $10,370 $ 9,704 $ 9,613
7/30/2004 $10,377 $10,026 $ 9,129 $ 9,070
8/31/2004 $10,317 $10,067 $ 9,072 $ 9,025
9/30/2004 $10,669 $10,176 $ 9,191 $ 9,111
10/29/2004 $10,914 $10,332 $ 9,341 $ 9,253
11/30/2004 $11,369 $10,750 $ 9,701 $ 9,571
12/31/2004 $11,796 $11,115 $10,078 $ 9,946
1/31/2005 $11,363 $10,844 $ 9,732 $ 9,615
2/28/2005 $11,567 $11,073 $ 9,838 $ 9,717
3/31/2005 $11,297 $10,877 $ 9,642 $ 9,540
4/29/2005 $10,986 $10,670 $ 9,422 $ 9,358
5/31/2005 $11,523 $11,010 $ 9,895 $ 9,811
6/30/2005 $11,441 $11,025 $ 9,888 $ 9,775
7/29/2005 $11,953 $11,435 $10,390 $10,253
8/31/2005 $11,865 $11,331 $10,255 $10,121
9/30/2005 $11,991 $11,423 $10,305 $10,167
10/31/2005 $11,799 $11,232 $10,180 $10,068
11/30/2005 $12,484 $11,657 $10,631 $10,503
12/30/2005 $12,497 $11,661 $10,599 $10,470
1/31/2006 $13,115 $11,970 $10,858 $10,654
2/28/2006 $13,131 $12,003 $10,837 $10,637
3/31/2006 $13,257 $12,152 $11,031 $10,794
4/28/2006 $13,191 $12,315 $11,014 $10,779
5/31/2006 $12,415 $11,961 $10,603 $10,414
6/30/2006 $12,563 $11,977 $10,565 $10,373
7/31/2006 $12,296 $12,051 $10,334 $10,175
8/31/2006 $12,506 $12,338 $10,654 $10,493
9/29/2006 $12,748 $12,655 $10,929 $10,781
10/31/2006 $13,056 $13,068 $11,339 $11,160
11/30/2006 $13,357 $13,316 $11,568 $11,381
12/29/2006 $13,183 $13,503 $11,602 $11,420
1/31/2007 $13,598 $13,707 $11,893 $11,713
2/28/2007 $13,350 $13,439 $11,685 $11,493
3/30/2007 $13,466 $13,590 $11,752 $11,556
4/30/2007 $14,016 $14,192 $12,285 $12,100
5/31/2007 $14,456 $14,687 $12,736 $12,535
6/29/2007 $14,378 $14,443 $12,556 $12,348
7/31/2007 $14,281 $13,995 $12,322 $12,156
8/31/2007 $14,740 $14,205 $12,527 $12,350
9/28/2007 $15,670 $14,736 $13,039 $12,867
10/31/2007 $16,114 $14,970 $13,494 $13,305
11/30/2007 $15,372 $14,345 $12,961 $12,815
12/31/2007 $15,260 $14,245 $12,924 $12,769
1/31/2008 $13,753 $13,391 $11,902 $11,773
2/29/2008 $13,335 $12,956 $11,652 $11,539
3/31/2008 $13,379 $12,900 $11,581 $11,469
4/30/2008 $14,398 $13,528 $12,188 $12,071
5/30/2008 $15,011 $13,703 $12,654 $12,514
6/30/2008 $13,938 $12,548 $11,755 $11,612
7/31/2008 $13,865 $12,442 $11,568 $11,392
8/29/2008 $14,069 $12,622 $11,705 $11,514
9/30/2008 $12,492 $11,498 $10,352 $10,181
10/31/2008 $10,455 $ 9,567 $ 8,496 $ 8,388
11/28/2008 $ 9,686 $ 8,880 $ 7,795 $ 7,721
12/31/2008 $ 9,702 $ 8,975 $ 7,956 $ 7,861
1/30/2009 $ 9,172 $ 8,218 $ 7,556 $ 7,483
2/27/2009 $ 8,482 $ 7,343 $ 6,973 $ 6,920
3/31/2009 $ 9,201 $ 7,986 $ 7,595 $ 7,537
4/30/2009 $10,187 $ 8,751 $ 8,353 $ 8,261
5/31/2009 $10,452 $ 9,240 $ 8,761 $ 8,670
6/30/2009 $10,535 $ 9,259 $ 8,872 $ 8,767
7/31/2009 $11,266 $ 9,959 $ 9,507 $ 9,390
8/31/2009 $11,397 $10,318 $ 9,696 $ 9,585
9/30/2009 $12,055 $10,703 $10,125 $ 9,992
10/31/2009 $11,841 $10,505 $ 9,945 $ 9,857
11/30/2009 $12,476 $11,135 $10,533 $10,462
12/31/2009 $12,984 $11,350 $10,900 $10,786
1/31/2010 $12,377 $10,941 $10,423 $10,315
2/28/2010 $12,715 $11,280 $10,789 $10,670
3/31/2010 $13,507 $11,961 $11,431 $11,287
4/30/2010 $13,632 $12,150 $11,585 $11,413
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 4/30/10
- ---------------- -------
1-Year +34.49%
5-Year +4.93%
10-Year -0.49%
ADVISOR CLASS (5/1/00-4/30/10)(6)
(PERFORMANCE GRAPH)
FRANKLIN RUSSELL RUSSELL
FLEX CAP 3000 1000
GROWTH FUND - S&P 500 GROWTH GROWTH
DATE ADVISOR CLASS INDEX INDEX INDEX
- ---- ------------- ------- ------- -------
5/1/2000 $10,000 $10,000 $10,000 $10,000
5/31/2000 $ 9,344 $ 9,795 $ 9,471 $ 9,496
6/30/2000 $10,740 $10,036 $10,222 $10,216
7/31/2000 $10,455 $ 9,879 $ 9,765 $ 9,790
8/31/2000 $11,984 $10,493 $10,658 $10,677
9/30/2000 $11,611 $ 9,939 $ 9,682 $ 9,667
10/31/2000 $10,600 $ 9,897 $ 9,201 $ 9,209
11/30/2000 $ 8,339 $ 9,117 $ 7,824 $ 7,852
12/31/2000 $ 8,768 $ 9,161 $ 7,623 $ 7,603
1/31/2001 $ 8,922 $ 9,486 $ 8,156 $ 8,129
2/28/2001 $ 7,271 $ 8,621 $ 6,790 $ 6,749
3/31/2001 $ 6,489 $ 8,075 $ 6,060 $ 6,014
4/30/2001 $ 7,216 $ 8,703 $ 6,825 $ 6,775
5/31/2001 $ 7,218 $ 8,761 $ 6,743 $ 6,675
6/30/2001 $ 7,174 $ 8,548 $ 6,613 $ 6,521
7/31/2001 $ 6,905 $ 8,464 $ 6,420 $ 6,358
8/31/2001 $ 6,555 $ 7,934 $ 5,903 $ 5,838
9/30/2001 $ 5,648 $ 7,293 $ 5,290 $ 5,255
10/31/2001 $ 6,038 $ 7,432 $ 5,582 $ 5,531
11/30/2001 $ 6,604 $ 8,002 $ 6,113 $ 6,062
12/31/2001 $ 6,731 $ 8,072 $ 6,127 $ 6,051
1/31/2002 $ 6,587 $ 7,955 $ 6,011 $ 5,944
2/28/2002 $ 6,335 $ 7,801 $ 5,752 $ 5,697
3/31/2002 $ 6,822 $ 8,095 $ 5,971 $ 5,894
4/30/2002 $ 6,506 $ 7,604 $ 5,509 $ 5,413
5/31/2002 $ 6,362 $ 7,548 $ 5,361 $ 5,282
6/30/2002 $ 5,849 $ 7,010 $ 4,868 $ 4,793
7/31/2002 $ 5,243 $ 6,464 $ 4,568 $ 4,530
8/31/2002 $ 5,216 $ 6,506 $ 4,580 $ 4,543
9/30/2002 $ 4,824 $ 5,799 $ 4,114 $ 4,072
10/31/2002 $ 5,086 $ 6,310 $ 4,481 $ 4,446
11/30/2002 $ 5,400 $ 6,681 $ 4,736 $ 4,687
12/31/2002 $ 5,052 $ 6,288 $ 4,409 $ 4,363
1/31/2003 $ 5,061 $ 6,124 $ 4,301 $ 4,257
2/28/2003 $ 5,036 $ 6,032 $ 4,276 $ 4,238
3/31/2003 $ 5,080 $ 6,090 $ 4,354 $ 4,317
4/30/2003 $ 5,417 $ 6,592 $ 4,682 $ 4,636
5/31/2003 $ 5,824 $ 6,939 $ 4,934 $ 4,867
6/30/2003 $ 5,860 $ 7,028 $ 5,004 $ 4,934
7/31/2003 $ 6,099 $ 7,152 $ 5,146 $ 5,057
8/31/2003 $ 6,396 $ 7,291 $ 5,285 $ 5,183
9/30/2003 $ 6,207 $ 7,214 $ 5,222 $ 5,127
10/31/2003 $ 6,748 $ 7,622 $ 5,527 $ 5,415
11/30/2003 $ 6,962 $ 7,689 $ 5,594 $ 5,472
12/31/2003 $ 7,098 $ 8,092 $ 5,775 $ 5,661
1/31/2004 $ 7,210 $ 8,241 $ 5,907 $ 5,777
2/29/2004 $ 7,271 $ 8,355 $ 5,941 $ 5,814
3/31/2004 $ 7,303 $ 8,229 $ 5,841 $ 5,706
4/30/2004 $ 7,155 $ 8,100 $ 5,755 $ 5,639
5/31/2004 $ 7,369 $ 8,211 $ 5,863 $ 5,745
6/30/2004 $ 7,498 $ 8,371 $ 5,946 $ 5,816
7/31/2004 $ 7,045 $ 8,094 $ 5,593 $ 5,488
8/31/2004 $ 7,006 $ 8,127 $ 5,558 $ 5,460
9/30/2004 $ 7,248 $ 8,215 $ 5,631 $ 5,512
10/31/2004 $ 7,418 $ 8,340 $ 5,723 $ 5,598
11/30/2004 $ 7,731 $ 8,678 $ 5,944 $ 5,791
12/31/2004 $ 8,024 $ 8,973 $ 6,175 $ 6,018
1/31/2005 $ 7,733 $ 8,754 $ 5,963 $ 5,817
2/28/2005 $ 7,875 $ 8,938 $ 6,028 $ 5,879
3/31/2005 $ 7,693 $ 8,780 $ 5,908 $ 5,772
4/30/2005 $ 7,485 $ 8,614 $ 5,773 $ 5,662
5/31/2005 $ 7,854 $ 8,888 $ 6,063 $ 5,936
6/30/2005 $ 7,803 $ 8,900 $ 6,059 $ 5,914
7/31/2005 $ 8,153 $ 9,231 $ 6,366 $ 6,203
8/31/2005 $ 8,098 $ 9,147 $ 6,283 $ 6,123
9/30/2005 $ 8,187 $ 9,221 $ 6,314 $ 6,152
10/31/2005 $ 8,060 $ 9,067 $ 6,237 $ 6,092
11/30/2005 $ 8,530 $ 9,410 $ 6,514 $ 6,355
12/31/2005 $ 8,543 $ 9,414 $ 6,494 $ 6,335
1/31/2006 $ 8,969 $ 9,663 $ 6,653 $ 6,446
2/28/2006 $ 8,984 $ 9,689 $ 6,640 $ 6,436
3/31/2006 $ 9,073 $ 9,810 $ 6,759 $ 6,531
4/30/2006 $ 9,033 $ 9,941 $ 6,749 $ 6,522
5/31/2006 $ 8,505 $ 9,655 $ 6,496 $ 6,301
6/30/2006 $ 8,609 $ 9,668 $ 6,473 $ 6,276
7/31/2006 $ 8,431 $ 9,728 $ 6,331 $ 6,156
8/31/2006 $ 8,577 $ 9,959 $ 6,528 $ 6,348
9/30/2006 $ 8,749 $10,216 $ 6,696 $ 6,523
10/31/2006 $ 8,963 $10,549 $ 6,948 $ 6,752
11/30/2006 $ 9,172 $10,750 $ 7,088 $ 6,886
12/31/2006 $ 9,058 $10,900 $ 7,108 $ 6,910
1/31/2007 $ 9,345 $11,065 $ 7,287 $ 7,087
2/28/2007 $ 9,179 $10,849 $ 7,159 $ 6,954
3/31/2007 $ 9,262 $10,970 $ 7,200 $ 6,992
4/30/2007 $ 9,644 $11,456 $ 7,527 $ 7,321
5/31/2007 $ 9,950 $11,856 $ 7,803 $ 7,584
6/30/2007 $ 9,902 $11,659 $ 7,693 $ 7,471
7/31/2007 $ 9,841 $11,297 $ 7,549 $ 7,355
8/31/2007 $10,159 $11,467 $ 7,676 $ 7,472
9/30/2007 $10,805 $11,896 $ 7,989 $ 7,785
10/31/2007 $11,113 $12,085 $ 8,268 $ 8,050
11/30/2007 $10,608 $11,580 $ 7,941 $ 7,754
12/31/2007 $10,536 $11,499 $ 7,919 $ 7,726
1/31/2008 $ 9,501 $10,810 $ 7,292 $ 7,123
2/29/2008 $ 9,214 $10,458 $ 7,139 $ 6,982
3/31/2008 $ 9,248 $10,413 $ 7,096 $ 6,939
4/30/2008 $ 9,956 $10,920 $ 7,468 $ 7,304
5/31/2008 $10,385 $11,062 $ 7,753 $ 7,571
6/30/2008 $ 9,645 $10,129 $ 7,202 $ 7,026
7/31/2008 $ 9,600 $10,044 $ 7,088 $ 6,892
8/31/2008 $ 9,747 $10,189 $ 7,172 $ 6,967
9/30/2008 $ 8,657 $ 9,281 $ 6,343 $ 6,160
10/31/2008 $ 7,249 $ 7,723 $ 5,206 $ 5,075
11/30/2008 $ 6,718 $ 7,169 $ 4,776 $ 4,672
12/31/2008 $ 6,733 $ 7,245 $ 4,874 $ 4,756
1/31/2009 $ 6,368 $ 6,634 $ 4,630 $ 4,527
2/28/2009 $ 5,892 $ 5,928 $ 4,272 $ 4,187
3/31/2009 $ 6,394 $ 6,447 $ 4,653 $ 4,560
4/30/2009 $ 7,080 $ 7,064 $ 5,118 $ 4,998
5/31/2009 $ 7,268 $ 7,459 $ 5,368 $ 5,246
6/30/2009 $ 7,330 $ 7,474 $ 5,436 $ 5,305
7/31/2009 $ 7,840 $ 8,039 $ 5,825 $ 5,681
8/31/2009 $ 7,935 $ 8,330 $ 5,941 $ 5,799
9/30/2009 $ 8,396 $ 8,640 $ 6,204 $ 6,046
10/31/2009 $ 8,252 $ 8,480 $ 6,093 $ 5,964
11/30/2009 $ 8,698 $ 8,988 $ 6,454 $ 6,330
12/31/2009 $ 9,056 $ 9,162 $ 6,678 $ 6,526
1/31/2010 $ 8,636 $ 8,832 $ 6,386 $ 6,241
2/28/2010 $ 8,875 $ 9,106 $ 6,610 $ 6,456
3/31/2010 $ 9,432 $ 9,656 $ 7,003 $ 6,829
4/30/2010 $ 9,522 $ 9,808 $ 7,098 $ 6,905
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 AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES
A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) 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 +34.73% and +5.33%.
(7.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The Russell 3000 Growth Index is market
capitalization weighted and measures performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted
growth values. 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.
12 | Annual Report
Your Fund's Expenses
FRANKLIN FLEX CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 13
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
BEGINNING ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
VALUE VALUE PERIOD*
11/1/09 4/30/10 11/1/09-4/30/10
--------- --------- ---------------
CLASS A
Actual $1,000 $1,152.70 $5.28
Hypothetical (5% return before expenses) $1,000 $1,019.89 $4.96
CLASS B
Actual $1,000 $1,148.40 $9.16
Hypothetical (5% return before expenses) $1,000 $1,016.27 $8.60
CLASS C
Actual $1,000 $1,148.40 $9.27
Hypothetical (5% return before expenses) $1,000 $1,016.17 $8.70
CLASS R
Actual $1,000 $1,151.30 $6.61
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.21
ADVISOR CLASS
Actual $1,000 $1,154.00 $3.95
Hypothetical (5% return before expenses) $1,000 $1,021.12 $3.71
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 0.99%; B: 1.72%; C:
1.74%; R: 1.24%; and Advisor: 0.74%), multiplied by the average account
value over the period, multiplied by 181/365 to reflect the one-half year
period.
14 | Annual Report
Franklin Focused Core Equity Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Focused Core Equity Fund seeks
capital appreciation by normally 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)
We are pleased to bring you Franklin Focused Core Equity Fund's annual report
for the fiscal year ended April 30, 2010.
PERFORMANCE OVERVIEW
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.
For the 12 months under review, Franklin Focused Core Equity Fund - Class A
delivered a +44.05% cumulative total return. The Fund outperformed its
benchmark, the S&P 500, which posted a +38.84% total return for the same
period.(2) You can find more of the Fund's performance data in the Performance
Summary beginning on page 18.
INVESTMENT STRATEGY
We are research-driven, 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 paid for 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 is a market capitalization-weighted index of 500 stocks
designed to measure total U.S. equity market performance.
(2.) Source: (C) 2010 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 68.
Annual Report | 15
PORTFOLIO BREAKDOWN
Franklin Focused Core Equity Fund
Based on Total Net Assets as of 4/30/10
Financials 18.0%
Health Care 17.0%
Information Technology 14.1%
Industrials 13.0%
Energy 9.1%
Consumer Discretionary 7.8%
Consumer Staples 7.3%
Materials 6.3%
Telecommunication Services 2.8%
Short-Term Investments & Other Net Assets 4.6%
MANAGER'S DISCUSSION
During the year under review, all sectors rose in value and the vast majority of
the Fund's individual holdings delivered positive results. In particular, many
of our positions in the information technology, health care, financials and
industrials sectors proved beneficial to absolute returns. In the information
technology sector, top contributors included Maxim Integrated Products, which
designs, develops and manufactures more than 6,000 kinds of analog and
mixed-signal semiconductors; MasterCard, which operates the second-largest
consumer payment system for about 23,000 member financial institutions
worldwide; and Corning, which designs and produces material components for a
wide range of technology-related industries. Within health care, pharmaceuticals
companies Merck & Co. and Roche Holding performed well. Among financials, the
Fund benefited significantly from its positions in commercial bank U.S. Bancorp
and Berkshire Hathaway, an insurance conglomerate with interests in several
other, unrelated industries. Top contributors among the Fund's industrials
stocks included Precision Castparts, which manufactures a host of castings for
industrial, aerospace, military and medical applications; and Republic Services,
a provider of waste-disposal services and related facilities to 40 states
through a network of more than 370 collection companies.
Despite the Fund's robust performance during the fiscal year, there were a few
minor detractors. Shares of leading natural gas explorer and producer Petrohawk
Energy fell in value, as did those for diversified financial services firm
JPMorgan Chase & Co. Both were new positions this reporting period.
16 | Annual 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
(PHOTO OF BRETT CRAWFORD)
/s/ Brett Crawford
Brett Crawford
Portfolio Management Team
Franklin Focused Core Equity Fund
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, 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.
BRETT CRAWFORD assumed portfolio manager responsibilities for Franklin
Focused Core Equity Fund in April 2010. He also manages institutional large
cap equity portfolios. He is a member of the financials research team and
specializes in the analysis of the specialty finance and bank industries.
Prior to joining the firm, Mr. Crawford was a portfolio manager with
Mesirow Financial in Chicago, where he co-managed the large cap equity
product. Prior to this position, he worked for J.P. Morgan and Goldman,
Sachs & Co. in New York.
Mr. Crawford earned a B.S. in commerce from the University of Virginia,
McIntire School of Commerce, and an M.B.A. in finance from the University
of Chicago Booth School of Business.
TOP 10 EQUITY HOLDINGS
Franklin Focused Core Equity Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Merck & Co. Inc. 6.4%
HEALTH CARE
Celanese Corp., A 4.6%
MATERIALS
Maxim Integrated Products Inc. 4.6%
INFORMATION TECHNOLOGY
Apollo Group Inc., A 4.3%
CONSUMER DISCRETIONARY
CVS Caremark Corp. 4.1%
CONSUMER STAPLES
Corning Inc. 4.0%
INFORMATION TECHNOLOGY
Roche Holding AG (Switzerland) 4.0%
HEALTH CARE
Marathon Oil Corp. 3.9%
ENERGY
MasterCard Inc., A 3.8%
INFORMATION TECHNOLOGY
Berkshire Hathaway Inc., B 3.7%
FINANCIALS
Annual Report | 17
Performance Summary as of 4/30/10
FRANKLIN FOCUSED CORE EQUITY FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: N/A) CHANGE 4/30/10 4/30/09
- --------------------- ------ ------- -------
Net Asset Value (NAV) +$2.76 $9.03 $6.27
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.0015
CLASS C (SYMBOL: N/A) CHANGE 4/30/10 4/30/09
- --------------------- ------ ------- -------
Net Asset Value (NAV) +$2.66 $8.90 $6.24
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.0014
CLASS R (SYMBOL: N/A) CHANGE 4/30/10 4/30/09
- --------------------- ------ ------- -------
Net Asset Value (NAV) +$2.73 $9.00 $6.27
ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/10 4/30/09
- --------------------------- ------ ------- -------
Net Asset Value (NAV) +$2.78 $9.06 $6.28
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.0042
18 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR INCEPTION (12/13/07)
- ------- ------- --------------------
Cumulative Total Return(2) +44.05% -7.57%
Average Annual Total Return(3) +35.81% -5.63%
Value of $10,000 Investment(4) $13,581 $8,712
Avg. Ann. Total Return (3/31/10)(5) +56.65% -6.01%
Total Annual Operating Expenses(6)
Without Waiver 4.03%
With Waiver 1.19%
CLASS C 1-YEAR INCEPTION (12/13/07)
- ------- ------- --------------------
Cumulative Total Return(2) +42.65% -9.17%
Average Annual Total Return(3) +41.65% -3.96%
Value of $10,000 Investment(4) $14,165 $9,083
Avg. Ann. Total Return (3/31/10)(5) +63.90% -4.24%
Total Annual Operating Expenses(6)
Without Waiver 4.71%
With Waiver 1.87%
CLASS R 1-YEAR INCEPTION (12/13/07)
- ------- ------- --------------------
Cumulative Total Return(2) +43.54% -8.18%
Average Annual Total Return(3) +43.54% -3.52%
Value of $10,000 Investment(4) $14,354 $9,182
Avg. Ann. Total Return (3/31/10)(5) +65.62% -3.83%
Total Annual Operating Expenses(6)
Without Waiver 4.25%
With Waiver 1.41%
ADVISOR CLASS 1-YEAR INCEPTION (12/13/07)
- ------------- ------- --------------------
Cumulative Total Return(2) +44.34% -6.99%
Average Annual Total Return(3) +44.34% -3.00%
Value of $10,000 Investment(4) $14,434 $9,301
Avg. Ann. Total Return (3/31/10)(5) +66.50% -3.29%
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, GO TO
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.
Annual Report | 19
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged index includes reinvestment of
any income or distributions. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +35.81%
Since Inception (12/13/07) -5.63%
CLASS A (12/13/07-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE S&P 500
DATE EQUITY FUND - CLASS A INDEX
- ---- --------------------- -------
12/13/2007 $9,425 $10,000
12/31/2007 $9,529 $ 9,960
1/31/2008 $8,775 $ 9,362
2/29/2008 $8,247 $ 9,058
3/31/2008 $7,653 $ 9,019
4/30/2008 $8,181 $ 9,458
5/31/2008 $8,539 $ 9,581
6/30/2008 $7,728 $ 8,773
7/31/2008 $7,653 $ 8,699
8/31/2008 $8,077 $ 8,825
9/30/2008 $7,220 $ 8,039
10/31/2008 $5,580 $ 6,689
11/30/2008 $5,052 $ 6,209
12/31/2008 $5,276 $ 6,275
1/31/2009 $5,035 $ 5,746
2/28/2009 $4,572 $ 5,134
3/31/2009 $5,218 $ 5,584
4/30/2009 $6,048 $ 6,118
5/31/2009 $6,347 $ 6,461
6/30/2009 $6,308 $ 6,473
7/31/2009 $6,916 $ 6,963
8/31/2009 $7,302 $ 7,214
9/30/2009 $7,524 $ 7,484
10/31/2009 $7,466 $ 7,345
11/30/2009 $7,736 $ 7,785
12/31/2009 $8,113 $ 7,935
1/31/2010 $7,998 $ 7,650
2/28/2010 $8,152 $ 7,887
3/31/2010 $8,673 $ 8,363
4/30/2010 $8,712 $ 8,495
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +41.65%
Since Inception (12/13/07) -3.96%
CLASS C (12/13/07-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE S&P 500
DATE EQUITY FUND - CLASS C INDEX
- ---- --------------------- -------
12/13/2007 $10,000 $10,000
12/31/2007 $10,110 $ 9,960
1/31/2008 $ 9,300 $ 9,362
2/29/2008 $ 8,740 $ 9,058
3/31/2008 $ 8,100 $ 9,019
4/30/2008 $ 8,670 $ 9,458
5/31/2008 $ 9,040 $ 9,581
6/30/2008 $ 8,180 $ 8,773
7/31/2008 $ 8,100 $ 8,699
8/31/2008 $ 8,540 $ 8,825
9/30/2008 $ 7,620 $ 8,039
10/31/2008 $ 5,890 $ 6,689
11/30/2008 $ 5,320 $ 6,209
12/31/2008 $ 5,561 $ 6,275
1/31/2009 $ 5,306 $ 5,746
2/28/2009 $ 4,806 $ 5,134
3/31/2009 $ 5,490 $ 5,584
4/30/2009 $ 6,367 $ 6,118
5/31/2009 $ 6,673 $ 6,461
6/30/2009 $ 6,622 $ 6,473
7/31/2009 $ 7,255 $ 6,963
8/31/2009 $ 7,653 $ 7,214
9/30/2009 $ 7,888 $ 7,484
10/31/2009 $ 7,826 $ 7,345
11/30/2009 $ 8,102 $ 7,785
12/31/2009 $ 8,481 $ 7,935
1/31/2010 $ 8,358 $ 7,650
2/28/2010 $ 8,511 $ 7,887
3/31/2010 $ 9,052 $ 8,363
4/30/2010 $ 9,083 $ 8,495
20 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/10
- ------- -------
1-Year +43.54%
Since Inception (12/13/07) -3.52%
CLASS R (12/13/07-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE S&P 500
DATE EQUITY FUND - CLASS R INDEX
- ---- --------------------- -------
12/13/2007 $10,000 $10,000
12/31/2007 $10,110 $ 9,960
1/31/2008 $ 9,310 $ 9,362
2/29/2008 $ 8,750 $ 9,058
3/31/2008 $ 8,120 $ 9,019
4/30/2008 $ 8,680 $ 9,458
5/31/2008 $ 9,050 $ 9,581
6/30/2008 $ 8,190 $ 8,773
7/31/2008 $ 8,110 $ 8,699
8/31/2008 $ 8,560 $ 8,825
9/30/2008 $ 7,650 $ 8,039
10/31/2008 $ 5,910 $ 6,689
11/30/2008 $ 5,350 $ 6,209
12/31/2008 $ 5,591 $ 6,275
1/31/2009 $ 5,336 $ 5,746
2/28/2009 $ 4,836 $ 5,134
3/31/2009 $ 5,519 $ 5,584
4/30/2009 $ 6,397 $ 6,118
5/31/2009 $ 6,713 $ 6,461
6/30/2009 $ 6,672 $ 6,473
7/31/2009 $ 7,315 $ 6,963
8/31/2009 $ 7,713 $ 7,214
9/30/2009 $ 7,958 $ 7,484
10/31/2009 $ 7,886 $ 7,345
11/30/2009 $ 8,172 $ 7,785
12/31/2009 $ 8,560 $ 7,935
1/31/2010 $ 8,437 $ 7,650
2/28/2010 $ 8,590 $ 7,887
3/31/2010 $ 9,141 $ 8,363
4/30/2010 $ 9,182 $ 8,495
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/10
- ------------- -------
1-Year +44.34%
Since Inception (12/13/07) -3.00%
ADVISOR CLASS (12/13/07-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN FOCUSED CORE S&P 500
DATE EQUITY FUND - ADVISOR CLASS INDEX
- ---- --------------------------- -------
12/13/2007 $10,000 $10,000
12/31/2007 $10,120 $ 9,960
1/31/2008 $ 9,320 $ 9,362
2/29/2008 $ 8,760 $ 9,058
3/31/2008 $ 8,130 $ 9,019
4/30/2008 $ 8,700 $ 9,458
5/31/2008 $ 9,070 $ 9,581
6/30/2008 $ 8,220 $ 8,773
7/31/2008 $ 8,140 $ 8,699
8/31/2008 $ 8,590 $ 8,825
9/30/2008 $ 7,680 $ 8,039
10/31/2008 $ 5,940 $ 6,689
11/30/2008 $ 5,370 $ 6,209
12/31/2008 $ 5,613 $ 6,275
1/31/2009 $ 5,366 $ 5,746
2/28/2009 $ 4,864 $ 5,134
3/31/2009 $ 5,561 $ 5,584
4/30/2009 $ 6,444 $ 6,118
5/31/2009 $ 6,762 $ 6,461
6/30/2009 $ 6,731 $ 6,473
7/31/2009 $ 7,377 $ 6,963
8/31/2009 $ 7,788 $ 7,214
9/30/2009 $ 8,024 $ 7,484
10/31/2009 $ 7,962 $ 7,345
11/30/2009 $ 8,260 $ 7,785
12/31/2009 $ 8,654 $ 7,935
1/31/2010 $ 8,531 $ 7,650
2/28/2010 $ 8,695 $ 7,887
3/31/2010 $ 9,260 $ 8,363
4/30/2010 $ 9,301 $ 8,495
Annual Report | 21
Performance Summary (CONTINUED)
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. SPECIAL
RISKS ARE 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.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(6.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(7.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance.
22 | Annual Report
Your Fund's Expenses
FRANKLIN FOCUSED CORE EQUITY FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 23
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
BEGINNING ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
VALUE VALUE PERIOD*
11/1/09 4/30/10 11/1/09-4/30/10
--------- --------- ---------------
CLASS A
Actual $1,000 $1,166.90 $ 5.86
Hypothetical (5% return before expenses) $1,000 $1,019.39 $ 5.46
CLASS C
Actual $1,000 $1,160.60 $10.12
Hypothetical (5% return before expenses) $1,000 $1,015.42 $ 9.44
CLASS R
Actual $1,000 $1,164.30 $ 7.46
Hypothetical (5% return before expenses) $1,000 $1,017.90 $ 6.95
ADVISOR CLASS
Actual $1,000 $1,168.10 $ 4.78
Hypothetical (5% return before expenses) $1,000 $1,020.38 $ 4.46
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.09%; C: 1.89%; R:
1.39%; and Advisor: 0.89%), multiplied by the average account value over
the period, multiplied by 181/365 to reflect the one-half year period.
24 | Annual Report
Franklin Growth Opportunities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Opportunities Fund seeks
capital appreciation by normally investing substantially in equity securities of
companies demonstrating accelerating growth, increasing profitability, or
above-average growth or growth potential as compared with the overall economy.
We are pleased to bring you Franklin Growth Opportunities Fund's annual report
for the fiscal year ended April 30, 2010.
PERFORMANCE OVERVIEW
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.
For the 12 months under review, Franklin Growth Opportunities Fund - Class A
delivered a +41.14% cumulative total return. The Fund outperformed its narrow
benchmark, the Russell 3000 Growth Index, which posted a +38.69% total return,
and outperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500),
which generated a +38.84% total return for the same period.(1) You can find the
Fund's long-term performance data in the Performance Summary beginning on page
28.
INVESTMENT STRATEGY
We 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
(1.) Source: (C) 2010 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 is a market capitalization-weighted index of 500 stocks designed to
measure total U.S. equity market 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 75.
Annual Report | 25
PORTFOLIO BREAKDOWN
Franklin Growth Opportunities Fund
Based on Total Net Assets as of 4/30/10*
(BAR CHART)
Information Technology** 34.3%
Health Care 17.2%
Consumer Discretionary 13.1%
Industrials 13.0%
Energy 8.7%
Financials 5.1%
Telecommunication Services 4.3%
Materials 2.9%
Consumer Staples 2.1%
* Short-term investments and other net assets = -0.7% due to Fund
liabilities.
** 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.
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
All sectors the Fund invested in contributed to its absolute performance during
the 12 months under review. Investments in the information technology, consumer
discretionary and health care sectors fared particularly well, led by holdings
in the computers and peripherals, specialty retail and pharmaceuticals
industries, respectively. Individual contributors far outnumbered detractors
during this period. Among the most significant 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. Robotic surgical systems developer
Intuitive Surgical, from the health care sector, was another noteworthy
contributor during the period.
In contrast, some of the Fund's individual securities detracted from absolute
results. Key detractors included biotechnology firm Myriad Genetics, which
produces a range of molecular diagnostic testing products, and forensic
financial consulting services provider Huron Consulting Group. In addition, our
new position in smartphone manufacturer Palm had a negative impact on Fund
performance. We no longer held these Fund positions by period-end.
26 | Annual Report
Thank you for your continued participation in Franklin Growth Opportunities
Fund. We look forward to serving your future investment needs.
(PHOTO OF GRANT BOWERS)
/s/ Grant Bowers
Grant Bowers
Portfolio Manager
Franklin Growth Opportunities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Growth Opportunities Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Apple Inc. 3.8%
INFORMATION TECHNOLOGY
MasterCard Inc., A 3.4%
INFORMATION TECHNOLOGY
Precision Castparts Corp. 3.1%
INDUSTRIALS
FLIR Systems Inc. 2.6%
INFORMATION TECHNOLOGY
SBA Communications Corp. 2.5%
TELECOMMUNICATION SERVICES
Google Inc., A 2.1%
INFORMATION TECHNOLOGY
Celgene Corp. 2.1%
HEALTH CARE
QUALCOMM Inc. 1.8%
INFORMATION TECHNOLOGY
Weatherford International Ltd. 1.8%
ENERGY
Intuitive Surgical Inc. 1.8%
HEALTH CARE
Annual Report | 27
Performance Summary as of 4/30/10
FRANKLIN GROWTH OPPORTUNITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FGRAX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$5.71 $19.59 $13.88
CLASS B (SYMBOL: FKABX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$5.23 $18.25 $13.02
CLASS C (SYMBOL: FKACX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$5.21 $18.20 $12.99
CLASS R (SYMBOL: FKARX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$5.58 $19.25 $13.67
ADVISOR CLASS (SYMBOL: FRAAX) CHANGE 4/30/10 4/30/09
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$5.94 $20.24 $14.30
28 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ---------
Cumulative Total Return(1) +41.14% +46.96% -22.30%
Average Annual Total Return(2) +32.99% +6.74% -3.07%
Value of $10,000 Investment(3) $13,299 $13,854 $7,323
Avg. Ann. Total Return (3/31/10)(4) +43.23% +5.27% -4.82%
Total Annual Operating Expenses(5) 1.34%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ---------
Cumulative Total Return(1) +40.17% +41.80% -26.48%
Average Annual Total Return(2) +36.17% +6.93% -3.03%
Value of $10,000 Investment(3) $13,617 $13,980 $7,352
Avg. Ann. Total Return (3/31/10)(4) +46.89% +5.46% -4.78%
Total Annual Operating Expenses(5) 2.04%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ---------
Cumulative Total Return(1) +40.11% +41.74% -27.52%
Average Annual Total Return(2) +39.11% +7.23% -3.17%
Value of $10,000 Investment(3) $13,911 $14,174 $7,248
Avg. Ann. Total Return (3/31/10)(4) +49.85% +5.76% -4.92%
Total Annual Operating Expenses(5) 2.05%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------- ------- ------- ---------
Cumulative Total Return(1) +40.82% +45.39% +40.00%
Average Annual Total Return(2) +40.82% +7.77% +4.13%
Value of $10,000 Investment(3) $14,082 $14,539 $14,000
Avg. Ann. Total Return (3/31/10)(4) +51.65% +6.31% +3.88%
Total Annual Operating Expenses(5) 1.56%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- ---------
Cumulative Total Return(1) +41.54% +49.04% -20.00%
Average Annual Total Return(2) +41.54% +8.31% -2.21%
Value of $10,000 Investment(3) $14,154 $14,904 $8,000
Avg. Ann. Total Return (3/31/10)(4) +52.39% +6.84% -3.97%
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, GO TO
franklintempleton.com OR CALL (800) 342-5236.
Annual Report | 29
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +32.99%
5-Year +6.74%
10-Year -3.07%
CLASS A (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS A S&P 500 INDEX GROWTH INDEX
- ---- ----------------------------- ------------- ------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $ 8,483 $ 9,795 $ 9,471
6/30/2000 $10,243 $10,036 $10,222
7/31/2000 $ 9,915 $ 9,879 $ 9,765
8/31/2000 $11,002 $10,493 $10,658
9/30/2000 $10,516 $ 9,939 $ 9,682
10/31/2000 $ 9,257 $ 9,897 $ 9,201
11/30/2000 $ 6,678 $ 9,117 $ 7,824
12/31/2000 $ 6,636 $ 9,161 $ 7,623
1/31/2001 $ 7,492 $ 9,486 $ 8,156
2/28/2001 $ 5,746 $ 8,621 $ 6,790
3/31/2001 $ 4,987 $ 8,075 $ 6,060
4/30/2001 $ 5,720 $ 8,703 $ 6,825
5/31/2001 $ 5,701 $ 8,761 $ 6,743
6/30/2001 $ 5,660 $ 8,548 $ 6,613
7/31/2001 $ 5,305 $ 8,464 $ 6,420
8/31/2001 $ 4,808 $ 7,934 $ 5,903
9/30/2001 $ 3,892 $ 7,293 $ 5,290
10/31/2001 $ 4,359 $ 7,432 $ 5,582
11/30/2001 $ 4,972 $ 8,002 $ 6,113
12/31/2001 $ 5,137 $ 8,072 $ 6,127
1/31/2002 $ 4,901 $ 7,955 $ 6,011
2/28/2002 $ 4,542 $ 7,801 $ 5,752
3/31/2002 $ 4,901 $ 8,095 $ 5,971
4/30/2002 $ 4,628 $ 7,604 $ 5,509
5/31/2002 $ 4,464 $ 7,548 $ 5,361
6/30/2002 $ 3,978 $ 7,010 $ 4,868
7/31/2002 $ 3,428 $ 6,464 $ 4,568
8/31/2002 $ 3,353 $ 6,506 $ 4,580
9/30/2002 $ 3,021 $ 5,799 $ 4,114
10/31/2002 $ 3,305 $ 6,310 $ 4,481
11/30/2002 $ 3,664 $ 6,681 $ 4,736
12/31/2002 $ 3,301 $ 6,288 $ 4,409
1/31/2003 $ 3,286 $ 6,124 $ 4,301
2/28/2003 $ 3,260 $ 6,032 $ 4,276
3/31/2003 $ 3,297 $ 6,090 $ 4,354
4/30/2003 $ 3,552 $ 6,592 $ 4,682
5/31/2003 $ 3,858 $ 6,939 $ 4,934
6/30/2003 $ 3,892 $ 7,028 $ 5,004
7/31/2003 $ 4,082 $ 7,152 $ 5,146
8/31/2003 $ 4,284 $ 7,291 $ 5,285
9/30/2003 $ 4,150 $ 7,214 $ 5,222
10/31/2003 $ 4,520 $ 7,622 $ 5,527
11/30/2003 $ 4,636 $ 7,689 $ 5,594
12/31/2003 $ 4,752 $ 8,092 $ 5,775
1/31/2004 $ 4,860 $ 8,241 $ 5,907
2/29/2004 $ 4,868 $ 8,355 $ 5,941
3/31/2004 $ 4,886 $ 8,229 $ 5,841
4/30/2004 $ 4,699 $ 8,100 $ 5,755
5/31/2004 $ 4,830 $ 8,211 $ 5,863
6/30/2004 $ 5,002 $ 8,371 $ 5,946
7/31/2004 $ 4,647 $ 8,094 $ 5,593
8/31/2004 $ 4,576 $ 8,127 $ 5,558
9/30/2004 $ 4,841 $ 8,215 $ 5,631
10/31/2004 $ 4,998 $ 8,340 $ 5,723
11/30/2004 $ 5,346 $ 8,678 $ 5,944
12/31/2004 $ 5,574 $ 8,973 $ 6,175
1/31/2005 $ 5,365 $ 8,754 $ 5,963
2/28/2005 $ 5,365 $ 8,938 $ 6,028
3/31/2005 $ 5,219 $ 8,780 $ 5,908
4/30/2005 $ 4,983 $ 8,614 $ 5,773
5/31/2005 $ 5,312 $ 8,888 $ 6,063
6/30/2005 $ 5,387 $ 8,900 $ 6,059
7/31/2005 $ 5,682 $ 9,231 $ 6,366
8/31/2005 $ 5,649 $ 9,147 $ 6,283
9/30/2005 $ 5,765 $ 9,221 $ 6,314
10/31/2005 $ 5,768 $ 9,067 $ 6,237
11/30/2005 $ 6,157 $ 9,410 $ 6,514
12/31/2005 $ 6,191 $ 9,414 $ 6,494
1/31/2006 $ 6,617 $ 9,663 $ 6,653
2/28/2006 $ 6,658 $ 9,689 $ 6,640
3/31/2006 $ 6,871 $ 9,810 $ 6,759
4/30/2006 $ 6,841 $ 9,941 $ 6,749
5/31/2006 $ 6,307 $ 9,655 $ 6,496
6/30/2006 $ 6,382 $ 9,668 $ 6,473
7/31/2006 $ 6,086 $ 9,728 $ 6,331
8/31/2006 $ 6,139 $ 9,959 $ 6,528
9/30/2006 $ 6,292 $10,216 $ 6,696
10/31/2006 $ 6,438 $10,549 $ 6,948
11/30/2006 $ 6,654 $10,750 $ 7,088
12/31/2006 $ 6,610 $10,900 $ 7,108
1/31/2007 $ 6,774 $11,065 $ 7,287
2/28/2007 $ 6,669 $10,849 $ 7,159
3/31/2007 $ 6,774 $10,970 $ 7,200
4/30/2007 $ 6,931 $11,456 $ 7,527
5/31/2007 $ 7,178 $11,856 $ 7,803
6/30/2007 $ 7,226 $11,659 $ 7,693
7/31/2007 $ 7,219 $11,297 $ 7,549
8/31/2007 $ 7,455 $11,467 $ 7,676
9/30/2007 $ 8,191 $11,896 $ 7,989
10/31/2007 $ 8,658 $12,085 $ 8,268
11/30/2007 $ 7,982 $11,580 $ 7,941
12/31/2007 $ 7,993 $11,499 $ 7,919
1/31/2008 $ 7,096 $10,810 $ 7,292
2/29/2008 $ 6,808 $10,458 $ 7,139
3/31/2008 $ 6,789 $10,413 $ 7,096
4/30/2008 $ 7,499 $10,920 $ 7,468
5/31/2008 $ 7,989 $11,062 $ 7,753
6/30/2008 $ 7,398 $10,129 $ 7,202
7/31/2008 $ 7,185 $10,044 $ 7,088
8/31/2008 $ 7,159 $10,189 $ 7,172
9/30/2008 $ 6,068 $ 9,281 $ 6,343
10/31/2008 $ 5,133 $ 7,723 $ 5,206
11/30/2008 $ 4,684 $ 7,169 $ 4,776
12/31/2008 $ 4,789 $ 7,245 $ 4,874
1/31/2009 $ 4,669 $ 6,634 $ 4,630
2/28/2009 $ 4,318 $ 5,928 $ 4,272
3/31/2009 $ 4,710 $ 6,447 $ 4,653
4/30/2009 $ 5,189 $ 7,064 $ 5,118
5/31/2009 $ 5,428 $ 7,459 $ 5,368
6/30/2009 $ 5,477 $ 7,474 $ 5,436
7/31/2009 $ 5,847 $ 8,039 $ 5,825
8/31/2009 $ 5,955 $ 8,330 $ 5,941
9/30/2009 $ 6,355 $ 8,640 $ 6,204
10/31/2009 $ 6,157 $ 8,480 $ 6,093
11/30/2009 $ 6,483 $ 8,988 $ 6,454
12/31/2009 $ 6,875 $ 9,162 $ 6,678
1/31/2010 $ 6,509 $ 8,832 $ 6,386
2/28/2010 $ 6,688 $ 9,106 $ 6,610
3/31/2010 $ 7,159 $ 9,656 $ 7,003
4/30/2010 $ 7,323 $ 9,808 $ 7,098
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/10
- ------- -------
1-Year +36.17%
5-Year +6.93%
10-Year -3.03%
CLASS B (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000 GROWTH
DATE FUND - CLASS B S&P 500 INDEX INDEX
- ---- ----------------------------- ------------- -------------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 8,999 $ 9,795 $ 9,471
6/30/2000 $10,858 $10,036 $10,222
7/31/2000 $10,500 $ 9,879 $ 9,765
8/31/2000 $11,648 $10,493 $10,658
9/30/2000 $11,128 $ 9,939 $ 9,682
10/31/2000 $ 9,790 $ 9,897 $ 9,201
11/30/2000 $ 7,057 $ 9,117 $ 7,824
12/31/2000 $ 7,008 $ 9,161 $ 7,623
1/31/2001 $ 7,906 $ 9,486 $ 8,156
2/28/2001 $ 6,059 $ 8,621 $ 6,790
3/31/2001 $ 5,260 $ 8,075 $ 6,060
4/30/2001 $ 6,027 $ 8,703 $ 6,825
5/31/2001 $ 6,003 $ 8,761 $ 6,743
6/30/2001 $ 5,959 $ 8,548 $ 6,613
7/31/2001 $ 5,582 $ 8,464 $ 6,420
8/31/2001 $ 5,053 $ 7,934 $ 5,903
9/30/2001 $ 4,088 $ 7,293 $ 5,290
10/31/2001 $ 4,581 $ 7,432 $ 5,582
11/30/2001 $ 5,216 $ 8,002 $ 6,113
12/31/2001 $ 5,387 $ 8,072 $ 6,127
1/31/2002 $ 5,137 $ 7,955 $ 6,011
2/28/2002 $ 4,759 $ 7,801 $ 5,752
3/31/2002 $ 5,133 $ 8,095 $ 5,971
4/30/2002 $ 4,847 $ 7,604 $ 5,509
5/31/2002 $ 4,668 $ 7,548 $ 5,361
6/30/2002 $ 4,160 $ 7,010 $ 4,868
7/31/2002 $ 3,580 $ 6,464 $ 4,568
8/31/2002 $ 3,500 $ 6,506 $ 4,580
9/30/2002 $ 3,150 $ 5,799 $ 4,114
10/31/2002 $ 3,448 $ 6,310 $ 4,481
11/30/2002 $ 3,822 $ 6,681 $ 4,736
12/31/2002 $ 3,441 $ 6,288 $ 4,409
1/31/2003 $ 3,425 $ 6,124 $ 4,301
2/28/2003 $ 3,393 $ 6,032 $ 4,276
3/31/2003 $ 3,429 $ 6,090 $ 4,354
4/30/2003 $ 3,695 $ 6,592 $ 4,682
5/31/2003 $ 4,009 $ 6,939 $ 4,934
6/30/2003 $ 4,040 $ 7,028 $ 5,004
7/31/2003 $ 4,235 $ 7,152 $ 5,146
8/31/2003 $ 4,446 $ 7,291 $ 5,285
9/30/2003 $ 4,303 $ 7,214 $ 5,222
10/31/2003 $ 4,684 $ 7,622 $ 5,527
11/30/2003 $ 4,799 $ 7,689 $ 5,594
12/31/2003 $ 4,918 $ 8,092 $ 5,775
1/31/2004 $ 5,026 $ 8,241 $ 5,907
2/29/2004 $ 5,034 $ 8,355 $ 5,941
3/31/2004 $ 5,050 $ 8,229 $ 5,841
4/30/2004 $ 4,855 $ 8,100 $ 5,755
5/31/2004 $ 4,986 $ 8,211 $ 5,863
6/30/2004 $ 5,161 $ 8,371 $ 5,946
7/31/2004 $ 4,791 $ 8,094 $ 5,593
8/31/2004 $ 4,712 $ 8,127 $ 5,558
9/30/2004 $ 4,986 $ 8,215 $ 5,631
10/31/2004 $ 5,145 $ 8,340 $ 5,723
11/30/2004 $ 5,498 $ 8,678 $ 5,944
12/31/2004 $ 5,729 $ 8,973 $ 6,175
1/31/2005 $ 5,514 $ 8,754 $ 5,963
2/28/2005 $ 5,510 $ 8,938 $ 6,028
3/31/2005 $ 5,355 $ 8,780 $ 5,908
4/30/2005 $ 5,113 $ 8,614 $ 5,773
5/31/2005 $ 5,447 $ 8,888 $ 6,063
6/30/2005 $ 5,518 $ 8,900 $ 6,059
7/31/2005 $ 5,816 $ 9,231 $ 6,366
8/31/2005 $ 5,781 $ 9,147 $ 6,283
9/30/2005 $ 5,896 $ 9,221 $ 6,314
10/31/2005 $ 5,896 $ 9,067 $ 6,237
11/30/2005 $ 6,285 $ 9,410 $ 6,514
12/31/2005 $ 6,321 $ 9,414 $ 6,494
1/31/2006 $ 6,750 $ 9,663 $ 6,653
2/28/2006 $ 6,786 $ 9,689 $ 6,640
3/31/2006 $ 6,996 $ 9,810 $ 6,759
4/30/2006 $ 6,964 $ 9,941 $ 6,749
5/31/2006 $ 6,416 $ 9,655 $ 6,496
6/30/2006 $ 6,488 $ 9,668 $ 6,473
7/31/2006 $ 6,186 $ 9,728 $ 6,331
8/31/2006 $ 6,237 $ 9,959 $ 6,528
9/30/2006 $ 6,388 $10,216 $ 6,696
10/31/2006 $ 6,531 $10,549 $ 6,948
11/30/2006 $ 6,750 $10,750 $ 7,088
12/31/2006 $ 6,698 $10,900 $ 7,108
1/31/2007 $ 6,861 $11,065 $ 7,287
2/28/2007 $ 6,750 $10,849 $ 7,159
3/31/2007 $ 6,853 $10,970 $ 7,200
4/30/2007 $ 7,008 $11,456 $ 7,527
5/31/2007 $ 7,254 $11,856 $ 7,803
6/30/2007 $ 7,298 $11,659 $ 7,693
7/31/2007 $ 7,290 $11,297 $ 7,549
8/31/2007 $ 7,521 $11,467 $ 7,676
9/30/2007 $ 8,256 $11,896 $ 7,989
10/31/2007 $ 8,720 $12,085 $ 8,268
11/30/2007 $ 8,037 $11,580 $ 7,941
12/31/2007 $ 8,045 $11,499 $ 7,919
1/31/2008 $ 7,135 $10,810 $ 7,292
2/29/2008 $ 6,841 $10,458 $ 7,139
3/31/2008 $ 6,821 $10,413 $ 7,096
4/30/2008 $ 7,529 $10,920 $ 7,468
5/31/2008 $ 8,021 $11,062 $ 7,753
6/30/2008 $ 7,428 $10,129 $ 7,202
7/31/2008 $ 7,214 $10,044 $ 7,088
8/31/2008 $ 7,187 $10,189 $ 7,172
9/30/2008 $ 6,092 $ 9,281 $ 6,343
10/31/2008 $ 5,153 $ 7,723 $ 5,206
11/30/2008 $ 4,703 $ 7,169 $ 4,776
12/31/2008 $ 4,808 $ 7,245 $ 4,874
1/31/2009 $ 4,688 $ 6,634 $ 4,630
2/28/2009 $ 4,335 $ 5,928 $ 4,272
3/31/2009 $ 4,729 $ 6,447 $ 4,653
4/30/2009 $ 5,209 $ 7,064 $ 5,118
5/31/2009 $ 5,450 $ 7,459 $ 5,368
6/30/2009 $ 5,498 $ 7,474 $ 5,436
7/31/2009 $ 5,870 $ 8,039 $ 5,825
8/31/2009 $ 5,979 $ 8,330 $ 5,941
9/30/2009 $ 6,381 $ 8,640 $ 6,204
10/31/2009 $ 6,182 $ 8,480 $ 6,093
11/30/2009 $ 6,508 $ 8,988 $ 6,454
12/31/2009 $ 6,902 $ 9,162 $ 6,678
1/31/2010 $ 6,534 $ 8,832 $ 6,386
2/28/2010 $ 6,715 $ 9,106 $ 6,610
3/31/2010 $ 7,187 $ 9,656 $ 7,003
4/30/2010 $ 7,352 $ 9,808 $ 7,098
30 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +39.11%
5-Year +7.23%
10-Year -3.17%
CLASS C (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000
DATE FUND - CLASS C S&P 500 INDEX GROWTH INDEX
- ---- ----------------------------- ------------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,001 $ 9,795 $ 9,471
6/30/2000 $10,860 $10,036 $10,222
7/31/2000 $10,506 $ 9,879 $ 9,765
8/31/2000 $11,652 $10,493 $10,658
9/30/2000 $11,131 $ 9,939 $ 9,682
10/31/2000 $ 9,793 $ 9,897 $ 9,201
11/30/2000 $ 7,058 $ 9,117 $ 7,824
12/31/2000 $ 7,013 $ 9,161 $ 7,623
1/31/2001 $ 7,913 $ 9,486 $ 8,156
2/28/2001 $ 6,065 $ 8,621 $ 6,790
3/31/2001 $ 5,261 $ 8,075 $ 6,060
4/30/2001 $ 6,029 $ 8,703 $ 6,825
5/31/2001 $ 6,005 $ 8,761 $ 6,743
6/30/2001 $ 5,962 $ 8,548 $ 6,613
7/31/2001 $ 5,583 $ 8,464 $ 6,420
8/31/2001 $ 5,054 $ 7,934 $ 5,903
9/30/2001 $ 4,090 $ 7,293 $ 5,290
10/31/2001 $ 4,584 $ 7,432 $ 5,582
11/30/2001 $ 5,221 $ 8,002 $ 6,113
12/31/2001 $ 5,392 $ 8,072 $ 6,127
1/31/2002 $ 5,141 $ 7,955 $ 6,011
2/28/2002 $ 4,763 $ 7,801 $ 5,752
3/31/2002 $ 5,137 $ 8,095 $ 5,971
4/30/2002 $ 4,851 $ 7,604 $ 5,509
5/31/2002 $ 4,671 $ 7,548 $ 5,361
6/30/2002 $ 4,162 $ 7,010 $ 4,868
7/31/2002 $ 3,584 $ 6,464 $ 4,568
8/31/2002 $ 3,504 $ 6,506 $ 4,580
9/30/2002 $ 3,154 $ 5,799 $ 4,114
10/31/2002 $ 3,453 $ 6,310 $ 4,481
11/30/2002 $ 3,823 $ 6,681 $ 4,736
12/31/2002 $ 3,441 $ 6,288 $ 4,409
1/31/2003 $ 3,425 $ 6,124 $ 4,301
2/28/2003 $ 3,397 $ 6,032 $ 4,276
3/31/2003 $ 3,433 $ 6,090 $ 4,354
4/30/2003 $ 3,696 $ 6,592 $ 4,682
5/31/2003 $ 4,010 $ 6,939 $ 4,934
6/30/2003 $ 4,042 $ 7,028 $ 5,004
7/31/2003 $ 4,237 $ 7,152 $ 5,146
8/31/2003 $ 4,448 $ 7,291 $ 5,285
9/30/2003 $ 4,305 $ 7,214 $ 5,222
10/31/2003 $ 4,687 $ 7,622 $ 5,527
11/30/2003 $ 4,803 $ 7,689 $ 5,594
12/31/2003 $ 4,918 $ 8,092 $ 5,775
1/31/2004 $ 5,030 $ 8,241 $ 5,907
2/29/2004 $ 5,038 $ 8,355 $ 5,941
3/31/2004 $ 5,050 $ 8,229 $ 5,841
4/30/2004 $ 4,854 $ 8,100 $ 5,755
5/31/2004 $ 4,986 $ 8,211 $ 5,863
6/30/2004 $ 5,161 $ 8,371 $ 5,946
7/31/2004 $ 4,791 $ 8,094 $ 5,593
8/31/2004 $ 4,715 $ 8,127 $ 5,558
9/30/2004 $ 4,990 $ 8,215 $ 5,631
10/31/2004 $ 5,145 $ 8,340 $ 5,723
11/30/2004 $ 5,504 $ 8,678 $ 5,944
12/31/2004 $ 5,731 $ 8,973 $ 6,175
1/31/2005 $ 5,516 $ 8,754 $ 5,963
2/28/2005 $ 5,512 $ 8,938 $ 6,028
3/31/2005 $ 5,356 $ 8,780 $ 5,908
4/30/2005 $ 5,113 $ 8,614 $ 5,773
5/31/2005 $ 5,448 $ 8,888 $ 6,063
6/30/2005 $ 5,520 $ 8,900 $ 6,059
7/31/2005 $ 5,818 $ 9,231 $ 6,366
8/31/2005 $ 5,782 $ 9,147 $ 6,283
9/30/2005 $ 5,898 $ 9,221 $ 6,314
10/31/2005 $ 5,898 $ 9,067 $ 6,237
11/30/2005 $ 6,288 $ 9,410 $ 6,514
12/31/2005 $ 6,320 $ 9,414 $ 6,494
1/31/2006 $ 6,754 $ 9,663 $ 6,653
2/28/2006 $ 6,786 $ 9,689 $ 6,640
3/31/2006 $ 7,001 $ 9,810 $ 6,759
4/30/2006 $ 6,965 $ 9,941 $ 6,749
5/31/2006 $ 6,420 $ 9,655 $ 6,496
6/30/2006 $ 6,491 $ 9,668 $ 6,473
7/31/2006 $ 6,189 $ 9,728 $ 6,331
8/31/2006 $ 6,240 $ 9,959 $ 6,528
9/30/2006 $ 6,388 $10,216 $ 6,696
10/31/2006 $ 6,531 $10,549 $ 6,948
11/30/2006 $ 6,750 $10,750 $ 7,088
12/31/2006 $ 6,698 $10,900 $ 7,108
1/31/2007 $ 6,862 $11,065 $ 7,287
2/28/2007 $ 6,754 $10,849 $ 7,159
3/31/2007 $ 6,858 $10,970 $ 7,200
4/30/2007 $ 7,013 $11,456 $ 7,527
5/31/2007 $ 7,256 $11,856 $ 7,803
6/30/2007 $ 7,300 $11,659 $ 7,693
7/31/2007 $ 7,292 $11,297 $ 7,549
8/31/2007 $ 7,523 $11,467 $ 7,676
9/30/2007 $ 8,259 $11,896 $ 7,989
10/31/2007 $ 8,725 $12,085 $ 8,268
11/30/2007 $ 8,040 $11,580 $ 7,941
12/31/2007 $ 8,044 $11,499 $ 7,919
1/31/2008 $ 7,136 $10,810 $ 7,292
2/29/2008 $ 6,842 $10,458 $ 7,139
3/31/2008 $ 6,822 $10,413 $ 7,096
4/30/2008 $ 7,531 $10,920 $ 7,468
5/31/2008 $ 8,016 $11,062 $ 7,753
6/30/2008 $ 7,423 $10,129 $ 7,202
7/31/2008 $ 7,200 $10,044 $ 7,088
8/31/2008 $ 7,172 $10,189 $ 7,172
9/30/2008 $ 6,073 $ 9,281 $ 6,343
10/31/2008 $ 5,133 $ 7,723 $ 5,206
11/30/2008 $ 4,683 $ 7,169 $ 4,776
12/31/2008 $ 4,783 $ 7,245 $ 4,874
1/31/2009 $ 4,663 $ 6,634 $ 4,630
2/28/2009 $ 4,309 $ 5,928 $ 4,272
3/31/2009 $ 4,699 $ 6,447 $ 4,653
4/30/2009 $ 5,173 $ 7,064 $ 5,118
5/31/2009 $ 5,408 $ 7,459 $ 5,368
6/30/2009 $ 5,456 $ 7,474 $ 5,436
7/31/2009 $ 5,818 $ 8,039 $ 5,825
8/31/2009 $ 5,922 $ 8,330 $ 5,941
9/30/2009 $ 6,316 $ 8,640 $ 6,204
10/31/2009 $ 6,117 $ 8,480 $ 6,093
11/30/2009 $ 6,435 $ 8,988 $ 6,454
12/31/2009 $ 6,822 $ 9,162 $ 6,678
1/31/2010 $ 6,451 $ 8,832 $ 6,386
2/28/2010 $ 6,627 $ 9,106 $ 6,610
3/31/2010 $ 7,089 $ 9,656 $ 7,003
4/30/2010 $ 7,248 $ 9,808 $ 7,098
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/10
- ------- -------
1-Year +40.82%
5-Year +7.77%
Since Inception (1/1/02) +4.13%
CLASS R (1/1/02-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES S&P 500 RUSSELL 3000 GROWTH
DATE FUND - CLASS R INDEX INDEX
- ---- ----------------------------- ------- -------------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,535 $ 9,854 $ 9,811
2/28/2002 $ 8,837 $ 9,664 $ 9,389
3/31/2002 $ 9,535 $10,027 $ 9,746
4/30/2002 $ 8,997 $ 9,420 $ 8,991
5/31/2002 $ 8,677 $ 9,350 $ 8,750
6/30/2002 $ 7,731 $ 8,684 $ 7,946
7/31/2002 $ 6,655 $ 8,007 $ 7,455
8/31/2002 $ 6,509 $ 8,060 $ 7,476
9/30/2002 $ 5,862 $ 7,184 $ 6,715
10/31/2002 $ 6,415 $ 7,816 $ 7,313
11/30/2002 $ 7,113 $ 8,276 $ 7,730
12/31/2002 $ 6,408 $ 7,790 $ 7,196
1/31/2003 $ 6,378 $ 7,586 $ 7,021
2/28/2003 $ 6,320 $ 7,472 $ 6,978
3/31/2003 $ 6,393 $ 7,545 $ 7,107
4/30/2003 $ 6,888 $ 8,166 $ 7,641
5/31/2003 $ 7,477 $ 8,596 $ 8,053
6/30/2003 $ 7,542 $ 8,706 $ 8,167
7/31/2003 $ 7,906 $ 8,859 $ 8,399
8/31/2003 $ 8,299 $ 9,032 $ 8,625
9/30/2003 $ 8,037 $ 8,936 $ 8,524
10/31/2003 $ 8,757 $ 9,442 $ 9,021
11/30/2003 $ 8,975 $ 9,525 $ 9,131
12/31/2003 $ 9,200 $10,024 $ 9,425
1/31/2004 $ 9,411 $10,208 $ 9,641
2/29/2004 $ 9,426 $10,350 $ 9,696
3/31/2004 $ 9,455 $10,194 $ 9,533
4/30/2004 $ 9,099 $10,034 $ 9,394
5/31/2004 $ 9,346 $10,172 $ 9,570
6/30/2004 $ 9,673 $10,370 $ 9,704
7/31/2004 $ 8,982 $10,026 $ 9,129
8/31/2004 $ 8,844 $10,067 $ 9,072
9/30/2004 $ 9,360 $10,176 $ 9,191
10/31/2004 $ 9,659 $10,332 $ 9,341
11/30/2004 $10,335 $10,750 $ 9,701
12/31/2004 $10,771 $11,115 $10,078
1/31/2005 $10,371 $10,844 $ 9,732
2/28/2005 $10,364 $11,073 $ 9,838
3/31/2005 $10,080 $10,877 $ 9,642
4/30/2005 $ 9,630 $10,670 $ 9,422
5/31/2005 $10,262 $11,010 $ 9,895
6/30/2005 $10,400 $11,025 $ 9,888
7/31/2005 $10,968 $11,435 $10,390
8/31/2005 $10,902 $11,331 $10,255
9/30/2005 $11,128 $11,423 $10,305
10/31/2005 $11,135 $11,232 $10,180
11/30/2005 $11,870 $11,657 $10,631
12/31/2005 $11,942 $11,661 $10,599
1/31/2006 $12,757 $11,970 $10,858
2/28/2006 $12,830 $12,003 $10,837
3/31/2006 $13,237 $12,152 $11,031
4/30/2006 $13,179 $12,315 $11,014
5/31/2006 $12,146 $11,961 $10,603
6/30/2006 $12,291 $11,977 $10,565
7/31/2006 $11,724 $12,051 $10,334
8/31/2006 $11,819 $12,338 $10,654
9/30/2006 $12,110 $12,655 $10,929
10/31/2006 $12,386 $13,068 $11,339
11/30/2006 $12,808 $13,316 $11,568
12/31/2006 $12,713 $13,503 $11,602
1/31/2007 $13,033 $13,707 $11,893
2/28/2007 $12,830 $13,439 $11,685
3/31/2007 $13,026 $13,590 $11,752
4/30/2007 $13,332 $14,192 $12,285
5/31/2007 $13,797 $14,687 $12,736
6/30/2007 $13,884 $14,443 $12,556
7/31/2007 $13,877 $13,995 $12,322
8/31/2007 $14,321 $14,205 $12,527
9/30/2007 $15,732 $14,736 $13,039
10/31/2007 $16,626 $14,970 $13,494
11/30/2007 $15,332 $14,345 $12,961
12/31/2007 $15,346 $14,245 $12,924
1/31/2008 $13,615 $13,391 $11,902
2/29/2008 $13,062 $12,956 $11,652
3/31/2008 $13,026 $12,900 $11,581
4/30/2008 $14,401 $13,528 $12,188
5/31/2008 $15,339 $13,703 $12,654
6/30/2008 $14,204 $12,548 $11,755
7/31/2008 $13,790 $12,442 $11,568
8/31/2008 $13,739 $12,622 $11,705
9/30/2008 $11,637 $11,498 $10,352
10/31/2008 $ 9,840 $ 9,567 $ 8,496
11/30/2008 $ 8,982 $ 8,880 $ 7,795
12/31/2008 $ 9,179 $ 8,975 $ 7,956
1/31/2009 $ 8,953 $ 8,218 $ 7,556
2/28/2009 $ 8,277 $ 7,343 $ 6,973
3/31/2009 $ 9,026 $ 7,986 $ 7,595
4/30/2009 $ 9,942 $ 8,751 $ 8,353
5/31/2009 $10,400 $ 9,240 $ 8,761
6/30/2009 $10,488 $ 9,259 $ 8,872
7/31/2009 $11,193 $ 9,959 $ 9,507
8/31/2009 $11,397 $10,318 $ 9,696
9/30/2009 $12,161 $10,703 $10,125
10/31/2009 $11,782 $10,505 $ 9,945
11/30/2009 $12,401 $11,135 $10,533
12/31/2009 $13,150 $11,350 $10,900
1/31/2010 $12,444 $10,941 $10,423
2/28/2010 $12,786 $11,280 $10,789
3/31/2010 $13,688 $11,961 $11,431
4/30/2010 $14,000 $12,150 $11,585
Annual Report | 31
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/10
- ------------- -------
1-Year +41.54%
5-Year +8.31%
10-Year -2.21%
ADVISOR CLASS (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH OPPORTUNITIES RUSSELL 3000
DATE FUND - ADVISOR CLASS S&P 500 INDEX GROWTH INDEX
- ---- ----------------------------- ------------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,004 $ 9,795 $ 9,471
6/30/2000 $10,877 $10,036 $10,222
7/31/2000 $10,525 $ 9,879 $ 9,765
8/31/2000 $11,687 $10,493 $10,658
9/30/2000 $11,173 $ 9,939 $ 9,682
10/31/2000 $ 9,838 $ 9,897 $ 9,201
11/30/2000 $ 7,100 $ 9,117 $ 7,824
12/31/2000 $ 7,055 $ 9,161 $ 7,623
1/31/2001 $ 7,968 $ 9,486 $ 8,156
2/28/2001 $ 6,110 $ 8,621 $ 6,790
3/31/2001 $ 5,304 $ 8,075 $ 6,060
4/30/2001 $ 6,087 $ 8,703 $ 6,825
5/31/2001 $ 6,067 $ 8,761 $ 6,743
6/30/2001 $ 6,027 $ 8,548 $ 6,613
7/31/2001 $ 5,652 $ 8,464 $ 6,420
8/31/2001 $ 5,118 $ 7,934 $ 5,903
9/30/2001 $ 4,146 $ 7,293 $ 5,290
10/31/2001 $ 4,648 $ 7,432 $ 5,582
11/30/2001 $ 5,300 $ 8,002 $ 6,113
12/31/2001 $ 5,478 $ 8,072 $ 6,127
1/31/2002 $ 5,225 $ 7,955 $ 6,011
2/28/2002 $ 4,846 $ 7,801 $ 5,752
3/31/2002 $ 5,233 $ 8,095 $ 5,971
4/30/2002 $ 4,941 $ 7,604 $ 5,509
5/31/2002 $ 4,763 $ 7,548 $ 5,361
6/30/2002 $ 4,245 $ 7,010 $ 4,868
7/31/2002 $ 3,660 $ 6,464 $ 4,568
8/31/2002 $ 3,581 $ 6,506 $ 4,580
9/30/2002 $ 3,225 $ 5,799 $ 4,114
10/31/2002 $ 3,533 $ 6,310 $ 4,481
11/30/2002 $ 3,917 $ 6,681 $ 4,736
12/31/2002 $ 3,530 $ 6,288 $ 4,409
1/31/2003 $ 3,518 $ 6,124 $ 4,301
2/28/2003 $ 3,486 $ 6,032 $ 4,276
3/31/2003 $ 3,530 $ 6,090 $ 4,354
4/30/2003 $ 3,802 $ 6,592 $ 4,682
5/31/2003 $ 4,130 $ 6,939 $ 4,934
6/30/2003 $ 4,166 $ 7,028 $ 5,004
7/31/2003 $ 4,371 $ 7,152 $ 5,146
8/31/2003 $ 4,589 $ 7,291 $ 5,285
9/30/2003 $ 4,447 $ 7,214 $ 5,222
10/31/2003 $ 4,846 $ 7,622 $ 5,527
11/30/2003 $ 4,972 $ 7,689 $ 5,594
12/31/2003 $ 5,095 $ 8,092 $ 5,775
1/31/2004 $ 5,213 $ 8,241 $ 5,907
2/29/2004 $ 5,225 $ 8,355 $ 5,941
3/31/2004 $ 5,245 $ 8,229 $ 5,841
4/30/2004 $ 5,047 $ 8,100 $ 5,755
5/31/2004 $ 5,186 $ 8,211 $ 5,863
6/30/2004 $ 5,371 $ 8,371 $ 5,946
7/31/2004 $ 4,992 $ 8,094 $ 5,593
8/31/2004 $ 4,917 $ 8,127 $ 5,558
9/30/2004 $ 5,205 $ 8,215 $ 5,631
10/31/2004 $ 5,375 $ 8,340 $ 5,723
11/30/2004 $ 5,751 $ 8,678 $ 5,944
12/31/2004 $ 5,996 $ 8,973 $ 6,175
1/31/2005 $ 5,775 $ 8,754 $ 5,963
2/28/2005 $ 5,778 $ 8,938 $ 6,028
3/31/2005 $ 5,616 $ 8,780 $ 5,908
4/30/2005 $ 5,367 $ 8,614 $ 5,773
5/31/2005 $ 5,723 $ 8,888 $ 6,063
6/30/2005 $ 5,806 $ 8,900 $ 6,059
7/31/2005 $ 6,126 $ 9,231 $ 6,366
8/31/2005 $ 6,091 $ 9,147 $ 6,283
9/30/2005 $ 6,217 $ 9,221 $ 6,314
10/31/2005 $ 6,221 $ 9,067 $ 6,237
11/30/2005 $ 6,640 $ 9,410 $ 6,514
12/31/2005 $ 6,680 $ 9,414 $ 6,494
1/31/2006 $ 7,142 $ 9,663 $ 6,653
2/28/2006 $ 7,186 $ 9,689 $ 6,640
3/31/2006 $ 7,415 $ 9,810 $ 6,759
4/30/2006 $ 7,383 $ 9,941 $ 6,749
5/31/2006 $ 6,810 $ 9,655 $ 6,496
6/30/2006 $ 6,893 $ 9,668 $ 6,473
7/31/2006 $ 6,577 $ 9,728 $ 6,331
8/31/2006 $ 6,636 $ 9,959 $ 6,528
9/30/2006 $ 6,802 $10,216 $ 6,696
10/31/2006 $ 6,960 $10,549 $ 6,948
11/30/2006 $ 7,197 $10,750 $ 7,088
12/31/2006 $ 7,150 $10,900 $ 7,108
1/31/2007 $ 7,332 $11,065 $ 7,287
2/28/2007 $ 7,217 $10,849 $ 7,159
3/31/2007 $ 7,336 $10,970 $ 7,200
4/30/2007 $ 7,506 $11,456 $ 7,527
5/31/2007 $ 7,774 $11,856 $ 7,803
6/30/2007 $ 7,830 $11,659 $ 7,693
7/31/2007 $ 7,826 $11,297 $ 7,549
8/31/2007 $ 8,083 $11,467 $ 7,676
9/30/2007 $ 8,877 $11,896 $ 7,989
10/31/2007 $ 9,387 $12,085 $ 8,268
11/30/2007 $ 8,660 $11,580 $ 7,941
12/31/2007 $ 8,672 $11,499 $ 7,919
1/31/2008 $ 7,699 $10,810 $ 7,292
2/29/2008 $ 7,387 $10,458 $ 7,139
3/31/2008 $ 7,371 $10,413 $ 7,096
4/30/2008 $ 8,142 $10,920 $ 7,468
5/31/2008 $ 8,676 $11,062 $ 7,753
6/30/2008 $ 8,039 $10,129 $ 7,202
7/31/2008 $ 7,806 $10,044 $ 7,088
8/31/2008 $ 7,782 $10,189 $ 7,172
9/30/2008 $ 6,597 $ 9,281 $ 6,343
10/31/2008 $ 5,585 $ 7,723 $ 5,206
11/30/2008 $ 5,099 $ 7,169 $ 4,776
12/31/2008 $ 5,213 $ 7,245 $ 4,874
1/31/2009 $ 5,087 $ 6,634 $ 4,630
2/28/2009 $ 4,703 $ 5,928 $ 4,272
3/31/2009 $ 5,130 $ 6,447 $ 4,653
4/30/2009 $ 5,656 $ 7,064 $ 5,118
5/31/2009 $ 5,917 $ 7,459 $ 5,368
6/30/2009 $ 5,972 $ 7,474 $ 5,436
7/31/2009 $ 6,375 $ 8,039 $ 5,825
8/31/2009 $ 6,494 $ 8,330 $ 5,941
9/30/2009 $ 6,929 $ 8,640 $ 6,204
10/31/2009 $ 6,719 $ 8,480 $ 6,093
11/30/2009 $ 7,075 $ 8,988 $ 6,454
12/31/2009 $ 7,502 $ 9,162 $ 6,678
1/31/2010 $ 7,103 $ 8,832 $ 6,386
2/28/2010 $ 7,300 $ 9,106 $ 6,610
3/31/2010 $ 7,818 $ 9,656 $ 7,003
4/30/2010 $ 8,000 $ 9,808 $ 7,098
ENDNOTES
THE FUND MAY BE MORE VOLATILE THAN A MORE CONSERVATIVE EQUITY FUND AND MAY BE
BEST SUITED FOR LONG-TERM INVESTORS. THE FUND'S INVESTMENTS IN SMALLER AND
MIDSIZED COMPANY STOCKS INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALLER
REVENUES, LIMITED PRODUCT LINES AND SMALLER MARKET SHARE. SMALLER AND MIDSIZED
COMPANY STOCKS HISTORICALLY HAVE EXHIBITED GREATER PRICE VOLATILITY THAN LARGER
COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. THE FUND'S PORTFOLIO INCLUDES
TECHNOLOGY STOCKS, A SECTOR 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.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The Russell 3000 Growth Index is market
capitalization weighted and measures performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted
growth values.
32 | Annual Report
Your Fund's Expenses
FRANKLIN GROWTH OPPORTUNITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 33
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
EXPENSES PAID
BEGINNING ACCOUNT ENDING ACCOUNT DURING PERIOD*
VALUE 11/1/09 VALUE 4/30/10 ACTUAL 11/1/09-4/30/10
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $1,189.40 $ 6.73
Hypothetical (5% return before expenses) $1,000 $1,018.65 $ 6.21
CLASS B
Actual $1,000 $1,185.10 $10.35
Hypothetical (5% return before expenses) $1,000 $1,015.32 $ 9.54
CLASS C
Actual $1,000 $1,184.90 $10.46
Hypothetical (5% return before expenses) $1,000 $1,015.22 $ 9.64
CLASS R
Actual $1,000 $1,188.30 $ 7.76
Hypothetical (5% return before expenses) $1,000 $1,017.70 $ 7.15
ADVISOR CLASS
Actual $1,000 $1,190.60 $ 5.05
Hypothetical (5% return before expenses) $1,000 $1,020.18 $ 4.66
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.24%; B: 1.91%; C:
1.93%; R: 1.43%; and Advisor: 0.93%), multiplied by the average account
value over the period, multiplied by 181/365 to reflect the one-half year
period.
34 | Annual Report
Franklin Small Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Growth Fund seeks
long-term capital growth by normally investing at least 80% of its net assets in
equity securities of small-capitalization companies, which for this Fund are
those 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)
We are pleased to bring you Franklin Small Cap Growth Fund's annual report for
the fiscal year ended April 30, 2010.
PERFORMANCE OVERVIEW
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.
For the 12 months under review, Franklin Small Cap Growth Fund - Class A
delivered a +56.32% cumulative total return. The Fund outperformed its narrow
benchmark, the Russell 2000 Growth Index, which generated a +45.20% total
return, and outperformed its broad benchmark, the Standard & Poor's 500 Index
(S&P 500), which posted a +38.84% total return for the same period.(2) You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 38.
INVESTMENT STRATEGY
We 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 a small amount of the total market capitalization of the
Russell 3000 Index.
(2.) Source: (C) 2010 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 is a market capitalization-weighted index of 500 stocks designed to
measure total U.S. equity market 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 83.
Annual Report | 35
PORTFOLIO BREAKDOWN
Franklin Small Cap Growth Fund
Based on Total Net Assets as of 4/30/10
(BAR CHART)
Information Technology* 31.6%
Health Care 17.9%
Consumer Discretionary 15.5%
Industrials 10.6%
Financials 8.5%
Energy 5.3%
Consumer Staples 3.2%
Telecommunication Services 1.2%
Materials 0.8%
Short-Term Investments & Other Net Assets 5.4%
* 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 year under review, all sectors provided positive contributions to the
Fund's total return, as did the majority of individual securities held within
the portfolio. Some of the largest contributors to the Fund's outperformance
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 major positive impact on relative Fund
performance as each sector outperformed the same sector in the benchmark index.
Also supporting Fund results was an overweighting in the information technology
sector, where technology consulting services provider Sapient and PC storage
systems designer Xyratex(3) were key contributors. Notable performers in the
consumer discretionary sector were vending specialist Coinstar, whose core
business is its more than 18,000 coin-counting machines installed across the
U.S. and Canada; and FGX International Holdings, which designs and markets
non-prescription reading glasses, sunglasses and costume jewelry in 15 countries
and 57,000 retail locations. Top contributors from the financials sector
included hotel real estate investment trust FelCor Lodging Trust(3) and
RiskMetrics Group, which provides risk management services to banks,
corporations, asset managers and other institutional investors. We sold the
Fund's positions in Xyratex, FGX International and RiskMetrics Group by
period-end.
In contrast, Huron Consulting Group, FTI Consulting(3) and Allegiant Travel were
some of 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
(3.) This holding is not an index component.
36 | Annual Report
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, consumer staples and materials sectors
constrained relative Fund performance. In the consumer staples sector, beverages
company Hansen Natural(3) and The Hain Celestial Group, which sells a wide range
of natural specialty foods, beverages and personal care products, weighed on
relative results. Some holdings within the health care sector also hindered the
Fund's results versus the benchmark index, including Cadence Pharmaceuticals and
molecular diagnostic test designer Myriad Genetics. In addition, our
underweighting of the materials sector did not allow the Fund to fully benefit
from the sector's robust rally.
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
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Small Cap Growth Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Bottomline Technologies Inc.
INFORMATION TECHNOLOGY 1.8%
Polycom Inc.
INFORMATION TECHNOLOGY 1.7%
Ixia
INFORMATION TECHNOLOGY 1.7%
PAREXEL International Corp.
HEALTH CARE 1.6%
FARO Technologies Inc.
INFORMATION TECHNOLOGY 1.5%
Phase Forward Inc.
HEALTH CARE 1.5%
Silicon Laboratories Inc.
INFORMATION TECHNOLOGY 1.5%
Sapient Corp.
INFORMATION TECHNOLOGY 1.4%
Clean Harbors Inc.
INDUSTRIALS 1.4%
Coinstar Inc.
CONSUMER DISCRETIONARY 1.4%
Annual Report | 37
Performance Summary as of 4/30/10
FRANKLIN SMALL CAP GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FSGRX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.61 $10.02 $6.41
CLASS B (SYMBOL: FBSGX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.24 $9.13 $5.89
CLASS C (SYMBOL: FCSGX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.26 $9.15 $5.89
CLASS R (SYMBOL: FSSRX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.51 $9.77 $6.26
ADVISOR CLASS (SYMBOL: FSSAX) CHANGE 4/30/10 4/30/09
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$3.76 $10.39 $6.63
38 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------------------
Cumulative Total Return(1) +56.32% +29.58% +37.74%
Average Annual Total Return(2) +47.35% +4.08% +2.64%
Value of $10,000 Investment(3) $14,735 $12,211 $12,982
Avg. Ann. Total Return (3/31/10)(4) +60.37% +1.68% +2.13%
Total Annual Operating Expenses(5) 1.36%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------------------
Cumulative Total Return(1) +55.01% +24.82% +30.05%
Average Annual Total Return(2) +51.01% +4.23% +2.66%
Value of $10,000 Investment(3) $15,101 $12,304 $13,005
Avg. Ann. Total Return (3/31/10)(4) +65.01% +1.81% +2.15%
Total Annual Operating Expenses(5) 2.06%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------------------
Cumulative Total Return(1) +55.35% +24.94% +28.31%
Average Annual Total Return(2) +54.35% +4.55% +2.53%
Value of $10,000 Investment(3) $15,435 $12,494 $12,831
Avg. Ann. Total Return (3/31/10)(4) +68.07% +2.13% +2.01%
Total Annual Operating Expenses(5) 2.06%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------------------
Cumulative Total Return(1) +56.07% +28.10% +36.66%
Average Annual Total Return(2) +56.07% +5.08% +3.82%
Value of $10,000 Investment(3) $15,607 $12,810 $13,666
Avg. Ann. Total Return (3/31/10)(4) +69.96% +2.65% +3.22%
Total Annual Operating Expenses(5) 1.56%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- ------------------
Cumulative Total Return(1) +56.71% +31.34% +41.71%
Average Annual Total Return(2) +56.71% +5.60% +3.55%
Value of $10,000 Investment(3) $15,671 $13,134 $14,171
Avg. Ann. Total Return (3/31/10)(4) +70.59% +3.14% +3.03%
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, GO TO
franklintempleton.com OR CALL (800) 342-5236.
Annual Report | 39
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +47.35%
5-Year +4.08%
10-Year +2.64%
CLASS A (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS A INDEX GROWTH INDEX
- ---- --------------------- ------- ------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $ 8,982 $ 9,795 $ 9,124
6/30/2000 $11,178 $10,036 $10,303
7/31/2000 $10,688 $ 9,879 $ 9,420
8/31/2000 $12,318 $10,493 $10,411
9/30/2000 $11,744 $ 9,939 $ 9,894
10/31/2000 $11,008 $ 9,897 $ 9,091
11/30/2000 $ 9,048 $ 9,117 $ 7,440
12/31/2000 $ 9,623 $ 9,161 $ 7,895
1/31/2001 $10,707 $ 9,486 $ 8,534
2/28/2001 $ 9,161 $ 8,621 $ 7,365
3/31/2001 $ 8,539 $ 8,075 $ 6,695
4/30/2001 $ 9,679 $ 8,703 $ 7,515
5/31/2001 $ 9,623 $ 8,761 $ 7,689
6/30/2001 $ 9,906 $ 8,548 $ 7,898
7/31/2001 $ 9,444 $ 8,464 $ 7,225
8/31/2001 $ 8,954 $ 7,934 $ 6,773
9/30/2001 $ 7,333 $ 7,293 $ 5,680
10/31/2001 $ 8,096 $ 7,432 $ 6,227
11/30/2001 $ 8,822 $ 8,002 $ 6,747
12/31/2001 $ 9,302 $ 8,072 $ 7,167
1/31/2002 $ 9,161 $ 7,955 $ 6,912
2/28/2002 $ 8,775 $ 7,801 $ 6,464
3/31/2002 $ 9,510 $ 8,095 $ 7,026
4/30/2002 $ 9,227 $ 7,604 $ 6,874
5/31/2002 $ 8,803 $ 7,548 $ 6,472
6/30/2002 $ 8,096 $ 7,010 $ 5,923
7/31/2002 $ 6,814 $ 6,464 $ 5,013
8/31/2002 $ 6,795 $ 6,506 $ 5,011
9/30/2002 $ 6,013 $ 5,799 $ 4,649
10/31/2002 $ 6,579 $ 6,310 $ 4,884
11/30/2002 $ 7,220 $ 6,681 $ 5,368
12/31/2002 $ 6,767 $ 6,288 $ 4,998
1/31/2003 $ 6,692 $ 6,124 $ 4,862
2/28/2003 $ 6,550 $ 6,032 $ 4,733
3/31/2003 $ 6,428 $ 6,090 $ 4,804
4/30/2003 $ 7,031 $ 6,592 $ 5,259
5/31/2003 $ 7,728 $ 6,939 $ 5,851
6/30/2003 $ 7,851 $ 7,028 $ 5,964
7/31/2003 $ 8,237 $ 7,152 $ 6,415
8/31/2003 $ 9,048 $ 7,291 $ 6,760
9/30/2003 $ 8,577 $ 7,214 $ 6,589
10/31/2003 $ 9,595 $ 7,622 $ 7,158
11/30/2003 $ 9,953 $ 7,689 $ 7,391
12/31/2003 $10,047 $ 8,092 $ 7,424
1/31/2004 $10,415 $ 8,241 $ 7,814
2/29/2004 $10,358 $ 8,355 $ 7,802
3/31/2004 $10,320 $ 8,229 $ 7,839
4/30/2004 $ 9,943 $ 8,100 $ 7,445
5/31/2004 $10,236 $ 8,211 $ 7,593
6/30/2004 $10,622 $ 8,371 $ 7,846
7/31/2004 $ 9,774 $ 8,094 $ 7,142
8/31/2004 $ 9,548 $ 8,127 $ 6,988
9/30/2004 $10,056 $ 8,215 $ 7,374
10/31/2004 $10,207 $ 8,340 $ 7,553
11/30/2004 $10,782 $ 8,678 $ 8,192
12/31/2004 $11,159 $ 8,973 $ 8,486
1/31/2005 $10,707 $ 8,754 $ 8,104
2/28/2005 $10,999 $ 8,938 $ 8,215
3/31/2005 $10,688 $ 8,780 $ 7,907
4/30/2005 $10,019 $ 8,614 $ 7,404
5/31/2005 $10,669 $ 8,888 $ 7,926
6/30/2005 $11,018 $ 8,900 $ 8,182
7/31/2005 $11,640 $ 9,231 $ 8,754
8/31/2005 $11,404 $ 9,147 $ 8,631
9/30/2005 $11,508 $ 9,221 $ 8,699
10/31/2005 $10,971 $ 9,067 $ 8,378
11/30/2005 $11,762 $ 9,410 $ 8,852
12/31/2005 $11,659 $ 9,414 $ 8,839
1/31/2006 $12,592 $ 9,663 $ 9,691
2/28/2006 $12,743 $ 9,689 $ 9,640
3/31/2006 $13,148 $ 9,810 $10,108
4/30/2006 $13,101 $ 9,941 $10,079
5/31/2006 $12,224 $ 9,655 $ 9,370
6/30/2006 $12,205 $ 9,668 $ 9,375
7/31/2006 $11,480 $ 9,728 $ 8,888
8/31/2006 $11,772 $ 9,959 $ 9,149
9/30/2006 $11,744 $10,216 $ 9,211
10/31/2006 $12,356 $10,549 $ 9,807
11/30/2006 $12,771 $10,750 $10,042
12/31/2006 $12,761 $10,900 $10,018
1/31/2007 $13,106 $11,065 $10,205
2/28/2007 $13,263 $10,849 $10,172
3/31/2007 $13,315 $10,970 $10,266
4/30/2007 $13,628 $11,456 $10,535
5/31/2007 $14,161 $11,856 $11,015
6/30/2007 $14,025 $11,659 $10,953
7/31/2007 $13,263 $11,297 $10,384
8/31/2007 $13,492 $11,467 $10,645
9/30/2007 $13,868 $11,896 $10,955
10/31/2007 $14,463 $12,085 $11,448
11/30/2007 $13,263 $11,580 $10,657
12/31/2007 $13,181 $11,499 $10,724
1/31/2008 $11,736 $10,810 $ 9,740
2/29/2008 $11,225 $10,458 $ 9,403
3/31/2008 $10,918 $10,413 $ 9,348
4/30/2008 $11,621 $10,920 $ 9,829
5/31/2008 $12,311 $11,062 $10,386
6/30/2008 $11,276 $10,129 $ 9,766
7/31/2008 $11,237 $10,044 $ 9,994
8/31/2008 $11,749 $10,189 $10,242
9/30/2008 $10,394 $ 9,281 $ 9,084
10/31/2008 $ 8,335 $ 7,723 $ 7,113
11/30/2008 $ 7,428 $ 7,169 $ 6,252
12/31/2008 $ 7,761 $ 7,245 $ 6,591
1/31/2009 $ 7,191 $ 6,634 $ 6,090
2/28/2009 $ 6,491 $ 5,928 $ 5,459
3/31/2009 $ 7,242 $ 6,447 $ 5,949
4/30/2009 $ 8,305 $ 7,064 $ 6,844
5/31/2009 $ 8,719 $ 7,459 $ 7,109
6/30/2009 $ 9,108 $ 7,474 $ 7,340
7/31/2009 $ 9,859 $ 8,039 $ 7,909
8/31/2009 $ 9,950 $ 8,330 $ 7,986
9/30/2009 $10,572 $ 8,640 $ 8,511
10/31/2009 $ 9,963 $ 8,480 $ 7,919
11/30/2009 $10,365 $ 8,988 $ 8,164
12/31/2009 $11,285 $ 9,162 $ 8,863
1/31/2010 $10,896 $ 8,832 $ 8,467
2/28/2010 $11,285 $ 9,106 $ 8,836
3/31/2010 $12,321 $ 9,656 $ 9,538
4/30/2010 $12,982 $ 9,808 $ 9,938
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/10
- ------- -------
1-Year +51.01%
5-Year +4.23%
10-Year +2.66%
CLASS B (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS B INDEX GROWTH INDEX
- ---- --------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,850 $10,036 $10,303
7/31/2000 $11,330 $ 9,879 $ 9,420
8/31/2000 $13,040 $10,493 $10,411
9/30/2000 $12,430 $ 9,939 $ 9,894
10/31/2000 $11,640 $ 9,897 $ 9,091
11/30/2000 $ 9,570 $ 9,117 $ 7,440
12/31/2000 $10,170 $ 9,161 $ 7,895
1/31/2001 $11,300 $ 9,486 $ 8,534
2/28/2001 $ 9,670 $ 8,621 $ 7,365
3/31/2001 $ 9,010 $ 8,075 $ 6,695
4/30/2001 $10,200 $ 8,703 $ 7,515
5/31/2001 $10,140 $ 8,761 $ 7,689
6/30/2001 $10,430 $ 8,548 $ 7,898
7/31/2001 $ 9,940 $ 8,464 $ 7,225
8/31/2001 $ 9,420 $ 7,934 $ 6,773
9/30/2001 $ 7,710 $ 7,293 $ 5,680
10/31/2001 $ 8,510 $ 7,432 $ 6,227
11/30/2001 $ 9,270 $ 8,002 $ 6,747
12/31/2001 $ 9,760 $ 8,072 $ 7,167
1/31/2002 $ 9,610 $ 7,955 $ 6,912
2/28/2002 $ 9,200 $ 7,801 $ 6,464
3/31/2002 $ 9,970 $ 8,095 $ 7,026
4/30/2002 $ 9,660 $ 7,604 $ 6,874
5/31/2002 $ 9,220 $ 7,548 $ 6,472
6/30/2002 $ 8,470 $ 7,010 $ 5,923
7/31/2002 $ 7,130 $ 6,464 $ 5,013
8/31/2002 $ 7,100 $ 6,506 $ 5,011
9/30/2002 $ 6,280 $ 5,799 $ 4,649
10/31/2002 $ 6,870 $ 6,310 $ 4,884
11/30/2002 $ 7,540 $ 6,681 $ 5,368
12/31/2002 $ 7,060 $ 6,288 $ 4,998
1/31/2003 $ 6,980 $ 6,124 $ 4,862
2/28/2003 $ 6,830 $ 6,032 $ 4,733
3/31/2003 $ 6,690 $ 6,090 $ 4,804
4/30/2003 $ 7,330 $ 6,592 $ 5,259
5/31/2003 $ 8,040 $ 6,939 $ 5,851
6/30/2003 $ 8,160 $ 7,028 $ 5,964
7/31/2003 $ 8,560 $ 7,152 $ 6,415
8/31/2003 $ 9,400 $ 7,291 $ 6,760
9/30/2003 $ 8,900 $ 7,214 $ 6,589
10/31/2003 $ 9,950 $ 7,622 $ 7,158
11/30/2003 $10,320 $ 7,689 $ 7,391
12/31/2003 $10,410 $ 8,092 $ 7,424
1/31/2004 $10,780 $ 8,241 $ 7,814
2/29/2004 $10,710 $ 8,355 $ 7,802
3/31/2004 $10,670 $ 8,229 $ 7,839
4/30/2004 $10,270 $ 8,100 $ 7,445
5/31/2004 $10,560 $ 8,211 $ 7,593
6/30/2004 $10,960 $ 8,371 $ 7,846
7/31/2004 $10,070 $ 8,094 $ 7,142
8/31/2004 $ 9,840 $ 8,127 $ 6,988
9/30/2004 $10,350 $ 8,215 $ 7,374
10/31/2004 $10,500 $ 8,340 $ 7,553
11/30/2004 $11,090 $ 8,678 $ 8,192
12/31/2004 $11,470 $ 8,973 $ 8,486
1/31/2005 $10,990 $ 8,754 $ 8,104
2/28/2005 $11,290 $ 8,938 $ 8,215
3/31/2005 $10,960 $ 8,780 $ 7,907
4/30/2005 $10,260 $ 8,614 $ 7,404
5/31/2005 $10,930 $ 8,888 $ 7,926
6/30/2005 $11,280 $ 8,900 $ 8,182
7/31/2005 $11,910 $ 9,231 $ 8,754
8/31/2005 $11,660 $ 9,147 $ 8,631
9/30/2005 $11,750 $ 9,221 $ 8,699
10/31/2005 $11,200 $ 9,067 $ 8,378
11/30/2005 $12,000 $ 9,410 $ 8,852
12/31/2005 $11,890 $ 9,414 $ 8,839
1/31/2006 $12,830 $ 9,663 $ 9,691
2/28/2006 $12,980 $ 9,689 $ 9,640
3/31/2006 $13,380 $ 9,810 $10,108
4/30/2006 $13,320 $ 9,941 $10,079
5/31/2006 $12,420 $ 9,655 $ 9,370
6/30/2006 $12,400 $ 9,668 $ 9,375
7/31/2006 $11,650 $ 9,728 $ 8,888
8/31/2006 $11,940 $ 9,959 $ 9,149
9/30/2006 $11,910 $10,216 $ 9,211
10/31/2006 $12,520 $10,549 $ 9,807
11/30/2006 $12,930 $10,750 $10,042
12/31/2006 $12,920 $10,900 $10,018
1/31/2007 $13,254 $11,065 $10,205
2/28/2007 $13,410 $10,849 $10,172
3/31/2007 $13,444 $10,970 $10,266
4/30/2007 $13,756 $11,456 $10,535
5/31/2007 $14,290 $11,856 $11,015
6/30/2007 $14,134 $11,659 $10,953
7/31/2007 $13,366 $11,297 $10,384
8/31/2007 $13,589 $11,467 $10,645
9/30/2007 $13,956 $11,896 $10,955
10/31/2007 $14,546 $12,085 $11,448
11/30/2007 $13,332 $11,580 $10,657
12/31/2007 $13,231 $11,499 $10,724
1/31/2008 $11,780 $10,810 $ 9,740
2/29/2008 $11,268 $10,458 $ 9,403
3/31/2008 $10,950 $10,413 $ 9,348
4/30/2008 $11,655 $10,920 $ 9,829
5/31/2008 $12,347 $11,062 $10,386
6/30/2008 $11,309 $10,129 $ 9,766
7/31/2008 $11,270 $10,044 $ 9,994
8/31/2008 $11,783 $10,189 $10,242
9/30/2008 $10,424 $ 9,281 $ 9,084
10/31/2008 $ 8,360 $ 7,723 $ 7,113
11/30/2008 $ 7,449 $ 7,169 $ 6,252
12/31/2008 $ 7,783 $ 7,245 $ 6,591
1/31/2009 $ 7,212 $ 6,634 $ 6,090
2/28/2009 $ 6,510 $ 5,928 $ 5,459
3/31/2009 $ 7,264 $ 6,447 $ 5,949
4/30/2009 $ 8,329 $ 7,064 $ 6,844
5/31/2009 $ 8,745 $ 7,459 $ 7,109
6/30/2009 $ 9,135 $ 7,474 $ 7,340
7/31/2009 $ 9,888 $ 8,039 $ 7,909
8/31/2009 $ 9,979 $ 8,330 $ 7,986
9/30/2009 $10,603 $ 8,640 $ 8,511
10/31/2009 $ 9,992 $ 8,480 $ 7,919
11/30/2009 $10,395 $ 8,988 $ 8,164
12/31/2009 $11,318 $ 9,162 $ 8,863
1/31/2010 $10,928 $ 8,832 $ 8,467
2/28/2010 $11,318 $ 9,106 $ 8,836
3/31/2010 $12,357 $ 9,656 $ 9,538
4/30/2010 $13,005 $ 9,808 $ 9,938
40 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +54.35%
5-Year +4.55%
10-Year +2.53%
CLASS C (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS C INDEX GROWTH INDEX
- ---------- --------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,840 $10,036 $10,303
7/31/2000 $11,330 $ 9,879 $ 9,420
8/31/2000 $13,040 $10,493 $10,411
9/30/2000 $12,430 $ 9,939 $ 9,894
10/31/2000 $11,650 $ 9,897 $ 9,091
11/30/2000 $ 9,570 $ 9,117 $ 7,440
12/31/2000 $10,180 $ 9,161 $ 7,895
1/31/2001 $11,310 $ 9,486 $ 8,534
2/28/2001 $ 9,680 $ 8,621 $ 7,365
3/31/2001 $ 9,020 $ 8,075 $ 6,695
4/30/2001 $10,210 $ 8,703 $ 7,515
5/31/2001 $10,150 $ 8,761 $ 7,689
6/30/2001 $10,440 $ 8,548 $ 7,898
7/31/2001 $ 9,950 $ 8,464 $ 7,225
8/31/2001 $ 9,420 $ 7,934 $ 6,773
9/30/2001 $ 7,720 $ 7,293 $ 5,680
10/31/2001 $ 8,520 $ 7,432 $ 6,227
11/30/2001 $ 9,270 $ 8,002 $ 6,747
12/31/2001 $ 9,770 $ 8,072 $ 7,167
1/31/2002 $ 9,620 $ 7,955 $ 6,912
2/28/2002 $ 9,210 $ 7,801 $ 6,464
3/31/2002 $ 9,970 $ 8,095 $ 7,026
4/30/2002 $ 9,670 $ 7,604 $ 6,874
5/31/2002 $ 9,230 $ 7,548 $ 6,472
6/30/2002 $ 8,470 $ 7,010 $ 5,923
7/31/2002 $ 7,130 $ 6,464 $ 5,013
8/31/2002 $ 7,110 $ 6,506 $ 5,011
9/30/2002 $ 6,280 $ 5,799 $ 4,649
10/31/2002 $ 6,870 $ 6,310 $ 4,884
11/30/2002 $ 7,550 $ 6,681 $ 5,368
12/31/2002 $ 7,070 $ 6,288 $ 4,998
1/31/2003 $ 6,990 $ 6,124 $ 4,862
2/28/2003 $ 6,830 $ 6,032 $ 4,733
3/31/2003 $ 6,700 $ 6,090 $ 4,804
4/30/2003 $ 7,330 $ 6,592 $ 5,259
5/31/2003 $ 8,050 $ 6,939 $ 5,851
6/30/2003 $ 8,170 $ 7,028 $ 5,964
7/31/2003 $ 8,570 $ 7,152 $ 6,415
8/31/2003 $ 9,400 $ 7,291 $ 6,760
9/30/2003 $ 8,910 $ 7,214 $ 6,589
10/31/2003 $ 9,960 $ 7,622 $ 7,158
11/30/2003 $10,330 $ 7,689 $ 7,391
12/31/2003 $10,410 $ 8,092 $ 7,424
1/31/2004 $10,780 $ 8,241 $ 7,814
2/29/2004 $10,720 $ 8,355 $ 7,802
3/31/2004 $10,670 $ 8,229 $ 7,839
4/30/2004 $10,270 $ 8,100 $ 7,445
5/31/2004 $10,570 $ 8,211 $ 7,593
6/30/2004 $10,960 $ 8,371 $ 7,846
7/31/2004 $10,080 $ 8,094 $ 7,142
8/31/2004 $ 9,840 $ 8,127 $ 6,988
9/30/2004 $10,360 $ 8,215 $ 7,374
10/31/2004 $10,500 $ 8,340 $ 7,553
11/30/2004 $11,090 $ 8,678 $ 8,192
12/31/2004 $11,480 $ 8,973 $ 8,486
1/31/2005 $11,000 $ 8,754 $ 8,104
2/28/2005 $11,290 $ 8,938 $ 8,215
3/31/2005 $10,970 $ 8,780 $ 7,907
4/30/2005 $10,270 $ 8,614 $ 7,404
5/31/2005 $10,930 $ 8,888 $ 7,926
6/30/2005 $11,280 $ 8,900 $ 8,182
7/31/2005 $11,920 $ 9,231 $ 8,754
8/31/2005 $11,660 $ 9,147 $ 8,631
9/30/2005 $11,760 $ 9,221 $ 8,699
10/31/2005 $11,210 $ 9,067 $ 8,378
11/30/2005 $12,010 $ 9,410 $ 8,852
12/31/2005 $11,900 $ 9,414 $ 8,839
1/31/2006 $12,840 $ 9,663 $ 9,691
2/28/2006 $12,990 $ 9,689 $ 9,640
3/31/2006 $13,380 $ 9,810 $10,108
4/30/2006 $13,330 $ 9,941 $10,079
5/31/2006 $12,430 $ 9,655 $ 9,370
6/30/2006 $12,400 $ 9,668 $ 9,375
7/31/2006 $11,660 $ 9,728 $ 8,888
8/31/2006 $11,950 $ 9,959 $ 9,149
9/30/2006 $11,920 $10,216 $ 9,211
10/31/2006 $12,530 $10,549 $ 9,807
11/30/2006 $12,940 $10,750 $10,042
12/31/2006 $12,919 $10,900 $10,018
1/31/2007 $13,264 $11,065 $10,205
2/28/2007 $13,420 $10,849 $10,172
3/31/2007 $13,454 $10,970 $10,266
4/30/2007 $13,766 $11,456 $10,535
5/31/2007 $14,300 $11,856 $11,015
6/30/2007 $14,144 $11,659 $10,953
7/31/2007 $13,376 $11,297 $10,384
8/31/2007 $13,599 $11,467 $10,645
9/30/2007 $13,966 $11,896 $10,955
10/31/2007 $14,556 $12,085 $11,448
11/30/2007 $13,342 $11,580 $10,657
12/31/2007 $13,241 $11,499 $10,724
1/31/2008 $11,790 $10,810 $ 9,740
2/29/2008 $11,265 $10,458 $ 9,403
3/31/2008 $10,947 $10,413 $ 9,348
4/30/2008 $11,652 $10,920 $ 9,829
5/31/2008 $12,329 $11,062 $10,386
6/30/2008 $11,293 $10,129 $ 9,766
7/31/2008 $11,237 $10,044 $ 9,994
8/31/2008 $11,749 $10,189 $10,242
9/30/2008 $10,394 $ 9,281 $ 9,084
10/31/2008 $ 8,321 $ 7,723 $ 7,113
11/30/2008 $ 7,422 $ 7,169 $ 6,252
12/31/2008 $ 7,741 $ 7,245 $ 6,591
1/31/2009 $ 7,166 $ 6,634 $ 6,090
2/28/2009 $ 6,465 $ 5,928 $ 5,459
3/31/2009 $ 7,208 $ 6,447 $ 5,949
4/30/2009 $ 8,260 $ 7,064 $ 6,844
5/31/2009 $ 8,680 $ 7,459 $ 7,109
6/30/2009 $ 9,059 $ 7,474 $ 7,340
7/31/2009 $ 9,788 $ 8,039 $ 7,909
8/31/2009 $ 9,886 $ 8,330 $ 7,986
9/30/2009 $10,489 $ 8,640 $ 8,511
10/31/2009 $ 9,886 $ 8,480 $ 7,919
11/30/2009 $10,279 $ 8,988 $ 8,164
12/31/2009 $11,191 $ 9,162 $ 8,863
1/31/2010 $10,798 $ 8,832 $ 8,467
2/28/2010 $11,163 $ 9,106 $ 8,836
3/31/2010 $12,186 $ 9,656 $ 9,538
4/30/2010 $12,831 $ 9,808 $ 9,938
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/10
- ------- -------
1-Year +56.07%
5-Year +5.08%
Since Inception (1/1/02) +3.82%
CLASS R (1/1/02-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP S&P 500 RUSSELL 2000
DATE GROWTH FUND - CLASS R INDEX GROWTH INDEX
- ---- --------------------- ------- ------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,838 $ 9,854 $ 9,644
2/28/2002 $ 9,423 $ 9,664 $ 9,020
3/31/2002 $10,212 $10,027 $ 9,804
4/30/2002 $ 9,909 $ 9,420 $ 9,592
5/31/2002 $ 9,464 $ 9,350 $ 9,031
6/30/2002 $ 8,694 $ 8,684 $ 8,265
7/31/2002 $ 7,318 $ 8,007 $ 6,995
8/31/2002 $ 7,287 $ 8,060 $ 6,992
9/30/2002 $ 6,447 $ 7,184 $ 6,487
10/31/2002 $ 7,044 $ 7,816 $ 6,815
11/30/2002 $ 7,743 $ 8,276 $ 7,490
12/31/2002 $ 7,257 $ 7,790 $ 6,974
1/31/2003 $ 7,176 $ 7,586 $ 6,784
2/28/2003 $ 7,014 $ 7,472 $ 6,603
3/31/2003 $ 6,883 $ 7,545 $ 6,703
4/30/2003 $ 7,540 $ 8,166 $ 7,338
5/31/2003 $ 8,279 $ 8,596 $ 8,165
6/30/2003 $ 8,401 $ 8,706 $ 8,322
7/31/2003 $ 8,816 $ 8,859 $ 8,951
8/31/2003 $ 9,686 $ 9,032 $ 9,432
9/30/2003 $ 9,180 $ 8,936 $ 9,193
10/31/2003 $10,263 $ 9,442 $ 9,987
11/30/2003 $10,648 $ 9,525 $10,313
12/31/2003 $10,739 $10,024 $10,359
1/31/2004 $11,123 $10,208 $10,903
2/29/2004 $11,063 $10,350 $10,886
3/31/2004 $11,022 $10,194 $10,937
4/30/2004 $10,617 $10,034 $10,388
5/31/2004 $10,921 $10,172 $10,595
6/30/2004 $11,336 $10,370 $10,948
7/31/2004 $10,425 $10,026 $ 9,965
8/31/2004 $10,192 $10,067 $ 9,750
9/30/2004 $10,729 $10,176 $10,289
10/31/2004 $10,881 $10,332 $10,539
11/30/2004 $11,498 $10,750 $11,430
12/31/2004 $11,903 $11,115 $11,841
1/31/2005 $11,407 $10,844 $11,308
2/28/2005 $11,721 $11,073 $11,463
3/31/2005 $11,387 $10,877 $11,033
4/30/2005 $10,668 $10,670 $10,331
5/31/2005 $11,356 $11,010 $11,059
6/30/2005 $11,731 $11,025 $11,417
7/31/2005 $12,389 $11,435 $12,215
8/31/2005 $12,136 $11,331 $12,043
9/30/2005 $12,237 $11,423 $12,138
10/31/2005 $11,670 $11,232 $11,690
11/30/2005 $12,510 $11,657 $12,351
12/31/2005 $12,399 $11,661 $12,333
1/31/2006 $13,391 $11,970 $13,523
2/28/2006 $13,542 $12,003 $13,450
3/31/2006 $13,968 $12,152 $14,104
4/30/2006 $13,917 $12,315 $14,063
5/31/2006 $12,976 $11,961 $13,074
6/30/2006 $12,955 $11,977 $13,082
7/31/2006 $12,186 $12,051 $12,402
8/31/2006 $12,500 $12,338 $12,765
9/30/2006 $12,470 $12,655 $12,852
10/31/2006 $13,117 $13,068 $13,685
11/30/2006 $13,542 $13,316 $14,012
12/31/2006 $13,532 $13,503 $13,979
1/31/2007 $13,891 $13,707 $14,239
2/28/2007 $14,060 $13,439 $14,194
3/31/2007 $14,116 $13,590 $14,325
4/30/2007 $14,442 $14,192 $14,701
5/31/2007 $15,003 $14,687 $15,370
6/30/2007 $14,857 $14,443 $15,283
7/31/2007 $14,049 $13,995 $14,489
8/31/2007 $14,284 $14,205 $14,854
9/30/2007 $14,689 $14,736 $15,285
10/31/2007 $15,306 $14,970 $15,974
11/30/2007 $14,037 $14,345 $14,870
12/31/2007 $13,936 $14,245 $14,964
1/31/2008 $12,418 $13,391 $13,591
2/29/2008 $11,866 $12,956 $13,121
3/31/2008 $11,535 $12,900 $13,044
4/30/2008 $12,294 $13,528 $13,715
5/31/2008 $13,012 $13,703 $14,491
6/30/2008 $11,922 $12,548 $13,628
7/31/2008 $11,866 $12,442 $13,944
8/31/2008 $12,405 $12,622 $14,291
9/30/2008 $10,983 $11,498 $12,676
10/31/2008 $ 8,803 $ 9,567 $ 9,925
11/30/2008 $ 7,851 $ 8,880 $ 8,724
12/31/2008 $ 8,183 $ 8,975 $ 9,197
1/31/2009 $ 7,595 $ 8,218 $ 8,497
2/28/2009 $ 6,854 $ 7,343 $ 7,617
3/31/2009 $ 7,637 $ 7,986 $ 8,301
4/30/2009 $ 8,756 $ 8,751 $ 9,550
5/31/2009 $ 9,204 $ 9,240 $ 9,920
6/30/2009 $ 9,609 $ 9,259 $10,241
7/31/2009 $10,393 $ 9,959 $11,036
8/31/2009 $10,491 $10,318 $11,143
9/30/2009 $11,148 $10,703 $11,875
10/31/2009 $10,505 $10,505 $11,050
11/30/2009 $10,924 $11,135 $11,392
12/31/2009 $11,903 $11,350 $12,367
1/31/2010 $11,484 $10,941 $11,814
2/28/2010 $11,875 $11,280 $12,329
3/31/2010 $12,980 $11,961 $13,308
4/30/2010 $13,666 $12,150 $13,867
Annual Report | 41
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/10
- ------------- -------
1-Year +56.71%
5-Year +5.60%
10-Year +3.55%
ADVISOR CLASS (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL CAP GROWTH S&P 500 RUSSELL 2000
DATE FUND - ADVISOR CLASS INDEX GROWTH INDEX
- ---- ------------------------- ------- ------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,530 $ 9,795 $ 9,124
6/30/2000 $11,870 $10,036 $10,303
7/31/2000 $11,350 $ 9,879 $ 9,420
8/31/2000 $13,080 $10,493 $10,411
9/30/2000 $12,490 $ 9,939 $ 9,894
10/31/2000 $11,710 $ 9,897 $ 9,091
11/30/2000 $ 9,630 $ 9,117 $ 7,440
12/31/2000 $10,240 $ 9,161 $ 7,895
1/31/2001 $11,390 $ 9,486 $ 8,534
2/28/2001 $ 9,760 $ 8,621 $ 7,365
3/31/2001 $ 9,100 $ 8,075 $ 6,695
4/30/2001 $10,310 $ 8,703 $ 7,515
5/31/2001 $10,250 $ 8,761 $ 7,689
6/30/2001 $10,560 $ 8,548 $ 7,898
7/31/2001 $10,070 $ 8,464 $ 7,225
8/31/2001 $ 9,550 $ 7,934 $ 6,773
9/30/2001 $ 7,830 $ 7,293 $ 5,680
10/31/2001 $ 8,640 $ 7,432 $ 6,227
11/30/2001 $ 9,420 $ 8,002 $ 6,747
12/31/2001 $ 9,930 $ 8,072 $ 7,167
1/31/2002 $ 9,780 $ 7,955 $ 6,912
2/28/2002 $ 9,370 $ 7,801 $ 6,464
3/31/2002 $10,160 $ 8,095 $ 7,026
4/30/2002 $ 9,860 $ 7,604 $ 6,874
5/31/2002 $ 9,420 $ 7,548 $ 6,472
6/30/2002 $ 8,660 $ 7,010 $ 5,923
7/31/2002 $ 7,290 $ 6,464 $ 5,013
8/31/2002 $ 7,270 $ 6,506 $ 5,011
9/30/2002 $ 6,430 $ 5,799 $ 4,649
10/31/2002 $ 7,040 $ 6,310 $ 4,884
11/30/2002 $ 7,740 $ 6,681 $ 5,368
12/31/2002 $ 7,250 $ 6,288 $ 4,998
1/31/2003 $ 7,180 $ 6,124 $ 4,862
2/28/2003 $ 7,030 $ 6,032 $ 4,733
3/31/2003 $ 6,890 $ 6,090 $ 4,804
4/30/2003 $ 7,550 $ 6,592 $ 5,259
5/31/2003 $ 8,300 $ 6,939 $ 5,851
6/30/2003 $ 8,430 $ 7,028 $ 5,964
7/31/2003 $ 8,850 $ 7,152 $ 6,415
8/31/2003 $ 9,720 $ 7,291 $ 6,760
9/30/2003 $ 9,220 $ 7,214 $ 6,589
10/31/2003 $10,310 $ 7,622 $ 7,158
11/30/2003 $10,700 $ 7,689 $ 7,391
12/31/2003 $10,800 $ 8,092 $ 7,424
1/31/2004 $11,190 $ 8,241 $ 7,814
2/29/2004 $11,140 $ 8,355 $ 7,802
3/31/2004 $11,100 $ 8,229 $ 7,839
4/30/2004 $10,690 $ 8,100 $ 7,445
5/31/2004 $11,010 $ 8,211 $ 7,593
6/30/2004 $11,430 $ 8,371 $ 7,846
7/31/2004 $10,510 $ 8,094 $ 7,142
8/31/2004 $10,280 $ 8,127 $ 6,988
9/30/2004 $10,820 $ 8,215 $ 7,374
10/31/2004 $10,980 $ 8,340 $ 7,553
11/30/2004 $11,610 $ 8,678 $ 8,192
12/31/2004 $12,020 $ 8,973 $ 8,486
1/31/2005 $11,530 $ 8,754 $ 8,104
2/28/2005 $11,850 $ 8,938 $ 8,215
3/31/2005 $11,520 $ 8,780 $ 7,907
4/30/2005 $10,790 $ 8,614 $ 7,404
5/31/2005 $11,500 $ 8,888 $ 7,926
6/30/2005 $11,880 $ 8,900 $ 8,182
7/31/2005 $12,550 $ 9,231 $ 8,754
8/31/2005 $12,300 $ 9,147 $ 8,631
9/30/2005 $12,410 $ 9,221 $ 8,699
10/31/2005 $11,840 $ 9,067 $ 8,378
11/30/2005 $12,690 $ 9,410 $ 8,852
12/31/2005 $12,590 $ 9,414 $ 8,839
1/31/2006 $13,600 $ 9,663 $ 9,691
2/28/2006 $13,760 $ 9,689 $ 9,640
3/31/2006 $14,200 $ 9,810 $10,108
4/30/2006 $14,150 $ 9,941 $10,079
5/31/2006 $13,200 $ 9,655 $ 9,370
6/30/2006 $13,190 $ 9,668 $ 9,375
7/31/2006 $12,400 $ 9,728 $ 8,888
8/31/2006 $12,730 $ 9,959 $ 9,149
9/30/2006 $12,700 $10,216 $ 9,211
10/31/2006 $13,370 $10,549 $ 9,807
11/30/2006 $13,810 $10,750 $10,042
12/31/2006 $13,810 $10,900 $10,018
1/31/2007 $14,186 $11,065 $10,205
2/28/2007 $14,363 $10,849 $10,172
3/31/2007 $14,418 $10,970 $10,266
4/30/2007 $14,750 $11,456 $10,535
5/31/2007 $15,336 $11,856 $11,015
6/30/2007 $15,192 $11,659 $10,953
7/31/2007 $14,374 $11,297 $10,384
8/31/2007 $14,617 $11,467 $10,645
9/30/2007 $15,037 $11,896 $10,955
10/31/2007 $15,679 $12,085 $11,448
11/30/2007 $14,385 $11,580 $10,657
12/31/2007 $14,300 $11,499 $10,724
1/31/2008 $12,738 $10,810 $ 9,740
2/29/2008 $12,186 $10,458 $ 9,403
3/31/2008 $11,849 $10,413 $ 9,348
4/30/2008 $12,616 $10,920 $ 9,829
5/31/2008 $13,370 $11,062 $10,386
6/30/2008 $12,253 $10,129 $ 9,766
7/31/2008 $12,199 $10,044 $ 9,994
8/31/2008 $12,765 $10,189 $10,242
9/30/2008 $11,297 $ 9,281 $ 9,084
10/31/2008 $ 9,062 $ 7,723 $ 7,113
11/30/2008 $ 8,079 $ 7,169 $ 6,252
12/31/2008 $ 8,443 $ 7,245 $ 6,591
1/31/2009 $ 7,829 $ 6,634 $ 6,090
2/28/2009 $ 7,065 $ 5,928 $ 5,459
3/31/2009 $ 7,884 $ 6,447 $ 5,949
4/30/2009 $ 9,043 $ 7,064 $ 6,844
5/31/2009 $ 9,507 $ 7,459 $ 7,109
6/30/2009 $ 9,930 $ 7,474 $ 7,340
7/31/2009 $10,734 $ 8,039 $ 7,909
8/31/2009 $10,843 $ 8,330 $ 7,986
9/30/2009 $11,525 $ 8,640 $ 8,511
10/31/2009 $10,857 $ 8,480 $ 7,919
11/30/2009 $11,307 $ 8,988 $ 8,164
12/31/2009 $12,316 $ 9,162 $ 8,863
1/31/2010 $11,894 $ 8,832 $ 8,467
2/28/2010 $12,316 $ 9,106 $ 8,836
3/31/2010 $13,449 $ 9,656 $ 9,538
4/30/2010 $14,171 $ 9,808 $ 9,938
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.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The Russell 2000 Growth Index is market
capitalization weighted and measures performance of those Russell 2000
Index companies with higher price-to-book ratios and higher forecasted
growth values.
42 | Annual Report
Your Fund's Expenses
FRANKLIN SMALL CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 43
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/09 VALUE 4/30/10 PERIOD* 11/1/09-4/30/10
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,303.00 $ 7.42
Hypothetical (5% return before expenses) $1,000 $1,018.35 $ 6.51
CLASS B
Actual $1,000 $1,296.90 $11.39
Hypothetical (5% return before expenses) $1,000 $1,014.88 $ 9.99
CLASS C
Actual $1,000 $1,297.90 $11.51
Hypothetical (5% return before expenses) $1,000 $1,014.78 $10.09
CLASS R
Actual $1,000 $1,300.90 $ 8.67
Hypothetical (5% return before expenses) $1,000 $1,017.26 $ 7.60
ADVISOR CLASS
Actual $1,000 $1,305.30 $ 5.83
Hypothetical (5% return before expenses) $1,000 $1,019.74 $ 5.11
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.30%; B: 2.00%; C:
2.02%; R: 1.52%; and Advisor: 1.02%), multiplied by the average account
value over the period, multiplied by 181/365 to reflect the one-half year
period.
44 | Annual Report
Franklin Small-Mid Cap Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small-Mid Cap Growth Fund seeks
long-term capital growth by normally 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)
This annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year
ended April 30, 2010.
PERFORMANCE OVERVIEW
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.
For the 12 months under review, Franklin Small-Mid Cap Growth Fund - Class A
delivered a +44.54% cumulative total return. The Fund underperformed its narrow
benchmark, the Russell Midcap Growth Index, which posted a +46.95% total return,
but outperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500),
which had a +38.84% total return for the same period.(2) You can find the Fund's
long-term performance data in the Performance Summary beginning on page 48.
INVESTMENT STRATEGY
We 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 2500 Index is market capitalization weighted and measures
performance of the 2,500 smallest companies in the Russell 3000 Index,
which represent a modest amount of the Russell 3000 Index's total market
capitalization. The Russell Midcap Index is market capitalization weighted
and measures performance of the smallest companies in the Russell 1000
Index, which represent a modest amount of the Russell 1000 Index's total
market capitalization.
(2.) Source: (C) 2010 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 is a market capitalization-weighted index of 500 stocks designed to
measure total U.S. equity market 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 91.
Annual Report | 45
PORTFOLIO BREAKDOWN
Franklin Small-Mid Cap Growth Fund
Based on Total Net Assets as of 4/30/10
(BAR CHART)
Information Technology 23.8%
Health Care 18.9%
Consumer Discretionary 17.8%
Industrials 15.4%
Financials 7.3%
Energy 6.7%
Telecommunication Services 2.6%
Materials 2.6%
Consumer Staples 1.6%
Short-Term Investments & Other Net Assets 3.3%
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 year under review, a broad-based market rally supported positive
returns across all sectors represented in the Fund's portfolio. The majority of
the Fund's individual holdings rose in value, while several appreciated by more
than 100%. Among the largest contributors to the Fund's performance relative to
the Russell Midcap Growth Index were video-conferencing systems provider
Tandberg;(3) Concho Resources,(3) which explores and develops properties,
located primarily in the Permian Basin region of eastern New Mexico and West
Texas, for the production of oil and gas; Intuitive Surgical, which develops
technologically advanced systems to facilitate robotically aided surgical
procedures from a remote console; and Community Health Systems, a hospital
operator serving mostly rural and small-town communities. We no longer held a
position in Tandberg by period-end.
From a sector perspective, underweighting and stock selection in consumer
discretionary and utilities supported the Fund's relative results. In the
consumer discretionary sector, apparel retailers Guess? and Urban Outfitters
were key contributors, as was Johnson Controls,(3) a manufacturer of batteries
and interior parts for regular passenger and hybrid electric vehicles, as well
as energy-efficient HVAC systems for commercial buildings. Independent power
producer Calpine, from the utilities sector, also aided results, and we sold the
Fund's position by period-end.
In contrast, key detractors from the Fund's relative performance included Myriad
Genetics,(3) a designer of molecular diagnostic tests and related instruments;
SAIC, a leading government services contractor that provides a wide range of
information technology support to federal and state agencies; and Activision
Blizzard, which publishes a range of popular video game titles for console games
systems, handheld devices and smartphones. In addition, the Fund's investment in
discount broker Charles Schwab impeded relative results.(3)
(3.) This holding is not an index component.
46 | Annual Report
Stock selection in the industrials and information technology sectors weighed on
relative Fund results. Among industrials, weak returns from non-index holdings
Allegiant Travel and Ryanair Holdings were detrimental to relative performance.
Nuance Communications, which provides speech recognition and digital imaging
software to several industries, also dampened performance.
Thank you for your continued participation in Franklin Small-Mid Cap Growth
Fund. We look forward to serving your future investment needs.
(PHOTO OF EDWARD B. JAMIESON)
/s/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small-Mid Cap Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 HOLDINGS
Franklin Small-Mid Cap Growth Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Concho Resources Inc. 2.0%
ENERGY
Community Health Systems Inc. 1.8%
HEALTH CARE
Silicon Laboratories Inc. 1.7%
INFORMATION TECHNOLOGY
Alliance Data Systems Corp. 1.7%
INFORMATION TECHNOLOGY
SBA Communications Corp. 1.7%
TELECOMMUNICATION SERVICES
Precision Castparts Corp. 1.7%
INDUSTRIALS
Nuance Communications Inc. 1.6%
INFORMATION TECHNOLOGY
Johnson Controls Inc. 1.5%
CONSUMER DISCRETIONARY
Guess? Inc. 1.5%
CONSUMER DISCRETIONARY
Flowserve Corp. 1.5%
INDUSTRIALS
Annual Report | 47
Performance Summary as of 4/30/10
FRANKLIN SMALL-MID CAP GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FRSGX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$9.95 $32.29 $22.34
CLASS B (SYMBOL: FBSMX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$9.13 $30.14 $21.01
CLASS C (SYMBOL: FRSIX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$8.81 $29.10 $20.29
CLASS R (SYMBOL: FSMRX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$9.65 $31.50 $21.85
ADVISOR CLASS (SYMBOL: FSGAX) CHANGE 4/30/10 4/30/09
- ----------------------------- ------- ------- -------
Net Asset Value (NAV) +$10.29 $33.19 $22.90
48 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(1) +44.54% +32.48% -7.44%
Average Annual Total Return(2) +36.24% +4.54% -1.35%
Value of $10,000 Investment(3) $13,624 $12,486 $8,725
Avg. Ann. Total Return (3/31/10)(4) +47.98% +2.79% -2.66%
Total Annual Operating Expenses(5) 1.11%
CLASS B 1-YEAR 5-YEAR INCEPTION (7/1/02)
- ------- ------- ------- ------------------
Cumulative Total Return(1) +43.46% +27.57% +60.71%
Average Annual Total Return(2) +39.46% +4.67% +6.25%
Value of $10,000 Investment(3) $13,946 $12,561 $16,071
Avg. Ann. Total Return (3/31/10)(4) +51.89% +2.92% +5.84%
Total Annual Operating Expenses(5) 1.86%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +43.42% +27.65% -14.10%
Average Annual Total Return(2) +42.42% +5.00% -1.51%
Value of $10,000 Investment(3) $14,242 $12,765 $8,590
Avg. Ann. Total Return (3/31/10)(4) +54.88% +3.25% -2.81%
Total Annual Operating Expenses(5) 1.86%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------------------
Cumulative Total Return(1) +44.16% +30.83% +30.32%
Average Annual Total Return(2) +44.16% +5.52% +3.23%
Value of $10,000 Investment(3) $14,416 $13,083 $13,032
Avg. Ann. Total Return (3/31/10)(4) +56.64% +3.76% +2.83%
Total Annual Operating Expenses(5) 1.36%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- -------
Cumulative Total Return(1) +44.93% +34.15% -5.14%
Average Annual Total Return(2) +44.93% +6.05% -0.53%
Value of $10,000 Investment(3) $14,493 $13,415 $9,486
Avg. Ann. Total Return (3/31/10)(4) +57.44% +4.29% -1.84%
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, GO TO
franklintempleton.com OR CALL (800) 342-5236.
Annual Report | 49
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +36.24%
5-Year +4.54%
10-Year -1.35%
CLASS A (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID
CAP GROWTH FUND RUSSELL MIDCAP
DATE - CLASS A GROWTH INDEX S&P 500 Index
- ---- ------------------ -------------- -------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $ 8,805 $ 9,271 $ 9,795
6/30/2000 $10,169 $10,255 $10,036
7/31/2000 $ 9,553 $ 9,606 $ 9,879
8/31/2000 $10,865 $11,054 $10,493
9/30/2000 $10,503 $10,514 $ 9,939
10/31/2000 $ 9,690 $ 9,794 $ 9,897
11/30/2000 $ 7,614 $ 7,666 $ 9,117
12/31/2000 $ 8,249 $ 8,069 $ 9,161
1/31/2001 $ 8,656 $ 8,530 $ 9,486
2/28/2001 $ 7,020 $ 7,055 $ 8,621
3/31/2001 $ 6,261 $ 6,045 $ 8,075
4/30/2001 $ 7,163 $ 7,053 $ 8,703
5/31/2001 $ 7,100 $ 7,020 $ 8,761
6/30/2001 $ 7,024 $ 7,023 $ 8,548
7/31/2001 $ 6,657 $ 6,550 $ 8,464
8/31/2001 $ 6,202 $ 6,075 $ 7,934
9/30/2001 $ 5,258 $ 5,071 $ 7,293
10/31/2001 $ 5,707 $ 5,604 $ 7,432
11/30/2001 $ 6,233 $ 6,207 $ 8,002
12/31/2001 $ 6,556 $ 6,443 $ 8,072
1/31/2002 $ 6,301 $ 6,234 $ 7,955
2/28/2002 $ 5,944 $ 5,881 $ 7,801
3/31/2002 $ 6,375 $ 6,330 $ 8,095
4/30/2002 $ 6,068 $ 5,994 $ 7,604
5/31/2002 $ 5,872 $ 5,816 $ 7,548
6/30/2002 $ 5,315 $ 5,174 $ 7,010
7/31/2002 $ 4,640 $ 4,671 $ 6,464
8/31/2002 $ 4,614 $ 4,655 $ 6,506
9/30/2002 $ 4,209 $ 4,285 $ 5,799
10/31/2002 $ 4,574 $ 4,617 $ 6,310
11/30/2002 $ 4,970 $ 4,978 $ 6,681
12/31/2002 $ 4,617 $ 4,678 $ 6,288
1/31/2003 $ 4,556 $ 4,632 $ 6,124
2/28/2003 $ 4,499 $ 4,591 $ 6,032
3/31/2003 $ 4,505 $ 4,677 $ 6,090
4/30/2003 $ 4,867 $ 4,995 $ 6,592
5/31/2003 $ 5,323 $ 5,476 $ 6,939
6/30/2003 $ 5,353 $ 5,554 $ 7,028
7/31/2003 $ 5,487 $ 5,752 $ 7,152
8/31/2003 $ 5,771 $ 6,069 $ 7,291
9/30/2003 $ 5,588 $ 5,952 $ 7,214
10/31/2003 $ 6,034 $ 6,431 $ 7,622
11/30/2003 $ 6,240 $ 6,603 $ 7,689
12/31/2003 $ 6,356 $ 6,675 $ 8,092
1/31/2004 $ 6,537 $ 6,896 $ 8,241
2/29/2004 $ 6,541 $ 7,011 $ 8,355
3/31/2004 $ 6,499 $ 6,998 $ 8,229
4/30/2004 $ 6,244 $ 6,801 $ 8,100
5/31/2004 $ 6,440 $ 6,961 $ 8,211
6/30/2004 $ 6,634 $ 7,072 $ 8,371
7/31/2004 $ 6,190 $ 6,603 $ 8,094
8/31/2004 $ 6,108 $ 6,522 $ 8,127
9/30/2004 $ 6,354 $ 6,766 $ 8,215
10/31/2004 $ 6,577 $ 6,995 $ 8,340
11/30/2004 $ 6,907 $ 7,356 $ 8,678
12/31/2004 $ 7,185 $ 7,709 $ 8,973
1/31/2005 $ 6,987 $ 7,502 $ 8,754
2/28/2005 $ 7,157 $ 7,692 $ 8,938
3/31/2005 $ 6,917 $ 7,580 $ 8,780
4/30/2005 $ 6,585 $ 7,280 $ 8,614
5/31/2005 $ 6,985 $ 7,697 $ 8,888
6/30/2005 $ 7,195 $ 7,840 $ 8,900
7/31/2005 $ 7,633 $ 8,297 $ 9,231
8/31/2005 $ 7,626 $ 8,247 $ 9,147
9/30/2005 $ 7,702 $ 8,354 $ 9,221
10/31/2005 $ 7,525 $ 8,108 $ 9,067
11/30/2005 $ 7,921 $ 8,548 $ 9,410
12/31/2005 $ 7,942 $ 8,641 $ 9,414
1/31/2006 $ 8,384 $ 9,159 $ 9,663
2/28/2006 $ 8,368 $ 9,046 $ 9,689
3/31/2006 $ 8,536 $ 9,299 $ 9,810
4/30/2006 $ 8,509 $ 9,338 $ 9,941
5/31/2006 $ 8,047 $ 8,899 $ 9,655
6/30/2006 $ 8,026 $ 8,862 $ 9,668
7/31/2006 $ 7,767 $ 8,545 $ 9,728
8/31/2006 $ 7,965 $ 8,742 $ 9,959
9/30/2006 $ 8,039 $ 8,941 $10,216
10/31/2006 $ 8,294 $ 9,284 $10,549
11/30/2006 $ 8,620 $ 9,649 $10,750
12/31/2006 $ 8,540 $ 9,562 $10,900
1/31/2007 $ 8,797 $ 9,910 $11,065
2/28/2007 $ 8,897 $ 9,889 $10,849
3/31/2007 $ 9,044 $ 9,941 $10,970
4/30/2007 $ 9,392 $10,377 $11,456
5/31/2007 $ 9,806 $10,798 $11,856
6/30/2007 $ 9,693 $10,611 $11,659
7/31/2007 $ 9,457 $10,373 $11,297
8/31/2007 $ 9,620 $10,429 $11,467
9/30/2007 $10,167 $10,839 $11,896
10/31/2007 $10,439 $11,115 $12,085
11/30/2007 $ 9,539 $10,626 $11,580
12/31/2007 $ 9,536 $10,655 $11,499
1/31/2008 $ 8,548 $ 9,808 $10,810
2/29/2008 $ 8,305 $ 9,659 $10,458
3/31/2008 $ 8,117 $ 9,488 $10,413
4/30/2008 $ 8,806 $10,177 $10,920
5/31/2008 $ 9,199 $10,713 $11,062
6/30/2008 $ 8,521 $ 9,929 $10,129
7/31/2008 $ 8,222 $ 9,552 $10,044
8/31/2008 $ 8,429 $ 9,639 $10,189
9/30/2008 $ 7,436 $ 8,167 $ 9,281
10/31/2008 $ 5,984 $ 6,375 $ 7,723
11/30/2008 $ 5,459 $ 5,722 $ 7,169
12/31/2008 $ 5,482 $ 5,932 $ 7,245
1/31/2009 $ 5,271 $ 5,665 $ 6,634
2/28/2009 $ 4,920 $ 5,234 $ 5,928
3/31/2009 $ 5,366 $ 5,733 $ 6,447
4/30/2009 $ 6,036 $ 6,547 $ 7,064
5/31/2009 $ 6,228 $ 6,886 $ 7,459
6/30/2009 $ 6,295 $ 6,918 $ 7,474
7/31/2009 $ 6,741 $ 7,463 $ 8,039
8/31/2009 $ 6,849 $ 7,692 $ 8,330
9/30/2009 $ 7,335 $ 8,134 $ 8,640
10/31/2009 $ 7,108 $ 7,808 $ 8,480
11/30/2009 $ 7,387 $ 8,172 $ 8,988
12/31/2009 $ 7,849 $ 8,678 $ 9,162
1/31/2010 $ 7,522 $ 8,332 $ 8,832
2/28/2010 $ 7,857 $ 8,745 $ 9,106
3/31/2010 $ 8,424 $ 9,344 $ 9,656
4/30/2010 $ 8,725 $ 9,621 $ 9,808
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/10
- ------- -------
1-Year +39.46%
5-Year +4.67%
Since Inception (7/1/02) +6.25%
CLASS B (7/1/02-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID
CAP GROWTH FUND RUSSELL MIDCAP
DATE - CLASS B GROWTH INDEX S&P 500 Index
- ---- ------------------ -------------- -------------
7/1/2002 $10,000 $10,000 $10,000
7/31/2002 $ 9,063 $ 9,028 $ 9,220
8/31/2002 $ 9,001 $ 8,997 $ 9,281
9/30/2002 $ 8,208 $ 8,282 $ 8,272
10/31/2002 $ 8,915 $ 8,924 $ 9,000
11/30/2002 $ 9,684 $ 9,622 $ 9,530
12/31/2002 $ 8,989 $ 9,041 $ 8,970
1/31/2003 $ 8,861 $ 8,952 $ 8,735
2/28/2003 $ 8,751 $ 8,874 $ 8,604
3/31/2003 $ 8,755 $ 9,039 $ 8,688
4/30/2003 $ 9,453 $ 9,655 $ 9,403
5/31/2003 $10,329 $10,584 $ 9,899
6/30/2003 $10,382 $10,735 $10,025
7/31/2003 $10,637 $11,118 $10,202
8/31/2003 $11,180 $11,731 $10,401
9/30/2003 $10,814 $11,503 $10,290
10/31/2003 $11,673 $12,430 $10,873
11/30/2003 $12,063 $12,763 $10,968
12/31/2003 $12,277 $12,902 $11,543
1/31/2004 $12,618 $13,328 $11,755
2/29/2004 $12,622 $13,552 $11,919
3/31/2004 $12,532 $13,526 $11,739
4/30/2004 $12,035 $13,144 $11,555
5/31/2004 $12,400 $13,454 $11,713
6/30/2004 $12,766 $13,668 $11,941
7/31/2004 $11,903 $12,763 $11,546
8/31/2004 $11,739 $12,606 $11,592
9/30/2004 $12,207 $13,077 $11,718
10/31/2004 $12,626 $13,520 $11,897
11/30/2004 $13,251 $14,218 $12,378
12/31/2004 $13,777 $14,899 $12,800
1/31/2005 $13,391 $14,501 $12,488
2/28/2005 $13,707 $14,868 $12,750
3/31/2005 $13,239 $14,651 $12,525
4/30/2005 $12,598 $14,071 $12,287
5/31/2005 $13,350 $14,877 $12,678
6/30/2005 $13,744 $15,153 $12,696
7/31/2005 $14,570 $16,038 $13,168
8/31/2005 $14,550 $15,940 $13,048
9/30/2005 $14,686 $16,146 $13,154
10/31/2005 $14,340 $15,671 $12,934
11/30/2005 $15,080 $16,521 $13,424
12/31/2005 $15,113 $16,702 $13,428
1/31/2006 $15,943 $17,702 $13,784
2/28/2006 $15,902 $17,485 $13,821
3/31/2006 $16,219 $17,973 $13,993
4/30/2006 $16,157 $18,049 $14,181
5/31/2006 $15,269 $17,200 $13,773
6/30/2006 $15,216 $17,129 $13,792
7/31/2006 $14,718 $16,516 $13,877
8/31/2006 $15,080 $16,896 $14,207
9/30/2006 $15,212 $17,282 $14,573
10/31/2006 $15,688 $17,945 $15,048
11/30/2006 $16,293 $18,649 $15,334
12/31/2006 $16,131 $18,482 $15,549
1/31/2007 $16,608 $19,155 $15,784
2/28/2007 $16,785 $19,113 $15,476
3/31/2007 $17,051 $19,214 $15,649
4/30/2007 $17,697 $20,057 $16,342
5/31/2007 $18,467 $20,871 $16,912
6/30/2007 $18,241 $20,509 $16,631
7/31/2007 $17,790 $20,050 $16,116
8/31/2007 $18,082 $20,158 $16,357
9/30/2007 $19,099 $20,949 $16,969
10/31/2007 $19,595 $21,484 $17,239
11/30/2007 $17,896 $20,538 $16,518
12/31/2007 $17,876 $20,594 $16,403
1/31/2008 $16,016 $18,957 $15,420
2/29/2008 $15,554 $18,669 $14,919
3/31/2008 $15,192 $18,339 $14,854
4/30/2008 $16,473 $19,669 $15,578
5/31/2008 $17,195 $20,706 $15,779
6/30/2008 $15,915 $19,191 $14,449
7/31/2008 $15,346 $18,462 $14,328
8/31/2008 $15,724 $18,631 $14,535
9/30/2008 $13,864 $15,785 $13,240
10/31/2008 $11,148 $12,321 $11,016
11/30/2008 $10,165 $11,059 $10,226
12/31/2008 $10,200 $11,466 $10,335
1/31/2009 $ 9,800 $10,950 $ 9,463
2/28/2009 $ 9,145 $10,116 $ 8,456
3/31/2009 $ 9,960 $11,080 $ 9,197
4/30/2009 $11,203 $12,655 $10,077
5/31/2009 $11,549 $13,309 $10,640
6/30/2009 $11,667 $13,370 $10,661
7/31/2009 $12,483 $14,425 $11,468
8/31/2009 $12,680 $14,867 $11,882
9/30/2009 $13,570 $15,722 $12,325
10/31/2009 $13,144 $15,091 $12,096
11/30/2009 $13,650 $15,796 $12,822
12/31/2009 $14,493 $16,773 $13,070
1/31/2010 $13,880 $16,104 $12,599
2/28/2010 $14,487 $16,903 $12,990
3/31/2010 $15,527 $18,060 $13,774
4/30/2010 $16,071 $18,596 $13,991
50 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +42.42%
5-Year +5.00%
10-Year -1.51%
CLASS C (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID
CAP GROWTH FUND RUSSELL MIDCAP
DATE - CLASS C GROWTH INDEX S&P 500 Index
- ---- ------------------ -------------- -------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,336 $ 9,271 $ 9,795
6/30/2000 $10,776 $10,255 $10,036
7/31/2000 $10,117 $ 9,606 $ 9,879
8/31/2000 $11,498 $11,054 $10,493
9/30/2000 $11,108 $10,514 $ 9,939
10/31/2000 $10,242 $ 9,794 $ 9,897
11/30/2000 $ 8,042 $ 7,666 $ 9,117
12/31/2000 $ 8,706 $ 8,069 $ 9,161
1/31/2001 $ 9,132 $ 8,530 $ 9,486
2/28/2001 $ 7,399 $ 7,055 $ 8,621
3/31/2001 $ 6,596 $ 6,045 $ 8,075
4/30/2001 $ 7,539 $ 7,053 $ 8,703
5/31/2001 $ 7,472 $ 7,020 $ 8,761
6/30/2001 $ 7,386 $ 7,023 $ 8,548
7/31/2001 $ 6,995 $ 6,550 $ 8,464
8/31/2001 $ 6,515 $ 6,075 $ 7,934
9/30/2001 $ 5,517 $ 5,071 $ 7,293
10/31/2001 $ 5,987 $ 5,604 $ 7,432
11/30/2001 $ 6,533 $ 6,207 $ 8,002
12/31/2001 $ 6,867 $ 6,443 $ 8,072
1/31/2002 $ 6,596 $ 6,234 $ 7,955
2/28/2002 $ 6,219 $ 5,881 $ 7,801
3/31/2002 $ 6,666 $ 6,330 $ 8,095
4/30/2002 $ 6,339 $ 5,994 $ 7,604
5/31/2002 $ 6,131 $ 5,816 $ 7,548
6/30/2002 $ 5,547 $ 5,174 $ 7,010
7/31/2002 $ 4,840 $ 4,671 $ 6,464
8/31/2002 $ 4,809 $ 4,655 $ 6,506
9/30/2002 $ 4,385 $ 4,285 $ 5,799
10/31/2002 $ 4,761 $ 4,617 $ 6,310
11/30/2002 $ 5,170 $ 4,978 $ 6,681
12/31/2002 $ 4,800 $ 4,678 $ 6,288
1/31/2003 $ 4,732 $ 4,632 $ 6,124
2/28/2003 $ 4,671 $ 4,591 $ 6,032
3/31/2003 $ 4,673 $ 4,677 $ 6,090
4/30/2003 $ 5,048 $ 4,995 $ 6,592
5/31/2003 $ 5,517 $ 5,476 $ 6,939
6/30/2003 $ 5,544 $ 5,554 $ 7,028
7/31/2003 $ 5,682 $ 5,752 $ 7,152
8/31/2003 $ 5,971 $ 6,069 $ 7,291
9/30/2003 $ 5,777 $ 5,952 $ 7,214
10/31/2003 $ 6,235 $ 6,431 $ 7,622
11/30/2003 $ 6,443 $ 6,603 $ 7,689
12/31/2003 $ 6,558 $ 6,675 $ 8,092
1/31/2004 $ 6,740 $ 6,896 $ 8,241
2/29/2004 $ 6,743 $ 7,011 $ 8,355
3/31/2004 $ 6,695 $ 6,998 $ 8,229
4/30/2004 $ 6,429 $ 6,801 $ 8,100
5/31/2004 $ 6,625 $ 6,961 $ 8,211
6/30/2004 $ 6,824 $ 7,072 $ 8,371
7/31/2004 $ 6,364 $ 6,603 $ 8,094
8/31/2004 $ 6,276 $ 6,522 $ 8,127
9/30/2004 $ 6,526 $ 6,766 $ 8,215
10/31/2004 $ 6,752 $ 6,995 $ 8,340
11/30/2004 $ 7,086 $ 7,356 $ 8,678
12/31/2004 $ 7,361 $ 7,709 $ 8,973
1/31/2005 $ 7,153 $ 7,502 $ 8,754
2/28/2005 $ 7,325 $ 7,692 $ 8,938
3/31/2005 $ 7,072 $ 7,580 $ 8,780
4/30/2005 $ 6,729 $ 7,280 $ 8,614
5/31/2005 $ 7,133 $ 7,697 $ 8,888
6/30/2005 $ 7,343 $ 7,840 $ 8,900
7/31/2005 $ 7,785 $ 8,297 $ 9,231
8/31/2005 $ 7,774 $ 8,247 $ 9,147
9/30/2005 $ 7,846 $ 8,354 $ 9,221
10/31/2005 $ 7,661 $ 8,108 $ 9,067
11/30/2005 $ 8,058 $ 8,548 $ 9,410
12/31/2005 $ 8,076 $ 8,641 $ 9,414
1/31/2006 $ 8,519 $ 9,159 $ 9,663
2/28/2006 $ 8,498 $ 9,046 $ 9,689
3/31/2006 $ 8,665 $ 9,299 $ 9,810
4/30/2006 $ 8,631 $ 9,338 $ 9,941
5/31/2006 $ 8,158 $ 8,899 $ 9,655
6/30/2006 $ 8,130 $ 8,862 $ 9,668
7/31/2006 $ 7,864 $ 8,545 $ 9,728
8/31/2006 $ 8,058 $ 8,742 $ 9,959
9/30/2006 $ 8,128 $ 8,941 $10,216
10/31/2006 $ 8,381 $ 9,284 $10,549
11/30/2006 $ 8,706 $ 9,649 $10,750
12/31/2006 $ 8,617 $ 9,562 $10,900
1/31/2007 $ 8,875 $ 9,910 $11,065
2/28/2007 $ 8,970 $ 9,889 $10,849
3/31/2007 $ 9,111 $ 9,941 $10,970
4/30/2007 $ 9,457 $10,377 $11,456
5/31/2007 $ 9,866 $10,798 $11,856
6/30/2007 $ 9,746 $10,611 $11,659
7/31/2007 $ 9,505 $10,373 $11,297
8/31/2007 $ 9,661 $10,429 $11,467
9/30/2007 $10,204 $10,839 $11,896
10/31/2007 $10,472 $11,115 $12,085
11/30/2007 $ 9,561 $10,626 $11,580
12/31/2007 $ 9,553 $10,655 $11,499
1/31/2008 $ 8,559 $ 9,808 $10,810
2/29/2008 $ 8,309 $ 9,659 $10,458
3/31/2008 $ 8,118 $ 9,488 $10,413
4/30/2008 $ 8,800 $10,177 $10,920
5/31/2008 $ 9,185 $10,713 $11,062
6/30/2008 $ 8,503 $ 9,929 $10,129
7/31/2008 $ 8,200 $ 9,552 $10,044
8/31/2008 $ 8,400 $ 9,639 $10,189
9/30/2008 $ 7,406 $ 8,167 $ 9,281
10/31/2008 $ 5,956 $ 6,375 $ 7,723
11/30/2008 $ 5,432 $ 5,722 $ 7,169
12/31/2008 $ 5,452 $ 5,932 $ 7,245
1/31/2009 $ 5,239 $ 5,665 $ 6,634
2/28/2009 $ 4,888 $ 5,234 $ 5,928
3/31/2009 $ 5,325 $ 5,733 $ 6,447
4/30/2009 $ 5,989 $ 6,547 $ 7,064
5/31/2009 $ 6,175 $ 6,886 $ 7,459
6/30/2009 $ 6,237 $ 6,918 $ 7,474
7/31/2009 $ 6,674 $ 7,463 $ 8,039
8/31/2009 $ 6,777 $ 7,692 $ 8,330
9/30/2009 $ 7,252 $ 8,134 $ 8,640
10/31/2009 $ 7,025 $ 7,808 $ 8,480
11/30/2009 $ 7,297 $ 8,172 $ 8,988
12/31/2009 $ 7,748 $ 8,678 $ 9,162
1/31/2010 $ 7,418 $ 8,332 $ 8,832
2/28/2010 $ 7,745 $ 8,745 $ 9,106
3/31/2010 $ 8,300 $ 9,344 $ 9,656
4/30/2010 $ 8,590 $ 9,621 $ 9,808
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/10
- ------- -------
1-Year +44.16%
5-Year +5.52%
Since Inception (1/1/02) +3.23%
CLASS R (1/1/02-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID
CAP GROWTH FUND RUSSELL MIDCAP
DATE - CLASS R GROWTH INDEX S&P 500 Index
- ---- ------------------ -------------- -------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,612 $ 9,675 $ 9,854
2/28/2002 $ 9,066 $ 9,127 $ 9,664
3/31/2002 $ 9,721 $ 9,823 $10,027
4/30/2002 $ 9,246 $ 9,303 $ 9,420
5/31/2002 $ 8,951 $ 9,026 $ 9,350
6/30/2002 $ 8,104 $ 8,030 $ 8,684
7/31/2002 $ 7,073 $ 7,249 $ 8,007
8/31/2002 $ 7,028 $ 7,224 $ 8,060
9/30/2002 $ 6,412 $ 6,650 $ 7,184
10/31/2002 $ 6,964 $ 7,165 $ 7,816
11/30/2002 $ 7,568 $ 7,726 $ 8,276
12/31/2002 $ 7,025 $ 7,259 $ 7,790
1/31/2003 $ 6,932 $ 7,188 $ 7,586
2/28/2003 $ 6,846 $ 7,126 $ 7,472
3/31/2003 $ 6,852 $ 7,258 $ 7,545
4/30/2003 $ 7,401 $ 7,753 $ 8,166
5/31/2003 $ 8,094 $ 8,498 $ 8,596
6/30/2003 $ 8,132 $ 8,620 $ 8,706
7/31/2003 $ 8,338 $ 8,928 $ 8,859
8/31/2003 $ 8,765 $ 9,419 $ 9,032
9/30/2003 $ 8,486 $ 9,237 $ 8,936
10/31/2003 $ 9,163 $ 9,981 $ 9,442
11/30/2003 $ 9,471 $10,248 $ 9,525
12/31/2003 $ 9,644 $10,360 $10,024
1/31/2004 $ 9,917 $10,702 $10,208
2/29/2004 $ 9,923 $10,882 $10,350
3/31/2004 $ 9,856 $10,861 $10,194
4/30/2004 $ 9,468 $10,554 $10,034
5/31/2004 $ 9,763 $10,803 $10,172
6/30/2004 $10,052 $10,975 $10,370
7/31/2004 $ 9,378 $10,248 $10,026
8/31/2004 $ 9,253 $10,122 $10,067
9/30/2004 $ 9,625 $10,500 $10,176
10/31/2004 $ 9,962 $10,856 $10,332
11/30/2004 $10,456 $11,417 $10,750
12/31/2004 $10,876 $11,964 $11,115
1/31/2005 $10,575 $11,643 $10,844
2/28/2005 $10,832 $11,938 $11,073
3/31/2005 $10,466 $11,764 $10,877
4/30/2005 $ 9,962 $11,298 $10,670
5/31/2005 $10,562 $11,945 $11,010
6/30/2005 $10,880 $12,168 $11,025
7/31/2005 $11,538 $12,878 $11,435
8/31/2005 $11,525 $12,799 $11,331
9/30/2005 $11,637 $12,965 $11,423
10/31/2005 $11,368 $12,583 $11,232
11/30/2005 $11,961 $13,266 $11,657
12/31/2005 $11,994 $13,411 $11,661
1/31/2006 $12,656 $14,214 $11,970
2/28/2006 $12,630 $14,039 $12,003
3/31/2006 $12,884 $14,432 $12,152
4/30/2006 $12,839 $14,493 $12,315
5/31/2006 $12,142 $13,811 $11,961
6/30/2006 $12,103 $13,754 $11,977
7/31/2006 $11,715 $13,261 $12,051
8/31/2006 $12,007 $13,567 $12,338
9/30/2006 $12,116 $13,876 $12,655
10/31/2006 $12,502 $14,409 $13,068
11/30/2006 $12,990 $14,975 $13,316
12/31/2006 $12,864 $14,840 $13,503
1/31/2007 $13,250 $15,380 $13,707
2/28/2007 $13,395 $15,347 $13,439
3/31/2007 $13,616 $15,428 $13,590
4/30/2007 $14,137 $16,105 $14,192
5/31/2007 $14,755 $16,758 $14,687
6/30/2007 $14,582 $16,468 $14,443
7/31/2007 $14,227 $16,099 $13,995
8/31/2007 $14,468 $16,186 $14,205
9/30/2007 $15,286 $16,821 $14,736
10/31/2007 $15,690 $17,251 $14,970
11/30/2007 $14,334 $16,491 $14,345
12/31/2007 $14,330 $16,536 $14,245
1/31/2008 $12,841 $15,222 $13,391
2/29/2008 $12,474 $14,990 $12,956
3/31/2008 $12,190 $14,725 $12,900
4/30/2008 $13,221 $15,794 $13,528
5/31/2008 $13,806 $16,626 $13,703
6/30/2008 $12,788 $15,410 $12,548
7/31/2008 $12,334 $14,825 $12,442
8/31/2008 $12,643 $14,960 $12,622
9/30/2008 $11,151 $12,675 $11,498
10/31/2008 $ 8,969 $ 9,893 $ 9,567
11/30/2008 $ 8,186 $ 8,880 $ 8,880
12/31/2008 $ 8,217 $ 9,207 $ 8,975
1/31/2009 $ 7,898 $ 8,792 $ 8,218
2/28/2009 $ 7,373 $ 8,123 $ 7,343
3/31/2009 $ 8,035 $ 8,897 $ 7,986
4/30/2009 $ 9,040 $10,161 $ 8,751
5/31/2009 $ 9,326 $10,686 $ 9,240
6/30/2009 $ 9,421 $10,736 $ 9,259
7/31/2009 $10,087 $11,583 $ 9,959
8/31/2009 $10,248 $11,937 $10,318
9/30/2009 $10,972 $12,624 $10,703
10/31/2009 $10,629 $12,117 $10,505
11/30/2009 $11,047 $12,683 $11,135
12/31/2009 $11,734 $13,468 $11,350
1/31/2010 $11,241 $12,931 $10,941
2/28/2010 $11,742 $13,573 $11,280
3/31/2010 $12,586 $14,502 $11,961
4/30/2010 $13,032 $14,932 $12,150
Annual Report | 51
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/10
- ------------- -------
1-Year +44.93%
5-Year +6.05%
10-Year -0.53%
ADVISOR CLASS (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN SMALL-MID
CAP GROWTH FUND RUSSELL MIDCAP
DATE - ADVISOR CLASS GROWTH INDEX S&P 500 Index
- ---- ------------------ -------------- -------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,346 $ 9,271 $ 9,795
6/30/2000 $10,796 $10,255 $10,036
7/31/2000 $10,144 $ 9,606 $ 9,879
8/31/2000 $11,539 $11,054 $10,493
9/30/2000 $11,157 $10,514 $ 9,939
10/31/2000 $10,295 $ 9,794 $ 9,897
11/30/2000 $ 8,091 $ 7,666 $ 9,117
12/31/2000 $ 8,767 $ 8,069 $ 9,161
1/31/2001 $ 9,204 $ 8,530 $ 9,486
2/28/2001 $ 7,462 $ 7,055 $ 8,621
3/31/2001 $ 6,657 $ 6,045 $ 8,075
4/30/2001 $ 7,617 $ 7,053 $ 8,703
5/31/2001 $ 7,553 $ 7,020 $ 8,761
6/30/2001 $ 7,473 $ 7,023 $ 8,548
7/31/2001 $ 7,085 $ 6,550 $ 8,464
8/31/2001 $ 6,600 $ 6,075 $ 7,934
9/30/2001 $ 5,596 $ 5,071 $ 7,293
10/31/2001 $ 6,075 $ 5,604 $ 7,432
11/30/2001 $ 6,635 $ 6,207 $ 8,002
12/31/2001 $ 6,982 $ 6,443 $ 8,072
1/31/2002 $ 6,710 $ 6,234 $ 7,955
2/28/2002 $ 6,333 $ 5,881 $ 7,801
3/31/2002 $ 6,792 $ 6,330 $ 8,095
4/30/2002 $ 6,467 $ 5,994 $ 7,604
5/31/2002 $ 6,259 $ 5,816 $ 7,548
6/30/2002 $ 5,666 $ 5,174 $ 7,010
7/31/2002 $ 4,948 $ 4,671 $ 6,464
8/31/2002 $ 4,921 $ 4,655 $ 6,506
9/30/2002 $ 4,491 $ 4,285 $ 5,799
10/31/2002 $ 4,879 $ 4,617 $ 6,310
11/30/2002 $ 5,305 $ 4,978 $ 6,681
12/31/2002 $ 4,928 $ 4,678 $ 6,288
1/31/2003 $ 4,863 $ 4,632 $ 6,124
2/28/2003 $ 4,805 $ 4,591 $ 6,032
3/31/2003 $ 4,812 $ 4,677 $ 6,090
4/30/2003 $ 5,200 $ 4,995 $ 6,592
5/31/2003 $ 5,688 $ 5,476 $ 6,939
6/30/2003 $ 5,722 $ 5,554 $ 7,028
7/31/2003 $ 5,867 $ 5,752 $ 7,152
8/31/2003 $ 6,172 $ 6,069 $ 7,291
9/30/2003 $ 5,976 $ 5,952 $ 7,214
10/31/2003 $ 6,455 $ 6,431 $ 7,622
11/30/2003 $ 6,676 $ 6,603 $ 7,689
12/31/2003 $ 6,801 $ 6,675 $ 8,092
1/31/2004 $ 6,997 $ 6,896 $ 8,241
2/29/2004 $ 7,004 $ 7,011 $ 8,355
3/31/2004 $ 6,959 $ 6,998 $ 8,229
4/30/2004 $ 6,687 $ 6,801 $ 8,100
5/31/2004 $ 6,899 $ 6,961 $ 8,211
6/30/2004 $ 7,107 $ 7,072 $ 8,371
7/31/2004 $ 6,634 $ 6,603 $ 8,094
8/31/2004 $ 6,547 $ 6,522 $ 8,127
9/30/2004 $ 6,812 $ 6,766 $ 8,215
10/31/2004 $ 7,053 $ 6,995 $ 8,340
11/30/2004 $ 7,408 $ 7,356 $ 8,678
12/31/2004 $ 7,709 $ 7,709 $ 8,973
1/31/2005 $ 7,499 $ 7,502 $ 8,754
2/28/2005 $ 7,682 $ 7,692 $ 8,938
3/31/2005 $ 7,425 $ 7,580 $ 8,780
4/30/2005 $ 7,071 $ 7,280 $ 8,614
5/31/2005 $ 7,501 $ 7,697 $ 8,888
6/30/2005 $ 7,729 $ 7,840 $ 8,900
7/31/2005 $ 8,199 $ 8,297 $ 9,231
8/31/2005 $ 8,195 $ 8,247 $ 9,147
9/30/2005 $ 8,279 $ 8,354 $ 9,221
10/31/2005 $ 8,090 $ 8,108 $ 9,067
11/30/2005 $ 8,516 $ 8,548 $ 9,410
12/31/2005 $ 8,542 $ 8,641 $ 9,414
1/31/2006 $ 9,019 $ 9,159 $ 9,663
2/28/2006 $ 9,001 $ 9,046 $ 9,689
3/31/2006 $ 9,187 $ 9,299 $ 9,810
4/30/2006 $ 9,160 $ 9,338 $ 9,941
5/31/2006 $ 8,665 $ 8,899 $ 9,655
6/30/2006 $ 8,643 $ 8,862 $ 9,668
7/31/2006 $ 8,368 $ 8,545 $ 9,728
8/31/2006 $ 8,580 $ 8,742 $ 9,959
9/30/2006 $ 8,663 $ 8,941 $10,216
10/31/2006 $ 8,941 $ 9,284 $10,549
11/30/2006 $ 9,292 $ 9,649 $10,750
12/31/2006 $ 9,206 $ 9,562 $10,900
1/31/2007 $ 9,490 $ 9,910 $11,065
2/28/2007 $ 9,598 $ 9,889 $10,849
3/31/2007 $ 9,759 $ 9,941 $10,970
4/30/2007 $10,135 $10,377 $11,456
5/31/2007 $10,584 $10,798 $11,856
6/30/2007 $10,467 $10,611 $11,659
7/31/2007 $10,215 $10,373 $11,297
8/31/2007 $10,392 $10,429 $11,467
9/30/2007 $10,985 $10,839 $11,896
10/31/2007 $11,281 $11,115 $12,085
11/30/2007 $10,308 $10,626 $11,580
12/31/2007 $10,308 $10,655 $11,499
1/31/2008 $ 9,242 $ 9,808 $10,810
2/29/2008 $ 8,983 $ 9,659 $10,458
3/31/2008 $ 8,780 $ 9,488 $10,413
4/30/2008 $ 9,527 $10,177 $10,920
5/31/2008 $ 9,955 $10,713 $11,062
6/30/2008 $ 9,222 $ 9,929 $10,129
7/31/2008 $ 8,900 $ 9,552 $10,044
8/31/2008 $ 9,125 $ 9,639 $10,189
9/30/2008 $ 8,054 $ 8,167 $ 9,281
10/31/2008 $ 6,481 $ 6,375 $ 7,723
11/30/2008 $ 5,916 $ 5,722 $ 7,169
12/31/2008 $ 5,944 $ 5,932 $ 7,245
1/31/2009 $ 5,715 $ 5,665 $ 6,634
2/28/2009 $ 5,335 $ 5,234 $ 5,928
3/31/2009 $ 5,818 $ 5,733 $ 6,447
4/30/2009 $ 6,547 $ 6,547 $ 7,064
5/31/2009 $ 6,758 $ 6,886 $ 7,459
6/30/2009 $ 6,830 $ 6,918 $ 7,474
7/31/2009 $ 7,316 $ 7,463 $ 8,039
8/31/2009 $ 7,436 $ 7,692 $ 8,330
9/30/2009 $ 7,965 $ 8,134 $ 8,640
10/31/2009 $ 7,719 $ 7,808 $ 8,480
11/30/2009 $ 8,025 $ 8,172 $ 8,988
12/31/2009 $ 8,528 $ 8,678 $ 9,162
1/31/2010 $ 8,174 $ 8,332 $ 8,832
2/28/2010 $ 8,540 $ 8,745 $ 9,106
3/31/2010 $ 9,160 $ 9,344 $ 9,656
4/30/2010 $ 9,486 $ 9,621 $ 9,808
ENDNOTES
INVESTORS SHOULD BE COMFORTABLE WITH FLUCTUATIONS IN THE VALUE OF THEIR
INVESTMENT, AS SMALL AND MIDSIZED COMPANY STOCKS CAN BE VOLATILE, ESPECIALLY
OVER THE SHORT TERM. SMALLER OR RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE
PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR
GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE
FUND INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY
VOLATILE AND INVOLVES SPECIAL RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(6.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The Russell Midcap Growth Index is market
capitalization weighted and measures performance of those Russell Midcap
Index companies with higher price-to-book ratios and higher forecasted
growth values.
52 | Annual Report
Your Fund's Expenses
FRANKLIN SMALL-MID CAP GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases; and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 53
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/09 VALUE 4/30/10 PERIOD* 11/1/09-4/30/10
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,227.30 $5.58
Hypothetical (5% return before expenses) $1,000 $1,019.79 $5.06
CLASS B
Actual $1,000 $1,222.70 $9.59
Hypothetical (5% return before expenses) $1,000 $1,016.17 $8.70
CLASS C
Actual $1,000 $1,222.70 $9.70
Hypothetical (5% return before expenses) $1,000 $1,016.07 $8.80
CLASS R
Actual $1,000 $1,226.20 $6.95
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.31
ADVISOR CLASS
Actual $1,000 $1,228.90 $4.20
Hypothetical (5% return before expenses) $1,000 $1,021.03 $3.81
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.01%; B: 1.74%; C: 1.76%; R: 1.26%; and
Advisor: 0.76%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
54 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 32.46 $ 45.77 $ 45.15 $ 42.45 $ 35.26
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.06) (0.03) (0.05) 0.06 0.11
Net realized and unrealized gains (losses) .... 11.15 (13.28) 1.43 2.70 7.08
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. 11.09 (13.31) 1.38 2.76 7.19
---------- ---------- ---------- ---------- ----------
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)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 43.55 $ 32.46 $ 45.77 $ 45.15 $ 42.45
========== ========== ========== ========== ==========
Total return(e) .................................. 34.17% (29.08)% 2.98% 6.50% 20.39%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.01% 1.00% 0.94% 0.96% 0.93%
Expenses net of waiver and payments by
affiliates(f) ................................. 0.99% 1.00% 0.93% 0.96% 0.93%
Net investment income (loss) ..................... (0.16)% (0.08)% (0.10)% 0.15% 0.27%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,899,703 $1,370,025 $2,011,348 $1,977,605 $2,070,364
Portfolio turnover rate .......................... 47.70% 35.95% 36.70% 62.54% 66.63%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 55
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------
CLASS B 2010 2009 2008 2007 2006
- ------- ------- ------- ------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 30.04 $ 42.66 $ 42.43 $ 40.14 $ 33.59
------- ------- ------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.31) (0.29) (0.37) (0.23) (0.19)
Net realized and unrealized gains (losses) .... 10.27 (12.33) 1.34 2.52 6.74
------- ------- ------- -------- --------
Total from investment operations ................. 9.96 (12.62) 0.97 2.29 6.55
------- ------- ------- -------- --------
Less distributions from net realized gains ....... -- -- (0.74) -- --
------- ------- ------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
------- ------- ------- -------- --------
Net asset value, end of year ..................... $ 40.00 $ 30.04 $ 42.66 $ 42.43 $ 40.14
======= ======= ======= ======== ========
Total return(e) .................................. 33.16% (29.58)% 2.19% 5.71% 19.50%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.75% 1.75% 1.69% 1.71% 1.68%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.73% 1.75% 1.68% 1.71% 1.68%
Net investment income (loss) ..................... (0.90)% (0.83)% (0.85)% (0.60)% (0.48)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $36,922 $42,485 $95,600 $118,806 $143,477
Portfolio turnover rate .......................... 47.70% 35.95% 36.70% 62.54% 66.63%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
56 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
CLASS C 2010 2009 2008 2007 2006
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 30.10 $ 42.76 $ 42.52 $ 40.22 $ 33.66
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.32) (0.28) (0.37) (0.23) (0.18)
Net realized and unrealized gains (losses) .... 10.30 (12.38) 1.35 2.53 6.74
-------- -------- -------- -------- --------
Total from investment operations ................. 9.98 (12.66) 0.98 2.30 6.56
-------- -------- -------- -------- --------
Less distributions from net realized gains ....... -- -- (0.74) -- --
-------- -------- -------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 40.08 $ 30.10 $ 42.76 $ 42.52 $ 40.22
======== ======== ======== ======== ========
Total return(e) .................................. 33.16% (29.61)% 2.21% 5.72% 19.49%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.76% 1.74% 1.69% 1.69% 1.68%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.74% 1.74% 1.68% 1.69% 1.68%
Net investment income (loss) ..................... (0.91)% (0.82)% (0.85)% (0.58)% (0.48)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $315,013 $243,308 $375,822 $371,164 $388,478
Portfolio turnover rate .......................... 47.70% 35.95% 36.70% 62.54% 66.63%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 57
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
CLASS R 2010 2009 2008 2007 2006
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 31.91 $ 45.10 $ 44.61 $ 42.01 $ 34.98
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.16) (0.12) (0.16) (0.04) 0.01
Net realized and unrealized gains (losses) .... 10.95 (13.07) 1.41 2.66 7.02
------- ------- ------- ------- -------
Total from investment operations ................. 10.79 (13.19) 1.25 2.62 7.03
------- ------- ------- ------- -------
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)
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 42.70 $ 31.91 $ 45.10 $ 44.61 $ 42.01
======= ======= ======= ======= =======
Total return(e) .................................. 33.81% (29.25)% 2.73% 6.25% 20.07%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.26% 1.25% 1.19% 1.21% 1.18%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.24% 1.25% 1.18% 1.21% 1.18%
Net investment income (loss) ..................... (0.41)% (0.33)% (0.35)% (0.10)% 0.02%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $60,904 $43,940 $66,250 $81,398 $91,229
Portfolio turnover rate .......................... 47.70% 35.95% 36.70% 62.54% 66.63%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
58 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 32.82 $ 46.15 $ 45.41 $ 42.63 $ 35.32
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.04 0.07 0.07 0.16 0.23
Net realized and unrealized gains (losses) .... 11.28 (13.40) 1.43 2.71 7.08
-------- -------- -------- -------- --------
Total from investment operations ................. 11.32 (13.33) 1.50 2.87 7.31
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... -- -- (0.02) (0.09) --
Net realized gains ............................ -- -- (0.74) -- --
-------- -------- -------- -------- --------
Total distributions .............................. -- -- (0.76) (0.09) --
-------- -------- -------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 44.14 $ 32.82 $ 46.15 $ 45.41 $ 42.63
======== ======== ======== ======== ========
Total return(e) .................................. 34.49% (28.88)% 3.23% 6.77% 20.67%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 0.76% 0.75% 0.69% 0.71% 0.68%
Expenses net of waiver and payments by
affiliates(f) ................................. 0.74% 0.75% 0.68% 0.71% 0.68%
Net investment income ............................ 0.09% 0.17% 0.15% 0.40% 0.52%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $856,298 $364,798 $348,245 $297,856 $209,680
Portfolio turnover rate .......................... 47.70% 35.95% 36.70% 62.54% 66.63%
(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) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 59
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
COMMON STOCKS 96.7%
AUTOMOBILES & COMPONENTS 1.8%
Johnson Controls Inc. ............................................... 1,700,000 $ 57,102,999
--------------
BANKS 1.1%
Wells Fargo & Co. ................................................... 1,000,000 33,110,000
--------------
CAPITAL GOODS 7.2%
Cummins Inc. ........................................................ 400,000 28,892,000
Danaher Corp. ....................................................... 425,000 35,819,000
(a) First Solar Inc. .................................................... 165,000 23,685,750
Flowserve Corp. ..................................................... 350,000 40,103,000
(a) Jacobs Engineering Group Inc. ....................................... 350,000 16,877,000
Precision Castparts Corp. ........................................... 400,000 51,336,000
United Technologies Corp. ........................................... 425,000 31,853,750
--------------
228,566,500
--------------
COMMERCIAL & PROFESSIONAL SERVICES 1.1%
(a) Stericycle Inc. ..................................................... 600,000 35,340,000
--------------
CONSUMER DURABLES & APPAREL 2.1%
NIKE Inc., B ........................................................ 450,000 34,159,500
Polo Ralph Lauren Corp. ............................................. 375,000 33,712,500
--------------
67,872,000
--------------
CONSUMER SERVICES 1.4%
(a) Apollo Group Inc., A ................................................ 500,000 28,705,000
Marriott International Inc., A ...................................... 450,000 16,542,000
--------------
45,247,000
--------------
DIVERSIFIED FINANCIALS 3.6%
BlackRock Inc. ...................................................... 85,000 15,640,000
JPMorgan Chase & Co. ................................................ 700,000 29,806,000
Lazard Ltd. ......................................................... 850,000 32,861,000
T. Rowe Price Group Inc. ............................................ 600,000 34,506,000
--------------
112,813,000
--------------
ENERGY 6.4%
Anadarko Petroleum Corp. ............................................ 550,000 34,188,000
(a) Cameron International Corp. ......................................... 900,000 35,514,000
(a) Concho Resources Inc. ............................................... 900,000 51,138,000
(a) FMC Technologies Inc. ............................................... 365,000 24,706,850
(a) Petrohawk Energy Corp. .............................................. 1,150,000 24,828,500
Smith International Inc. ............................................ 700,000 33,432,000
--------------
203,807,350
--------------
FOOD & STAPLES RETAILING 1.8%
CVS Caremark Corp. .................................................. 1,575,000 58,164,750
--------------
FOOD, BEVERAGE & TOBACCO 1.9%
(a) Hansen Natural Corp. ................................................ 625,000 27,550,000
PepsiCo Inc. ........................................................ 500,000 32,610,000
--------------
60,160,000
--------------
60 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES 8.9%
(a) Athenahealth Inc. ................................................... 575,000 $ 16,686,500
C. R. Bard Inc. ..................................................... 375,000 32,448,750
Covidien PLC ........................................................ 350,000 16,796,500
(a) DaVita Inc. ......................................................... 400,000 24,972,000
(a) Edwards Lifesciences Corp. .......................................... 120,702 12,441,962
(a) Express Scripts Inc. ................................................ 475,000 47,561,750
(a) Intuitive Surgical Inc. ............................................. 135,000 48,675,600
Stryker Corp. ....................................................... 400,000 22,976,000
(a) Varian Medical Systems Inc. ......................................... 425,000 23,961,500
(a) VCA Antech Inc. ..................................................... 1,250,000 35,575,000
--------------
282,095,562
--------------
HOUSEHOLD & PERSONAL PRODUCTS 1.0%
The Procter & Gamble Co. ............................................ 500,000 31,080,000
--------------
INSURANCE 1.6%
Aflac Inc. .......................................................... 1,000,000 50,960,000
--------------
MATERIALS 4.6%
Celanese Corp., A ................................................... 1,250,000 39,987,500
Ecolab Inc. ......................................................... 900,000 43,956,000
Praxair Inc. ........................................................ 750,000 62,827,500
--------------
146,771,000
--------------
MEDIA 1.5%
(a) Discovery Communications Inc., C .................................... 469,240 15,658,539
The Walt Disney Co. ................................................. 900,000 33,156,000
--------------
48,814,539
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 7.9%
Abbott Laboratories ................................................. 300,000 15,348,000
(a) Celgene Corp. ....................................................... 825,000 51,108,750
(a) Gilead Sciences Inc. ................................................ 800,000 31,736,000
Johnson & Johnson ................................................... 350,000 22,505,000
Merck & Co. Inc. .................................................... 1,250,000 43,800,000
(a) Onyx Pharmaceuticals Inc. ........................................... 600,000 17,322,000
(a) Salix Pharmaceuticals Ltd. .......................................... 372,774 14,985,515
(a) Talecris Biotherapeutics Holdings Corp. ............................. 479,500 8,990,625
(a) Waters Corp. ........................................................ 600,000 43,194,000
--------------
248,989,890
--------------
RETAILING 5.4%
(a) Amazon.com Inc. ..................................................... 300,000 41,118,000
(a) Dollar General Corp. ................................................ 1,131,500 32,326,955
Expedia Inc. ........................................................ 700,000 16,527,000
(a) Kohl's Corp. ........................................................ 550,000 30,244,500
(a) Priceline.com Inc. .................................................. 95,000 24,894,750
(a) Urban Outfitters Inc. ............................................... 650,000 24,381,500
--------------
169,492,705
--------------
Annual Report | 61
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.7%
Analog Devices Inc. ................................................. 600,000 $ 17,958,000
Intel Corp. ......................................................... 1,050,000 23,971,500
(a) Lam Research Corp. .................................................. 450,000 18,247,500
Microchip Technology Inc. ........................................... 800,000 23,368,000
Xilinx Inc. ......................................................... 1,250,000 32,225,000
--------------
115,770,000
--------------
SOFTWARE & SERVICES 12.2%
(a) Alliance Data Systems Corp. ......................................... 275,000 20,641,500
(a) Concur Technologies Inc. ............................................ 400,000 16,764,000
FactSet Research Systems Inc. ....................................... 300,000 22,566,000
(a) Google Inc., A ...................................................... 110,000 57,798,400
MasterCard Inc., A .................................................. 220,000 54,568,800
(a) Nuance Communications Inc. .......................................... 1,900,000 34,713,000
Oracle Corp. ........................................................ 1,650,000 42,636,000
Paychex Inc. ........................................................ 550,000 16,830,000
(a) SAIC Inc. ........................................................... 1,400,000 24,374,000
(a) SS&C Technologies Holdings Inc. ..................................... 228,800 3,839,264
(a) Sybase Inc. ......................................................... 875,000 37,957,500
Visa Inc., A ........................................................ 600,000 54,138,000
--------------
386,826,464
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 16.1%
(a) Apple Inc. .......................................................... 460,000 120,115,200
(a) Cisco Systems Inc. .................................................. 3,400,000 91,528,000
(a) EMC Corp. ........................................................... 1,850,000 35,168,500
(a) FLIR Systems Inc. ................................................... 1,150,000 35,178,500
Hewlett-Packard Co. ................................................. 1,400,000 72,758,000
(a) Juniper Networks Inc. ............................................... 750,000 21,307,500
National Instruments Corp. .......................................... 750,000 25,935,000
(a) NetApp Inc. ......................................................... 1,000,000 34,670,000
QUALCOMM Inc. ....................................................... 1,250,000 48,425,000
(a) Trimble Navigation Ltd. ............................................. 800,000 26,168,000
--------------
511,253,700
--------------
TELECOMMUNICATION SERVICES 2.5%
(a) American Tower Corp., A ............................................. 1,000,000 40,810,000
(a, b) Anda Networks ....................................................... 36,443 26,603
(a) NII Holdings Inc. ................................................... 900,000 38,178,000
--------------
79,014,603
--------------
TRANSPORTATION 2.9%
C.H. Robinson Worldwide Inc. ........................................ 275,000 16,582,500
Expeditors International of Washington Inc. ......................... 850,000 34,629,000
FedEx Corp. ......................................................... 450,000 40,504,500
--------------
91,716,000
--------------
TOTAL COMMON STOCKS (COST $2,264,634,783) ........................... 3,064,968,062
--------------
62 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN FLEX CAP GROWTH FUND SHARES VALUE
----------------------------- ----------- --------------
PREFERRED STOCKS (COST $9,999,998) 0.3%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.3%
(a, b) FibroGen Inc., pfd., E .............................................. 2,227,171 $ 10,022,270
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $2,274,634,781) ............................................ 3,074,990,332
--------------
SHORT TERM INVESTMENTS (COST $106,406,553) 3.4%
MONEY MARKET FUNDS 3.4%
(c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ......... 106,406,553 106,406,553
--------------
TOTAL INVESTMENTS (COST $2,381,041,334) 100.4% ...................... 3,181,396,885
OTHER ASSETS, LESS LIABILITIES (0.4)% ............................... (12,557,803)
--------------
NET ASSETS 100.0% ................................................... $3,168,839,082
==============
(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.
Annual Report | 63
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED APRIL 30,
---------------------------------
CLASS A 2010 2009 2008(a)
- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 6.27 $ 8.69 $ 10.00
------- ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.02 0.06 0.03
Net realized and unrealized gains (losses) ...... 2.74 (2.36) (1.34)
------- ------- -------
Total from investment operations ................... 2.76 (2.30) (1.31)
------- ------- -------
Less distributions from:
Net investment income ........................... --(d) (0.10) --
Net realized gains .............................. -- (0.02) --
------- ------- -------
Total distributions ................................ --(d) (0.12) --
------- ------- -------
Net asset value, end of year ....................... $ 9.03 $ 6.27 $ 8.69
======= ======= =======
Total return(e) .................................... 44.05% (26.07)% (13.10)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates .. 2.04% 3.99% 5.48%
Expenses net of waiver and payments by affiliates .. 1.09%(g) 1.17%(g) 1.22%
Net investment income .............................. 0.21% 0.91% 0.91%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $10,974 $ 4,889 $ 4,652
Portfolio turnover rate ............................ 42.73% 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.
64 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED APRIL 30,
--------------------------------
CLASS C 2010 2009 2008(a)
- ------- ------ ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 6.24 $ 8.67 $ 10.00
------ ------- -------
Income from investment operations(b):
Net investment income (loss)(c) ................. (0.05) --(d) 0.01
Net realized and unrealized gains (losses) ...... 2.71 (2.33) (1.34)
------ ------- -------
Total from investment operations ................... 2.66 (2.33) (1.33)
------ ------- -------
Less distributions from:
Net investment income ........................... --(d) (0.08) --
Net realized gains .............................. -- (0.02) --
------ ------- -------
Total distributions ................................ --(d) (0.10) --
------ ------- -------
Net asset value, end of year ....................... $ 8.90 $ 6.24 $ 8.67
====== ======= =======
Total return(e) .................................... 42.65% (26.56)% (13.30)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates .. 2.84% 4.67% 6.11%
Expenses net of waiver and payments by affiliates .. 1.89%(g) 1.85%(g) 1.85%
Net investment income (loss) ....................... (0.59)% 0.23% 0.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $1,853 $ 106 $ 41
Portfolio turnover rate ............................ 42.73% 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.
Annual Report | 65
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED APRIL 30,
-------------------------------
CLASS R 2010 2009 2008(a)
- ------- ------ ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 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) ...... 2.74 (2.36) (1.35)
------ ------- -------
Total from investment operations ................... 2.73 (2.31) (1.32)
------ ------- -------
Less distributions from:
Net investment income ........................... -- (0.08) --
Net realized gains .............................. -- (0.02) --
------ ------- -------
Total distributions ................................ -- (0.10) --
------ ------- -------
Net asset value, end of year ....................... $ 9.00 $ 6.27 $ 8.68
====== ======= =======
Total return(d) .................................... 43.54% (26.30)% (13.20)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates .. 2.34% 4.21% 5.65%
Expenses net of waiver and payments by affiliates .. 1.39%(f) 1.39%(f) 1.39%
Net investment income (loss) ....................... (0.09)% 0.69% 0.74%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 21 $ 6 $ 9
Portfolio turnover rate ............................ 42.73% 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.
66 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND
YEAR ENDED APRIL 30,
--------------------------------
ADVISOR CLASS 2010 2009 2008(a)
- ------------- ------ ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 6.28 $ 8.70 $ 10.00
------ ------- -------
Income from investment operations(b):
Net investment income(c) ........................ 0.04 0.08 0.04
Net realized and unrealized gains (losses) ...... 2.74 (2.37) (1.34)
------ ------- -------
Total from investment operations ................... 2.78 (2.29) (1.30)
------ ------- -------
Less distributions from:
Net investment income ........................... --(d) (0.11) --
Net realized gains .............................. -- (0.02) --
------ ------- -------
Total distributions ................................ --(d) (0.13) --
------ ------- -------
Net asset value, end of year ....................... $ 9.06 $ 6.28 $ 8.70
====== ======= =======
Total return(e) .................................... 44.34% (25.93)% (13.00)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates .. 1.84% 3.71% 5.15%
Expenses net of waiver and payments by affiliates .. 0.89%(g) 0.89%(g) 0.89%
Net investment income .............................. 0.41% 1.19% 1.24%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $1,182 $ 167 $ 171
Portfolio turnover rate ............................ 42.73% 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 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.
Annual Report | 67
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
--------------------------------- ------------- ------- -----------
COMMON STOCKS 94.6%
CONSUMER DISCRETIONARY 7.8%
(a) Apollo Group Inc., A .............................. United States 10,490 $ 602,231
(a) Harman International Industries Inc. .............. United States 5,230 206,480
Target Corp. ...................................... United States 5,110 290,606
-----------
1,099,317
-----------
CONSUMER STAPLES 7.3%
Corn Products International Inc. .................. United States 5,330 191,880
CVS Caremark Corp. ................................ United States 15,610 576,477
(a) Hansen Natural Corp. .............................. United States 5,900 260,072
-----------
1,028,429
-----------
ENERGY 9.1%
Marathon Oil Corp. ................................ United States 16,930 544,300
(a) Petrohawk Energy Corp. ............................ United States 14,470 312,407
Petroplus Holdings AG ............................. Switzerland 23,153 416,722
-----------
1,273,429
-----------
FINANCIALS 17.2%
(a) Berkshire Hathaway Inc., B ........................ United States 6,730 518,210
JPMorgan Chase & Co. .............................. United States 10,530 448,367
Legg Mason Inc. ................................... United States 7,370 233,555
Loews Corp. ....................................... United States 8,430 313,933
Northern Trust Corp. .............................. United States 8,350 459,083
U.S. Bancorp ...................................... United States 16,480 441,170
-----------
2,414,318
-----------
HEALTH CARE 17.0%
Aetna Inc. ........................................ United States 15,970 471,914
Alcon Inc. ........................................ Switzerland 1,620 252,493
Merck & Co. Inc. .................................. United States 25,554 895,412
Pharmaceutical Product Development Inc. ........... United States 7,340 201,850
Roche Holding AG .................................. Switzerland 3,580 565,552
-----------
2,387,221
-----------
INDUSTRIALS 13.0%
3M Co. ............................................ United States 2,760 244,729
FedEx Corp. ....................................... United States 2,340 210,623
Precision Castparts Corp. ......................... United States 3,310 424,806
Republic Services Inc. ............................ United States 7,500 232,725
Rockwell Collins Inc. ............................. United States 4,350 282,750
Ryanair Holdings PLC, ADR ......................... Ireland 15,126 425,948
-----------
1,821,581
-----------
INFORMATION TECHNOLOGY 14.1%
(a) Apple Inc. ........................................ United States 860 224,563
Corning Inc. ...................................... United States 29,380 565,565
MasterCard Inc., A ................................ United States 2,160 535,767
Maxim Integrated Products Inc. .................... United States 33,310 646,880
-----------
1,972,775
-----------
68 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN FOCUSED CORE EQUITY FUND COUNTRY SHARES VALUE
--------------------------------- ------------- ------- -----------
COMMON STOCKS (CONTINUED)
MATERIALS 6.3%
Celanese Corp., A ................................. United States 20,390 $ 652,276
Valspar Corp. ..................................... United States 7,560 236,779
-----------
889,055
-----------
TELECOMMUNICATION SERVICES 2.8%
(a) NII Holdings Inc. ................................. United States 9,230 391,537
-----------
TOTAL COMMON STOCKS (COST $11,266,555) ............ 13,277,662
-----------
CONVERTIBLE PREFERRED STOCKS (COST $80,000) 0.8%
FINANCIALS 0.8%
Citigroup Inc., 7.50%, cvt. pfd. .................. United States 800 105,456
-----------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $11,346,555) ............................. 13,383,118
-----------
SHORT TERM INVESTMENTS (COST $953,675) 6.8%
MONEY MARKET FUNDS 6.8%
(b) Institutional Fiduciary Trust Money Market
Portfolio, 0.00% ............................... United States 953,675 953,675
-----------
TOTAL INVESTMENTS (COST $12,300,230) 102.2% ....... 14,336,793
OTHER ASSETS, LESS LIABILITIES (2.2)% ............. (306,594)
-----------
NET ASSETS 100.0% ................................. $14,030,199
===========
See Abbreviations on page 123.
(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.
Annual Report | 69
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- -------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 13.88 $ 20.06 $ 18.54 $ 18.30 $ 13.33
-------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.14) (0.14) (0.15) (0.12) (0.15)
Net realized and unrealized gains (losses) .... 5.85 (6.04) 1.67 0.36 5.12
-------- ------- -------- -------- --------
Total from investment operations ................. 5.71 (6.18) 1.52 0.24 4.97
-------- ------- -------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- ------- -------- -------- --------
Net asset value, end of year ..................... $ 19.59 $ 13.88 $ 20.06 $ 18.54 $ 18.30
======== ======= ======== ======== ========
Total return(e) .................................. 41.14% (30.81)% 8.20% 1.31% 37.28%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.31% 1.32% 1.27% 1.38% 1.39%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.24% 1.32% 1.27% 1.38% 1.39%
Net investment income (loss) ..................... (0.81)% (0.89)% (0.77)% (0.70)% (0.92)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $168,205 $99,939 $137,313 $105,407 $113,713
Portfolio turnover rate .......................... 67.27% 90.24% 133.58% 176.15% 183.31%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
70 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-------------------------------------------------
CLASS B 2010 2009 2008 2007 2006
- ------- ------ ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $13.02 $ 18.95 $ 17.64 $ 17.53 $ 12.87
------ ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.23) (0.24) (0.28) (0.23) (0.26)
Net realized and unrealized gains (losses) .... 5.46 (5.69) 1.59 0.34 4.92
------ ------- ------- ------- -------
Total from investment operations ................. 5.23 (5.93) 1.31 0.11 4.66
------ ------- ------- ------- -------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
------ ------- ------- ------- -------
Net asset value, end of year ..................... $18.25 $ 13.02 $ 18.95 $ 17.64 $ 17.53
====== ======= ======= ======= =======
Total return(e) .................................. 40.17% (31.29)% 7.43% 0.63% 36.21%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 2.00% 2.02% 1.99% 2.08% 2.13%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.93% 2.02% 1.99% 2.08% 2.13%
Net investment income (loss) ..................... (1.50)% (1.59)% (1.49)% (1.40)% (1.66)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $5,275 $ 5,124 $11,528 $15,638 $19,508
Portfolio turnover rate .......................... 67.27% 90.24% 133.58% 176.15% 183.31%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 71
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
CLASS C 2010 2009 2008 2007 2006
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 12.99 $ 18.91 $ 17.61 $ 17.49 $ 12.84
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.24) (0.23) (0.28) (0.23) (0.26)
Net realized and unrealized gains (losses) .... 5.45 (5.69) 1.58 0.35 4.91
------- ------- ------- ------- -------
Total from investment operations ................. 5.21 (5.92) 1.30 0.12 4.65
------- ------- ------- ------- -------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 18.20 $ 12.99 $ 18.91 $ 17.61 $ 17.49
======= ======= ======= ======= =======
Total return(e) .................................. 40.11% (31.31)% 7.38% 0.69% 36.21%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 2.02% 2.03% 1.99% 2.09% 2.14%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.95% 2.03% 1.99% 2.09% 2.14%
Net investment income (loss) ..................... (1.52)% (1.60)% (1.49)% (1.41)% (1.67)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $46,227 $27,519 $40,253 $31,518 $31,167
Portfolio turnover rate .......................... 67.27% 90.24% 133.58% 176.15% 183.31%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
72 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
CLASS R 2010 2009 2008 2007 2006
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 13.67 $ 19.80 $ 18.33 $ 18.12 $ 13.24
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.17) (0.17) (0.20) (0.16) (0.19)
Net realized and unrealized gains (losses) .... 5.75 (5.96) 1.67 0.37 5.07
------- ------- ------- ------- -------
Total from investment operations ................. 5.58 (6.13) 1.47 0.21 4.88
------- ------- ------- ------- -------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 19.25 $ 13.67 $ 19.80 $ 18.33 $ 18.12
======= ======= ======= ======= =======
Total return(e) .................................. 40.82% (30.96)% 8.02% 1.16% 36.86%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.52% 1.54% 1.49% 1.59% 1.64%
Expenses net of waiver and payments by
affiliates(f) ................................. 1.45% 1.54% 1.49% 1.59% 1.64%
Net investment income (loss) ..................... (1.02)% (1.11)% (0.99)% (0.91)% (1.17)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $17,010 $ 7,320 $ 7,863 $ 7,413 $ 5,171
Portfolio turnover rate .......................... 67.27% 90.24% 133.58% 176.15% 183.31%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 73
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.30 $ 20.60 $ 18.99 $ 18.68 $ 13.58
-------- -------- -------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.09) (0.10) (0.10) (0.07) (0.11)
Net realized and unrealized gains (losses) .... 6.03 (6.20) 1.71 0.38 5.21
-------- -------- -------- ------- -------
Total from investment operations ................. 5.94 (6.30) 1.61 0.31 5.10
-------- -------- -------- ------- -------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- ------- -------
Net asset value, end of year ..................... $ 20.24 $ 14.30 $ 20.60 $ 18.99 $ 18.68
======== ======== ======== ======= =======
Total return ..................................... 41.54% (30.58)% 8.48% 1.66% 37.56%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.02% 1.04% 0.99% 1.09% 1.14%
Expenses net of waiver and payments by
affiliates(e) ................................. 0.95% 1.04% 0.99% 1.09% 1.14%
Net investment income (loss) ..................... (0.52)% (0.61)% (0.49)% (0.41)% (0.67)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $245,727 $141,010 $101,885 $85,486 $36,744
Portfolio turnover rate .......................... 67.27% 90.24% 133.58% 176.15% 183.31%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
74 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE
---------------------------------- -------------- --------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 100.7%
CONSUMER DISCRETIONARY 13.1%
(a) Amazon.com Inc. ............................... United States 40,400 $ 5,537,224
Guess? Inc. ................................... United States 186,300 8,545,581
(a) Kohl's Corp. .................................. United States 110,700 6,087,393
NIKE Inc., B .................................. United States 68,000 5,161,880
(a) Peet's Coffee & Tea Inc. ...................... United States 57,500 2,278,150
Polo Ralph Lauren Corp. ....................... United States 50,500 4,539,950
(a) Priceline.com Inc. ............................ United States 32,900 8,621,445
Starwood Hotels & Resorts Worldwide Inc. ...... United States 87,500 4,769,625
(b) Strayer Education Inc. ........................ United States 19,300 4,692,216
(a) Urban Outfitters Inc. ......................... United States 166,300 6,237,913
(a) WMS Industries Inc. ........................... United States 128,600 6,432,572
---------------
62,903,949
---------------
CONSUMER STAPLES 2.1%
(a) Hansen Natural Corp. .......................... United States 124,900 5,505,592
(a) TreeHouse Foods Inc. .......................... United States 110,200 4,660,358
---------------
10,165,950
---------------
ENERGY 8.7%
(a) Brigham Exploration Co. ....................... United States 324,200 6,325,142
(a) Concho Resources Inc. ......................... United States 146,900 8,346,858
(a) FMC Technologies Inc. ......................... United States 107,580 7,282,090
(a) Petrohawk Energy Corp. ........................ United States 242,500 5,235,575
Schlumberger Ltd. ............................. United States 87,580 6,254,964
(a) Weatherford International Ltd. ................ United States 480,000 8,692,800
---------------
42,137,429
---------------
FINANCIALS 5.1%
Bank of America Corp. ......................... United States 269,900 4,812,317
BlackRock Inc. ................................ United States 32,380 5,957,920
The Charles Schwab Corp. ...................... United States 123,900 2,390,031
Janus Capital Group Inc. ...................... United States 165,200 2,326,016
Lazard Ltd. ................................... United States 63,000 2,435,580
(a) MSCI Inc., A .................................. United States 93,700 3,246,705
(a) Primerica Inc. ................................ United States 40,000 948,800
W. R. Berkley Corp. ........................... United States 84,900 2,292,300
---------------
24,409,669
---------------
HEALTH CARE 17.2%
Aetna Inc. .................................... United States 142,300 4,204,965
Allergan Inc. ................................. United States 62,300 3,967,887
(a) Athenahealth Inc. ............................. United States 144,500 4,193,390
(a) BioMarin Pharmaceutical Inc. .................. United States 140,200 3,276,474
(a) Celgene Corp. ................................. United States 159,900 9,905,805
(a) DaVita Inc. ................................... United States 52,000 3,246,360
(a) Express Scripts Inc. .......................... United States 47,100 4,716,123
(a) Gilead Sciences Inc. .......................... United States 100,960 4,005,083
(a) Intuitive Surgical Inc. ....................... United States 24,100 8,689,496
(a) Life Technologies Corp. ....................... United States 126,200 6,904,402
Annual Report | 75
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE
---------------------------------- -------------- --------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HEALTH CARE (CONTINUED)
(a) Onyx Pharmaceuticals Inc. ...................... United States 104,353 $ 3,012,671
Perrigo Co. .................................... United States 67,366 4,111,347
Pharmaceutical Product Development Inc. ........ United States 271,600 7,469,000
(a) Salix Pharmaceuticals Ltd. ..................... United States 184,500 7,416,900
(a) Talecris Biotherapeutics Holdings Corp. ........ United States 215,024 4,031,700
(a) Varian Medical Systems Inc. .................... United States 67,600 3,811,288
---------------
82,962,891
---------------
INDUSTRIALS 13.0%
ABB Ltd., ADR .................................. Switzerland 285,300 5,466,348
(a) Allegiant Travel Co. ........................... United States 60,400 3,106,372
C.H. Robinson Worldwide Inc. ................... United States 41,130 2,480,139
Cummins Inc. ................................... United States 108,000 7,800,840
Expeditors International of Washington Inc. .... United States 181,700 7,402,458
FedEx Corp. .................................... United States 64,300 5,787,643
Flowserve Corp. ................................ United States 55,400 6,347,732
Heico Corp. .................................... United States 81,650 3,516,665
(a) ICF International Inc. ......................... United States 97,100 2,248,836
Precision Castparts Corp. ...................... United States 116,030 14,891,290
(a) Ryanair Holdings PLC, ADR ...................... Ireland 126,800 3,570,688
---------------
62,619,011
---------------
INFORMATION TECHNOLOGY 34.3%
(a) Adobe Systems Inc. ............................. United States 70,500 2,368,095
(a) Alliance Data Systems Corp. .................... United States 99,000 7,430,940
(a) ANSYS Inc. ..................................... United States 96,300 4,333,500
(a) Apple Inc. ..................................... United States 70,600 18,435,072
ARM Holdings PLC ............................... United Kingdom 1,622,100 6,351,572
(a) Calix Networks Inc. ............................ United States 59,900 718,800
(a) Cisco Systems Inc. ............................. United States 132,700 3,572,284
(a) Concur Technologies Inc. ....................... United States 74,550 3,124,391
(a) Cree Inc. ...................................... United States 49,400 3,616,574
(a, c) Dilithium Networks Inc. ........................ United States 376,433 --
(a, c) Dilithium Networks Inc., wts. .................. United States 12,447 30
(a) Dolby Laboratories Inc., A ..................... United States 50,100 3,442,872
(a) EMC Corp. ...................................... United States 238,500 4,533,885
(a) F5 Networks Inc. ............................... United States 77,100 5,275,953
(a) FLIR Systems Inc. .............................. United States 408,000 12,480,720
(a) FormFactor Inc. ................................ United States 73,600 1,104,736
(a) Google Inc., A ................................. United States 18,890 9,925,562
(a) Juniper Networks Inc. .......................... United States 231,900 6,588,279
MasterCard Inc., A ............................. United States 65,600 16,271,424
National Instruments Corp. ..................... United States 68,200 2,358,356
(a) Netezza Corp. .................................. United States 215,900 2,955,671
(a) Netlogic Microsystems Inc. ..................... United States 204,200 6,364,914
(a) Polycom Inc. ................................... United States 153,900 5,009,445
QUALCOMM Inc. .................................. United States 224,980 8,715,725
76 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN GROWTH OPPORTUNITIES FUND COUNTRY SHARES/WARRANTS VALUE
---------------------------------- -------------- --------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS
(CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
(a) Salesforce.com Inc. ............................ United States 82,000 $ 7,019,200
(a) Silicon Laboratories Inc. ...................... United States 116,300 5,623,105
(a) Sybase Inc. .................................... United States 97,900 4,246,902
(a) Trimble Navigation Ltd. ........................ United States 160,840 5,261,076
(a) ViaSat Inc. .................................... United States 105,200 3,729,340
Visa Inc., A ................................... United States 51,000 4,601,730
---------------
165,460,153
---------------
MATERIALS 2.9%
Celanese Corp., A............................... United States 191,800 6,135,682
Ecolab Inc...................................... United States 75,500 3,687,420
Praxair Inc..................................... United States 51,200 4,289,024
---------------
14,112,126
---------------
TELECOMMUNICATION SERVICES 4.3%
(a) NII Holdings Inc. .............................. United States 202,880 8,606,170
(a) SBA Communications Corp. ....................... United States 347,060 12,275,512
---------------
20,881,682
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $366,368,614).......................... 485,652,860
---------------
PREFERRED STOCKS (COST $14,501) 0.0%(d)
INFORMATION TECHNOLOGY 0.0%(d)
(a, c) Dilithium Networks Inc., depository receipt,
D, pfd., 144A, PIPES ........................ United States 28,987 31,886
---------------
TOTAL INVESTMENTS BEFORE CASH COLLATERAL
RECEIVED FOR LOANED SECURITIES
(COST $366,383,115).......................... 485,684,746
---------------
(e) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR
LOANED SECURITIES (COST $4,815,000) 1.0%
MONEY MARKET FUNDS 1.0%
(f) Bank of New York Institutional Cash Reserve
Fund, Series A, 0.16% ....................... 4,815,000 4,815,000
---------------
TOTAL INVESTMENTS (COST $371,198,115) 101.7% ... 490,499,746
OTHER ASSETS, LESS LIABILITIES (1.7)% .......... (8,055,128)
---------------
NET ASSETS 100.0% .............................. $ 482,444,618
===============
See Abbreviations on page 123.
(a) Non-income producing.
(b) A portion or all of the security is on loan at April 30, 2010. See Note
1(c).
(c) See Note 8 regarding restricted securities.
(d) Rounds to less than 0.1% of net assets.
(e) See Note 1(c) 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.
Annual Report | 77
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
----------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.41 $ 9.09 $ 13.05 $ 13.90 $ 10.63
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.09) (0.08) (0.09) (0.10) (0.08)
Net realized and unrealized gains (losses) .... 3.70 (2.53) (1.59) 0.58 3.35
-------- -------- -------- -------- --------
Total from investment operations ................. 3.61 (2.61) (1.68) 0.48 3.27
-------- -------- -------- -------- --------
Less distributions from net realized gains ....... -- (0.07) (2.28) (1.33) --
-------- -------- -------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 10.02 $ 6.41 $ 9.09 $ 13.05 $ 13.90
======== ======== ======== ======== ========
Total return(e) .................................. 56.32% (28.54)% (14.73)% 4.02% 30.76%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.37% 1.34% 1.17% 1.20% 1.16%
Expenses net of waiver and payments by
affiliates .................................... 1.35% 1.34%(f) 1.17%(f) 1.20%(f) 1.16%(f)
Net investment income (loss) ..................... (1.06)% (1.07)% (0.72)% (0.77)% (0.61)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $197,461 $123,037 $274,142 $549,733 $693,084
Portfolio turnover rate .......................... 61.32% 43.04% 48.52% 51.49% 44.34%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
78 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
---------------------------------------------------------
CLASS B 2010 2009 2008 2007 2006
- ------- ------ ------- ------- ------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 5.89 $ 8.43 $ 12.35 $ 13.32 $ 10.26
------ ------- ------- ------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.13) (0.12) (0.16) (0.18) (0.16)
Net realized and unrealized gains (losses) .... 3.37 (2.35) (1.48) 0.54 3.22
------ ------- ------- ------- --------
Total from investment operations ................. 3.24 (2.47) (1.64) 0.36 3.06
------ ------- ------- ------- --------
Less distributions from net realized gains ....... -- (0.07) (2.28) (1.33) --
------ ------- ------- ------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
------ ------- ------- ------- --------
Net asset value, end of year ..................... $ 9.13 $ 5.89 $ 8.43 $ 12.35 $ 13.32
====== ======= ======= ======= ========
Total return(e) .................................. 55.01% (29.11)% (15.27)% 3.27% 29.82%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 2.09% 2.04% 1.92% 1.96% 1.91%
Expenses net of waiver and payments by
affiliates .................................... 2.07% 2.04%(f) 1.92%(f) 1.96%(f) 1.91%(f)
Net investment income (loss) ..................... (1.78)% (1.77)% (1.47)% (1.53)% (1.36)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $6,019 $15,159 $52,465 $85,684 $111,458
Portfolio turnover rate .......................... 61.32% 43.04% 48.52% 51.49% 44.34%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 79
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
CLASS C 2010 2009 2008 2007 2006
- ------- ------- ------- ------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 5.89 $ 8.43 $ 12.36 $ 13.33 $ 10.27
------- ------- ------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.13) (0.12) (0.16) (0.18) (0.16)
Net realized and unrealized gains (losses) .... 3.39 (2.35) (1.49) 0.54 3.22
------- ------- ------- -------- --------
Total from investment operations ................. 3.26 (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)
------- ------- ------- -------- --------
Net asset value, end of year ..................... $ 9.15 $ 5.89 $ 8.43 $ 12.36 $ 13.33
======= ======= ======= ======== ========
Total return(e) .................................. 55.35% (29.11)% (15.35)% 3.27% 29.80%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 2.10% 2.04% 1.92% 1.95% 1.92%
Expenses net of waiver and payments by
affiliates .................................... 2.08% 2.04%(f) 1.92%(f) 1.95%(f) 1.92%(f)
Net investment income (loss) ..................... (1.79)% (1.77)% (1.47)% (1.52)% (1.37)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $57,298 $40,180 $75,846 $120,900 $170,159
Portfolio turnover rate .......................... 61.32% 43.04% 48.52% 51.49% 44.34%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
80 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
------------------------------------------------------
CLASS R 2010 2009 2008 2007 2006
- ------- ------ ------- ------- ------ ------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.26 $ 8.91 $ 12.86 $13.75 $10.54
------ ------- ------- ------ ------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.10) (0.09) (0.11) (0.13) (0.11)
Net realized and unrealized gains (losses) .... 3.61 (2.49) (1.56) 0.57 3.32
------ ------- ------- ------ ------
Total from investment operations ................. 3.51 (2.58) (1.67) 0.44 3.21
------ ------- ------- ------ ------
Less distributions from net realized gains ....... -- (0.07) (2.28) (1.33) --
------ ------- ------- ------ ------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
------ ------- ------- ------ ------
Net asset value, end of year ..................... $ 9.77 $ 6.26 $ 8.91 $12.86 $13.75
====== ======= ======= ====== ======
Total return(e) .................................. 56.07% (28.78)% (14.87)% 3.77% 30.46%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.60% 1.54% 1.42% 1.46% 1.42%
Expenses net of waiver and payments by
affiliates .................................... 1.58% 1.54%(f) 1.42%(f) 1.46%(f) 1.42%(f)
Net investment income (loss) ..................... (1.29)% (1.27)% (0.97)% (1.03)% (0.87)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $4,290 $ 1,912 $ 3,166 $5,759 $6,328
Portfolio turnover rate .......................... 61.32% 43.04% 48.52% 51.49% 44.34%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 81
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- -------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.63 $ 9.37 $ 13.34 $ 14.15 $ 10.79
-------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.07) (0.06) (0.05) (0.07) (0.05)
Net realized and unrealized gains (losses) .... 3.83 (2.61) (1.64) 0.59 3.41
-------- ------- -------- -------- --------
Total from investment operations ................. 3.76 (2.67) (1.69) 0.52 3.36
-------- ------- -------- -------- --------
Less distributions from net realized gains ....... -- (0.07) (2.28) (1.33) --
-------- ------- -------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- ------- -------- -------- --------
Net asset value, end of year ..................... $ 10.39 $ 6.63 $ 9.37 $ 13.34 $ 14.15
======== ======= ======== ======== ========
Total return ..................................... 56.71% (28.32)% (14.46)% 4.24% 31.14%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................... 1.10% 1.04% 0.92% 0.96% 0.92%
Expenses net of waiver and payments by
affiliates .................................... 1.08% 1.04%(e) 0.92%(e) 0.96%(e) 0.92%(e)
Net investment income (loss) ..................... (0.79)% (0.77)% (0.47)% (0.53)% (0.37)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $114,212 $57,957 $220,857 $325,425 $326,475
Portfolio turnover rate .......................... 61.32% 43.04% 48.52% 51.49% 44.34%
(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) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
82 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ -------------- ---------------
COMMON STOCKS 94.6%
CONSUMER DISCRETIONARY 15.5%
(a) Buffalo Wild Wings Inc. ........................ 72,500 $ 2,997,150
(a) Capella Education Co. .......................... 29,400 2,664,228
(a) Chipotle Mexican Grill Inc. .................... 20,500 2,765,655
(a) Coinstar Inc. .................................. 121,100 5,371,996
(a) Drew Industries Inc. ........................... 74,100 1,900,665
Gaiam Inc., A .................................. 390,732 3,540,032
(a) Grand Canyon Education Inc. .................... 108,900 2,633,202
Guess? Inc. .................................... 40,100 1,839,387
(a) Gymboree Corp. ................................. 79,400 3,900,922
(a) Iconix Brand Group Inc. ........................ 165,100 2,849,626
(a) Lions Gate Entertainment Corp. ................. 766,100 5,301,412
(a) Panera Bread Co. ............................... 25,600 1,995,264
(a) Peet's Coffee & Tea Inc. ....................... 72,200 2,860,564
(a) Shuffle Master Inc. ............................ 467,200 4,485,120
(a) Tenneco Inc. ................................... 165,100 4,254,627
Tractor Supply Co. ............................. 40,600 2,727,102
(a) Under Armour Inc., A ........................... 109,100 3,682,125
(a) Vitamin Shoppe Inc. ............................ 115,600 2,869,192
---------------
58,638,269
---------------
CONSUMER STAPLES 3.2%
(a) Hain Celestial Group Inc. ...................... 212,600 4,205,228
(a) Hansen Natural Corp. ........................... 83,500 3,680,680
(a) TreeHouse Foods Inc. ........................... 101,500 4,292,435
---------------
12,178,343
---------------
ENERGY 5.3%
(a) Bill Barrett Corp. ............................. 109,500 3,731,760
(a) Brigham Exploration Co. ........................ 238,300 4,649,233
(a) Comstock Resources Inc. ........................ 82,100 2,632,126
(a) Dril-Quip Inc. ................................. 41,600 2,409,888
(a) Helix Energy Solutions Group Inc. .............. 136,000 1,982,880
(a) Superior Energy Services Inc. .................. 171,400 4,638,084
---------------
20,043,971
---------------
FINANCIALS 8.5%
(a) Affiliated Managers Group Inc. ................. 46,700 3,931,206
(a) Chatham Lodging Trust .......................... 99,600 1,977,060
Evercore Partners Inc. ......................... 99,200 3,555,328
(a) FelCor Lodging Trust Inc. ...................... 216,600 1,756,626
First Interstate BancSystem Inc. ............... 98,700 1,592,031
First Midwest Bancorp Inc. ..................... 105,300 1,600,560
Glacier Bancorp Inc. ........................... 98,400 1,819,416
(a) iStar Financial Inc. ........................... 200,000 1,342,000
Janus Capital Group Inc. ....................... 318,500 4,484,480
Northwest Bancshares Inc. ...................... 243,600 3,042,564
(a) Signature Bank ................................. 90,700 3,662,466
(a) Stifel Financial Corp. ......................... 56,200 3,221,946
---------------
31,985,683
---------------
Annual Report | 83
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ -------------- ---------------
COMMON STOCKS (CONTINUED)
HEALTH CARE 17.9%
(a) American Medical Systems Holdings Inc. ......... 258,100 $ 4,625,152
(a) Ardea Biosciences Inc. ......................... 46,900 1,191,260
(a) ArQule Inc. .................................... 187,200 1,192,464
(a) Athenahealth Inc. .............................. 91,300 2,649,526
(a) BioMarin Pharmaceutical Inc. ................... 138,800 3,243,756
(a) Cadence Pharmaceuticals Inc. ................... 239,700 2,349,060
(a) Community Health Systems Inc. .................. 96,900 3,959,334
(a) Dexcom Inc. .................................... 466,000 5,102,700
(a) Impax Laboratories Inc. ........................ 195,400 3,536,740
(a) Map Pharmaceuticals Inc. ....................... 88,700 1,593,052
Masimo Corp. ................................... 112,800 2,640,648
(a) Medidata Solutions Inc. ........................ 65,800 965,286
(a) MWI Veterinary Supply Inc. ..................... 45,800 1,921,310
(a) Myriad Genetics Inc. ........................... 70,200 1,685,502
(a) Onyx Pharmaceuticals Inc. ...................... 68,400 1,974,708
(a) PAREXEL International Corp. .................... 253,100 5,968,098
(a) Penwest Pharmaceuticals Co. .................... 354,000 1,242,540
(a) Phase Forward Inc. ............................. 343,400 5,772,554
(a) Psychiatric Solutions Inc. ..................... 93,200 2,998,244
Quality Systems Inc. ........................... 27,500 1,760,275
(a) Salix Pharmaceuticals Ltd. ..................... 65,500 2,633,100
(a) Savient Pharmaceuticals Inc. ................... 67,700 981,650
(a, b) Sequenom Inc. .................................. 98,600 611,320
STERIS Corp. ................................... 63,300 2,106,624
(a) Transcept Pharmaceuticals Inc. ................. 117,400 1,206,872
(a) VCA Antech Inc. ................................ 138,600 3,944,556
---------------
67,856,331
---------------
INDUSTRIALS 10.6%
(a) Aerovironment Inc. ............................. 65,300 1,709,554
(a) Allegiant Travel Co. ........................... 87,100 4,479,553
(a) Clean Harbors Inc. ............................. 85,200 5,404,236
(a) Digitalglobe Inc. .............................. 66,300 1,760,928
(a) FTI Consulting Inc. ............................ 94,700 3,895,011
Heico Corp. .................................... 104,775 4,512,659
(a) Huron Consulting Group Inc. .................... 89,700 2,100,774
(a) ICF International Inc. ......................... 115,100 2,665,716
Kaydon Corp. ................................... 68,700 2,859,981
Knight Transportation Inc. ..................... 128,900 2,744,281
(a) Marten Transport Ltd. .......................... 22,100 482,885
(a) Mobile Mini Inc. ............................... 308,100 5,120,622
Wabtec Corp. ................................... 53,700 2,555,046
---------------
40,291,246
---------------
INFORMATION TECHNOLOGY 31.6%
(a) ANSYS Inc. ..................................... 84,100 3,784,500
(a) Art Technology Group Inc. ...................... 894,700 3,829,316
(a) Atheros Communications ......................... 95,100 3,693,684
(a) Bottomline Technologies Inc. ................... 395,804 6,886,990
(a) Calix Networks Inc. ............................ 51,522 618,264
(a) Coherent Inc. .................................. 65,700 2,468,349
84 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN SMALL CAP GROWTH FUND SHARES VALUE
------------------------------ -------------- ---------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
(a) CyberSource Corp. .............................. 82,400 $ 2,116,032
(a) Cymer Inc. ..................................... 104,700 3,575,505
(a) DivX Inc. ...................................... 390,900 3,267,924
(a) Echo Global Logistics Inc. ..................... 224,300 3,025,807
(a) FARO Technologies Inc. ......................... 230,800 5,818,468
(a) FormFactor Inc. ................................ 137,700 2,066,877
(a) GSI Commerce Inc. .............................. 160,100 4,362,725
(a) Ixia ........................................... 629,200 6,449,300
(a) Microsemi Corp. ................................ 223,800 3,706,128
National Instruments Corp. ..................... 147,200 5,090,176
(a) Netezza Corp. .................................. 312,200 4,274,018
(a) Netlogic Microsystems Inc. ..................... 164,000 5,111,880
(a) Nuance Communications Inc. ..................... 164,400 3,003,588
(a) Polycom Inc. ................................... 199,800 6,503,490
Power Integrations Inc. ........................ 103,300 3,974,984
(a) Quest Software Inc. ............................ 146,900 2,575,157
(a) Quinstreet Inc. ................................ 195,200 3,296,928
Sapient Corp. .................................. 534,920 5,472,232
(a) Shoretel Inc. .................................. 333,100 2,181,805
(a) Silicon Laboratories Inc. ...................... 116,400 5,627,940
(a) Taleo Corp., A ................................. 191,400 4,972,572
(a) Trimble Navigation Ltd. ........................ 93,800 3,068,198
(a) Varian Semiconductor Equipment Associates
Inc. ........................................ 135,475 4,462,546
(a) ViaSat Inc. .................................... 129,800 4,601,410
---------------
119,886,793
---------------
MATERIALS 0.8%
(a) STR holdings Inc. .............................. 135,800 3,131,548
---------------
TELECOMMUNICATION SERVICES 1.2%
(a) SBA Communications Corp. ....................... 129,400 4,576,878
---------------
TOTAL COMMON STOCKS (COST $270,628,848) ........ 358,589,062
---------------
SHORT TERM INVESTMENTS 5.5%
MONEY MARKET FUNDS (COST $20,355,255) 5.3%
(c) Institutional Fiduciary Trust Money Market
Portfolio, 0.00% ............................ 20,355,255 20,355,255
---------------
(d) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR
LOANED SECURITIES 0.2%
MONEY MARKET FUNDS (COST $665,000) 0.2%
(e) Bank of New York Institutional Cash Reserve
Fund, Series A, 0.16% ....................... 665,000 665,000
---------------
TOTAL INVESTMENTS (COST $291,649,103) 100.1% ... 379,609,317
OTHER ASSETS, LESS LIABILITIES (0.1)% .......... (328,712)
---------------
NET ASSETS 100.0% .............................. $ 379,280,605
===============
See Abbreviations on page 123.
(a) Non-income producing.
(b) A portion or all of the security is on loan at April 30, 2010. See Note
1(c).
(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.
(d) See Note 1(c) regarding securities on loan.
(e) The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
Annual Report | 85
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........... $ 22.34 $ 32.70 $ 41.54 $ 40.42 $ 31.31
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income (loss)(b) ........... (0.13) (0.11) (0.19) (0.13) --(c)
Net realized and unrealized gains
(losses) ............................... 10.08 (10.19) (1.93) 4.09 9.15
---------- ---------- ---------- ---------- ----------
Total from investment operations ............. 9.95 (10.30) (2.12) 3.96 9.15
---------- ---------- ---------- ---------- ----------
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)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................. $ 32.29 $ 22.34 $ 32.70 $ 41.54 $ 40.42
========== ========== ========== ========== ==========
Total return(e) .............................. 44.54% (31.46)% (6.24)% 10.38% 29.21%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................. 1.04% 1.08% 1.02% 0.98% 0.96%
Net investment income (loss) ................. (0.48)% (0.45)% (0.50)% (0.33)% --%(g)
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $2,585,515 $2,195,975 $4,331,657 $5,619,694 $6,532,284
Portfolio turnover rate ...................... 55.44% 54.86% 55.09% 52.76% 39.84%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
86 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
--------------------------------------------------
CLASS B 2010 2009 2008 2007 2006
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........... $ 21.01 $ 31.00 $ 40.00 $ 39.31 $ 30.65
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ........... (0.31) (0.29) (0.46) (0.40) (0.27)
Net realized and unrealized gains
(losses) ............................... 9.44 (9.64) (1.82) 3.93 8.93
------- ------- ------- ------- -------
Total from investment operations ............. 9.13 (9.93) (2.28) 3.53 8.66
------- ------- ------- ------- -------
Less distributions from net realized gains ... -- (0.06) (6.72) (2.84) --
------- ------- ------- ------- -------
Redemption fees(c) ........................... -- --(d) --(d) --(d) --(d)
------- ------- ------- ------- -------
Net asset value, end of year ................. $ 30.14 $ 21.01 $ 31.00 $ 40.00 $ 39.31
======= ======= ======= ======= =======
Total return(e) .............................. 43.46% (31.99)% (6.92)% 9.53% 28.25%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................. 1.78% 1.83% 1.77% 1.73% 1.71%
Net investment income (loss) ................. (1.22)% (1.20)% (1.25)% (1.08)% (0.75)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $16,233 $13,399 $25,457 $32,570 $36,911
Portfolio turnover rate ...................... 55.44% 54.86% 55.09% 52.76% 39.84%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 87
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
CLASS C 2010 2009 2008 2007 2006
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........... $ 20.29 $ 29.92 $ 38.85 $ 38.25 $ 29.82
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ........... (0.30) (0.27) (0.45) (0.39) (0.26)
Net realized and unrealized gains
(losses) ............................... 9.11 (9.30) (1.76) 3.83 8.69
-------- -------- -------- -------- --------
Total from investment operations ............. 8.81 (9.57) (2.21) 3.44 8.43
-------- -------- -------- -------- --------
Less distributions from net realized gains ... -- (0.06) (6.72) (2.84) --
-------- -------- -------- -------- --------
Redemption fees(c) ........................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 29.10 $ 20.29 $ 29.92 $ 38.85 $ 38.25
======== ======== ======== ======== ========
Total return(e) .............................. 43.42% (31.94)% (6.94)% 9.56% 28.27%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................. 1.79% 1.83% 1.77% 1.72% 1.71%
Net investment income (loss) ................. (1.23)% (1.20)% (1.25)% (1.07)% (0.75)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $366,292 $285,597 $523,040 $653,529 $728,710
Portfolio turnover rate ...................... 55.44% 54.86% 55.09% 52.76% 39.84%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
88 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
---------------------------------------------------
CLASS R 2010 2009 2008 2007 2006
- ------- ------- ------- ------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 21.85 $ 32.06 $ 40.96 $ 39.98 $ 31.04
------- ------- ------- -------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.19) (0.17) (0.29) (0.23) (0.08)
Net realized and unrealized gains (losses) .... 9.84 (9.98) (1.89) 4.05 9.04
------- ------- ------- -------- -------
Total from investment operations ................. 9.65 (10.15) (2.18) 3.82 8.96
------- ------- ------- -------- -------
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)
------- ------- ------- -------- -------
Net asset value, end of year ..................... $ 31.50 $ 21.85 $ 32.06 $ 40.96 $ 39.98
======= ======= ======= ======== =======
Total returne .................................... 44.16% (31.62)% (6.48)% 10.11% 28.88%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ...................................... 1.29% 1.33% 1.27% 1.23% 1.21%
Net investment income (loss) ..................... (0.73)% (0.70)% (0.75)% (0.58)% (0.25)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $69,415 $54,180 $94,334 $118,387 $93,916
Portfolio turnover rate .......................... 55.44% 54.86% 55.09% 52.76% 39.84%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 89
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 22.90 $ 33.43 $ 42.22 $ 40.93 $ 31.71
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............... (0.07) (0.05) (0.10) (0.03) 0.10
Net realized and unrealized gains (losses) .... 10.36 (10.42) (1.97) 4.16 9.26
-------- -------- -------- -------- --------
Total from investment operations ................. 10.29 (10.47) (2.07) 4.13 9.36
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... -- -- -- -- (0.14)
Net realized gains ............................ -- (0.06) (6.72) (2.84) --
-------- -------- -------- -------- --------
Total distributions .............................. -- (0.06) (6.72) (2.84) (0.14)
-------- -------- -------- -------- --------
Redemption fees(c) ............................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 33.19 $ 22.90 $ 33.43 $ 42.22 $ 40.93
======== ======== ======== ======== ========
Total return ..................................... 44.93% (31.28)% (6.00)% 10.65% 29.55%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ...................................... 0.79% 0.83% 0.77% 0.73% 0.71%
Net investment income (loss) ..................... (0.23)% (0.20)% (0.25)% (0.08)% 0.25%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $783,021 $498,207 $812,503 $803,365 $794,395
Portfolio turnover rate .......................... 55.44% 54.86% 55.09% 52.76% 39.84%
(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) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
90 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ------------ ---------------
COMMON STOCKS 96.6%
CONSUMER DISCRETIONARY 17.8%
Advance Auto Parts Inc. ............................................. 410,000 $ 18,491,000
(a) Apollo Group Inc., A ................................................ 368,800 21,172,808
(a) BorgWarner Inc. ..................................................... 1,062,200 46,035,748
(a) Buffalo Wild Wings Inc. ............................................. 565,000 23,357,100
(a) Capella Education Co. ............................................... 100,000 9,062,000
(a) Chipotle Mexican Grill Inc. ......................................... 228,300 30,799,953
(a) Dick's Sporting Goods Inc. .......................................... 1,000,000 29,110,000
(a) Discovery Communications Inc., A .................................... 600,000 23,220,000
(a) Dollar General Corp. ................................................ 942,335 26,922,511
Expedia Inc. ........................................................ 800,000 18,888,000
Guess? Inc. ......................................................... 1,220,000 55,961,400
Jarden Corp. ........................................................ 1,027,600 33,006,512
Johnson Controls Inc. ............................................... 1,675,000 56,263,250
(a) Kohl's Corp. ........................................................ 870,000 47,841,300
(a) Peet's Coffee & Tea Inc. ............................................ 180,400 7,147,448
Polo Ralph Lauren Corp. ............................................. 315,000 28,318,500
(a) Priceline.com Inc. .................................................. 140,000 36,687,000
Starwood Hotels & Resorts Worldwide Inc. ............................ 725,000 39,519,750
(a) Under Armour Inc., A ................................................ 908,335 30,656,306
(a) Urban Outfitters Inc. ............................................... 823,700 30,896,987
(a) WMS Industries Inc. ................................................. 650,000 32,513,000
Wolverine World Wide Inc. ........................................... 1,136,642 34,792,612
---------------
680,663,185
---------------
CONSUMER STAPLES 1.6%
(a) Hansen Natural Corp. ................................................ 770,000 33,941,600
Mead Johnson Nutrition Co., A ....................................... 550,000 28,385,500
---------------
62,327,100
---------------
ENERGY 6.7%
(a) Cameron International Corp. ......................................... 1,061,500 41,886,790
(a) Concho Resources Inc. ............................................... 1,375,600 78,161,592
(a) FMC Technologies Inc. ............................................... 460,000 31,137,400
Noble Corp. ......................................................... 420,000 16,585,800
Peabody Energy Corp. ................................................ 650,000 30,368,000
(a) Petrohawk Energy Corp. .............................................. 1,240,000 26,771,600
(a) Weatherford International Ltd. ...................................... 1,600,000 28,976,000
---------------
253,887,182
---------------
FINANCIALS 7.3%
(a) Affiliated Managers Group Inc. ...................................... 365,000 30,725,700
The Charles Schwab Corp. ............................................ 1,383,400 26,685,786
First Niagara Financial Group Inc. .................................. 1,350,000 18,765,000
(a) IntercontinentalExchange Inc. ....................................... 175,000 20,410,250
(a, b) iStar Financial Inc. ................................................ 3,747,379 25,144,913
Janus Capital Group Inc. ............................................ 1,400,000 19,712,000
Lazard Ltd. ......................................................... 720,000 27,835,200
Northern Trust Corp. ................................................ 420,000 23,091,600
People's United Financial Inc. ...................................... 1,200,000 18,636,000
Annual Report | 91
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ------------ ---------------
COMMON STOCKS (CONTINUED)
FINANCIALS (CONTINUED)
T. Rowe Price Group Inc. ............................................ 755,100 $ 43,425,801
W. R. Berkley Corp. ................................................. 900,000 24,300,000
---------------
278,732,250
---------------
HEALTH CARE 18.9%
Aetna Inc. .......................................................... 1,425,000 42,108,750
(a) Allscripts-Misys Healthcare Solutions Inc. .......................... 1,098,700 22,160,779
(a) ArQule Inc. ......................................................... 1,493,900 9,516,143
(a) Athenahealth Inc. ................................................... 200,000 5,804,000
(a) BioMarin Pharmaceutical Inc. ........................................ 929,500 21,722,415
C. R. Bard Inc. ..................................................... 523,200 45,272,496
(a) Cerner Corp. ........................................................ 383,600 32,571,476
(a) Community Health Systems Inc. ....................................... 1,636,986 66,887,248
(a) DaVita Inc. ......................................................... 496,800 31,015,224
(a) Dendreon Corp. ...................................................... 325,000 17,621,500
(a) Edwards Lifesciences Corp. .......................................... 350,000 36,078,000
(a) Express Scripts Inc. ................................................ 450,000 45,058,500
(a) Human Genome Sciences Inc. .......................................... 350,000 9,691,500
(a) Intuitive Surgical Inc. ............................................. 75,000 27,042,000
Masimo Corp. ........................................................ 226,700 5,307,047
(a) Mettler-Toledo International Inc. ................................... 391,727 49,153,904
(a) Myriad Genetics Inc. ................................................ 651,200 15,635,312
(a) Onyx Pharmaceuticals Inc. ........................................... 312,800 9,030,536
Pharmaceutical Product Development Inc. ............................. 1,020,000 28,050,000
(a) QIAGEN NV (Netherlands) ............................................. 1,500,000 34,275,000
(a) Salix Pharmaceuticals Ltd. .......................................... 561,497 22,572,179
(a) Savient Pharmaceuticals Inc. ........................................ 680,000 9,860,000
(a, b) Sequenom Inc. ....................................................... 570,800 3,538,960
(a) Stereotaxis Inc. .................................................... 1,813,200 8,612,700
(a) Talecris Biotherapeutics Holdings Corp. ............................. 1,488,300 27,905,625
(a) Varian Medical Systems Inc. ......................................... 765,000 43,130,700
(a) Waters Corp. ........................................................ 745,000 53,632,550
---------------
723,254,544
---------------
INDUSTRIALS 15.4%
(a) Allegiant Travel Co. ................................................ 430,000 22,114,900
AMETEK Inc. ......................................................... 692,000 29,929,000
C.H. Robinson Worldwide Inc. ........................................ 385,000 23,215,500
(a) Copart Inc. ......................................................... 560,000 19,986,400
Cummins Inc. ........................................................ 750,000 54,172,500
Danaher Corp. ....................................................... 398,400 33,577,152
(a) First Solar Inc. .................................................... 350,500 50,314,275
Flowserve Corp. ..................................................... 486,800 55,777,544
Fluor Corp. ......................................................... 350,000 18,494,000
J.B. Hunt Transport Services Inc. ................................... 775,000 28,566,500
(a) Jacobs Engineering Group Inc. ....................................... 400,000 19,288,000
Joy Global Inc. ..................................................... 600,000 34,086,000
Knight Transportation Inc. .......................................... 500,000 10,645,000
92 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN SMALL-MID CAP GROWTH FUND SHARES VALUE
---------------------------------- ------------ ---------------
COMMON STOCKS (CONTINUED)
INDUSTRIALS (CONTINUED)
Precision Castparts Corp. ........................................... 507,110 $ 65,082,497
Robert Half International Inc. ...................................... 939,800 25,731,724
Rockwell Collins Inc. ............................................... 764,300 49,679,500
(a) Ryanair Holdings PLC, ADR (Ireland) ................................. 1,156,600 32,569,856
(a) Tetra Tech Inc. ..................................................... 521,000 12,686,350
---------------
585,916,698
---------------
INFORMATION TECHNOLOGY 23.7%
Activision Blizzard Inc. ............................................ 2,525,300 27,980,324
(a) Alliance Data Systems Corp. ......................................... 877,400 65,857,644
Analog Devices Inc. ................................................. 1,035,000 30,977,550
(a) ANSYS Inc. .......................................................... 807,200 36,324,000
(a) Avago Technologies Ltd. (Singapore) ................................. 950,000 19,494,000
(a) Citrix Systems Inc. ................................................. 900,000 42,300,000
FactSet Research Systems Inc. ....................................... 500,000 37,610,000
(a) FLIR Systems Inc. ................................................... 1,000,000 30,590,000
Global Payments Inc. ................................................ 500,000 21,405,000
(a) GSI Commerce Inc. ................................................... 930,400 25,353,400
(a) Hittite Microwave Corp. ............................................. 644,300 33,039,704
(a) Juniper Networks Inc. ............................................... 1,125,000 31,961,250
(a) Lam Research Corp. .................................................. 750,000 30,412,500
MasterCard Inc., A .................................................. 185,000 45,887,400
(a) NetApp Inc. ......................................................... 700,100 24,272,467
(a) Nuance Communications Inc. .......................................... 3,350,000 61,204,500
(a) Polycom Inc. ........................................................ 1,135,000 36,944,250
(a) Red Hat Inc. ........................................................ 450,000 13,441,500
(a) SAIC Inc. ........................................................... 1,500,000 26,115,000
(a) Sensata Technologies Holding NV ..................................... 1,466,300 29,326,000
(a) Silicon Laboratories Inc. ........................................... 1,380,400 66,742,340
(a) Sybase Inc. ......................................................... 1,025,000 44,464,500
(a) Taleo Corp., A ...................................................... 365,000 9,482,700
(a) Trimble Navigation Ltd. ............................................. 860,000 28,130,600
(a) Varian Semiconductor Equipment Associates Inc. ...................... 1,069,938 35,243,758
(a) ViaSat Inc. ......................................................... 562,567 19,943,000
Xilinx Inc. ......................................................... 1,250,000 32,225,000
---------------
906,728,387
---------------
MATERIALS 2.6%
Celanese Corp., A ................................................... 1,500,000 47,985,000
Ecolab Inc. ......................................................... 550,000 26,862,000
The Scotts Miracle-Gro Co., A ....................................... 475,000 23,013,750
---------------
97,860,750
---------------
TELECOMMUNICATION SERVICES 2.6%
(a) American Tower Corp., A ............................................. 838,100 34,202,861
(a, c) Anda Networks ....................................................... 91,107 66,508
(a) SBA Communications Corp. ............................................ 1,844,000 65,222,280
---------------
99,491,649
---------------
TOTAL COMMON STOCKS (COST $2,715,229,041) ........................... 3,688,861,745
---------------
Annual Report | 93
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN SMALL-MID CAP GROWTH FUND AMOUNT VALUE
---------------------------------- ------------ ---------------
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 $ 5,557,691
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $2,718,511,575) ............................................ 3,694,419,436
---------------
SHARES
------------
SHORT TERM INVESTMENTS 3.3%
MONEY MARKET FUNDS (COST $116,316,160) 3.0%
(e) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ......... 116,316,160 116,316,160
---------------
(f) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.3%
MONEY MARKET FUNDS 0.3%
Bank of New York Institutional Cash Reserve Fund,
(g) Series A, 0.16% .................................................. 9,766,000 9,766,000
(a) Series B ......................................................... 836,763 669,411
---------------
TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
(COST $10,602,763) ............................................... 10,435,411
---------------
TOTAL INVESTMENTS (COST $2,845,430,498) 100.0% ...................... 3,821,171,007
OTHER ASSETS, LESS LIABILITIES 0.0%h ................................ (695,157)
---------------
NET ASSETS 100.0% ................................................... $ 3,820,475,850
===============
See Abbreviations on page 123.
(a) Non-income producing.
(b) A portion or all of the security is on loan at April 30, 2010. See Note
1(c).
(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 April 30, 2010,
the value of this security was $5,557,691, representing 0.15% 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(c) regarding securities on loan.
(g) The rate shown is the annualized seven-day yield at period end.
(h) Rounds to less than 0.1% of net assets.
The accompanying notes are an integral part of these financial statements.
94 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2010
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................... $2,274,634,781 $11,346,555 $371,198,115
Cost - Sweep Money Fund (Note 7) .................. 106,406,553 953,675 --
-------------- ----------- ------------
Total cost of investments ......................... $2,381,041,334 $12,300,230 $371,198,115
-------------- ----------- ------------
Value - Unaffiliated issuers ...................... $3,074,990,332 $13,383,118 $490,499,746
Value - Sweep Money Fund (Note 7) ................. 106,406,553 953,675 --
-------------- ----------- ------------
Total value of investments(a) ..................... 3,181,396,885 14,336,793 490,499,746
Receivables:
Investment securities sold ........................ 18,396,573 136,667 8,240,900
Capital shares sold ............................... 4,053,918 57,926 873,368
Dividends ......................................... 1,089,463 7,477 60,438
Other assets ......................................... 6,743 25 991
-------------- ----------- ------------
Total assets ................................... 3,204,943,582 14,538,888 499,675,443
-------------- ----------- ------------
Liabilities:
Payables:
Investment securities purchased ................... 28,436,415 468,942 9,027,733
Capital shares redeemed ........................... 4,618,928 32,113 683,712
Affiliates ........................................ 2,263,024 1,943 405,912
Allocator Funds (Note 10) ......................... 78,148 -- 27,337
Funds advanced by custodian .......................... -- -- 2,201,305
Payable upon return of securities loaned ............. -- -- 4,815,000
Accrued expenses and other liabilities ............... 707,985 5,691 69,826
-------------- ----------- ------------
Total liabilities .............................. 36,104,500 508,689 17,230,825
-------------- ----------- ------------
Net assets, at value ........................ $3,168,839,082 $14,030,199 $482,444,618
============== =========== ============
Net assets consist of:
Paid-in capital ...................................... $2,477,483,205 $12,888,774 $450,790,509
Undistributed net investment income .................. -- 12,287 --
Net unrealized appreciation (depreciation) ........... 800,355,551 2,036,678 119,301,720
Accumulated net realized gain (loss) ................. (108,999,674) (907,540) (87,647,611)
-------------- ----------- ------------
Net assets, at value ........................ $3,168,839,082 $14,030,199 $482,444,618
============== =========== ============
(a) Includes securities loaned .......................... $ -- $ -- $ 4,692,216
The accompanying notes are an integral part of these financial statements.
Annual Report | 95
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2010
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
CLASS A:
Net assets, at value $1,899,702,970 $10,973,949 $168,205,370
-------------- ----------- ------------
Shares outstanding 43,622,971 1,215,241 8,587,484
-------------- ----------- ------------
Net asset value per share(a) $ 43.55 $ 9.03 $ 19.59
-------------- ----------- ------------
Maximum offering price per share (net asset value per
share / 94.25%) $ 46.21 $ 9.58 $ 20.79
-------------- ----------- ------------
CLASS B:
Net assets, at value $ 36,921,721 -- $ 5,274,774
-------------- ----------- ------------
Shares outstanding 923,135 -- 289,095
-------------- ----------- ------------
Net asset value and maximum offering price per
share(a) $ 40.00 -- $ 18.25
-------------- ----------- ------------
CLASS C:
Net assets, at value $ 315,013,164 $ 1,852,620 $ 46,227,224
-------------- ----------- ------------
Shares outstanding 7,859,892 208,105 2,539,691
-------------- ----------- ------------
Net asset value and maximum offering price per
share(a) $ 40.08 $ 8.90 $ 18.20
-------------- ----------- ------------
CLASS R:
Net assets, at value $ 60,903,657 $ 21,464 $ 17,010,062
-------------- ----------- ------------
Shares outstanding 1,426,318 2,386 883,778
-------------- ----------- ------------
Net asset value and maximum offering price per share $ 42.70 $ 9.00 $ 19.25
-------------- ----------- ------------
ADVISOR CLASS:
Net assets, at value $ 856,297,570 $ 1,182,166 $245,727,188
-------------- ----------- ------------
Shares outstanding 19,399,026 130,494 12,140,786
-------------- ----------- ------------
Net asset value and maximum offering price per share $ 44.14 $ 9.06 $ 20.24
-------------- ----------- ------------
(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.
96 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2010
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------- --------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................... $271,293,848 $2,729,114,338
Cost - Sweep Money Fund (Note 7) ..................... 20,355,255 116,316,160
------------ --------------
Total cost of investments ............................ $291,649,103 $2,845,430,498
============ ==============
Value - Unaffiliated issuers ......................... $359,254,062 $3,704,854,847
Value - Sweep Money Fund (Note 7) .................... 20,355,255 116,316,160
------------ --------------
Total value of investments(a) ........................ 379,609,317 3,821,171,007
Receivables:
Investment securities sold ........................... 3,352,186 27,647,797
Capital shares sold .................................. 612,890 2,646,777
Dividends and interest ............................... 26,583 604,190
Other assets ............................................ 5,132 7,895
------------ --------------
Total assets ...................................... 383,606,108 3,852,077,666
------------ --------------
Liabilities:
Payables:
Investment securities purchased ...................... 2,657,786 10,679,684
Capital shares redeemed .............................. 514,092 6,041,931
Affiliates ........................................... 370,347 2,771,672
Payable upon return of securities loaned ................ 665,000 10,602,763
Accrued expenses and other liabilities .................. 118,278 1,505,766
------------ --------------
Total liabilities ................................. 4,325,503 31,601,816
------------ --------------
Net assets, at value .............................. $379,280,605 $3,820,475,850
============ ==============
Net assets consist of:
Paid-in capital ......................................... $384,197,900 $3,179,498,096
Net unrealized appreciation (depreciation) .............. 87,960,214 975,740,509
Accumulated net realized gain (loss) .................... (92,877,509) (334,762,755)
------------ --------------
Net assets, at value .............................. $379,280,605 $3,820,475,850
============ ==============
(a) Includes securities loaned ............................. $ 610,880 $ 10,248,960
The accompanying notes are an integral part of these financial statements.
Annual Report | 97
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2010
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ --------------
CLASS A:
Net assets, at value .................................................... $197,461,478 $2,585,514,629
------------ --------------
Shares outstanding ...................................................... 19,707,716 80,073,816
------------ --------------
Net asset value per share(a) ............................................ $ 10.02 $ 32.29
------------ --------------
Maximum offering price per share (net asset value per share / 94.25%) ... $ 10.63 $ 34.26
------------ --------------
CLASS B:
Net assets, at value .................................................... $ 6,019,377 $ 16,232,963
------------ --------------
Shares outstanding ...................................................... 659,036 538,642
------------ --------------
Net asset value and maximum offering price per share(a) ................. $ 9.13 $ 30.14
------------ --------------
CLASS C:
Net assets, at value .................................................... $ 57,297,786 $ 366,291,677
------------ --------------
Shares outstanding ...................................................... 6,262,472 12,587,656
------------ --------------
Net asset value and maximum offering price per share(a) ................. $ 9.15 $ 29.10
------------ --------------
CLASS R:
Net assets, at value .................................................... $ 4,290,431 $ 69,415,110
------------ --------------
Shares outstanding ...................................................... 439,002 2,203,944
------------ --------------
Net asset value and maximum offering price per share .................... $ 9.77 $ 31.50
------------ --------------
ADVISOR CLASS:
Net assets, at value .................................................... $114,211,533 $ 783,021,471
------------ --------------
Shares outstanding ...................................................... 10,989,808 23,595,398
------------ --------------
Net asset value and maximum offering price per share .................... $ 10.39 $ 33.19
------------ --------------
(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.
98 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended April 30, 2010
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
------------ ------------ -------------
Investment income:
Dividends:
Unaffiliated issuers ............................................ $ 23,011,157 $ 125,338 $ 1,709,591
Sweep Money Fund (Note 7) ....................................... 4,832 12 --
Income from securities loaned ...................................... 31,723 -- 17,402
------------ ----------- -------------
Total investment income ...................................... 23,047,712 125,350 1,726,993
------------ ----------- -------------
Expenses:
Management fees (Note 3a) .......................................... 12,504,843 71,044 1,950,360
Administrative fees (Note 3b) ...................................... -- 19,295 788,101
Distribution fees: (Note 3c)
Class A ......................................................... 4,200,864 16,290 422,758
Class B ......................................................... 409,750 -- 55,905
Class C ......................................................... 2,869,525 9,359 385,338
Class R ......................................................... 267,267 64 60,706
Transfer agent fees (Note 3e) ...................................... 6,677,823 11,878 731,229
Special servicing agreement fees (Note 10) ......................... 959,748 -- 323,852
Custodian fees (Note 4) ............................................ 36,337 302 8,068
Reports to shareholders ............................................ 446,622 3,268 67,522
Registration and filing fees ....................................... 117,653 40,086 76,993
Professional fees .................................................. 49,912 25,674 33,781
Trustees' fees and expenses ........................................ 53,014 25 7,287
Other .............................................................. 84,988 6,058 20,702
------------ ----------- -------------
Total expenses ............................................... 28,678,346 203,343 4,932,602
Expense reductions (Note 4) .................................. (188) (1) (42)
Expenses waived/paid by affiliates (Note 3f) ................. (405,102) (91,474) (244,832)
------------ ----------- -------------
Net expenses .............................................. 28,273,056 111,868 4,687,728
------------ ----------- -------------
Net investment income (loss) ........................... (5,225,344) 13,482 (2,960,735)
------------ ----------- -------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ..................................................... (11,841,335) (221,681) 50,291,596
Foreign currency transactions ................................... -- 632 (175,824)
------------ ----------- -------------
Net realized gain (loss) ............................... (11,841,335) (221,049) 50,115,772
------------ ----------- -------------
Net change in unrealized appreciation (depreciation) on:
Investments ..................................................... 808,395,319 3,392,050 84,861,674
Translation of other assets and liabilities denominated in
foreign currencies ........................................... -- 240 (81)
------------ ----------- -------------
Net change in unrealized appreciation (depreciation) ... 808,395,319 3,392,290 84,861,593
------------ ----------- -------------
Net realized and unrealized gain (loss) ............................... 796,553,984 3,171,241 134,977,365
------------ ----------- -------------
Net increase (decrease) in net assets resulting from operations ....... $791,328,640 $ 3,184,723 $ 132,016,630
============ =========== =============
The accompanying notes are an integral part of these financial statements.
Annual Report | 99
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended April 30, 2010
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ -------------
Investment income:
Dividends:
Unaffiliated issuers .......................................... $ 810,789 $ 17,085,629
Sweep Money Fund (Note 7) ..................................... 284 5,530
Interest ......................................................... -- 272,079
Income from securities loaned .................................... 69,432 1,779,345
------------ --------------
Total investment income ................................... 880,505 19,142,583
------------ --------------
Expenses:
Management fees (Note 3a) ........................................ 1,646,783 15,392,031
Administrative fees (Note 3b) .................................... 606,816 --
Distribution fees: (Note 3c)
Class A ....................................................... 428,657 5,910,783
Class B ....................................................... 106,115 147,930
Class C ....................................................... 484,360 3,263,208
Class R ....................................................... 14,489 330,941
Transfer agent fees (Note 3e) .................................... 771,148 10,216,254
Special servicing agreement fees (Note 10) ....................... 116,198 --
Custodian fees (Note 4) .......................................... 5,412 53,962
Reports to shareholders .......................................... 76,942 630,677
Registration and filing fees ..................................... 70,523 145,740
Professional fees ................................................ 28,397 66,259
Trustees' fees and expenses ...................................... 5,809 68,314
Other ............................................................ 17,490 265,191
------------ --------------
Total expenses ............................................. 4,379,139 36,491,290
Expense reductions (Note 4) ................................ -- (113)
Expenses waived/paid by affiliates (Note 3f) ............... (55,350) --
------------ --------------
Net expenses ........................................... 4,323,789 36,491,177
------------ --------------
Net investment income (loss) ........................ (3,443,284) (17,348,594)
------------ --------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ...................................... 28,700,578 353,109,176
Non-controlled affiliated issuers (Note 9) ................ -- (11,736,913)
Foreign currency transactions ................................. 8,681 211,891
------------ --------------
Net realized gain (loss) ............................ 28,709,259 341,584,154
----------- --------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................... 109,445,269 925,356,921
Translation of other assets and liabilities denominated in
foreign currencies ............................................ (112) (2,617)
------------ --------------
Net change in unrealized appreciation
(depreciation) ................................... 109,445,157 925,354,304
------------ --------------
Net realized and unrealized gain (loss) ............................. 138,154,416 1,266,938,458
------------ --------------
Net increase (decrease) in net assets resulting from operations ..... $134,711,132 $1,249,589,864
============ ==============
The accompanying notes are an integral part of these financial statements.
100 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN FLEX CAP FRANKLIN FOCUSED CORE
GROWTH FUND EQUITY FUND
------------------------------- -------------------------
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
------------------------------- -------------------------
2010 2009 2010 2009
-------------- -------------- ----------- -----------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............... $ (5,225,344) $ (3,677,869) $ 13,482 $ 41,035
Net realized gain (loss) from investments
and foreign currency transactions ....... (11,841,335) (87,232,126) (221,049) (683,456)
Net change in unrealized appreciation
(depreciation) on investments and
translation of other assets and
liabilities denominated in
foreign currencies ...................... 808,395,319 (764,613,305) 3,392,290 (644,799)
-------------- -------------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations ............ 791,328,640 (855,523,300) 3,184,723 (1,287,220)
-------------- -------------- ----------- -----------
Distributions to shareholders from:
Net investment income:
Class A ................................. -- -- (1,639) (74,501)
Class C ................................. -- -- (192) (1,612)
Class R ................................. -- -- -- (83)
Advisor Class ........................... -- -- (378) (2,076)
Net realized gains:
Class A ................................. -- -- -- (16,497)
Class C ................................. -- -- -- (426)
Class R ................................. -- -- -- (22)
Advisor Class ........................... -- -- -- (403)
-------------- -------------- ----------- -----------
Total distributions to shareholders ........... -- -- (2,209) (95,620)
-------------- -------------- ----------- -----------
Capital share transactions: (Note 2)
Class A ................................. 45,426,202 (51,271,229) 3,349,764 1,542,220
Class B ................................. (17,460,453) (26,638,743) -- --
Class C ................................. (9,054,553) (19,089,342) 1,484,137 97,423
Class R ................................. 1,887,097 (3,859,450) 11,844 --
Advisor Class ........................... 292,155,935 123,671,368 834,265 38,570
-------------- -------------- ----------- -----------
Total capital share transactions .............. 312,954,228 22,812,604 5,680,010 1,678,213
-------------- -------------- ----------- -----------
Redemption fees ............................... -- 2,260 -- --
-------------- -------------- ----------- -----------
Net increase (decrease) in net assets ... 1,104,282,868 (832,708,436) 8,862,524 295,373
Net assets:
Beginning of year ............................. 2,064,556,214 2,897,264,650 5,167,675 4,872,302
-------------- -------------- ----------- -----------
End of year ................................... $3,168,839,082 $2,064,556,214 $14,030,199 $ 5,167,675
============== ============== =========== ===========
Undistributed net investment income (loss)
included in net assets:
End of year ................................... $ -- $ (4,440) $ 12,287 $ 2,136
============== ============== =========== ===========
The accompanying notes are an integral part of these financial statements.
Annual Report | 101
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN GROWTH FRANKLIN SMALL CAP
OPPORTUNITIES FUND GROWTH FUND
--------------------------- ----------------------------
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
--------------------------- ----------------------------
2010 2009 2010 2009
------------ ------------ ------------ -------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............... $ (2,960,735) $ (2,317,619) $ (3,443,284) $ (4,544,515)
Net realized gain (loss) from investments
and foreign currency transactions ....... 50,115,772 (73,192,892) 28,709,259 (100,903,807)
Net change in unrealized appreciation
(depreciation) on investments and
translation of other assets and
liabilities denominated in
foreign currencies ...................... 84,861,593 (18,030,525) 109,445,157 (67,036,715)
------------ ------------ ------------ -------------
Net increase (decrease) in net assets
resulting from operations ............ 132,016,630 (93,541,036) 134,711,132 (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 .................................... 20,308,188 10,380,355 4,744,844 (75,656,594)
Class B .................................... (1,795,717) (2,912,763) (13,888,589) (24,020,660)
Class C .................................... 6,103,602 1,204,624 (4,066,668) (14,625,680)
Class R .................................... 5,699,353 1,865,922 1,052,204 (472,497)
Advisor Class .............................. 39,200,509 65,072,564 18,482,711 (96,965,191)
------------ ------------ ------------ -------------
Total capital share transactions .............. 69,515,935 75,610,702 6,324,502 (211,740,622)
------------ ------------ ------------ -------------
Redemption fees ............................... -- 966 -- 1,057
------------ ------------ ------------ -------------
Net increase (decrease) in net assets ... 201,532,565 (17,929,368) 141,035,634 (388,231,267)
Net assets:
Beginning of year ............................. 280,912,053 298,841,421 238,244,971 626,476,238
------------ ------------ ------------ -------------
End of year ................................... $482,444,618 $280,912,053 $379,280,605 $ 238,244,971
============ ============ ============ =============
Undistributed net investment income
included in net assets:
End of year ................................... $ -- $ -- $ -- $ --
============ ============ ============ =============
The accompanying notes are an integral part of these financial statements.
102 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
--------------------------------
YEAR ENDED APRIL 30,
--------------------------------
2010 2009
-------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............................. $ (17,348,594) $ (19,042,195)
Net realized gain (loss) from investments and
foreign currency transactions ......................... 341,584,154 (669,896,804)
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets
and liabilities denominated in foreign currencies ..... 925,354,304 (976,775,522)
-------------- ---------------
Net increase (decrease) in net assets resulting
from operations .................................... 1,249,589,864 (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 .................................................. (479,002,852) (895,592,567)
Class B .................................................. (2,515,953) (4,302,513)
Class C .................................................. (36,545,907) (75,422,060)
Class R .................................................. (8,968,574) (11,231,755)
Advisor Class ............................................ 50,561,439 (78,299,057)
-------------- ---------------
Total capital share transactions ............................ (476,471,847) (1,064,847,952)
-------------- ---------------
Redemption fees ............................................. -- 35,916
-------------- ---------------
Net increase (decrease) in net assets ................. 773,118,017 (2,739,633,202)
Net assets:
Beginning of year ........................................... 3,047,357,833 5,786,991,035
-------------- ---------------
End of year ................................................. $3,820,475,850 $ 3,047,357,833
============== ===============
Undistributed net investment income (loss) included
in net assets:
End of year ................................................. $ -- $ (285,426)
============== ===============
The accompanying notes are an integral part of these financial statements.
Annual Report | 103
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
eight separate funds, five of which are included in this report (Funds). The
financial statements of the remaining funds in the Trust are presented
separately. The classes of shares offered within each of the Funds are indicated
below. Each class of shares differs by its initial sales load, contingent
deferred sales charges, distribution fees, voting rights on matters affecting a
single class and its exchange privilege.
CLASS A, CLASS B, CLASS C, CLASS R
CLASS A, CLASS C, CLASS R & ADVISOR CLASS & 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 market 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.
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.
104 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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. 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. The Funds may enter
into foreign currency exchange contracts to facilitate transactions denominated
in a foreign currency. 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.
Annual Report | 105
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. 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 (Bank of New York 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.
In September of 2008, the Bank of New York Mellon advised the Franklin Small-Mid
Cap Growth Fund 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.
D. INCOME TAXES
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. As a result, no provision for federal
income taxes is required. The Funds file U.S. income tax returns as well as tax
returns in certain other jurisdictions. As of April 30, 2010, and for all open
tax years, the Funds have determined that no provision for income tax is
required in the Funds' financial statements. Open tax years are those that
remain subject to examination by such taxing authorities, which in the case of
the U.S. is three years after the filing of a fund's tax return.
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
106 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
may differ from earnings recorded in accordance with accounting principles
generally accepted in the United States of America. These differences may be
permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.
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.
Annual Report | 107
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2010, there were an unlimited number of shares authorized (without
par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN FOCUSED
FLEX CAP GROWTH FUND CORE EQUITY FUND
--------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- -------- -----------
CLASS A SHARES:
Year ended April 30, 2010
Shares sold ......................... 10,142,978 $ 382,850,039 582,595 $ 4,511,387
Shares issued in reinvestment of
distributions .................... -- -- 107 885
Shares redeemed ..................... (8,721,078) (337,423,837) (146,719) (1,162,508)
----------- ------------- -------- -----------
Net increase (decrease) ............. 1,421,900 $ 45,426,202 435,983 $ 3,349,764
=========== ============= ======== ===========
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:
Year ended April 30, 2010
Shares sold ......................... 64,640 $ 2,258,253
Shares redeemed ..................... (555,826) (19,718,706)
----------- -------------
Net increase (decrease) ............. (491,186) $ (17,460,453)
=========== =============
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:
Year ended April 30, 2010
Shares sold ......................... 1,310,372 $ 45,962,795 245,975 $ 1,917,768
Shares issued in reinvestment of
distributions .................... -- -- 23 186
Shares redeemed ..................... (1,533,211) (55,017,348) (54,816) (433,817)
----------- ------------- -------- -----------
Net increase (decrease) ............. (222,839) $ (9,054,553) 191,182 $ 1,484,137
=========== ============= ======== ===========
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
=========== ============= ======== ===========
108 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN FOCUSED
FLEX CAP GROWTH FUND CORE EQUITY FUND
------------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ------- --------
CLASS R SHARES:
Year ended April 30, 2010
Shares sold ......................... 473,944 $ 17,880,463 1,421 $ 12,129
Shares redeemed ..................... (424,588) (15,993,366) (35) (285)
---------- ------------ ------- --------
Net increase (decrease) ............. 49,356 $ 1,887,097 1,386 $ 11,844
========== ============ ======= ========
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) -- $ --
========== ============ ======= ========
ADVISOR CLASS SHARES:
Year ended April 30, 2010
Shares sold ......................... 9,273,966 $331,643,691 109,322 $876,605
Shares issued in reinvestment of
distributions .................... -- -- 45 377
Shares redeemed ..................... (988,678) (39,487,756) (5,472) (42,717)
---------- ------------ ------- --------
Net increase (decrease) ............. 8,285,288 $292,155,935 103,895 $834,265
========== ============ ======= ========
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:
Year ended April 30, 2010
Shares sold ......................... 4,138,485 $ 67,504,795 5,574,297 $ 45,740,122
Shares redeemed ..................... (2,751,361) (47,196,607) (5,065,052) (40,995,278)
---------- ------------ ----------- -------------
Net increase (decrease) ............. 1,387,124 $ 20,308,188 509,245 $ 4,744,844
========== ============ =========== =============
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)
========== ============ =========== =============
Annual Report | 109
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN GROWTH FRANKLIN
OPPORTUNITIES FUND SMALL CAP GROWTH FUND
------------------------ ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ----------- -------------
CLASS B SHARES:
Year ended April 30, 2010
Shares sold ......................... 84,999 $ 1,252,667 87,469 $ 620,135
Shares redeemed ..................... (189,435) (3,048,384) (2,003,577) (14,508,724)
--------- ------------ ----------- -------------
Net increase (decrease) ............. (104,436) $ (1,795,717) (1,916,108) $ (13,888,589)
========= ============ =========== =============
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)
========= ============ =========== =============
CLASS C SHARES:
Year ended April 30, 2010
Shares sold ......................... 1,064,354 $ 16,329,773 929,306 $ 7,067,940
Shares redeemed ..................... (643,275) (10,226,171) (1,483,260) (11,134,608)
--------- ------------ ----------- -------------
Net increase (decrease) ............. 421,079 $ 6,103,602 (553,954) $ (4,066,668)
========= ============ =========== =============
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:
Year ended April 30, 2010
Shares sold ......................... 696,058 $ 11,548,428 250,130 $ 1,984,960
Shares redeemed ..................... (347,824) (5,849,075) (116,303) (932,756)
--------- ------------ ----------- -------------
Net increase (decrease) ............. 348,234 $ 5,699,353 133,827 $ 1,052,204
========= ============ =========== =============
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:
Year ended April 30, 2010
Shares sold ......................... 2,570,954 $ 44,298,688 2,846,129 $ 23,616,929
Shares redeemed ..................... (289,033) (5,098,179) (599,506) (5,134,218)
--------- ------------ ----------- -------------
Net increase (decrease) ............. 2,281,921 $ 39,200,509 2,246,623 $ 18,482,711
========= ============ =========== =============
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)
========= ============ =========== =============
110 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
-----------------------------
SHARES AMOUNT
----------- ---------------
CLASS A SHARES:
Year ended April 30, 2010
Shares sold ......................... 11,760,716 $ 312,302,780
Shares redeemed ..................... (29,977,041) (791,305,632)
----------- ---------------
Net increase (decrease) ............. (18,216,325) $ (479,002,852)
=========== ===============
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)
=========== ===============
CLASS B SHARES:
Year ended April 30, 2010
Shares sold ......................... 65,241 $ 1,634,862
Shares redeemed ..................... (164,348) (4,150,815)
----------- ---------------
Net increase (decrease) ............. (99,107) $ (2,515,953)
=========== ===============
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:
Year ended April 30, 2010
Shares sold ......................... 933,047 $ 22,913,644
Shares redeemed ..................... (2,424,305) (59,459,551)
----------- ---------------
Net increase (decrease) ............. (1,491,258) $ (36,545,907)
=========== ===============
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:
Year ended April 30, 2010
Shares sold ......................... 868,517 $ 22,163,383
Shares redeemed ..................... (1,144,546) (31,131,957)
----------- ---------------
Net increase (decrease) ............. (276,029) $ (8,968,574)
=========== ===============
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)
=========== ===============
Annual Report | 111
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN SMALL-MID CAP
GROWTH FUND
--------------------------
SHARES AMOUNT
---------- -------------
ADVISOR CLASS SHARES:
Year ended April 30, 2010
Shares sold ......................... 6,267,101 $ 177,335,667
Shares redeemed ..................... (4,423,320) (126,774,228)
---------- -------------
Net increase (decrease) ............. 1,843,781 $ 50,561,439
========== =============
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)
========== =============
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
112 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Focused Core Equity Fund pays an investment management fee to
Advisers based on the average daily net assets 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
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
Annual Report | 113
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Franklin Focused Core Equity Fund, the Franklin Growth Opportunities Fund,
and the Franklin Small Cap Growth Fund pay an administrative fee to FT Services
of 0.20% per year of the average daily net assets of each of the Funds.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Flex Cap Growth Fund and the Franklin Small-Mid Cap Growth Fund.
The fee is paid by Advisers based on average daily net assets, and is not an
additional expense of the funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. 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
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' Class B, C and R 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.
114 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the year:
FRANKLIN
FRANKLIN FRANKLIN GROWTH FRANKLIN
FLEX CAP FOCUSED CORE OPPORTUNITIES SMALL CAP
GROWTH FUND EQUITY FUND FUND GROWTH FUND
----------- ------------ ------------- -----------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ...... $869,130 $10,979 $117,134 $51,842
Contingent deferred sales charges retained .. $ 36,427 $ 73 $ 6,571 $ 3,232
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ...... $220,460
Contingent deferred sales charges retained .. $ 14,214
E. TRANSFER AGENT FEES
For the year ended April 30, 2010, 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 .. $4,288,178 $8,698 $502,008 $481,716 $5,786,844
F. WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Focused Core Equity Fund, Advisers and FT Services 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 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) to
0.02% through April 30, 2010. See Note 10 regarding the SSA.
G. OTHER AFFILIATED TRANSACTIONS
At April 30, 2010, Advisers owned 32.00% of the Franklin Focused Core Equity
Fund's outstanding shares.
Annual Report | 115
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the year ended April 30, 2010, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2010, 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:
2011 ............................... $ -- $ -- $47,112,100
2017 ............................... 3,144,703 82,022 33,744,357
2018 ............................... 105,341,451 745,901 --
------------ -------- -----------
$108,486,154 $827,923 $80,856,457
============ ======== ===========
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ -------------
Capital loss carryforwards expiring in:
2017 ............................... $33,312,673 $ 78,384,777
2018 ............................... 52,744,322 254,810,727
----------- ------------
$86,056,995 $333,195,504
=========== ============
During the year ended April 30, 2010, the Franklin Growth Opportunities Fund
utilized $12,956,503 of capital loss carryforwards.
On April 30, 2010, the Franklin Growth Opportunities Fund had expired capital
loss carry-forwards of $69,560,332 which were reclassified to paid-in capital.
The tax character of distributions paid during the years ended April 30, 2010
and 2009, was as follows:
FRANKLIN
FOCUSED CORE FRANKLIN SMALL CAP
EQUITY FUND GROWTH FUND
---------------- ------------------
2010 2009 2010 2009
------ ------- ---- -----------
Distributions paid from:
Ordinary income .......... $2,209 $95,510 $-- $3,622,227
Long term capital gain ... -- 110 -- 384,438
------ ------- --- ----------
$2,209 $95,620 $-- $4,006,665
====== ======= === ==========
116 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
FRANKLIN
SMALL-MID CAP
GROWTH FUND
-----------------
2010 2009
---- ----------
Distributions paid from:
Ordinary income .......... $-- $ --
Long term capital gain ... -- 9,106,645
--- ----------
$-- $9,106,645
=== ==========
At April 30, 2010, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
FRANKLIN
FRANKLIN FRANKLIN GROWTH
FLEX CAP FOCUSED CORE OPPORTUNITIES
GROWTH FUND EQUITY FUND FUND
-------------- ------------ -------------
Cost of investments ........................... $2,381,554,855 $12,378,694 $377,989,269
============== =========== ============
Unrealized appreciation ....................... $ 831,793,155 $ 2,277,238 $119,742,897
Unrealized depreciation ....................... (31,951,125) (319,139) (7,232,420)
-------------- ----------- ------------
Net unrealized appreciation (depreciation) .... $ 799,842,030 $ 1,958,099 $112,510,477
============== =========== ============
Distributable earnings - undistributed ordinary
income ..................................... $ -- $ 11,250 $ --
============== =========== ============
FRANKLIN FRANKLIN
SMALL CAP SMALL-MID CAP
GROWTH FUND GROWTH FUND
------------ --------------
Cost of investments .......................... $298,469,620 $2,846,997,741
============ ==============
Unrealized appreciation ...................... $ 98,536,733 $1,095,519,751
Unrealized depreciation ...................... (17,397,036) (121,346,485)
------------ --------------
Net unrealized appreciation (depreciation) ... $ 81,139,697 $ 974,173,266
============ ==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, bond
discounts and premiums, corporate actions, non-deductible expenses, and
regulatory settlement.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, bond discounts and premiums, corporate actions, and regulatory
settlement.
Annual Report | 117
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2010, 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 ... $1,541,370,133 $9,248,253 $340,420,852 $178,458,692 $1,831,499,798
Sales ....... $1,269,961,006 $3,840,530 $259,058,578 $190,960,527 $2,318,589,501
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. Pursuant
to a SEC exemptive order specific to the Funds' investment in the Sweep Money
Fund, 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 April 30, 2010, the Funds held investments in restricted securities,
excluding certain securities exempt from registration under the 1933 Act deemed
to be liquid, as follows:
ACQUISITION
SHARES/WARRANTS ISSUER DATE COST VALUE
- --------------- ------ ----------- ---------- -----------
FRANKLIN FLEX CAP GROWTH FUND
36,443 Anda Networks .......................................... 3/24/00 $2,000,000 $ 26,603
2,227,171 FibroGen Inc., pfd., E ................................. 5/19/00 9,999,998 10,022,270
-----------
TOTAL RESTRICTED SECURITIES (0.32% of Net Assets) ... $10,048,873
===========
FRANKLIN GROWTH OPPORTUNITIES FUND
376,433 Dilithium Networks Inc. ................................ 7/13/06 $ 873,300 $ --
28,987 Dilithium Networks Inc., depository receipt, D, pfd.,
144A, PIPES ......................................... 10/30/08 14,501 31,886
12,447 Dilithium Networks Inc., wts., 12/31/09 ................ 10/30/08 -- 30
-----------
TOTAL RESTRICTED SECURITIES (0.01% of Net Assets) ... $ 31,916
===========
118 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
ACQUISITION
SHARES/WARRANTS ISSUER DATE COST VALUE
- --------------- ------ ----------- ---------- -----------
FRANKLIN SMALL-MID CAP GROWTH FUND
91,107 Anda Networks (0.00%(a) of Net Assets) ................. 3/24/00 $5,000,000 $ 66,508
===========
(a) Rounds to less than 0.01% of net assets.
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines "affiliated companies" to include investments in portfolio
companies in which a fund owns 5% or more of the outstanding voting securities.
Investments in "affiliated companies" for the Franklin Small-Mid Cap Growth Fund
for the year ended April 30, 2010, were as shown below.
NUMBER NUMBER
OF SHARES OF SHARES
HELD AT HELD AT REALIZED
BEGINNING GROSS GROSS END OF VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR END OF YEAR INCOME GAIN (LOSS)
- -------------- --------- --------- ---------- --------- ----------- ---------- ------------
FRANKLIN SMALL-MID CAP GROWTH FUND
NON-CONTROLLED AFFILIATES
FormFactor Inc. .................. 2,717,524 -- 2,717,524 -- $--(a) $-- $(11,736,913)
=== === ============
(a) As of April 30, 2010, no longer an affiliate.
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 may 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 (e.g., due to reduced
costs associated with servicing accounts) from the investment in the funds by
the Allocator Funds. The Allocator Funds are either managed by Advisers or
administered by FT Services, affiliates of the funds. For the year ended April
30, 2010, 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.
Annual Report | 119
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SPECIAL SERVICING AGREEMENT (CONTINUED)
At April 30, 2010, 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
- ----------- --------------- -----------
16.32% 40.47% 21.85%
11. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds
(collectively "Borrowers"), managed by Franklin Templeton Investments, are
borrowers in a joint syndicated senior unsecured credit facility totaling $750
million (Global Credit Facility) which matures on January 21, 2011. This Global
Credit Facility provides a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the 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 Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee of 0.10% based upon the unused portion of the Global
Credit Facility, which is reflected in other expenses on the Statements of
Operations. During the year ended April 30, 2010, the Funds did not utilize the
Global Credit Facility.
12. FAIR VALUE MEASUREMENTS
The Trust follows a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Trust's own market
assumptions (unobservable inputs). These inputs are used in determining the
value of the Funds' investments and are summarized in the following fair value
hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
120 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of April 30, 2010, 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 $ 248,989,890 $ -- $10,022,270 $ 259,012,160
Telecommunication
Services 78,988,000 -- 26,603 79,014,603
Other Equity Investments(b) 2,736,963,569 -- -- 2,736,963,569
Short Term Investments 106,406,553 -- -- 106,406,553
-------------- ---------- ----------- --------------
Total Investments in
Securities $3,171,348,012 $ -- $10,048,873 $3,181,396,885
============== ========== =========== ==============
FRANKLIN FOCUSED CORE EQUITY FUND
ASSETS:
Investments in Securities
Equity Investments(a ,b) $ 13,383,118 $ -- $ -- $ 13,383,118
Short Term Investments 953,675 -- -- 953,675
-------------- ---------- ----------- --------------
Total Investments in
Securities $ 14,336,793 $ -- $ -- $ 14,336,793
============== ========== =========== ==============
FRANKLIN GROWTH OPPORTUNITIES FUND
ASSETS:
Investments in Securities:
Equity Investments:(a)
Information Technology $ 165,460,123 $ -- $ 31,916(c) $ 165,492,039
Other Equity Investments(b) 320,192,707 -- -- 320,192,707
Short Term Investments -- 4,815,000 -- 4,815,000
-------------- ---------- ----------- --------------
Total Investments in
Securities $ 485,652,830 $4,815,000 $ 31,916 $ 490,499,746
============== ========== =========== ==============
FRANKLIN SMALL CAP GROWTH FUND
ASSETS:
Investments in Securities:
Equity Investments(b) $ 358,589,062 $ -- $ -- $ 358,589,062
Short Term Investments 20,355,255 665,000 -- 21,020,255
-------------- ---------- ----------- --------------
Total Investments in
Securities $ 378,944,317 $ 665,000 $ -- $ 379,609,317
============== ========== =========== ==============
Annual Report | 121
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ----------- ------- --------------
FRANKLIN SMALL-MID CAP GROWTH FUND
ASSETS:
Investments in Securities
Equity Investments:
Telecommunication
Services $ 99,425,141 $ -- $66,508 $ 99,491,649
Other Equity Investments(b) 3,589,370,096 -- -- 3,589,370,096
Convertible Bonds -- 5,557,691 -- 5,557,691
Short Term Investments 116,316,160 10,435,411 -- 126,751,571
-------------- ----------- ------- --------------
Total Investments in
Securities $3,805,111,397 $15,993,102 $66,508 $3,821,171,007
============== =========== ======= ==============
(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 April 30, 2010.
At April 30, 2010, 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 YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 YEAR AT YEAR END
----------- ----------- -------------- --------- ----------- ----------- --------------
FRANKLIN FLEX CAP GROWTH FUND
ASSETS
Equity Investments:(a)
Pharmaceuticals,
Biotechnology & Life
Sciences............ $11,224,942 $-- $(1,202,672) $-- $ -- $10,022,270 $(1,202,672)
Telecommunication
Services............ 28,061 -- (1,458) -- -- 26,603 (1,458)
----------- --- ----------- --- -------- ----------- -----------
Total............... $11,253,003 $-- $(1,204,130) $-- $ -- $10,048,873 $(1,204,130)
=========== === =========== === ======== =========== ===========
FRANKLIN GROWTH OPPORTUNITIES
FUND
ASSETS
Equity Investments:(a)
Information
Technology.......... $ 487,248 $-- $ (455,332) $-- $ -- $ 31,916(b) $ (455,332)
Notes..................... 14,501 -- -- -- (14,501) -- --
----------- --- ----------- --- -------- ----------- -----------
Total............... $ 501,749 $-- $ (455,332) $-- $(14,501) $ 31,916 $ (455,332)
=========== === =========== === ======== =========== ===========
FRANKLIN SMALL-MID CAP
GROWTH FUND
ASSETS
Equity Investments:
Telecommunication
Services............ $ 70,152 $-- $ (3,644) $-- $ -- $ 66,508 $ (3,644)
----------- --- ----------- --- -------- ----------- -----------
(a) Includes common and preferred stocks as well as other equity investments.
(b) Includes securities determined to have no value at April 30, 2010.
122 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board issued an Accounting
Standards Update which enhances and clarifies existing fair value measurement
disclosure requirements and is effective for interim and annual periods
beginning after December 15, 2009. The Funds believe the adoption of this
Accounting Standards Update will not have a material impact on their financial
statements.
14. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance 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
Annual Report | 123
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin Flex Cap Growth Fund,
Franklin Focused Core Equity Fund, Franklin Growth Opportunities Fund, Franklin
Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund (separate
portfolios of Franklin Strategic Series, hereafter referred to as the "Funds")
at April 30, 2010, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 2010 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 16, 2010
124 | Annual Report
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Franklin
Focused Core Equity Fund designates 100% of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year ended
April 30, 2010.
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended April 30, 2010:
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
- ----------- ------------ --------------- ----------- -------------
$22,899,990 $124,000 $1,581,792 $809,519 $16,586,698
Distributions, including qualified dividend income, paid during calendar year
2010 will be reported to shareholders on Form 1099-DIV in January 2011.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Annual Report | 125
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN
NAME, YEAR OF BIRTH LENGTH OF BY BOARD
AND ADDRESS POSITION TIME SERVED MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ---------------- ----------------- ----------------- -------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 131 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
SAM GINN (1937) Trustee Since 2007 108 ICO Global Communications (Holdings)
One Franklin Parkway Limited (satellite company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 131 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
FRANK W.T. LAHAYE (1929) Trustee Since 1991 107 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
126 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN
NAME, YEAR OF BIRTH LENGTH OF BY BOARD
AND ADDRESS POSITION TIME SERVED MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ---------------- ----------------- ----------------- -------------------------------------
J. MICHAEL LUTTIG (1954) Trustee Since 131 Boeing Capital Corporation (aircraft
One Franklin Parkway December 2009 financing).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President, General Counsel and member of Executive Council, The Boeing Company; and FORMERLY, Federal Appeals Court
Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).
FRANK A. OLSON (1932) Trustee Since 2007 131 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 139 Cbeyond, Inc. (business
One Franklin Parkway communications provider).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Independent Trustee since 108 None
One Franklin Parkway Trustee 2006 and Lead
San Mateo, CA 94403-1906 Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial
Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President -
Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting
firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN
NAME, YEAR OF BIRTH LENGTH OF BY BOARD
AND ADDRESS POSITION TIME SERVED MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ---------------- ----------------- ----------------- -------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 131 None
One Franklin Parkway Chairman of the 1991 and Chairman
San Mateo, CA 94403-1906 Board of the Board
since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies
in Franklin Templeton Investments.
Annual Report | 127
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN
NAME, YEAR OF BIRTH LENGTH OF BY BOARD
AND ADDRESS POSITION TIME SERVED MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ---------------- ----------------- ----------------- -------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee Since 1991 51 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior
Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 25 of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Compliance Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Officer and Vice Officer since
San Mateo, CA 94403-1906 President - AML 2004 and Vice
Compliance President - AML
Compliance since
2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
LAURA F. FERGERSON (1962) Chief Executive Since 2009 Not Applicable Not Applicable
One Franklin Parkway Officer -
San Mateo, CA 94403-1906 Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant
Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin
Templeton Services, LLC (1997-2003).
GASTON GARDEY (1967) Treasurer, Chief Since 2009 Not Applicable Not Applicable
One Franklin Parkway Financial
San Mateo, CA 94403-1906 Officer and
Chief Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton
Investments.
ALIYA S. GORDON (1973) Vice President Since 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
128 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN
NAME, YEAR OF BIRTH LENGTH OF BY BOARD
AND ADDRESS POSITION TIME SERVED MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ---------------- ----------------- ----------------- -------------------------------------
STEVEN J. GRAY (1955) Vice President Since August 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and
officer of 45 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) President and Since April 2010 Not Applicable Not Applicable
One Franklin Parkway Chief Executive
San Mateo, CA 94403-1906 Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and
of 10 of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC;
and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 22 of the investment companies in Franklin
Templeton Investments.
ROBERT C. ROSSELOT (1960) Vice President Since August 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President
and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of
the South; and officer of 45 of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin
Templeton Investments.
Annual Report | 129
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN
NAME, YEAR OF BIRTH LENGTH OF BY BOARD
AND ADDRESS POSITION TIME SERVED MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- ---------------- ----------------- ----------------- -------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
130 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 13, 2010, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds within the Trust
(Fund(s)). In reaching this decision, the Board took into account information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the annual renewal review process.
Information furnished and discussed throughout the year included investment
performance reports and related financial information for each Fund, as well as
periodic reports on shareholder services, legal, compliance, pricing, brokerage
commissions and execution and other services provided by the Investment Manager
(Manager) and its affiliates. Information furnished specifically in connection
with the renewal process included a report for each Fund prepared by Lipper,
Inc. (Lipper), an independent organization, as well as additional material,
including a Fund profitability analysis report prepared by management. The
Lipper reports compared each Fund's investment performance and expenses with
those of other mutual funds deemed comparable to the Fund as selected by Lipper.
The Fund profitability analysis report discussed the profitability to Franklin
Templeton Investments from its overall U.S. fund operations, as well as on an
individual fund-by-fund basis. Included with such profitability analysis report
was information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates to U.S. mutual funds and other accounts, including
management's explanation of differences where relevant and a three-year expense
analysis with an explanation for any increase in expense ratios. Additional
material accompanying such report was a memorandum prepared by management
describing project initiatives and capital investments relating to the services
provided to the Funds by the Franklin Templeton Investments organization, as
well as a memorandum relating to economies of scale and a comparative analysis
concerning transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management
Annual Report | 131
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
personnel with the code of ethics adopted throughout the Franklin Templeton fund
complex, the adherence to fair value pricing procedures established by the
Board, and the accuracy of net asset value calculations. The Board also noted
the extent of benefits provided Fund shareholders from being part of the
Franklin Templeton family of funds, including the right to exchange investments
between the same class of funds without a sales charge, the ability to reinvest
Fund dividends into other funds and the right to combine holdings in other funds
to obtain a reduced sales charge. Favorable consideration was given to
management's continuous efforts and expenditures in establishing back-up systems
and recovery procedures to function in the event of a natural disaster, it being
noted that such systems and procedures had functioned smoothly during the
Florida hurricanes and blackouts experienced in recent years. Among other
factors taken into account by the Board were the Manager's best execution
trading policies, including a favorable report by an independent portfolio
trading analytical firm. Consideration was also given to the experience of each
Fund's portfolio management team, the number of accounts managed and general
method of compensation. In this latter respect, the Board noted that a primary
factor in management's determination of a portfolio manager's bonus compensation
was the relative investment performance of the funds he or she managed and that
a portion of such bonus was required to be invested in a predesignated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, and the continuous enhancements to and
high industry ranking given the Franklin Templeton website. Particular attention
was given to management's conservative approach and diligent risk management
procedures, including continuous monitoring of counterparty credit risk and
attention given to derivatives and other complex instruments. The Board also
took into account, among other things, management's efforts in establishing a
global credit facility for the benefit of the Funds and other accounts managed
by Franklin Templeton Investments to provide a source of cash for temporary and
emergency purposes or to meet unusual redemption requests as well as the strong
financial position of the Manager's parent company and its commitment to the
mutual fund business as evidenced by its subsidization of money market funds.
The Board also noted management's efforts to minimize any negative impact on the
nature and quality of services provided the Funds arising from Franklin
Templeton Investments' implementation of a hiring freeze and employee reductions
in response to market conditions during the latter part of 2008 and early 2009.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Funds in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each individual Fund showed
the investment performance of its Class A shares in comparison to a performance
universe selected by Lipper. Comparative performance for each Fund was shown for
the one-year period ended January 31, 2010,
132 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
and previous periods ended that date of up to 10 years depending on when a
particular Fund commenced operations. The following summarizes the performance
results for each of these Funds and the Board's view of such performance.
FRANKLIN FLEX CAP GROWTH FUND - The performance universe for this Fund consisted
of the Fund and all retail and institutional multi-cap growth funds as selected
by Lipper. The Lipper report showed the Fund's total return to be in the middle
quintile of such performance universe for the one-year period, but on an
annualized basis to be in the second-highest quintile of the performance
universe during each of the previous three-, five- and 10-year periods. The
Board was satisfied with the Fund's performance as set forth in the Lipper
report, noting that the Fund's total return for the one-year period exceeded
35%.
FRANKLIN FOCUSED CORE EQUITY FUND - The performance universe for this Fund
consisted of all retail and institutional multi-cap core funds as selected by
Lipper. The Fund has been in operation for only two full years, and the Lipper
report showed its total return for the one-year period and for its annualized
two years of operation to be in the highest quintile of such performance
universe. The Board did not believe such performance to be particularly
meaningful in view of the Fund's brief period of operation.
FRANKLIN GROWTH OPPORTUNITIES FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional multi-cap growth funds as
selected by Lipper. The Lipper report showed the Fund's total return for the
one-year period to be in the middle quintile of its performance universe, and on
an annualized basis to be in the highest quintile of such universe during each
of the previous three- and five-year periods, and in the second-lowest quintile
of such universe for the previous 10-year period. The Board found the Fund's
performance as set forth in the Lipper report to be acceptable.
FRANKLIN SMALL CAP GROWTH FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional small cap growth funds as
selected by Lipper. The Lipper report showed the Fund's total return to be in
the highest quintile of such performance universe during the one-year period,
and on an annualized basis to be in the second-highest quintile of such universe
for the previous three-year period, and the middle quintile of such universe for
the pervious five-year period. The Fund has not been in operation for a full
10-year period. The Board was satisfied with the Fund's performance as set forth
in the Lipper report.
FRANKLIN SMALL-MID CAP GROWTH FUND - The performance universe for this Fund
consisted of all retail and institutional mid-cap growth funds as selected by
Lipper. The Lipper report comparison for the Fund showed its total return during
the one-year period to be in the middle quintile of such performance universe,
and on an annualized basis to be in the middle quintile of such universe during
each of the previous three- and five-year periods, and the second-highest
quintile of such universe during the previous 10-year period. The Board found
the Fund's performance as set forth in the Lipper report to be acceptable.
Annual Report | 133
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group.
Lipper expense data is based upon information taken from each fund's most recent
annual report, which reflects historical asset levels that may be quite
different from those currently existing, particularly in a period of market
volatility. While recognizing such inherent limitation and the fact that expense
ratios generally increase as assets decline and decrease as assets grow, the
Board believed the independent analysis conducted by Lipper to be an appropriate
measure of comparative expenses. In reviewing comparative costs, Lipper provides
information on each Fund's contractual investment management fee in comparison
with the investment management fee that would have been charged by other funds
within its Lipper expense group assuming they were similar in size to the Fund,
as well as the actual total expense ratio of the Fund in comparison with those
of its Lipper expense group. The Lipper contractual investment management fee
analysis includes administrative charges as being part of the investment
management fee, and actual total expenses, for comparative consistency, are
shown by Lipper for Fund Class A shares. The results of such expense comparisons
showed the contractual investment management fee rates and actual total expense
ratios for each of Franklin Flex Cap Growth Fund and Franklin Small-Mid Cap
Growth Fund to be in the least expensive quintile of its respective Lipper
expense group. The contractual investment management fee rate for Franklin Small
Cap Growth Fund was in the least expensive quintile of its Lipper expense group
and its actual total expense ratio was at the median of such expense group. The
contractual investment management fee rate for Franklin Growth Opportunities
Fund was in the least expensive quintile of its Lipper expense group and the
actual total expense ratio was in the second least expensive quintile of such
group. The Board was satisfied with the contractual management fees and total
expense ratios of each of these Funds in comparison to its expense group as
shown in the Lipper reports. The contractual investment management fee rate for
Franklin Focused Core Equity Fund was in the middle quintile of its Lipper
expense group, and its actual total expense ratio was in the least expensive
quintile of such expense group. The Board was satisfied with the expenses of
this Fund as shown in its Lipper report, noting they were subsidized by
management.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds during the 12-month period ended September 30,
2009, being the most recent fiscal year-end for Franklin Resources, Inc., the
Manager's parent. In reviewing the analysis, attention was given to the
methodology followed in allocating costs to each Fund, it being recognized that
allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that, while being continuously refined and reflecting
changes in the Manager's own cost accounting, the allocation methodology was
consistent with that followed in profitability report presentations
134 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
for the Funds made in prior years and that the Funds' independent registered
public accounting firm had been engaged by the Manager to review the
reasonableness of the allocation methodologies solely for use by the Funds'
Board in reference to the profitability analysis. In reviewing and discussing
such analysis, management discussed with the Board its belief that costs
incurred in establishing the infrastructure necessary for the type of mutual
fund operations conducted by the Manager and its affiliates may not be fully
reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In
addition, the Board considered a third-party study comparing the profitability
of the Manager's parent on an overall basis to other publicly held managers
broken down to show profitability from management operations exclusive of
distribution expenses, as well as profitability including distribution expenses.
The Board also considered the extent to which the Manager and its affiliates
might derive ancillary benefits from fund operations, including its interest in
a joint venture entity that financed up-front commissions paid to
brokers/dealers who sold fund Class B shares prior to February 2005 when the
offering of such shares was discontinued, as well as potential benefits
resulting from allocation of fund brokerage and the use of commission dollars to
pay for research. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to each Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreements for all of the Funds contains breakpoints that continued to asset
levels that exceeded their asset size at December 31, 2009. The assets of
Franklin Focused Core Equity Fund amounted to approximately $11 million at
December 31, 2009, and the Board did not believe such size afforded any
economies of scale, noting expenses were subsidized by management. In view of
such fee structure and the favorable expense comparisons of the other Funds
within their respective expense groups, the Board believed that to the extent
economies of scale may be realized by the Manager of these Funds and its
affiliates, there was a sharing of benefits with each Fund and its shareholders.
Annual Report | 135
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager has established Proxy Voting Policies and
Procedures (Policies) that the Trust uses to determine how to vote proxies
relating to portfolio securities. Shareholders may view the Trust's complete
Policies online at franklintempleton.com. Alternatively, shareholders may
request copies of the Policies free of charge by calling the Proxy Group collect
at (954) 527-7678 or by sending a written request to: Franklin Templeton
Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are
also made available online at franklintempleton.com and posted on the U.S.
Securities and Exchange Commission's website at sec.gov and reflect the most
recent 12-month period ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling (800)
SEC-0330.
HOUSEHOLDING OF REPORTS AND PROSPECTUSES
You will receive the Fund's financial reports every six months as well as an
annual updated summary prospectus (prospectus available upon request). To reduce
Fund expenses, we try to identify related shareholders in a household and send
only one copy of the financial reports and summary prospectus. This process,
called "householding," will continue indefinitely unless you instruct us
otherwise. If you prefer not to have these documents householded, please call us
at (800) 632-2301. At any time you may view current prospectuses/summary
prospectuses and financial reports on our website. If you choose, you may
receive these documents through electronic delivery.
136 | Annual Report
Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A SUMMARY PROSPECTUS AND/OR 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 A 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 DynaTech Fund
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 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 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 Conservative Allocation Fund (3)
Franklin Templeton Growth Allocation Fund (3)
Franklin Templeton Moderate Allocation Fund (3)
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 (4)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(4)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund (4)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME (5)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund (6)
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 (7)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts (8)
Michigan (8)
Minnesota (8)
Missouri
New Jersey
New York (7)
North Carolina
Ohio(8)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust (9)
(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.) Effective 5/1/10, the Franklin Templeton Target Funds changed their name to
the Franklin Templeton Allocation Funds. The funds' investment goals and
principal investment strategies remained unchanged.
(4.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(5.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(6.) The fund invests primarily in insured municipal securities.
(7.) These funds are available in three or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and a money market portfolio (CA only).
(8.) 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 2/15/09.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
07/10 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a summary
prospectus and/or prospectus. Investors should carefully consider a fund's
investment goals, risks, charges and expenses before investing. A prospectus
contains this and other information; please read it carefully before investing.
To 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.
(C) 2010 Franklin Templeton Investments. All rights reserved.
FSS1 A 06/10
APRIL 30, 2010
ANNUAL 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 annual report
Contents
SHAREHOLDER LETTER ..................................................... 1
ANNUAL REPORT
Economic and Market Overview ........................................... 3
Franklin Biotechnology Discovery Fund .................................. 5
Franklin Natural Resources Fund ........................................ 13
Financial Highlights and Statements of Investments ..................... 23
Financial Statements ................................................... 36
Notes to Financial Statements .......................................... 40
Report of Independent Registered Public Accounting
Firm ................................................................ 53
Tax Designation ........................................................ 54
Board Members and Officers ............................................. 55
Shareholder Information ................................................ 60
Shareholder Letter
Dear Shareholder:
During the year ended April 30, 2010, the U.S. economy showed signs of an
increasingly broad-based expansion while interest rates remained near all-time
lows and inflation was muted. Although corporate and global economic data
underscored some weak spots amid short-term improvements, by fourth quarter 2009
and into 2010, most companies beat consensus earnings estimates, aided by
government incentives and a wave of restructuring and cost-cutting initiatives.
U.S. equity markets enjoyed an unusually strong rally until first quarter 2010,
when volatility returned as investors began to heed signs of overvaluation. In
addition, concerns about some European countries' creditworthiness contributed
to significant market uncertainty. Investors also questioned the global
recovery's sustainability as some government stimulus measures began to wind
down. During the reporting period, U.S. Treasury yields rose and fell in
response to wavering investor sentiment. The yield curve reached historically
steep levels during the first quarter of 2010 and flattened only slightly by
period-end.
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. Although conditions remain challenging, our experience gives us
reason to be optimistic about future market stabilization and economic recovery.
Franklin Strategic Series' annual report goes into greater detail about
prevailing conditions during the period under review. In addition, you will find
performance data, financial information and discussions from the portfolio
managers. Please remember that all securities markets fluctuate, as do mutual
fund share prices.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
If you would like more frequent updates, franklintempleton.com provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Funds. 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/ Edward B. Jamieson
Edward B. Jamieson
President and Chief Executive
Officer - Investment Management
Franklin Strategic Series
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2010. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
2 | Not part of the annual report
Annual Report
Economic and Market Overview
The U.S. economy ended the fiscal year under review in much better shape than it
began and showed signs of broad-based improvements. In the latter half of the
period, U.S. manufacturing and exports posted gains, consumer spending and
confidence rebounded from recessionary lows, and the services sector expanded
for the first time in more than two years. However, challenges remained as mixed
economic reports, elevated debt concerns surrounding the U.S. budget deficit and
lack of job prospects for the unemployed hindered the economy's advance. Fourth
quarter 2009 and first quarter 2010 corporate profit growth largely surpassed
consensus estimates, which allowed businesses to begin restocking inventories
that were depleted during the recession. Prices for new and previously occupied
homes rose in most regions due to lower interest rates, a first-time homebuyer
tax credit program, and prices dipping to levels that lured bargain hunters.
Unfortunately, the housing sector overall remained weak as the pace of home
sales and housing starts failed to gain traction.
The U.S. economy expanded at its fastest pace in six years during 2009's fourth
quarter, led by large inventory adjustments, government spending, a revival of
business investment and rising exports. U.S. economic output as measured by
gross domestic product grew at an annualized rate of 5.6% in the fourth quarter,
followed by an estimated annualized 3.0% advance in 2010's first quarter.(1) As
renewed signs of a demand-led recovery emerged, oil prices jumped from $51 per
barrel to $86 during the year under review. The April 2010 inflation rate was an
annualized 2.2%.(2) Core inflation, which excludes food and energy costs, rose
at a 0.9% annualized rate(2) and was below the Federal Reserve Board's (Fed's)
informal target range of 1.5% to 2.0%.
Given few inflationary pressures and uncertainty surrounding the economic
recovery, the Federal Open Market Committee (FOMC) announced it intended to hold
the federal funds target rate in the 0% to 0.25% range "for an extended period"
as it laid the groundwork for an eventual tightening of monetary policy. As the
economy improved, the Fed began withdrawing more of the extraordinary support
policies it had provided in response to the 2008 financial crisis. Late in the
reporting period, the labor market improved somewhat as the economy began to add
jobs, and the unemployment rate dropped from a 26-year high of 10.1% in October
2009 to 9.9% in April.(2)
(1.) Source: Bureau of Economic Analysis.
(2.) Source: Bureau of Labor Statistics.
Annual Report | 3
As investor confidence improved amid encouraging economic data, equity markets
generally rallied, though the advance was uneven. On April 12, 2010, the Dow
Jones Industrial Average (Dow) closed above 11,000, a level it had not reached
in nearly 19 months. The rally was driven in part by investor optimism about
corporate profits, a recovering economy and the announcement of a debt relief
plan for the ailing Greek government. This achievement was largely symbolic,
however, and volatile trading activity soon resumed. The market plunged after
independent credit rating agency Standard & Poor's(R) slashed its credit ratings
for Spain, Greece and Portugal but rebounded after the FOMC announced it would
keep interest rates stable and many companies released upbeat earnings reports.
For the 12 months under review, the blue chip stocks of the Dow delivered a
+38.69% total return, while the broader Standard & Poor's 500 Index (S&P 500(R))
posted a +38.84% total return and the technology-heavy NASDAQ Composite Index
returned +44.63%.(3) All major industry groups posted gains for the period, with
the strongest returns from the cyclical industrials, consumer discretionary and
financials sectors.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30,
2010. 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.
(3.) Source: (C) 2010 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 is price weighted based on the average market price of 30 blue chip
stocks that are generally industry leaders. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The NASDAQ Composite Index is a broad-based,
market capitalization-weighted index designed to measure all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market.
4 | Annual Report
Franklin Biotechnology Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Biotechnology Discovery Fund
seeks capital appreciation by investing at least 80% of its net assets in
securities of biotechnology companies and discovery research firms located in
the U.S. and other countries.
PORTFOLIO BREAKDOWN
Franklin Biotechnology Discovery Fund
Based on Total Net Assets as of 4/30/10
(PIE CHART)
Biotechnology................................... 73.7%
Pharmaceuticals................................. 16.0%
Life Sciences Tools & Services.................. 8.2%
Short-Term Investments & Other Net Assets....... 2.1%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Biotechnology Discovery Fund covers the fiscal
year ended April 30, 2010.
PERFORMANCE OVERVIEW
Franklin Biotechnology Discovery Fund - Class A delivered a +30.87% cumulative
total return for the 12 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 posted +39.46% and +38.84% total returns for
the same period.(1) For comparison, the NASDAQ
(1.) Source: (C) 2010 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 is a
capitalization-weighted index designed to measure the performance of all
NASDAQ stocks in the biotechnology sector. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market 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 25.
Annual Report | 5
TOP 10 HOLDINGS
Franklin Biotechnology Discovery Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Celgene Corp. 9.3%
BIOTECHNOLOGY
Genzyme Corp. 7.5%
BIOTECHNOLOGY
Amgen Inc. 7.4%
BIOTECHNOLOGY
Gilead Sciences Inc. 7.4%
BIOTECHNOLOGY
Alexion Pharmaceuticals Inc. 3.9%
BIOTECHNOLOGY
Life Technologies Corp. 3.6%
LIFE SCIENCES TOOLS & SERVICES
BioMarin Pharmaceutical Inc. 3.1%
BIOTECHNOLOGY
Biogen Idec Inc. 3.1%
BIOTECHNOLOGY
Human Genome Sciences Inc. 2.9%
BIOTECHNOLOGY
Onyx Pharmaceuticals Inc. 2.8%
BIOTECHNOLOGY
Composite Index had a 12-month return of +44.63%.(2) You can find the Fund's
long-term performance data in the Performance Summary beginning on page 8.
INVESTMENT STRATEGY
The Fund is managed using a bottom-up approach to individual stock selection,
with a focus on fundamental analysis and primary research. We look for
biotechnology, biopharmaceutical and platform technology companies that possess
products with favorable competitive profiles, large market opportunities and
strong intellectual property, supported by thoughtful clinical and market
development strategies. Our assessment of these products is based on extensive
primary research and due diligence and includes, but is not limited to, a
thorough review of medical literature, consultation of community and academic
physicians, and attendance at scientific meetings and symposia. Additionally, we
favor companies with excellent management, strong financial characteristics and
attractive valuations.
MANAGER'S DISCUSSION
During the fiscal year ended April 30, 2010, a majority of the Fund's holdings
appreciated in value, including many positions that more than doubled in value.
Some of the most significant contributors to the Fund's absolute performance
included Celgene, BioMarin Pharmaceutical and BioForm Medical. In the
biotechnology industry, Celgene develops and markets therapeutic and molecular
diagnostic products. BioMarin, whose focus is on rare genetic diseases, has
developed three FDA-approved drugs that qualify for orphan drug status, a
financial incentive that encourages companies to create drugs for rare diseases
by giving the compounds a period of market exclusivity. In the pharmaceuticals
industry, BioForm Medical (sold by period-end) makes a dermal filler product
used mainly for cosmetic purposes. Additional key contributors included Life
Technologies in the life sciences tools and services industry, Amgen and Gentium
in the biotechnology industry, and prescription drug makers Teva Pharmaceutical
Industries and Roche Holding in the pharmaceuticals industry. We no longer held
Roche at period-end.
(2.) Source: (C) 2010 Morningstar. The NASDAQ Composite Index is a broad-based,
market capitalization-weighted index designed to measure all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. 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.
6 | Annual Report
In contrast, major detractors from absolute Fund results during the reporting
period included biotechnology companies Gilead Sciences and Myriad Genetics, and
drug maker ARYx Therapeutics. 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. ARYx Therapeutics develops drugs using a proprietary technology that
takes old drugs and makes them better and safer. In particular, the technology
improves the way certain drugs are metabolized in the liver, thus reducing
unwanted side effects. We sold ARYx during the period. Other significant
detractors from the Fund's returns included FibroGen, a drug discovery firm that
focuses on developing and commercializing treatments for fibrosis, anemia,
diabetes and cancer; and Talecris Biotherapeutics Holdings, which develops
therapies for a range of deficiency-related ailments.
Thank you for your continued participation in Franklin Biotechnology Discovery
Fund. We look forward to serving your future investment needs.
(PHOTO OF EVAN MCCULLOCH)
Evan McCulloch, CFA
Portfolio Manager
Franklin Biotechnology Discovery Fund
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 7
Performance Summary as of 4/30/10
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 and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
CLASS A (SYMBOL: FBDIX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$15.35 $65.08 $49.73
ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/10 9/1/09
- --------------------------- ------- ------- -------
Net Asset Value (NAV) +$8.19 $65.20 $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 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(1) +30.87% +41.32% +7.97%
Average Annual Total Return(2) +23.35% +5.90% +0.17%
Value of $10,000 Investment(3) $12,335 $13,320 $10,176
Avg. Ann. Total Return (3/31/10)(4) +17.02% +6.05% -1.48%
Total Annual Operating Expenses(5) 1.37%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- -------
Cumulative Total Return(1) +31.13% +41.61% +8.19%
Average Annual Total Return(2) +31.13% +7.21% +0.79%
Value of $10,000 Investment(3) $13,113 $14,161 $10,819
Avg. Ann. Total Return (3/31/10)(4) +24.37% +7.35% -0.88%
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, GO TO
franklintempleton.com OR CALL (800) 342-5236.
8 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged indexes include reinvestment of
any income or distributions. They differ from the Fund in composition and do not
pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +23.35%
5-Year +5.90%
10-Year +0.17%
CLASS A (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN BIOTECHNOLOGY S&P 500 NASDAQ
DATE DISCOVERY FUND - CLASS A INDEX BIOTECHNOLOGY INDEX
- ---------- ------------------------ ------- -------------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $ 8,977 $ 9,795 $ 9,720
6/30/2000 $12,594 $10,036 $12,771
7/31/2000 $11,738 $ 9,879 $11,792
8/31/2000 $14,163 $10,493 $14,305
9/30/2000 $14,475 $ 9,939 $13,804
10/31/2000 $13,057 $ 9,897 $12,681
11/30/2000 $10,765 $ 9,117 $11,009
12/31/2000 $11,415 $ 9,161 $11,383
1/31/2001 $10,568 $ 9,486 $10,943
2/28/2001 $ 9,626 $ 8,621 $10,101
3/31/2001 $ 7,745 $ 8,075 $ 8,046
4/30/2001 $ 9,035 $ 8,703 $ 9,572
5/31/2001 $ 9,415 $ 8,761 $10,367
6/30/2001 $ 9,858 $ 8,548 $10,636
7/31/2001 $ 8,508 $ 8,464 $ 9,122
8/31/2001 $ 8,638 $ 7,934 $ 9,216
9/30/2001 $ 7,510 $ 7,293 $ 7,795
10/31/2001 $ 8,381 $ 7,432 $ 9,065
11/30/2001 $ 8,935 $ 8,002 $ 9,931
12/31/2001 $ 9,077 $ 8,072 $ 9,539
1/31/2002 $ 8,012 $ 7,955 $ 8,187
2/28/2002 $ 7,586 $ 7,801 $ 7,821
3/31/2002 $ 7,754 $ 8,095 $ 8,112
4/30/2002 $ 6,680 $ 7,604 $ 6,837
5/31/2002 $ 6,184 $ 7,548 $ 6,087
6/30/2002 $ 5,479 $ 7,010 $ 5,353
7/31/2002 $ 5,437 $ 6,464 $ 5,388
8/31/2002 $ 5,177 $ 6,506 $ 5,136
9/30/2002 $ 4,946 $ 5,799 $ 4,880
10/31/2002 $ 5,298 $ 6,310 $ 5,368
11/30/2002 $ 5,683 $ 6,681 $ 5,856
12/31/2002 $ 5,221 $ 6,288 $ 5,215
1/31/2003 $ 5,091 $ 6,124 $ 5,102
2/28/2003 $ 5,037 $ 6,032 $ 5,032
3/31/2003 $ 5,340 $ 6,090 $ 5,376
4/30/2003 $ 5,825 $ 6,592 $ 6,026
5/31/2003 $ 6,679 $ 6,939 $ 7,168
6/30/2003 $ 6,524 $ 7,028 $ 7,055
7/31/2003 $ 7,068 $ 7,152 $ 7,691
8/31/2003 $ 7,073 $ 7,291 $ 7,776
9/30/2003 $ 7,034 $ 7,214 $ 7,562
10/31/2003 $ 7,074 $ 7,622 $ 7,507
11/30/2003 $ 7,159 $ 7,689 $ 7,298
12/31/2003 $ 7,495 $ 8,092 $ 7,601
1/31/2004 $ 7,795 $ 8,241 $ 8,131
2/29/2004 $ 7,972 $ 8,355 $ 8,185
3/31/2004 $ 8,075 $ 8,229 $ 8,167
4/30/2004 $ 8,328 $ 8,100 $ 8,205
5/31/2004 $ 8,277 $ 8,211 $ 8,005
6/30/2004 $ 8,133 $ 8,371 $ 7,970
7/31/2004 $ 7,462 $ 8,094 $ 7,212
8/31/2004 $ 7,720 $ 8,127 $ 7,260
9/30/2004 $ 8,042 $ 8,215 $ 7,500
10/31/2004 $ 7,794 $ 8,340 $ 7,296
11/30/2004 $ 7,912 $ 8,678 $ 7,549
12/31/2004 $ 8,391 $ 8,973 $ 8,066
1/31/2005 $ 7,873 $ 8,754 $ 7,612
2/28/2005 $ 7,323 $ 8,938 $ 7,286
3/31/2005 $ 7,070 $ 8,780 $ 6,828
4/30/2005 $ 7,201 $ 8,614 $ 6,788
5/31/2005 $ 7,581 $ 8,888 $ 7,118
6/30/2005 $ 7,897 $ 8,900 $ 7,246
7/31/2005 $ 8,887 $ 9,231 $ 8,113
8/31/2005 $ 8,827 $ 9,147 $ 8,134
9/30/2005 $ 8,840 $ 9,221 $ 8,238
10/31/2005 $ 8,463 $ 9,067 $ 7,922
11/30/2005 $ 8,793 $ 9,410 $ 8,220
12/31/2005 $ 8,857 $ 9,414 $ 8,295
1/31/2006 $ 9,334 $ 9,663 $ 8,645
2/28/2006 $ 9,698 $ 9,689 $ 9,025
3/31/2006 $ 9,468 $ 9,810 $ 8,829
4/30/2006 $ 8,821 $ 9,941 $ 8,331
5/31/2006 $ 8,358 $ 9,655 $ 7,886
6/30/2006 $ 8,266 $ 9,668 $ 7,797
7/31/2006 $ 8,066 $ 9,728 $ 7,689
8/31/2006 $ 8,311 $ 9,959 $ 7,917
9/30/2006 $ 8,400 $10,216 $ 7,917
10/31/2006 $ 9,116 $10,549 $ 8,553
11/30/2006 $ 9,362 $10,750 $ 8,631
12/31/2006 $ 9,302 $10,900 $ 8,380
1/31/2007 $ 9,576 $11,065 $ 8,587
2/28/2007 $ 9,284 $10,849 $ 8,297
3/31/2007 $ 9,181 $10,970 $ 8,155
4/30/2007 $10,091 $11,456 $ 8,834
5/31/2007 $10,111 $11,856 $ 8,766
6/30/2007 $ 9,550 $11,659 $ 8,425
7/31/2007 $ 9,265 $11,297 $ 8,232
8/31/2007 $ 9,457 $11,467 $ 8,540
9/30/2007 $ 9,909 $11,896 $ 8,967
10/31/2007 $10,294 $12,085 $ 9,361
11/30/2007 $ 9,756 $11,580 $ 9,093
12/31/2007 $ 9,154 $11,499 $ 8,764
1/31/2008 $ 8,888 $10,810 $ 8,450
2/29/2008 $ 8,632 $10,458 $ 8,229
3/31/2008 $ 8,480 $10,413 $ 8,196
4/30/2008 $ 8,555 $10,920 $ 8,389
5/31/2008 $ 8,932 $11,062 $ 8,585
6/30/2008 $ 9,009 $10,129 $ 8,328
7/31/2008 $10,213 $10,044 $ 9,633
8/31/2008 $10,070 $10,189 $ 9,299
9/30/2008 $ 9,384 $ 9,281 $ 8,775
10/31/2008 $ 8,286 $ 7,723 $ 7,711
11/30/2008 $ 7,704 $ 7,169 $ 7,074
12/31/2008 $ 8,180 $ 7,245 $ 7,657
1/31/2009 $ 8,311 $ 6,634 $ 7,649
2/28/2009 $ 7,651 $ 5,928 $ 6,801
3/31/2009 $ 8,105 $ 6,447 $ 7,167
4/30/2009 $ 7,776 $ 7,064 $ 7,081
5/31/2009 $ 8,003 $ 7,459 $ 7,341
6/30/2009 $ 8,406 $ 7,474 $ 7,868
7/31/2009 $ 9,085 $ 8,039 $ 8,514
8/31/2009 $ 9,010 $ 8,330 $ 8,487
9/30/2009 $ 9,285 $ 8,640 $ 8,813
10/31/2009 $ 8,474 $ 8,480 $ 7,943
11/30/2009 $ 8,882 $ 8,988 $ 8,480
12/31/2009 $ 9,148 $ 9,162 $ 8,854
1/31/2010 $ 9,360 $ 8,832 $ 9,028
2/28/2010 $ 9,515 $ 9,106 $ 9,224
3/31/2010 $10,062 $ 9,656 $ 9,934
4/30/2010 $10,176 $ 9,808 $ 9,875
Total 1.76% -1.92% -1.25%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 4/30/10
- ---------------- -------
1-Year +31.13%
5-Year +7.21%
10-Year +0.79%
ADVISOR CLASS (5/1/00-4/30/10)(6)
(PERFORMANCE GRAPH)
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND - ADVISOR S&P 500 NASDAQ
DATE CLASS INDEX BIOTECHNOLOGY INDEX
- ---------- ------------------------ ------- -------------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,525 $ 9,795 $ 9,720
6/30/2000 $13,363 $10,036 $12,771
7/31/2000 $12,454 $ 9,879 $11,792
8/31/2000 $15,027 $10,493 $14,305
9/30/2000 $15,358 $ 9,939 $13,804
10/31/2000 $13,854 $ 9,897 $12,681
11/30/2000 $11,421 $ 9,117 $11,009
12/31/2000 $12,111 $ 9,161 $11,383
1/31/2001 $11,212 $ 9,486 $10,943
2/28/2001 $10,213 $ 8,621 $10,101
3/31/2001 $ 8,218 $ 8,075 $ 8,046
4/30/2001 $ 9,586 $ 8,703 $ 9,572
5/31/2001 $ 9,989 $ 8,761 $10,367
6/30/2001 $10,459 $ 8,548 $10,636
7/31/2001 $ 9,027 $ 8,464 $ 9,122
8/31/2001 $ 9,165 $ 7,934 $ 9,216
9/30/2001 $ 7,969 $ 7,293 $ 7,795
10/31/2001 $ 8,893 $ 7,432 $ 9,065
11/30/2001 $ 9,480 $ 8,002 $ 9,931
12/31/2001 $ 9,631 $ 8,072 $ 9,539
1/31/2002 $ 8,501 $ 7,955 $ 8,187
2/28/2002 $ 8,048 $ 7,801 $ 7,821
3/31/2002 $ 8,227 $ 8,095 $ 8,112
4/30/2002 $ 7,088 $ 7,604 $ 6,837
5/31/2002 $ 6,562 $ 7,548 $ 6,087
6/30/2002 $ 5,813 $ 7,010 $ 5,353
7/31/2002 $ 5,769 $ 6,464 $ 5,388
8/31/2002 $ 5,493 $ 6,506 $ 5,136
9/30/2002 $ 5,248 $ 5,799 $ 4,880
10/31/2002 $ 5,621 $ 6,310 $ 5,368
11/30/2002 $ 6,029 $ 6,681 $ 5,856
12/31/2002 $ 5,540 $ 6,288 $ 5,215
1/31/2003 $ 5,402 $ 6,124 $ 5,102
2/28/2003 $ 5,344 $ 6,032 $ 5,032
3/31/2003 $ 5,666 $ 6,090 $ 5,376
4/30/2003 $ 6,180 $ 6,592 $ 6,026
5/31/2003 $ 7,086 $ 6,939 $ 7,168
6/30/2003 $ 6,922 $ 7,028 $ 7,055
7/31/2003 $ 7,499 $ 7,152 $ 7,691
8/31/2003 $ 7,504 $ 7,291 $ 7,776
9/30/2003 $ 7,463 $ 7,214 $ 7,562
10/31/2003 $ 7,506 $ 7,622 $ 7,507
11/30/2003 $ 7,595 $ 7,689 $ 7,298
12/31/2003 $ 7,952 $ 8,092 $ 7,601
1/31/2004 $ 8,271 $ 8,241 $ 8,131
2/29/2004 $ 8,458 $ 8,355 $ 8,185
3/31/2004 $ 8,568 $ 8,229 $ 8,167
4/30/2004 $ 8,836 $ 8,100 $ 8,205
5/31/2004 $ 8,782 $ 8,211 $ 8,005
6/30/2004 $ 8,629 $ 8,371 $ 7,970
7/31/2004 $ 7,917 $ 8,094 $ 7,212
8/31/2004 $ 8,191 $ 8,127 $ 7,260
9/30/2004 $ 8,533 $ 8,215 $ 7,500
10/31/2004 $ 8,269 $ 8,340 $ 7,296
11/30/2004 $ 8,395 $ 8,678 $ 7,549
12/31/2004 $ 8,903 $ 8,973 $ 8,066
1/31/2005 $ 8,354 $ 8,754 $ 7,612
2/28/2005 $ 7,770 $ 8,938 $ 7,286
3/31/2005 $ 7,501 $ 8,780 $ 6,828
4/30/2005 $ 7,640 $ 8,614 $ 6,788
5/31/2005 $ 8,043 $ 8,888 $ 7,118
6/30/2005 $ 8,378 $ 8,900 $ 7,246
7/31/2005 $ 9,429 $ 9,231 $ 8,113
8/31/2005 $ 9,366 $ 9,147 $ 8,134
9/30/2005 $ 9,379 $ 9,221 $ 8,238
10/31/2005 $ 8,979 $ 9,067 $ 7,922
11/30/2005 $ 9,329 $ 9,410 $ 8,220
12/31/2005 $ 9,397 $ 9,414 $ 8,295
1/31/2006 $ 9,903 $ 9,663 $ 8,645
2/28/2006 $10,290 $ 9,689 $ 9,025
3/31/2006 $10,046 $ 9,810 $ 8,829
4/30/2006 $ 9,359 $ 9,941 $ 8,331
5/31/2006 $ 8,868 $ 9,655 $ 7,886
6/30/2006 $ 8,770 $ 9,668 $ 7,797
7/31/2006 $ 8,558 $ 9,728 $ 7,689
8/31/2006 $ 8,818 $ 9,959 $ 7,917
9/30/2006 $ 8,913 $10,216 $ 7,917
10/31/2006 $ 9,673 $10,549 $ 8,553
11/30/2006 $ 9,933 $10,750 $ 8,631
12/31/2006 $ 9,870 $10,900 $ 8,380
1/31/2007 $10,160 $11,065 $ 8,587
2/28/2007 $ 9,850 $10,849 $ 8,297
3/31/2007 $ 9,741 $10,970 $ 8,155
4/30/2007 $10,706 $11,456 $ 8,834
5/31/2007 $10,728 $11,856 $ 8,766
6/30/2007 $10,132 $11,659 $ 8,425
7/31/2007 $ 9,830 $11,297 $ 8,232
8/31/2007 $10,034 $11,467 $ 8,540
9/30/2007 $10,514 $11,896 $ 8,967
10/31/2007 $10,922 $12,085 $ 9,361
11/30/2007 $10,351 $11,580 $ 9,093
12/31/2007 $ 9,712 $11,499 $ 8,764
1/31/2008 $ 9,430 $10,810 $ 8,450
2/29/2008 $ 9,158 $10,458 $ 8,229
3/31/2008 $ 8,997 $10,413 $ 8,196
4/30/2008 $ 9,077 $10,920 $ 8,389
5/31/2008 $ 9,477 $11,062 $ 8,585
6/30/2008 $ 9,558 $10,129 $ 8,328
7/31/2008 $10,836 $10,044 $ 9,633
8/31/2008 $10,685 $10,189 $ 9,299
9/30/2008 $ 9,956 $ 9,281 $ 8,775
10/31/2008 $ 8,792 $ 7,723 $ 7,711
11/30/2008 $ 8,174 $ 7,169 $ 7,074
12/31/2008 $ 8,679 $ 7,245 $ 7,657
1/31/2009 $ 8,818 $ 6,634 $ 7,649
2/28/2009 $ 8,118 $ 5,928 $ 6,801
3/31/2009 $ 8,599 $ 6,447 $ 7,167
4/30/2009 $ 8,251 $ 7,064 $ 7,081
5/31/2009 $ 8,491 $ 7,459 $ 7,341
6/30/2009 $ 8,919 $ 7,474 $ 7,868
7/31/2009 $ 9,639 $ 8,039 $ 8,514
8/31/2009 $ 9,560 $ 8,330 $ 8,487
9/30/2009 $ 9,853 $ 8,640 $ 8,813
10/31/2009 $ 8,994 $ 8,480 $ 7,943
11/30/2009 $ 9,430 $ 8,988 $ 8,480
12/31/2009 $ 9,714 $ 9,162 $ 8,854
1/31/2010 $ 9,943 $ 8,832 $ 9,028
2/28/2010 $10,109 $ 9,106 $ 9,224
3/31/2010 $10,695 $ 9,656 $ 9,934
4/30/2010 $10,819 $ 9,808 $ 9,875
Total 8.19% -1.92% -1.25%
Annual Report | 9
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.
(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 +14.37%.
(7.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance. The NASDAQ Biotechnology Index is a
capitalization-weighted index designed to measure the performance of all
NASDAQ stocks in the biotechnology sector.
10 | Annual Report
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.
Annual 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
CLASS A VALUE 11/1/09 VALUE 4/30/10 PERIOD* 11/1/09-4/30/10
- ------- ----------------- -------------- -----------------------
Actual $1,000 $1,201.00 $6.88
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.31
ADVISOR CLASS
Actual $1,000 $1,202.90 $5.41
Hypothetical (5% return before expenses) $1,000 $1,019.89 $4.96
* Expenses are calculated using the most recent six-month annualized expense
ratio, annualized for each class (A: 1.26% and Advisor: 0.99%), multiplied
by the average account value over the period, multiplied by 181/365 to
reflect the one-half year period.
12 | Annual Report
Franklin Natural Resources Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Natural Resources Fund seeks
high total return (total return consists of both capital appreciation and
current dividend and interest income) by investing at least 80% of its net
assets in equity and debt securities of companies that own, produce, refine,
process, transport or market natural resources, as well as those that provide
related services for natural resources companies.
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
GEOGRAPHIC BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 4/30/10
(BAR CHART)
North America 81.9%
Europe 6.5%
Australia & New Zealand 4.5%
Latin America & Caribbean 2.3%
Asia 0.8%
Middle East & Africa 0.7%
Short-Term Investments & Other Net Assets 3.3%
We are pleased to bring you Franklin Natural Resources Fund's annual report for
the fiscal year ended April 30, 2010.
PERFORMANCE OVERVIEW
Franklin Natural Resources Fund - Class A posted a +49.04% cumulative total
return for the 12 months under review. The Fund outperformed its narrow
benchmark, the Standard & Poor's (S&P) North American Natural Resources Index,
which had a +43.58% total return.(1) It also outperformed its broad benchmark,
the S&P 500 Index (S&P 500), which generated a +38.84% total return for the same
period.(2) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 17.
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) 2010 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) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market 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 31.
Annual Report | 13
PORTFOLIO BREAKDOWN
Franklin Natural Resources Fund
Based on Total Net Assets as of 4/30/10
(BAR CHART)
Oil & Gas Exploration & Production 27.1%
Oil & Gas Equipment & Services 20.7%
Integrated Oil & Gas 17.1%
Gold 7.8%
Diversified Metals & Mining 7.1%
Coal & Consumable Fuels 3.8%
Oil & Gas Drilling 3.7%
Oil & Gas Refining & Marketing 2.8%
Other 6.6%
Short-Term Investments & Other Net Assets 3.3%
MANAGER'S DISCUSSION
During the fiscal year under review, the Fund continued to benefit broadly from
its investment positioning, and more specifically from investments made in late
2008 and the first quarter of 2009 during the stock market's recessionary lows.
Our shift away from North American natural gas-focused companies toward those
geared to oil and petroleum products also proved beneficial to Fund returns.
Most commodity prices rose over the period as signs of economic improvement
became more prevalent, particularly in developing countries such as China and
India. In addition, investors gravitated toward investments in commodities based
in part on expectations of continued improvement in developed countries'
economies and as a hedge against potential inflationary pressures driven by
government stimulus measures. Oil traded steadily and significantly higher with
a recovery of nearly 70% over the one-year period versus roughly 20% for natural
gas. Although natural gas prices surged in late 2009 in response to an
abnormally cold North American winter, the commodity suffered from sluggish
demand and a domestic supply glut. This was due in part to the expanding
development of shale resources through the use of effective new development
methods and technologies. As a result of this relative weakness and commensurate
equity performance, the Fund benefited due to its strategic underweighting in
natural gas-focused companies. In addition, our weighting of integrated oil and
gas companies remained relatively light when compared to the benchmark, the S&P
North American Natural Resources Index, which also benefited returns.
Gold prices also fared well, particularly in the latter half of the Fund's
fiscal year. The Fund benefited from this trend, as we nearly doubled the
portfolio's weighting in gold-mining companies just before the fiscal year
began. We made this shift in anticipation of increased investor concerns
regarding inflationary pressures following unprecedented stimulus measures taken
by governments around the world.
Much of the Fund's strong absolute performance was due to a combination of
favorable industry weightings within the oil and gas exploration and production
and the oil and gas equipment and services sectors, in addition to healthy
performance among these holdings. Some of the Fund's top contributors from oil
and gas related investments included Smith International, Occidental Petroleum,
FMC Technologies, EOG Resources, Devon Energy, Noble Energy and XTO Energy.
These holdings benefited generally from rising oil and natural gas prices, with
some also advancing on improving business fundamentals or merger and acquisition
activity. For example, Occidental Petroleum, a large U.S. onshore oil and gas
producer, announced a major discovery in California during July of 2009.
According to the company's CEO, this was believed to be the largest new
14 | Annual Report
oil and gas discovery made in California in more than 35 years. With respect to
merger and acquisition activity, drilling-related equipment and services
provider Smith International, the Fund's second-largest holding at period-end,
received an acquisition offer from Schlumberger, which is the world's leading
supplier of technology and solutions to the upstream oil and gas industry. In
addition, another large holding, XTO Energy, received an acquisition offer from
Exxon in late 2009 as the company made a surprising and significant shift into
the onshore natural gas market. Fund performance also benefited from the
acquisition of Addax Petroleum by Sinopec (not held by period-end as the
acquisition closed) and our decision to shift the portfolio away from North
American natural gas companies toward oil-focused producers such as Brigham
Exploration and Concho Resources.
The Fund's allocation among mining-related industries -- namely diversified
metals and mining, gold, precious metals and minerals, and steel -- also boosted
the Fund's performance this year. Notable contributors among diversified mining
companies included Australia's BHP Billiton, which ranks among the world's top
producers of iron ore and coal; and Canada-based Ivanhoe Mines, which explores
for and develops mineral properties, primarily in Asia. Within gold, investments
in several small- to mid-sized companies with active development projects drove
performance, including Osisko Mining, Jinshan Gold Mines (sold by period-end)
and Centamin Egypt. Investments in some of their large-capitalization
counterparts, such as Newcrest Mining and Randgold Resources, also aided
returns. The Fund's positioning in steel-related industries was concentrated
mostly in one company: U.S. iron ore and metallurgical coal producer Cliffs
Natural Resources. The steel industry benefited from China's and greater Asia's
growth in demand for metals, mirroring their recent demand profile for oil.
Only a handful of the Fund's investments fell in value during the fiscal year.
Returns might have been higher if the Fund had held more oil and gas storage and
transportation stocks, which rebounded strongly during the period. The paper
products industry was another area where the Fund had little or no exposure.
Detractors in terms of individual portfolio securities were a few disparate
holdings such as First Uranium (sold by period-end), Cobalt International
Energy, Uranium One and SouthGobi Energy Resources. Their impact on overall Fund
performance, however, was small. A relatively high allotment of cash as we
repositioned the Fund in mid-to-late 2009 also hampered performance at times.
On April 20, 2010, Mississippi Canyon 252, a deepwater exploration oil well also
known as Macondo, experienced a blow out, resulting in a devastating fire and
the eventual sinking of the rig involved in the drilling process. For reasons
unknown, numerous safety procedures and equipment systems failed before and
after the explosion, resulting in an oil spill that continued to flow well after
TOP 10 HOLDINGS
Franklin Natural Resources Fund
4/30/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Occidental Petroleum Corp. 4.3%
INTEGRATED OIL & GAS, U.S.
Smith International Inc. 3.0%
OIL & GAS EQUIPMENT & SERVICES, U.S.
Noble Energy Inc. 3.0%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
XTO Energy Inc. 2.7%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Petrohawk Energy Corp. 2.7%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Chevron Corp. 2.7%
INTEGRATED OIL & GAS, U.S.
Halliburton Co. 2.6%
OIL & GAS EQUIPMENT & SERVICES, U.S.
Exxon Mobil Corp. 2.6%
INTEGRATED OIL & GAS, U.S.
Devon Energy Corp. 2.4%
OIL & GAS EXPLORATION & PRODUCTION, U.S.
Weatherford International Ltd. 2.0%
OIL & GAS EQUIPMENT & SERVICES, U.S.
Annual Report | 15
the Fund's fiscal year ended. Deepwater drilling in the Gulf of Mexico provides
an important source of U.S. oil and natural gas, and the energy sector has
generally been very safety conscious with a long track record of safe
performance, making the accident even more surprising for those involved in
energy-related industries. Our hearts go out to those affected by the accident.
Given the Fund's sector focus, it has been nearly impossible to avoid exposure
to the fallout, particularly given the actions taken by the U.S. government,
including the implementation of a six-month deepwater drilling moratorium in the
Gulf of Mexico. Although most attention has been focused on Macondo well
operator BP, many oilfield services companies were involved in this well's
construction. These companies operate not only in the Gulf of Mexico, but in
offshore oil drilling markets worldwide. Although pending regulatory changes are
difficult to predict, the Gulf of Mexico represents a relatively small portion
of most companies' total worldwide revenues, and we believe the sector will
continue to offer attractive investment returns over the long term. Heading into
the summer of 2010 while keeping all of these factors in mind, we will continue
to assess the situation as information becomes available and will continue to
work diligently to invest the Fund's assets where we are finding the best
risk-adjusted return potential over the long term.
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
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, 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.
16 | Annual Report
Performance Summary as of 4/30/10
FRANKLIN NATURAL RESOURCES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRNRX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$10.60 $33.15 $22.55
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.4289
CLASS C (SYMBOL: FNCRX) CHANGE 4/30/10 4/30/09
- ----------------------- ------- ------- -------
Net Asset Value (NAV) +$10.42 $32.57 $22.15
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.1941
ADVISOR CLASS (SYMBOL: FNRAX) CHANGE 4/30/10 4/30/09
- ----------------------------- ------- ------- -------
Net Asset Value (NAV) +$11.25 $35.19 $23.94
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.5552
Annual Report | 17
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A(1) 1-YEAR 5-YEAR 10-YEAR
- ---------- ------- ------- -------
Cumulative Total Return(2) +49.04% +78.57% +185.30%
Average Annual Total Return(3) +40.44% +10.98% +10.40%
Value of $10,000 Investment(4) $14,044 $16,833 $26,890
Avg. Ann. Total Return (3/31/10)(5) +54.13% +8.80% +9.99%
Total Annual Operating Expenses(6) 1.11%
INCEPTION
CLASS C 1-YEAR 3-YEAR (9/1/05)
- ------- ------- ------- ---------
Cumulative Total Return(2) +48.00% +1.19% +33.16%
Average Annual Total Return(3) +47.00% +0.40% +6.34%
Value of $10,000 Investment(4) $14,700 $10,119 $13,316
Avg. Ann. Total Return (3/31/10)(5) +61.40% +1.57% +5.76%
Total Annual Operating Expenses(6) 1.84%
ADVISOR CLASS(1) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- -------
Cumulative Total Return(2) +49.48% +81.20% +195.12%
Average Annual Total Return(3) +49.48% +12.62% +11.43%
Value of $10,000 Investment(4) $14,948 $18,120 $29,512
Avg. Ann. Total Return (3/31/10)(5) +64.07% +10.43% +11.02%
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, GO TO
franklintempleton.com OR CALL (800) 342-5236.
18 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any applicable, maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged indexes include reinvestment of
any income or distributions. They differ from the Fund in composition and do not
pay management fees or expenses. One cannot invest directly in an index.
CLASS A (5/1/00-4/30/10)(1)
(PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P NORTH AMERICAN
RESOURCES S&P 500 NATURAL RESOURCES
DATE FUND - CLASS A Index INDEX
- ---------- ---------------- ------- ------------------
5/1/2000 $ 9,425 $10,000 $10,000
5/31/2000 $10,209 $ 9,795 $10,734
6/30/2000 $10,006 $10,036 $10,192
7/31/2000 $ 9,311 $ 9,879 $ 9,850
8/31/2000 $10,623 $10,493 $10,909
9/30/2000 $10,611 $ 9,939 $10,816
10/31/2000 $ 9,892 $ 9,897 $10,489
11/30/2000 $ 9,257 $ 9,117 $ 9,900
12/31/2000 $11,254 $ 9,161 $11,265
1/31/2001 $10,850 $ 9,486 $10,980
2/28/2001 $10,917 $ 8,621 $10,895
3/31/2001 $10,898 $ 8,075 $10,564
4/30/2001 $11,645 $ 8,703 $11,691
5/31/2001 $11,903 $ 8,761 $11,533
6/30/2001 $10,519 $ 8,548 $10,423
7/31/2001 $10,128 $ 8,464 $10,369
8/31/2001 $ 9,454 $ 7,934 $10,009
9/30/2001 $ 8,341 $ 7,293 $ 9,015
10/31/2001 $ 8,864 $ 7,432 $ 9,377
11/30/2001 $ 8,744 $ 8,002 $ 9,088
12/31/2001 $ 9,375 $ 8,072 $ 9,509
1/31/2002 $ 9,103 $ 7,955 $ 9,305
2/28/2002 $ 9,615 $ 7,801 $ 9,710
3/31/2002 $10,423 $ 8,095 $10,421
4/30/2002 $10,466 $ 7,604 $10,103
5/31/2002 $10,441 $ 7,548 $10,035
6/30/2002 $ 9,948 $ 7,010 $ 9,654
7/31/2002 $ 8,375 $ 6,464 $ 8,398
8/31/2002 $ 8,610 $ 6,506 $ 8,527
9/30/2002 $ 8,098 $ 5,799 $ 7,702
10/31/2002 $ 8,295 $ 6,310 $ 7,850
11/30/2002 $ 8,758 $ 6,681 $ 8,231
12/31/2002 $ 8,883 $ 6,288 $ 8,274
1/31/2003 $ 8,499 $ 6,124 $ 8,075
2/28/2003 $ 8,537 $ 6,032 $ 8,201
3/31/2003 $ 8,332 $ 6,090 $ 8,131
4/30/2003 $ 8,413 $ 6,592 $ 8,228
5/31/2003 $ 9,477 $ 6,939 $ 9,132
6/30/2003 $ 9,409 $ 7,028 $ 9,147
7/31/2003 $ 8,951 $ 7,152 $ 8,956
8/31/2003 $ 9,619 $ 7,291 $ 9,503
9/30/2003 $ 9,403 $ 7,214 $ 9,346
10/31/2003 $ 9,613 $ 7,622 $ 9,657
11/30/2003 $ 9,866 $ 7,689 $ 9,880
12/31/2003 $11,102 $ 8,092 $11,120
1/31/2004 $11,058 $ 8,241 $10,903
2/29/2004 $11,591 $ 8,355 $11,509
3/31/2004 $11,696 $ 8,229 $11,508
4/30/2004 $11,640 $ 8,100 $11,278
5/31/2004 $11,640 $ 8,211 $11,378
6/30/2004 $12,451 $ 8,371 $12,026
7/31/2004 $12,724 $ 8,094 $12,258
8/31/2004 $12,513 $ 8,127 $12,113
9/30/2004 $13,646 $ 8,215 $13,216
10/31/2004 $13,646 $ 8,340 $13,276
11/30/2004 $14,841 $ 8,678 $14,209
12/31/2004 $14,569 $ 8,973 $13,855
1/31/2005 $14,730 $ 8,754 $14,014
2/28/2005 $16,711 $ 8,938 $15,920
3/31/2005 $16,129 $ 8,780 $15,570
4/30/2005 $15,058 $ 8,614 $14,634
5/31/2005 $15,535 $ 8,888 $15,009
6/30/2005 $16,538 $ 8,900 $16,149
7/31/2005 $18,055 $ 9,231 $17,220
8/31/2005 $19,213 $ 9,147 $18,356
9/30/2005 $20,457 $ 9,221 $19,498
10/31/2005 $18,928 $ 9,067 $17,887
11/30/2005 $19,417 $ 9,410 $18,404
12/31/2005 $20,032 $ 9,414 $18,927
1/31/2006 $22,991 $ 9,663 $21,643
2/28/2006 $20,642 $ 9,689 $19,671
3/31/2006 $21,707 $ 9,810 $20,639
4/30/2006 $23,055 $ 9,941 $21,989
5/31/2006 $22,073 $ 9,655 $21,308
6/30/2006 $22,253 $ 9,668 $21,560
7/31/2006 $22,317 $ 9,728 $22,000
8/31/2006 $21,720 $ 9,959 $21,232
9/30/2006 $20,346 $10,216 $20,183
10/31/2006 $21,746 $10,549 $21,098
11/30/2006 $23,543 $10,750 $22,707
12/31/2006 $22,884 $10,900 $22,115
1/31/2007 $22,630 $11,065 $22,000
2/28/2007 $23,001 $10,849 $21,891
3/31/2007 $24,376 $10,970 $22,989
4/30/2007 $26,019 $11,456 $24,186
5/31/2007 $27,910 $11,856 $26,168
6/30/2007 $28,103 $11,659 $26,388
7/31/2007 $27,965 $11,297 $26,437
8/31/2007 $27,498 $11,467 $26,183
9/30/2007 $30,482 $11,896 $28,411
10/31/2007 $32,373 $12,085 $29,620
11/30/2007 $30,173 $11,580 $27,788
12/31/2007 $31,780 $11,499 $29,731
1/31/2008 $29,275 $10,810 $26,991
2/29/2008 $31,943 $10,458 $29,336
3/31/2008 $30,594 $10,413 $28,278
4/30/2008 $33,921 $10,920 $30,980
5/31/2008 $36,611 $11,062 $33,334
6/30/2008 $37,834 $10,129 $34,113
7/31/2008 $31,913 $10,044 $29,050
8/31/2008 $30,765 $10,189 $28,662
9/30/2008 $24,289 $ 9,281 $24,067
10/31/2008 $17,353 $ 7,723 $17,930
11/30/2008 $15,849 $ 7,169 $17,500
12/31/2008 $15,514 $ 7,245 $17,080
1/31/2009 $15,762 $ 6,634 $16,541
2/28/2009 $14,594 $ 5,928 $14,826
3/31/2009 $15,954 $ 6,447 $15,884
4/30/2009 $18,042 $ 7,064 $17,331
5/31/2009 $21,283 $ 7,459 $20,495
6/30/2009 $19,707 $ 7,474 $18,781
7/31/2009 $21,307 $ 8,039 $20,209
8/31/2009 $21,539 $ 8,330 $20,331
9/30/2009 $23,483 $ 8,640 $22,038
10/31/2009 $23,395 $ 8,480 $22,009
11/30/2009 $24,499 $ 8,988 $23,118
12/31/2009 $25,186 $ 9,162 $23,492
1/31/2010 $23,928 $ 8,832 $21,982
2/28/2010 $24,967 $ 9,106 $22,831
3/31/2010 $26,095 $ 9,656 $23,606
4/30/2010 $26,890 $ 9,808 $24,884
AVERAGE ANNUAL TOTAL RETURN
CLASS A(1) 4/30/10
- ---------- -------
1-Year +40.44%
5-Year +10.98%
10-Year +10.40%
CLASS C (9/1/05-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P NORTH AMERICAN
RESOURCES FUND - S&P 500 NATURAL RESOURCES
DATE CLASS C INDEX INDEX
- ---------- ---------------- ------- ------------------
9/1/2005 $10,000 $10,000 $10,000
9/30/2005 $10,459 $10,081 $10,622
10/31/2005 $ 9,670 $ 9,913 $ 9,744
11/30/2005 $ 9,918 $10,288 $10,026
12/31/2005 $10,227 $10,291 $10,311
1/31/2006 $11,734 $10,564 $11,791
2/28/2006 $10,529 $10,593 $10,716
3/31/2006 $11,064 $10,724 $11,243
4/30/2006 $11,747 $10,868 $11,979
5/31/2006 $11,238 $10,556 $11,608
6/30/2006 $11,320 $10,570 $11,745
7/31/2006 $11,347 $10,635 $11,985
8/31/2006 $11,038 $10,888 $11,566
9/30/2006 $10,333 $11,169 $10,995
10/31/2006 $11,038 $11,533 $11,494
11/30/2006 $11,938 $11,752 $12,370
12/31/2006 $11,597 $11,917 $12,048
1/31/2007 $11,464 $12,097 $11,985
2/28/2007 $11,643 $11,861 $11,926
3/31/2007 $12,332 $11,993 $12,524
4/30/2007 $13,159 $12,524 $13,176
5/31/2007 $14,107 $12,961 $14,256
6/30/2007 $14,195 $12,746 $14,376
7/31/2007 $14,118 $12,351 $14,402
8/31/2007 $13,873 $12,536 $14,264
9/30/2007 $15,371 $13,005 $15,478
10/31/2007 $16,320 $13,212 $16,136
11/30/2007 $15,199 $12,659 $15,138
12/31/2007 $15,999 $12,572 $16,197
1/31/2008 $14,729 $11,818 $14,704
2/29/2008 $16,060 $11,434 $15,982
3/31/2008 $15,372 $11,384 $15,405
4/30/2008 $17,037 $11,939 $16,877
5/31/2008 $18,378 $12,093 $18,160
6/30/2008 $18,979 $11,074 $18,584
7/31/2008 $16,003 $10,981 $15,826
8/31/2008 $15,413 $11,140 $15,614
9/30/2008 $12,163 $10,147 $13,111
10/31/2008 $ 8,684 $ 8,443 $ 9,768
11/30/2008 $ 7,925 $ 7,837 $ 9,533
12/31/2008 $ 7,754 $ 7,920 $ 9,305
1/31/2009 $ 7,876 $ 7,253 $ 9,011
2/28/2009 $ 7,287 $ 6,481 $ 8,077
3/31/2009 $ 7,957 $ 7,048 $ 8,653
4/30/2009 $ 8,997 $ 7,723 $ 9,442
5/31/2009 $10,606 $ 8,155 $11,165
6/30/2009 $ 9,814 $ 8,171 $10,232
7/31/2009 $10,606 $ 8,789 $11,009
8/31/2009 $10,716 $ 9,106 $11,076
9/30/2009 $11,674 $ 9,446 $12,006
10/31/2009 $11,621 $ 9,271 $11,990
11/30/2009 $12,166 $ 9,827 $12,594
12/31/2009 $12,502 $10,016 $12,798
1/31/2010 $11,868 $ 9,656 $11,975
2/28/2010 $12,375 $ 9,955 $12,438
3/31/2010 $12,923 $10,556 $12,860
4/30/2010 $13,316 $10,723 $13,556
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +47.00%
3-Year +0.40%
Since Inception (9/1/05) +6.34%
Annual Report | 19
Performance Summary (CONTINUED)
ADVISOR CLASS (5/1/00-4/30/10)(1)
(PERFORMANCE GRAPH)
FRANKLIN NATURAL S&P NORTH AMERICAN
RESOURCES FUND - S&P 500 NATURAL RESOURCES
DATE ADVISOR CLASS INDEX INDEX
- ---------- ---------------- ------- ------------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $10,837 $ 9,795 $10,734
6/30/2000 $10,622 $10,036 $10,192
7/31/2000 $ 9,883 $ 9,879 $ 9,850
8/31/2000 $11,287 $10,493 $10,909
9/30/2000 $11,275 $ 9,939 $10,816
10/31/2000 $10,511 $ 9,897 $10,489
11/30/2000 $ 9,846 $ 9,117 $ 9,900
12/31/2000 $11,972 $ 9,161 $11,265
1/31/2001 $11,544 $ 9,486 $10,980
2/28/2001 $11,618 $ 8,621 $10,895
3/31/2001 $11,606 $ 8,075 $10,564
4/30/2001 $12,406 $ 8,703 $11,691
5/31/2001 $12,679 $ 8,761 $11,533
6/30/2001 $11,209 $ 8,548 $10,423
7/31/2001 $10,799 $ 8,464 $10,369
8/31/2001 $10,085 $ 7,934 $10,009
9/30/2001 $ 8,894 $ 7,293 $ 9,015
10/31/2001 $ 9,458 $ 7,432 $ 9,377
11/30/2001 $ 9,328 $ 8,002 $ 9,088
12/31/2001 $10,005 $ 8,072 $ 9,509
1/31/2002 $ 9,718 $ 7,955 $ 9,305
2/28/2002 $10,272 $ 7,801 $ 9,710
3/31/2002 $11,131 $ 8,095 $10,421
4/30/2002 $11,182 $ 7,604 $10,103
5/31/2002 $11,163 $ 7,548 $10,035
6/30/2002 $10,635 $ 7,010 $ 9,654
7/31/2002 $ 8,955 $ 6,464 $ 8,398
8/31/2002 $ 9,215 $ 6,506 $ 8,527
9/30/2002 $ 8,662 $ 5,799 $ 7,702
10/31/2002 $ 8,878 $ 6,310 $ 7,850
11/30/2002 $ 9,375 $ 6,681 $ 8,231
12/31/2002 $ 9,512 $ 6,288 $ 8,274
1/31/2003 $ 9,102 $ 6,124 $ 8,075
2/28/2003 $ 9,147 $ 6,032 $ 8,201
3/31/2003 $ 8,942 $ 6,090 $ 8,131
4/30/2003 $ 9,038 $ 6,592 $ 8,228
5/31/2003 $10,178 $ 6,939 $ 9,132
6/30/2003 $10,107 $ 7,028 $ 9,147
7/31/2003 $ 9,621 $ 7,152 $ 8,956
8/31/2003 $10,344 $ 7,291 $ 9,503
9/30/2003 $10,114 $ 7,214 $ 9,346
10/31/2003 $10,344 $ 7,622 $ 9,657
11/30/2003 $10,613 $ 7,689 $ 9,880
12/31/2003 $11,944 $ 8,092 $11,120
1/31/2004 $11,905 $ 8,241 $10,903
2/29/2004 $12,483 $ 8,355 $11,509
3/31/2004 $12,605 $ 8,229 $11,508
4/30/2004 $12,547 $ 8,100 $11,278
5/31/2004 $12,547 $ 8,211 $11,378
6/30/2004 $13,428 $ 8,371 $12,026
7/31/2004 $13,723 $ 8,094 $12,258
8/31/2004 $13,498 $ 8,127 $12,113
9/30/2004 $14,732 $ 8,215 $13,216
10/31/2004 $14,732 $ 8,340 $13,276
11/30/2004 $16,030 $ 8,678 $14,209
12/31/2004 $15,734 $ 8,973 $13,855
1/31/2005 $15,914 $ 8,754 $14,014
2/28/2005 $18,060 $ 8,938 $15,920
3/31/2005 $17,437 $ 8,780 $15,570
4/30/2005 $16,287 $ 8,614 $14,634
5/31/2005 $16,801 $ 8,888 $15,009
6/30/2005 $17,893 $ 8,900 $16,149
7/31/2005 $19,538 $ 9,231 $17,220
8/31/2005 $20,803 $ 9,147 $18,356
9/30/2005 $22,152 $ 9,221 $19,498
10/31/2005 $20,501 $ 9,067 $17,887
11/30/2005 $21,035 $ 9,410 $18,404
12/31/2005 $21,707 $ 9,414 $18,927
1/31/2006 $24,922 $ 9,663 $21,643
2/28/2006 $22,379 $ 9,689 $19,671
3/31/2006 $23,544 $ 9,810 $20,639
4/30/2006 $25,009 $ 9,941 $21,989
5/31/2006 $23,964 $ 9,655 $21,308
6/30/2006 $24,157 $ 9,668 $21,560
7/31/2006 $24,230 $ 9,728 $22,000
8/31/2006 $23,591 $ 9,959 $21,232
9/30/2006 $22,100 $10,216 $20,183
10/31/2006 $23,631 $10,549 $21,098
11/30/2006 $25,581 $10,750 $22,707
12/31/2006 $24,875 $10,900 $22,115
1/31/2007 $24,604 $11,065 $22,000
2/28/2007 $25,010 $10,849 $21,891
3/31/2007 $26,507 $10,970 $22,989
4/30/2007 $28,310 $11,456 $24,186
5/31/2007 $30,377 $11,856 $26,168
6/30/2007 $30,591 $11,659 $26,388
7/31/2007 $30,448 $11,297 $26,437
8/31/2007 $29,949 $11,467 $26,183
9/30/2007 $33,206 $11,896 $28,411
10/31/2007 $35,273 $12,085 $29,620
11/30/2007 $32,879 $11,580 $27,788
12/31/2007 $34,643 $11,499 $29,731
1/31/2008 $31,921 $10,810 $26,991
2/29/2008 $34,835 $10,458 $29,336
3/31/2008 $33,370 $10,413 $28,278
4/30/2008 $37,013 $10,920 $30,980
5/31/2008 $39,958 $11,062 $33,334
6/30/2008 $41,308 $10,129 $34,113
7/31/2008 $34,850 $10,044 $29,050
8/31/2008 $33,600 $10,189 $28,662
9/30/2008 $26,544 $ 9,281 $24,067
10/31/2008 $18,967 $ 7,723 $17,930
11/30/2008 $17,325 $ 7,169 $17,500
12/31/2008 $16,964 $ 7,245 $17,080
1/31/2009 $17,244 $ 6,634 $16,541
2/28/2009 $15,966 $ 5,928 $14,826
3/31/2009 $17,450 $ 6,447 $15,884
4/30/2009 $19,743 $ 7,064 $17,331
5/31/2009 $23,297 $ 7,459 $20,495
6/30/2009 $21,573 $ 7,474 $18,781
7/31/2009 $23,330 $ 8,039 $20,209
8/31/2009 $23,594 $ 8,330 $20,331
9/30/2009 $25,722 $ 8,640 $22,038
10/31/2009 $25,639 $ 8,480 $22,009
11/30/2009 $26,851 $ 8,988 $23,118
12/31/2009 $27,616 $ 9,162 $23,492
1/31/2010 $26,240 $ 8,832 $21,982
2/28/2010 $27,389 $ 9,106 $22,831
3/31/2010 $28,631 $ 9,656 $23,606
4/30/2010 $29,512 $ 9,808 $24,884
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(1) 4/30/10
- ---------------- -------
1-Year +49.48%
5-Year +12.62%
10-Year +11.43%
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.
(4.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
(5.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(6.) Figures are as stated in the Fund's prospectus current as of the date of
this report. In periods of market volatility, assets may decline
significantly, causing total annual Fund operating expenses to become
higher than the figures shown.
(7.) Source: (C) 2010 Morningstar. The S&P 500 is a market
capitalization-weighted index of 500 stocks designed to measure total U.S.
equity market performance.
(8.) Source: (C) 2010 Morningstar. The S&P North American Natural Resources
Index is a capitalization-weighted index that includes companies involved
in extractive industries (mining), energy and forestry services, producers
of pulp and paper, and owners and operators of timber tracts or
plantations.
20 | Annual 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.
Annual Report | 21
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/09 VALUE 4/30/10 PERIOD* 11/1/09-4/30/10
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,149.40 $5.33
Hypothetical (5% return before expenses) $1,000 $1,019.84 $5.01
CLASS C
Actual $1,000 $1,145.80 $9.04
Hypothetical (5% return before expenses) $1,000 $1,016.36 $8.50
ADVISOR CLASS
Actual $1,000 $1,151.00 $3.73
Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.51
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.00%; C: 1.70%; and Advisor: 0.70%),
multiplied by the average account value over the period, multiplied by
181/365 to reflect the one-half year period.
22 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 49.73 $ 54.72 $ 64.53 $ 56.44 $ 46.05
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .......... (0.51) (0.21) (0.59) (0.57) (0.59)
Net realized and unrealized gains (losses) 15.86 (4.78) (9.22) 8.66 10.98
-------- -------- -------- -------- --------
Total from investment operations ............ 15.35 (4.99) (9.81) 8.09 10.39
-------- -------- -------- -------- --------
Redemption fees(c) .......................... -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ................ $ 65.08 $ 49.73 $ 54.72 $ 64.53 $ 56.44
======== ======== ======== ======== ========
Total return(e) ............................. 30.87% (9.12)% (15.22)% 14.39% 22.50%
RATIOS TO AVERAGE NET ASSETS
Expenses before expense reduction ........... 1.32% 1.32% 1.24% 1.35% 1.25%
Expenses net of expense reduction ........... 1.32%(f) 1.32%(f) 1.23% 1.35%(f) 1.25%(f)
Net investment income (loss) ................ (0.87)% (0.38)% (0.98)% (1.01)% (1.06)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $346,127 $274,324 $318,537 $457,390 $510,700
Portfolio turnover rate ..................... 41.58% 45.57% 31.84% 42.08% 37.38%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 23
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
PERIOD ENDED
ADVISOR CLASS APRIL 30, 2010(a)
- ------------- -----------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $57.01
------
Income from investment operations(b):
Net investment income (loss)(c) .......... (0.40)
Net realized and unrealized gains (losses) 8.59
------
Total from investment operations ............ 8.19
------
Net asset value, end of year ................ $65.20
======
Total return(d) ............................. 14.37%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses(f) ................................. 1.05%
Net investment income (loss) ................ (0.60)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $1,596
Portfolio turnover rate ..................... 41.58%
(a) For the period September 1, 2009 (effective date) to April 30, 2010.
(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.
24 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------------- -------------- --------------- -------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 96.4%
BIOTECHNOLOGY 72.2%
(a) Ablynx NV ........................................ Belgium 82,900 $ 782,847
(a) Achillion Pharmaceuticals Inc. ................... United States 591,900 1,556,698
(a) Acorda Therapeutics Inc. ......................... United States 124,400 4,820,500
(a) AEterna Zentaris Inc., wts., 12/23/11 ............ Canada 152,329 --
(a) Alexion Pharmaceuticals Inc. ..................... United States 249,100 13,670,608
(a) AMAG Pharmaceuticals Inc. ........................ United States 46,900 1,601,635
(a) Amgen Inc. ....................................... United States 448,700 25,737,432
(a) Anadys Pharmaceuticals Inc. ...................... United States 351,600 893,064
(a) ArQule Inc. ...................................... United States 776,809 4,948,274
(a) Biogen Idec Inc. ................................. United States 201,461 10,727,798
(a) BioMarin Pharmaceutical Inc. ..................... United States 462,938 10,818,861
(a) Biospecifics Technologies Corp. .................. United States 134,750 4,263,490
(a) Celgene Corp. .................................... United States 519,600 32,189,220
(a) Cephalon Inc. .................................... United States 142,100 9,122,820
(a) Chelsea Therapeutics International Ltd. .......... United States 422,500 1,694,225
(a) Clinical Data Inc. ............................... United States 80,400 1,501,872
(a, b) ConjuChem Biotechnologies Inc., wts., 12/31/11 ... Canada 2,343,750 --
(a) Curis Inc. ....................................... United States 629,800 2,078,340
(a) Dendreon Corp. ................................... United States 139,700 7,574,534
(a) Gentium SpA, ADR ................................. Italy 688,700 3,443,500
(a) Genzyme Corp. .................................... United States 493,100 26,252,644
(a) Gilead Sciences Inc. ............................. United States 645,200 25,595,084
(a) Human Genome Sciences Inc. ....................... United States 364,800 10,101,312
(a) Incyte Corp. ..................................... United States 264,200 3,545,564
(a, c) Indevus Pharmaceuticals Inc., Escrow Account ..... United States 1,006,900 314,656
(a) Inhibitex Inc. ................................... United States 366,787 902,296
(a) InterMune Inc. ................................... United States 98,200 4,179,392
(a) Ironwood Pharmaceuticals Inc. .................... United States 164,800 2,129,216
(a) Myriad Genetics Inc. ............................. United States 144,400 3,467,044
(a) NPS Pharmaceuticals Inc. ......................... United States 135,100 941,647
(a) Onyx Pharmaceuticals Inc. ........................ United States 335,100 9,674,337
(a) Orexigen Therapeutics Inc. ....................... United States 338,054 2,292,006
(a) Pharmasset Inc. .................................. United States 165,975 5,377,590
(a) Savient Pharmaceuticals Inc. ..................... United States 193,200 2,801,400
(a) Talecris Biotherapeutics Holdings Corp. .......... United States 171,800 3,221,250
(a) Targacept Inc. ................................... United States 66,000 1,570,800
(a) Transcept Pharmaceuticals Inc. ................... United States 108,600 1,116,408
(a) United Therapeutics Corp. ........................ United States 61,600 3,504,424
(a) VaxGen Inc. ...................................... United States 826,000 280,840
(a) Vertex Pharmaceuticals Inc. ...................... United States 167,000 6,474,590
-------------
251,168,218
-------------
LIFE SCIENCES TOOLS & SERVICES 8.2%
(a) Illumina Inc. .................................... United States 151,200 6,330,744
(a) Life Technologies Corp. .......................... United States 228,800 12,517,648
(a) QIAGEN NV ........................................ Netherlands 376,600 8,605,310
(a, d) Sequenom Inc. .................................... United States 176,071 1,091,640
-------------
28,545,342
-------------
Annual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND COUNTRY SHARES/WARRANTS VALUE
------------------------------------- -------------- --------------- -------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PHARMACEUTICALS 16.0%
Allergan Inc. .................................... United States 51,000 $ 3,248,190
(a) Ardea Biosciences Inc. ........................... United States 183,012 4,648,505
(a) Auxilium Pharmaceuticals Inc. .................... United States 104,800 3,730,880
(a) Biodel Inc. ...................................... United States 175,900 791,550
(a) Cadence Pharmaceuticals Inc. ..................... United States 121,056 1,186,349
(a) Cardiome Pharma Corp. ............................ Canada 437,828 3,660,242
(a) DepoMed Inc. ..................................... United States 284,082 1,144,850
(a) Eurand NV ........................................ Netherlands 151,600 1,561,480
(a) Inspire Pharmaceuticals Inc. ..................... United States 252,300 1,728,255
(a) Map Pharmaceuticals Inc. ......................... United States 244,900 4,398,404
(a) The Medicines Co. ................................ United States 436,900 3,206,846
(a) Nuvo Research Inc. ............................... Canada 6,928,900 1,805,998
(a) Nuvo Research Inc. (Legend Shares) ............... Canada 3,441,200 896,939
(a) Penwest Pharmaceuticals Co. ...................... United States 369,400 1,296,594
(a) Questcor Pharmaceuticals Inc. .................... United States 137,700 1,341,198
(a) Salix Pharmaceuticals Ltd. ....................... United States 210,500 8,462,100
Shire PLC, ADR ................................... United Kingdom 66,600 4,384,944
Teva Pharmaceutical Industries Ltd., ADR ......... Israel 135,100 7,934,423
-------------
55,427,747
-------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $275,732,400) ........................... 335,141,307
-------------
PREFERRED STOCKS (COST $5,065,937) 1.4%
BIOTECHNOLOGY 1.4%
(a, c) FibroGen Inc., pfd., E ........................... United States 1,128,271 5,077,220
-------------
PRINCIPAL
AMOUNT(e)
---------------
CONVERTIBLE BONDS (COST $1,480,677) 0.1%
BIOTECHNOLOGY 0.1%
(c, f) ConjuChem Biotechnologies Inc., cvt., sub. note,
144A, 8.00%, 12/31/10 ......................... Canada 1,500,000 CAD 295,072
-------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $282,279,014) ........................... 340,513,599
-------------
SHARES
---------------
SHORT TERM INVESTMENTS 3.1%
MONEY MARKET FUNDS (COST $9,434,211) 2.7%
(g) Institutional Fiduciary Trust Money Market
Portfolio, 0.00% .............................. United States 9,434,211 9,434,211
-------------
(h) INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR
LOANED SECURITIES
(COST $1,188,000) 0.4%
MONEY MARKET FUNDS 0.4%
(i) Bank of New York Institutional Cash Reserve Fund,
Series A, 0.16% ............................... United States 1,188,000 1,188,000
-------------
TOTAL INVESTMENTS (COST $292,901,225) 101.0% ..... 351,135,810
-------------
OTHER ASSETS, LESS LIABILITIES (1.0)% ............ (3,412,577)
-------------
NET ASSETS 100.0% ................................ $ 347,723,233
=============
26 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
See Abbreviations on page 52.
(a) Non-income producing.
(b) Security has been deemed illiquid because it may not be able to be sold
within seven days.
(c) See Note 9 regarding restricted securities.
(d) A portion or all of the security is on loan at April 30, 2010. See Note
1(c).
(e) The principal amount is stated in U.S. dollars unless otherwise indicated.
(f) See Note 8 regarding defaulted securities.
(g) 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.
(h) See Note 1(c) regarding securities on loan.
(i) The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
Annual Report | 27
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30,
-------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 22.55 $ 45.78 $ 37.84 $ 35.92 $ 24.32
-------- -------- -------- -------- --------
Income from investment operations(a) :
Net investment income(b) .................... 0.01 0.05 0.05 0.09 0.13
Net realized and unrealized gains (losses) .. 11.02 (21.78) 11.11 4.29 12.64
-------- -------- -------- -------- --------
Total from investment operations ............... 11.03 (21.73) 11.16 4.38 12.77
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.43) -- (0.52) (0.25) (0.09)
Net realized gains .......................... -- (1.50) (2.70) (2.21) (1.08)
-------- -------- -------- -------- --------
Total distributions ............................ (0.43) (1.50) (3.22) (2.46) (1.17)
-------- -------- -------- -------- --------
Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d)
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 33.15 $ 22.55 $ 45.78 $ 37.84 $ 35.92
======== ======== ======== ======== ========
Total return(e) ................................ 49.04% (46.81)% 30.37% 12.86% 53.11%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.04% 1.09% 0.97% 1.03% 1.02%
Net investment income .......................... 0.02% 0.18% 0.13% 0.26% 0.44%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $673,662 $393,713 $752,051 $475,912 $440,475
Portfolio turnover rate ........................ 31.18% 46.97% 37.93% 51.51% 56.08%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
28 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30,
---------------------------------------------------
CLASS C 2010 2009 2008 2007 2006(a)
- ------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 22.15 $ 45.35 $ 37.58 $ 35.79 $ 31.56
-------- ------- ------- ------- -------
Income from investment operations(b) :
Net investment income (loss)(c) ............. (0.20) (0.16) (0.25) (0.17) (0.01)
Net realized and unrealized gains (losses) .. 10.81 (21.54) 11.04 4.25 5.39
-------- ------- ------- ------- -------
Total from investment operations ............... 10.61 (21.70) 10.79 4.08 5.38
-------- ------- ------- ------- -------
Less distributions from:
Net investment income ....................... (0.19) -- (0.32) (0.08) (0.07)
Net realized gains .......................... -- (1.50) (2.70) (2.21) (1.08)
-------- ------- ------- ------- -------
Total distributions ............................ (0.19) (1.50) (3.02) (2.29) (1.15)
-------- ------- ------- ------- -------
Redemption fees(d) ............................. -- --(e) --(e) --(e) --(e)
-------- ------- ------- ------- -------
Net asset value, end of year ................... $ 32.57 $ 22.15 $ 45.35 $ 37.58 $ 35.79
======== ======= ======= ======= =======
Total return(f) ................................ 48.00% (47.19)% 29.47% 12.01% 17.47%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) .................................... 1.74% 1.82% 1.68% 1.76% 1.67%
Net investment income (loss) ................... (0.68)% (0.55)% (0.58)% (0.47)% (0.21)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $123,939 $61,360 $85,387 $33,723 $18,485
Portfolio turnover rate ........................ 31.18% 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.
Annual Report | 29
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
YEAR ENDED APRIL 30,
---------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 23.94 $ 48.27 $ 39.71 $ 37.57 $ 25.35
-------- ------- ------- ------- -------
Income from investment operations(a) :
Net investment income(b) .................... 0.10 0.14 0.19 0.18 0.25
Net realized and unrealized gains (losses) .. 11.71 (22.97) 11.69 4.52 13.18
-------- ------- ------- ------- -------
Total from investment operations ............... 11.81 (22.83) 11.88 4.70 13.43
-------- ------- ------- ------- -------
Less distributions from:
Net investment income ....................... (0.56) -- (0.62) (0.35) (0.13)
Net realized gains .......................... -- (1.50) (2.70) (2.21) (1.08)
-------- ------- ------- ------- -------
Total distributions ............................ (0.56) (1.50) (3.32) (2.56) (1.21)
-------- ------- ------- ------- -------
Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d)
-------- ------- ------- ------- -------
Net asset value, end of year ................... $ 35.19 $ 23.94 $ 48.27 $ 39.71 $ 37.57
======== ======= ======= ======= =======
Total return ................................... 49.48% (46.66)% 30.74% 13.20% 53.55%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .................................... 0.74% 0.82% 0.68% 0.76% 0.69%
Net investment income .......................... 0.32% 0.45% 0.42% 0.53% 0.77%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $106,773 $52,402 $77,361 $52,103 $43,874
Portfolio turnover rate ........................ 31.18% 46.97% 37.93% 51.51% 56.08%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and 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) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
30 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
------------------------------- -------------- ---------- ------------
COMMON STOCKS 93.9%
AGRICULTURAL PRODUCTS 0.7%
Bunge Ltd. ....................................... United States 117,000 $ 6,195,150
------------
COAL & CONSUMABLE FUELS 3.8%
(a) Alpha Natural Resources Inc. ..................... United States 145,000 6,826,600
(a, b) Energy Coal Resources, 144A ...................... United States 199,375 --
Peabody Energy Corp. ............................. United States 330,000 15,417,600
(a, c) SouthGobi Energy Resources Ltd., 144A ............ Canada 160,600 2,161,522
(a) Uranium One Inc. ................................. Canada 1,690,000 4,271,958
Yanzhou Coal Mining Co. Ltd., ADR ................ China 200,000 5,570,000
------------
34,247,680
------------
CONSTRUCTION & ENGINEERING 0.5%
(a) Boart Longyear Group ............................. Australia 3,798,152 1,158,321
(a, c) Boart Longyear Group, 144A ....................... Australia 11,406,000 3,478,482
------------
4,636,803
------------
DIVERSIFIED METALS & MINING 6.2%
BHP Billiton PLC, ADR ............................ United Kingdom 206,000 12,566,000
Freeport-McMoRan Copper & Gold Inc., B ........... United States 60,000 4,531,800
(a) Ivanhoe Australia Ltd. ........................... Australia 987,284 3,467,114
(a) Ivanhoe Mines Ltd. ............................... Canada 390,000 6,169,800
(a) Mirabela Nickel Ltd. ............................. Australia 180,000 394,807
(a, c) Mirabela Nickel Ltd., 144A ....................... Australia 845,850 1,855,263
(a) Nautilus Minerals Inc. ........................... Canada 817,000 1,494,659
(a, c) Nautilus Minerals Inc., 144A ..................... Canada 474,000 867,158
(a) OZ Minerals Ltd. ................................. Australia 2,700,000 2,881,962
(a) PanAust Ltd. ..................................... Australia 2,663,435 1,267,628
(a, c) PanAust Ltd., 144A ............................... Australia 5,767,586 2,745,009
Rio Tinto PLC, ADR ............................... United Kingdom 151,600 7,710,376
(a) Sandfire Resources NL ............................ Australia 740,000 2,461,936
(a, c) Sandfire Resources NL, 144A ...................... Australia 129,700 431,504
Xstrata PLC ...................................... Switzerland 420,000 6,979,795
------------
55,824,811
------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.6%
(a) First Solar Inc. ................................. United States 36,000 5,167,800
------------
FERTILIZERS & AGRICULTURAL CHEMICALS 0.6%
The Mosaic Co. ................................... United States 115,000 5,881,100
------------
GOLD 7.8%
(a) African Barrick Gold Ltd. ........................ United Kingdom 736,300 6,661,518
(a) Allied Gold Ltd. ................................. Australia 8,742,582 3,150,988
Barrick Gold Corp. ............................... Canada 210,000 9,145,500
(a, c) Centamin Egypt Ltd., 144A ........................ Australia 1,550,000 3,262,516
(a) Centerra Gold Inc. ............................... Canada 320,000 3,591,227
(a, c) Centerra Gold Inc., 144A ......................... Canada 264,600 2,969,495
(a) CGA Mining Ltd. .................................. Australia 150,000 326,055
(a, b) CGA Mining Ltd.,144A ............................. Australia 1,000,000 2,066,797
(a) Guyana Goldfields Inc. ........................... Canada 280,000 1,938,822
Annual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
------------------------------- -------------- ---------- ------------
COMMON STOCKS (CONTINUED)
GOLD (CONTINUED)
IAMGOLD Corp. .................................... Canada 200,000 $ 3,574,000
(a) Nevsun Resources Ltd. ............................ Canada 296,400 874,594
(a, c) Nevsun Resources Ltd., 144A ...................... Canada 500,000 1,475,361
Newcrest Mining Ltd. ............................. Australia 340,000 10,397,242
(a) Osisko Mining Corp. .............................. Canada 121,100 1,280,442
(a, c) Osisko Mining Corp., 144A ........................ Canada 642,200 6,790,253
Randgold Resources Ltd., ADR ..................... United Kingdom 130,000 10,951,200
(a) St. Barbara Ltd. ................................. Australia 4,187,800 1,064,293
(a, c) St. Barbara Ltd., 144A ........................... Australia 5,187,147 1,318,268
------------
70,838,571
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.2%
(a) Magma Energy Corp. ............................... Canada 200,000 289,171
(a, c) Magma Energy Corp., 144A ......................... Canada 799,800 1,156,394
------------
1,445,565
------------
INTEGRATED OIL & GAS 16.0%
Chevron Corp. .................................... United States 295,000 24,024,800
ConocoPhillips ................................... United States 167,000 9,884,730
Exxon Mobil Corp. ................................ United States 340,000 23,069,000
Hess Corp. ....................................... United States 200,000 12,710,000
Marathon Oil Corp. ............................... United States 537,000 17,264,550
Murphy Oil Corp. ................................. United States 150,000 9,022,500
Occidental Petroleum Corp. ....................... United States 442,000 39,187,720
Petroleo Brasileiro SA, ADR ...................... Brazil 68,000 2,885,240
Total SA, B, ADR ................................. France 125,000 6,797,500
------------
144,846,040
------------
INTERNET SOFTWARE & SERVICES 0.1%
(a, c) G-Resources Group Ltd., 144A ..................... Hong Kong 22,034,900 1,338,642
------------
MARINE 0.3%
(a) Genco Shipping & Trading Ltd. .................... United States 103,000 2,385,480
(a) Newlead Holdings Ltd. ............................ Bermuda 387,850 403,364
------------
2,788,844
------------
OIL & GAS DRILLING 3.7%
(a) Nabors Industries Ltd. ........................... United States 320,000 6,902,400
Noble Corp. ...................................... United States 175,000 6,910,750
Patterson-UTI Energy Inc. ........................ United States 240,000 3,669,600
(a) Rowan Cos. Inc. .................................. United States 155,000 4,619,000
(a) Transocean Ltd. .................................. United States 162,000 11,736,900
------------
33,838,650
------------
OIL & GAS EQUIPMENT & SERVICES 20.7%
Baker Hughes Inc. ................................ United States 81,000 4,030,560
(a) Cameron International Corp. ...................... United States 380,000 14,994,800
(a) Dresser-Rand Group Inc. .......................... United States 135,000 4,762,800
(a) Dril-Quip Inc. ................................... United States 185,000 10,717,050
32 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
------------------------------- -------------- ---------- ------------
COMMON STOCKS (CONTINUED)
OIL & GAS EQUIPMENT & SERVICES (CONTINUED)
(a) FMC Technologies Inc. ............................ United States 165,000 $ 11,168,850
(a) Global Industries Ltd. ........................... United States 470,000 3,149,000
Halliburton Co. .................................. United States 776,400 23,796,660
(a) Helix Energy Solutions Group Inc. ................ United States 300,000 4,374,000
(a) Hornbeck Offshore Services Inc. .................. United States 126,000 3,083,220
National Oilwell Varco Inc. ...................... United States 245,000 10,787,350
(a) Oceaneering International Inc. ................... United States 65,000 4,257,500
(a) Oil States International Inc. .................... United States 155,000 7,488,050
(a) PHI Inc., non-voting ............................. United States 74,000 1,538,460
Schlumberger Ltd. ................................ United States 250,300 17,876,426
Smith International Inc. ......................... United States 562,500 26,865,000
(a) Superior Energy Services Inc. .................... United States 405,000 10,959,300
(a) T-3 Energy Services Inc. ......................... United States 180,000 5,355,000
(a) Tesco Corp. ...................................... Canada 255,000 3,190,050
(a) Weatherford International Ltd. ................... United States 1,020,000 18,472,200
------------
186,866,276
------------
OIL & GAS EXPLORATION & PRODUCTION 26.3%
Anadarko Petroleum Corp. ......................... United States 270,000 16,783,200
(a) Bill Barrett Corp. ............................... United States 245,000 8,349,600
(a) Brigham Exploration Co. .......................... United States 670,000 13,071,700
(a) Cobalt International Energy Inc. ................. United States 478,600 5,508,686
(a) Comstock Resources Inc. .......................... United States 80,000 2,564,800
(a) Concho Resources Inc. ............................ United States 325,000 18,466,500
(a) Continental Resources Inc. ....................... United States 195,000 9,586,200
(a) Denbury Resources Inc. ........................... United States 410,000 7,851,500
Devon Energy Corp. ............................... United States 325,000 21,882,250
EOG Resources Inc. ............................... United States 145,000 16,257,400
(a) Gran Tierra Energy Inc. .......................... Canada 1,100,000 6,666,000
(a) Mariner Energy Inc. .............................. United States 170,000 4,059,600
Noble Energy Inc. ................................ United States 350,000 26,740,000
(a) Northern Oil & Gas Inc. .......................... United States 317,000 5,154,420
(a) Petrohawk Energy Corp. ........................... United States 1,120,000 24,180,800
Range Resources Corp. ............................ United States 165,000 7,880,400
(a) Southwestern Energy Co. .......................... United States 342,000 13,570,560
St. Mary Land & Exploration Co. .................. United States 115,000 4,627,600
(a) Westernzagros Resources Ltd. ..................... Canada 380,000 291,531
XTO Energy Inc. .................................. United States 510,000 24,235,200
------------
237,727,947
------------
OIL & GAS REFINING & MARKETING 2.8%
Aegean Marine Petroleum Network Inc. ............. United States 165,000 4,329,600
(a) CVR Energy Inc. .................................. United States 317,000 2,691,330
Frontier Oil Corp. ............................... United States 290,000 4,408,000
Holly Corp. ...................................... United States 235,000 6,345,000
Petroplus Holdings AG ............................ Switzerland 117,500 2,114,836
Valero Energy Corp. .............................. United States 273,000 5,675,670
------------
25,564,436
------------
Annual Report | 33
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND COUNTRY SHARES VALUE
------------------------------- -------------- ---------- ------------
COMMON STOCKS (CONTINUED)
OIL & GAS STORAGE & TRANSPORTATION 0.6%
DHT Holdings Inc. ................................ Jersey Islands 370,600 $ 1,749,232
General Maritime Corp. ........................... United States 177,000 1,435,470
(a) Scorpio Tankers Inc. ............................. United States 171,300 2,141,250
------------
5,325,952
------------
PRECIOUS METALS & MINERALS 1.7%
(c) Fresnillo PLC, 144A .............................. United Kingdom 215,000 2,637,403
Impala Platinum Holdings Ltd. .................... South Africa 222,000 6,329,988
(a) Imperial Metals Corp. ............................ Canada 170,000 3,297,334
(a) MAG Silver Corp. ................................. Canada 350,000 2,667,945
------------
14,932,670
------------
STEEL 1.3%
Cliffs Natural Resources Inc. .................... United States 128,000 8,003,840
United States Steel Corp. ........................ United States 70,000 3,826,200
------------
11,830,040
------------
TOTAL COMMON STOCKS (COST $677,752,832) .......... 849,296,977
------------
CONVERTIBLE PREFERRED STOCKS 0.8%
OIL & GAS EXPLORATION & PRODUCTION 0.8%
McMoRan Exploration Co., 8.00%, cvt. pfd. ........ United States 1,900 3,654,365
SandRidge Energy Inc., 8.50%, cvt. pfd. .......... United States 31,900 3,649,679
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $4,931,776) 7,304,044
------------
PREFERRED STOCKS 2.0%
COAL & CONSUMABLE FUELS 0.0%
(a, b) Energy Coal Resources, 144A, pfd. ................ United States 29,847 --
------------
DIVERSIFIED METALS & MINING 0.9%
Vale SA, ADR, pfd., A ............................ Brazil 298,000 8,019,180
------------
INTEGRATED OIL & GAS 1.1%
Petroleo Brasileiro SA, ADR, pfd. ................ Brazil 260,000 9,864,400
------------
TOTAL PREFERRED STOCKS (COST $11,456,542) ........ 17,883,580
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $694,141,150) ........................... 874,484,601
------------
SHORT TERM INVESTMENTS (COST $27,546,353) 3.0%
MONEY MARKET FUNDS 3.0%
(d) Institutional Fiduciary Trust Money Market
Portfolio, 0.00% .............................. United States 27,546,353 27,546,353
------------
TOTAL INVESTMENTS (COST $721,687,503) 99.7% ...... 902,030,954
OTHER ASSETS, LESS LIABILITIES 0.3% .............. 2,343,331
------------
NET ASSETS 100.0% ................................ $904,374,285
============
34 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN NATURAL RESOURCES FUND
See Abbreviations on page 52.
(a) Non-income producing.
(b) See Note 9 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 April 30, 2010,
the aggregate value of these securities was $32,487,270, representing 3.59%
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.
Annual Report | 35
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2010
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................... $ 283,467,014 $ 694,141,150
Cost - Sweep Money Fund (Note 7) ............... 9,434,211 27,546,353
------------- -------------
Total cost of investments ...................... $ 292,901,225 $ 721,687,503
------------- -------------
Value - Unaffiliated issuers ................... $ 341,701,599 $ 874,484,601
Value - Sweep Money Fund (Note 7) .............. 9,434,211 27,546,353
------------- -------------
Total value of investments* .................... 351,135,810 902,030,954
Receivables:
Investment securities sold ..................... 1,222,415 11,039,930
Capital shares sold ............................ 422,827 3,178,574
Dividends and interest ......................... 83,109 264,086
Other assets ...................................... 58,292 1,787
------------- -------------
Total assets ................................ 352,922,453 916,515,331
------------- -------------
Liabilities:
Payables:
Investment securities purchased ................ 2,880,780 9,418,823
Capital shares redeemed ........................ 676,945 1,786,509
Affiliates ..................................... 321,628 708,315
Allocator Funds (Note 10) ...................... -- 13,535
Payable upon return of securities loaned .......... 1,188,000 --
Accrued expenses and other liabilities ............ 131,867 213,864
------------- -------------
Total liabilities ........................... 5,199,220 12,141,046
------------- -------------
Net assets, at value ..................... $ 347,723,233 $ 904,374,285
------------- -------------
Net assets consist of:
Paid-in capital ................................... $ 529,723,322 $ 798,632,865
Distributions in excess of net investment income .. -- (2,357,114)
Net unrealized appreciation (depreciation) ........ 58,242,893 180,341,079
Accumulated net realized gain (loss) .............. (240,242,982) (72,242,545)
------------- -------------
Net assets, at value ..................... $ 347,723,233 $ 904,374,285
------------- -------------
* The Franklin Biotechnology Discovery Fund includes $1,091,640 of securities
loaned.
The accompanying notes are an integral part of these financial statements.
36 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2010
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
CLASS A:
Net assets, at value .............................. $ 346,126,915 $ 673,661,935
------------- -------------
Shares outstanding ................................ 5,318,885 20,324,222
------------- -------------
Net asset value per share(a) ...................... $ 65.08 $ 33.15
------------- -------------
Maximum offering price per share (net asset value
per share / 94.25%) ............................ $ 69.05 $ 35.17
------------- -------------
CLASS C:
Net assets, at value .............................. $ 123,939,491
-------------
Shares outstanding ................................ 3,805,752
-------------
Net asset value and maximum offering price per
share(a) ....................................... $ 32.57
-------------
ADVISOR CLASS:
Net assets, at value .............................. $ 1,596,318 $ 106,772,859
------------- -------------
Shares outstanding ................................ 24,484 3,034,547
------------- -------------
Net asset value and maximum offering price per
share .......................................... $ 65.20 $ 35.19
------------- -------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 37
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended April 30, 2010
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Investment income:
Dividends:
Unaffiliated issuers ........................... $ 1,245,165 $ 7,777,101
Sweep Money Fund (Note 7) ...................... 638 1,738
Interest .......................................... 73,430 --
Income from securities loaned ..................... 63,127 --
----------- ------------
Total investment income ..................... 1,382,360 7,778,839
----------- ------------
Expenses:
Management fees (Note 3a) ......................... 1,632,029 3,454,046
Administrative fees (Note 3b) ..................... 451,161 --
Distribution fees: (Note 3c)
Class A ........................................ 845,061 1,663,292
Class C ........................................ -- 965,834
Transfer agent fees (Note 3e) ..................... 1,038,732 1,688,158
Special servicing agreement fees (Note 10) ........ -- 137,529
Custodian fees (Note 4) ........................... 9,760 25,675
Reports to shareholders ........................... 99,665 150,524
Registration and filing fees ...................... 55,177 88,937
Professional fees ................................. 29,671 60,424
Trustees' fees and expenses ....................... 6,516 19,458
Other ............................................. (42,039)(a) (204,411)(b)
----------- ------------
Total expenses .............................. 4,125,733 8,049,466
Expense reductions (Note 4) ................. (118) (37)
----------- ------------
Net expenses ............................. 4,125,615 8,049,429
----------- ------------
Net investment income (loss) .......... (2,743,255) (270,590)
----------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................... 19,411,268 8,225,555
Foreign currency transactions .................. (89,329) (109,881)
----------- ------------
Net realized gain (loss) .............. 19,321,939 8,115,674
----------- ------------
Net change in unrealized appreciation
(depreciation) on:
Investments .................................... 66,514,935 255,845,059
Translation of other assets and liabilities
denominated in foreign currencies ........... 5,510 1,308
----------- ------------
Net change in unrealized appreciation
(depreciation) ..................... 66,520,445 255,846,367
----------- ------------
Net realized and unrealized gain (loss) .............. 85,842,384 263,962,041
----------- ------------
Net increase (decrease) in net assets resulting from
operations ........................................ $83,099,129 $263,691,451
----------- ------------
(a) Other expenses include a prior year excise tax reimbursement of $57,616
that was paid in the prior year.
(b) Other expenses include a reversal of an estimated federal income tax
liability of $250,000 recorded in a prior year.
The accompanying notes are an integral part of these financial statements.
38 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN BIOTECHNOLOGY FRANKLIN
DISCOVERY FUND NATURAL RESOURCES FUND
--------------------------- ----------------------------
YEAR ENDED APRIL 30, YEAR ENDED APRIL 30,
--------------------------- ----------------------------
2010 2009 2010 2009
------------ ------------ ------------ -------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................... $ (2,743,255) $ (1,178,040) $ (270,590) $ 789,378
Net realized gain (loss) from investments
and foreign currency transactions ........... 19,321,939 15,091,375 8,115,674 (63,673,070)
Net change in unrealized appreciation
(depreciation) on investments and translation
of other assets and liabilities denominated
in foreign currencies ....................... 66,520,445 (43,153,718) 255,846,367 (381,791,650)
------------ ------------ ------------ -------------
Net increase (decrease) in net assets
resulting from operations ................ 83,099,129 (29,240,383) 263,691,451 (444,675,342)
------------ ------------ ------------ -------------
Distributions to shareholders from:
Net investment Income:
Class A ........................................ -- -- (8,268,928) --
Class C ........................................ -- -- (671,795) --
Advisor Class .................................. -- -- (1,411,929) --
Net realized gains:
Class A ........................................ -- -- -- (23,435,904)
Class C ........................................ -- -- -- (3,211,358)
Advisor Class .................................. -- -- -- (2,857,267)
------------ ------------ ------------ -------------
Total distributions to shareholders .................. -- -- (10,352,652) (29,504,529)
------------ ------------ ------------ -------------
Capital share transactions: (Note 2)
Class A ........................................ (11,143,474) (14,973,617) 87,229,412 24,773,813
Class C ........................................ -- -- 29,705,400 26,255,441
Advisor Class .................................. 1,443,959 -- 26,626,289 15,817,345
------------ ------------ ------------ -------------
Total capital share transactions ..................... (9,699,515) (14,973,617) 143,561,101 66,846,599
------------ ------------ ------------ -------------
Redemption fees ...................................... -- 245 -- 9,119
------------ ------------ ------------ -------------
Net increase (decrease) in net assets ....... 73,399,614 (44,213,755) 396,899,900 (407,324,153)
Net assets:
Beginning of year ................................. 274,323,619 318,537,374 507,474,385 914,798,538
------------ ------------ ------------ -------------
End of year ....................................... $347,723,233 $274,323,619 $904,374,285 $ 507,474,385
------------ ------------ ------------ -------------
Distributions in excess of net investment income
included in net assets:
End of year ....................................... $ -- $ (789,307) $ (2,357,114) $ (2,911,204)
------------ ------------ ------------ -------------
The accompanying notes are an integral part of these financial statements.
Annual Report | 39
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
eight separate funds, two of which are included in this report (Funds). The
financial statements of the remaining funds in the Trust are presented
separately. The classes of shares offered within each of the Funds are indicated
below. 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 market 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.
40 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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 April 30, 2010, a market event occurred
resulting in a portion of the securities held by the Franklin Natural Resources
Fund 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. The Funds may enter
into foreign currency exchange contracts to facilitate transactions denominated
in a foreign currency. 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.
Annual Report | 41
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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 (Bank of New York 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 April 30, 2010, the Franklin Natural
Resources Fund had no securities on loan.
D. INCOME TAXES
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. As a result, no provision for federal
income taxes is required. The Funds file U.S. income tax returns as well as tax
returns in certain other jurisdictions. As of April 30, 2010, and for all open
tax years, the Funds have determined that no provision for income tax is
required in the Funds' financial statements. Open tax years are those that
remain subject to examination by such taxing authorities, which in the case of
the U.S. is three years after the filing of a fund's tax return.
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.
42 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, 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.
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.
Annual Report | 43
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2010, there were an unlimited number of shares authorized (without
par value). Transactions in the Funds' shares were as follows:
FRANKLIN BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -------------
CLASS A SHARES:
Year ended April 30, 2010
Shares sold ............................ 1,402,264 $ 82,627,423 8,051,451 $ 234,242,766
Shares issued in reinvestment of
distributions ....................... -- -- 253,014 7,691,607
Shares redeemed ........................ (1,599,105) (93,770,897) (5,438,715) (154,704,961)
---------- ------------ ---------- -------------
Net increase (decrease) ................ (196,841) $(11,143,474) 2,865,750 $ 87,229,412
========== ============ ========== =============
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
========== ============ ========== =============
CLASS C SHARES:
Year ended April 30, 2010
Shares sold ............................ 2,009,809 $ 57,427,382
Shares issued in reinvestment of
distributions ....................... 21,035 629,995
Shares redeemed ........................ (995,144) (28,351,977)
---------- -------------
Net increase (decrease) ................ 1,035,700 $ 29,705,400
========== =============
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:
Year ended April 30, 2010(a)
Shares sold ............................ 26,054 $ 1,537,171 1,298,326 $ 39,825,430
Shares issued in reinvestment of
distributions ....................... -- -- 42,224 1,361,307
Shares redeemed ........................ (1,570) (93,212) (494,581) (14,560,448)
---------- ------------ ---------- -------------
Net increase (decrease) ................ 24,484 $ 1,443,959 845,969 $ 26,626,289
========== ============ ========== =============
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 April 30, 2010 for
Franklin Biotechnology Discovery Fund.
44 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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 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 fund's 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.
Annual Report | 45
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
In addition, under the Franklin Natural Resources Fund's Class C compensation
distribution plan, the fund pays Distributors for costs incurred in connection
with the servicing, sale and distribution of the fund's shares up to the maximum
annual plan rate.
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 Plan:
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 year:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers .............. $73,089 $607,922
Contingent deferred sales charges retained .......... $ 225 $ 32,306
E. TRANSFER AGENT FEES
For the year ended April 30, 2010, 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 ............ $669,881 $1,056,266
46 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the year ended April 30, 2010, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2010, the capital loss carryforwards were as
follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Capital loss carryforwards expiring in:
2011 ............................... $188,128,320 $ --
2012 ............................... 49,603,386 --
2017 ............................... -- 2,454,781
2018 ............................... -- 48,622,183
------------ -----------
$237,731,706 $51,076,964
============ ===========
During the year ended April 30, 2010, the Franklin Biotechnology Discovery Fund
utilized $18,695,384 of capital loss carryforwards.
For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At April 30, 2010, the Franklin Biotechnology
Discovery Fund and Franklin Natural Resources Fund deferred realized currency
losses of $39,895 and realized capital losses of $4,242,275, respectively.
The tax character of distributions paid during the years ended April 30, 2010
and 2009, was as follows:
FRANKLIN
NATURAL RESOURCES FUND
-------------------------
2010 2009
----------- -----------
Distributions paid from:
Ordinary income ......... $10,352,652 $13,054,755
Long term capital gain .. -- 16,449,774
----------- -----------
$10,352,652 $29,504,529
----------- -----------
Annual Report | 47
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At April 30, 2010, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Cost of investments ................ $295,372,605 $751,224,187
============ ============
Unrealized appreciation ............ $ 79,244,910 $223,345,704
Unrealized depreciation ............ (23,481,705) (72,538,937)
------------ ------------
Net unrealized appreciation
(depreciation) .................. $ 55,763,205 $150,806,767
------------ ------------
Distributable earnings -
undistributed ordinary income ... $ -- $ 10,256,265
============ ============
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-taxable income.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2010, were as follows:
FRANKLIN
BIOTECHNOLOGY FRANKLIN NATURAL
DISCOVERY FUND RESOURCES FUND
-------------- ----------------
Purchases .. $126,151,801 $342,640,967
Sales ...... $125,233,202 $212,207,724
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. Pursuant
to a SEC exemptive order specific to the Funds' investment in the Sweep Money
Fund, 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.
48 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DEFAULTED SECURITIES
The Franklin Biotechnology Discovery Fund held a defaulted security and/or other
securities for which the income has been deemed uncollectible. At April 30,
2010, the value of this security for the fund was $295,072, representing 0.08%
of the fund's net assets. The fund discontinues accruing income on securities
for which income has been deemed uncollectible and provide an estimate for
losses on interest receivable. The security has been identified on the
accompanying Statement of Investments.
9. 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 April 30, 2010, the Funds held investments in restricted securities,
excluding 144A securities deemed to be liquid, 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 $ 295,072
1,128,271 FibroGen Inc., pfd., E .............. 5/19/00 5,065,937 5,077,220
1,006,900 Indevus Pharmaceuticals Inc.,
Escrow Account ................... 2/20/09 1,107,590 314,656
----------
TOTAL RESTRICTED SECURITIES (1.64% of Net Assets) ............... $5,686,948
==========
FRANKLIN NATURAL RESOURCES FUND
1,000,000(b) CGA Mining Ltd.,144A ................ 1/20/10 $2,114,063 $2,066,797
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 --
----------
TOTAL RESTRICTED SECURITIES (0.23% of Net Assets) ............... $2,066,797
==========
(a) The Fund also invests in unrestricted securities of other investments in
the issuer, valued at $0 as of April 30, 2010.
(b) The Fund also invests in unrestricted securities of other investments in
the issuer, valued at $326,055 as of April 30, 2010.
See Abbreviations on page 52.
Annual Report | 49
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SPECIAL SERVICING AGREEMENT
On May 1, 2009, the Franklin Natural Resources Fund, which is an eligible
underlying investment 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 may 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 fund (e.g., due to reduced
costs associated with servicing accounts) from the investment in the fund by the
Allocator Funds. The Allocator Funds are either managed by Advisers or
administered by FT Services, affiliates of the fund. For the year ended April
30, 2010, the fund was held by one or more of the Allocator Funds and was
allocated expenses as noted in the Statements of Operations. At April 30, 2010,
8.71% of the fund's outstanding shares was held by one or more of the Allocator
Funds.
11. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds
(collectively "Borrowers"), managed by Franklin Templeton Investments, are
borrowers in a joint syndicated senior unsecured credit facility totaling $750
million (Global Credit Facility) which matures on January 21, 2011. This Global
Credit Facility provides a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the 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 Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee of 0.10% based upon the unused portion of the Global
Credit Facility, which is reflected in other expenses on the Statements of
Operations. During the year ended April 30, 2010, the Funds did not utilize the
Global Credit Facility.
50 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 April 30, 2010, 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 ................. $250,853,562 $ -- $5,391,876(b) $256,245,438
Other Equity Investments(c) ... 83,973,089 -- -- 83,973,089
Convertible Bonds ................... -- -- 295,072 295,072
Short Term Investments .............. 9,434,211 1,188,000 -- 10,622,211
------------ ---------- ---------- ------------
Total Investments in
Securities .............. $344,260,862 $1,188,000 $5,686,948(b) $351,135,810
============ ========== ========== ============
FRANKLIN NATURAL RESOURCES FUND
ASSETS:
Investments in Securities
Equity Investments:(a)
Gold .......................... $ 68,771,774 $ -- $2,066,797 $ 70,838,571
Oil & Gas Exploration &
Production ................. 237,727,947 7,304,044 -- 245,031,991
Internet Software & Services .. -- 1,338,642 -- 1,338,642
Other Equity Investments(c) ... 557,275,397 -- --(b) 557,275,397
Short Term Investments ........... 27,546,353 -- -- 27,546,353
------------ ---------- ---------- ------------
Total Investments in
Securities .............. $891,321,471 $8,642,686 $2,066,797(b) $902,030,954
============ ========== ========== ============
(a) Includes common and preferred stock as well as other equity investments.
(b) Includes securities determined to have no value at April 30, 2010.
(c) For detailed industry descriptions, see the accompanying Statements of
Investments.
Annual Report | 51
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
At April 30, 2010, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Funds' fair value,
was as follows:
NET CHANGE
IN UNREALIZED
NET NET CHANGE TRANSFER APPRECIATION
BALANCE AT REALIZED IN UNREALIZED NET IN (OUT) BALANCE AT (DEPRECIATION)
BEGINNING GAIN APPRECIATION PURCHASES OF END OF ON ASSETS HELD
OF YEAR (LOSS) (DEPRECIATION) (SALES) LEVEL 3 YEAR AT YEAR END
---------- -------- -------------- ---------- -------- ---------- --------------
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
ASSETS
Equity Investments:(a)
Biotechnology ..... $6,787,229 $-- $(1,395,353) $ -- $-- $5,391,876(b) $(1,395,353)
Convertible Bonds .... 785,900 -- (490,828) -- -- 295,072 (490,828)
---------- --- ----------- ---------- --- ---------- -----------
Total .......... $7,573,129 $-- $(1,886,181) $ -- $-- $5,686,948(b) $(1,886,181)
========== === =========== ========== === ========== ===========
FRANKLIN NATURAL
RESOURCES FUND
ASSETS
Equity Investments:(a)
Coal & Consumable
Fuels .......... $ 399,194 $-- $ (399,194) $ -- $-- $ --(b) $ (399,194)
Gold .............. -- -- (47,266) 2,114,063 -- 2,066,797 (47,266)
---------- --- ----------- ---------- --- ---------- -----------
Total .......... $ 399,194 $-- $ (446,460) $2,114,063 $-- $2,066,797(b) $ (446,460)
========== === =========== ========== === ========== ===========
(a) Includes common and preferred stock as well as other equity investments.
(b) Includes securities determined to have no value at April 30, 2010.
13. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board issued an Accounting
Standards Update which enhances and clarifies existing fair value measurement
disclosure requirements and is effective for interim and annual periods
beginning after December 15, 2009. The Funds believe the adoption of this
Accounting Standards Update will not have a material impact on their financial
statements.
14. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance 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
52 | Annual Report
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Biotechnology Discovery
Fund and Franklin Natural Resources Fund (separate portfolios of Franklin
Strategic Series, hereafter referred to as the "Funds") at April 30, 2010, the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the two years in the period then ended and the
financial highlights for each of the periods presented, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 2010 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 16, 2010
Annual Report | 53
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Franklin
Natural Resources Fund designates 48.35% of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year ended
April 30, 2010.
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended April 30, 2010:
FRANKLIN FRANKLIN
BIOTECHNOLOGY NATURAL
DISCOVERY FUND RESOURCES FUND
- -------------- --------------
$1,269,092 $7,095,510
Distributions, including qualified dividend income, paid during calendar year
2010 will be reported to shareholders on Form 1099-DIV in January 2011.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
54 | Annual Report
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves a three-year term until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- ---------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 131 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
SAM GINN (1937) Trustee Since 2007 108 ICO Global Communications
One Franklin Parkway (Holdings) Limited (satellite company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 131 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
FRANK W.T. LAHAYE (1929) Trustee Since 1991 107 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
Annual Report | 55
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- ---------------------------------------
J. MICHAEL LUTTIG (1954) Trustee Since 131 Boeing Capital Corporation (aircraft
One Franklin Parkway December 2009 financing).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President, General Counsel and member of Executive Council, The Boeing Company; and FORMERLY, Federal Appeals Court
Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).
FRANK A. OLSON (1932) Trustee Since 2007 131 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 139 Cbeyond, Inc. (business
One Franklin Parkway communications provider).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 108 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm)
(1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- ---------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 131 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in
Franklin Templeton Investments.
56 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- ---------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee Since 1991 51 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior
Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 25 of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Chief Since 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant
Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton
Services, LLC (1997-2003).
GASTON GARDEY (1967) Treasurer, Since 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton
Investments.
ALIYA S. GORDON (1973) Vice President Since 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
Annual Report | 57
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- ---------------------------------------
STEVEN J. GRAY (1955) Vice President Since Not Applicable Not Applicable
One Franklin Parkway August 2009
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and officer
of 45 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) President and Since April 2010 Not Applicable Not Applicable
One Franklin Parkway Chief
San Mateo, CA 94403-1906 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of
10 of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY (1962) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and
officer of some of the other subsidiaries of Franklin Resources, Inc. and of 22 of the investment companies in Franklin Templeton
Investments.
ROBERT C. ROSSELOT (1960) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. August 2009
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the
South; and officer of 45 of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin
Templeton Investments.
58 | Annual Report
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF BIRTH LENGTH OF OVERSEEN BY
AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ -------------- ---------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES
OR THE LISTING STANDARDS APPLICABLE TO THE FUND.
The Statement of Additional Information (SAI) includes additional information
about the board members and is available, without charge, upon request.
Shareholders may call (800) DIAL BEN/(800) 342-5236 to request the SAI.
Annual Report | 59
Franklin Strategic Series
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 13, 2010, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds within the Trust
(Fund(s)). In reaching this decision, the Board took into account information
furnished throughout the year at regular Board meetings, as well as information
prepared specifically in connection with the annual renewal review process.
Information furnished and discussed throughout the year included investment
performance reports and related financial information for each Fund, as well as
periodic reports on shareholder services, legal, compliance, pricing, brokerage
commissions and execution and other services provided by the Investment Manager
(Manager) and its affiliates. Information furnished specifically in connection
with the renewal process included a report for each Fund prepared by Lipper,
Inc. (Lipper), an independent organization, as well as additional material,
including a Fund profitability analysis report prepared by management. The
Lipper reports compared each Fund's investment performance and expenses with
those of other mutual funds deemed comparable to the Fund as selected by Lipper.
The Fund profitability analysis report discussed the profitability to Franklin
Templeton Investments from its overall U.S. fund operations, as well as on an
individual fund-by-fund basis. Included with such profitability analysis report
was information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates to U.S. mutual funds and other accounts, including
management's explanation of differences where relevant and a three-year expense
analysis with an explanation for any increase in expense ratios. Additional
material accompanying such report was a memorandum prepared by management
describing project initiatives and capital investments relating to the services
provided to the Funds by the Franklin Templeton Investments organization, as
well as a memorandum relating to economies of scale and a comparative analysis
concerning transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other
60 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
management personnel with the code of ethics adopted throughout the Franklin
Templeton fund complex, the adherence to fair value pricing procedures
established by the Board, and the accuracy of net asset value calculations. The
Board also noted the extent of benefits provided Fund shareholders from being
part of the Franklin Templeton family of funds, including the right to exchange
investments between the same class of funds without a sales charge, the ability
to reinvest Fund dividends into other funds and the right to combine holdings in
other funds to obtain a reduced sales charge. Favorable consideration was given
to management's continuous efforts and expenditures in establishing back-up
systems and recovery procedures to function in the event of a natural disaster,
it being noted that such systems and procedures had functioned smoothly during
the Florida hurricanes and blackouts experienced in recent years. Among other
factors taken into account by the Board were the Manager's best execution
trading policies, including a favorable report by an independent portfolio
trading analytical firm. Consideration was also given to the experience of each
Fund's portfolio management team, the number of accounts managed and general
method of compensation. In this latter respect, the Board noted that a primary
factor in management's determination of a portfolio manager's bonus compensation
was the relative investment performance of the funds he or she managed and that
a portion of such bonus was required to be invested in a predesignated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, and the continuous enhancements to and
high industry ranking given the Franklin Templeton website. Particular attention
was given to management's conservative approach and diligent risk management
procedures, including continuous monitoring of counterparty credit risk and
attention given to derivatives and other complex instruments. The Board also
took into account, among other things, management's efforts in establishing a
global credit facility for the benefit of the Funds and other accounts managed
by Franklin Templeton Investments to provide a source of cash for temporary and
emergency purposes or to meet unusual redemption requests as well as the strong
financial position of the Manager's parent company and its commitment to the
mutual fund business as evidenced by its subsidization of money market funds.
The Board also noted management's efforts to minimize any negative impact on the
nature and quality of services provided the Funds arising from Franklin
Templeton Investments' implementation of a hiring freeze and employee reductions
in response to market conditions during the latter part of 2008 and early 2009.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Funds in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
agreement renewals. The Lipper reports prepared for each individual Fund showed
the investment performance of its Class A shares in comparison to a performance
universe selected by Lipper.
Annual Report | 61
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Comparative performance for each Fund was shown for the one-year period ended
January 31, 2010, and previous periods ended that date of up to 10 years
depending on when a particular Fund commenced operations. The following
summarizes the performance results for each of these Funds and the Board's view
of such performance.
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional health/biotechnology
funds as selected by Lipper. The Lipper report showed the Fund's total return
for the one-year period to be in the lowest quintile of its performance universe
and to be in either the lowest or second-lowest quintile of such universe during
each of the previous three-, five- and 10-year periods on an annualized basis.
In discussing such comparative investment results, management pointed out that
they largely reflected the Fund's one-year underperformance, which had impacted
long-term performance as well. Management explained that the one-year
performance primarily resulted from the Fund's conservative investment strategy
of being overweight in holdings of large-capitalization companies and
underweight in securities of small and mid-capitalization issuers, which type of
securities had performed well during such period. Management also pointed out
the volatility of its Lipper performance universe, noting that the Fund's
conservative investment strategy during the market turmoil that existed in 2008
had resulted in its total return during the previous one-year period ended
1/31/09, as well as during the annualized three-, five- and 10-year periods
preceding such year to all be in the highest or second-highest quintile of such
universe. Management also discussed with the Board actions being taken to
improve performance. While intending to continuously monitor future results, the
Board did not believe the Fund's performance as shown in the Lipper report to
warrant any change in portfolio management or overall investment strategy in
view of such explanations and discussions.
FRANKLIN NATURAL RESOURCES FUND - The performance universe for this Fund
consisted of the Fund and all retail and institutional global natural resources
funds as selected by Lipper. The Lipper report comparison for the Fund showed
its total return for the one-year period to be in the second-highest quintile of
its performance universe, and on an annualized basis to also be in the
second-highest quintile of the performance universe for the previous three-year
period, and to be in the middle quin-tile and lowest quintile of such universe
for the previous five- and 10-year periods, respectively. The Board found the
Fund's performance as set forth in the Lipper report to be acceptable, noting
that the Lipper report showed the Fund's annualized return for the 10-year
period exceeded 11%.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group.
Lipper expense data is based upon information taken from each fund's most recent
annual report, which reflects historical asset levels that may be quite
different from those currently existing, particularly in a period of market
volatility. While recognizing such inherent limitation and the fact that expense
ratios generally increase as assets decline and decrease as assets grow, the
Board believed the independent analysis conducted by Lipper to be an appropriate
measure of comparative expenses. In reviewing comparative costs,
62 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Lipper provides information on each Fund's contractual investment management fee
in comparison with the investment management fee that would have been charged by
other funds within its Lipper expense group assuming they were similar in size
to the Fund, as well as the actual total expense ratio of the Fund in comparison
with those of its Lipper expense group. The Lipper contractual investment
management fee analysis includes administrative charges as being part of the
investment management fee, and actual total expenses, for comparative
consistency, are shown by Lipper for Fund Class A shares. The results of such
expense comparisons showed the contractual investment management fee rate and
actual total expense ratio for Franklin Natural Resources Fund to be in the
least expensive quintile of its Lipper expense group. The contractual investment
management fee rate for Franklin Biotechnology Discovery Fund was in the least
expensive quintile of its Lipper expense group and its actual total expense
ratio was in the second least expensive quin-tile of such group. The Board was
satisfied with the contractual management fees and total expense ratios of each
of these Funds in comparison to its expense group as shown in the Lipper
reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds during the 12-month period ended September 30,
2009, being the most recent fiscal year-end for Franklin Resources, Inc., the
Manager's parent. In reviewing the analysis, attention was given to the
methodology followed in allocating costs to each Fund, it being recognized that
allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that, while being continuously refined and reflecting
changes in the Manager's own cost accounting, the allocation methodology was
consistent with that followed in profitability report presentations for the
Funds made in prior years and that the Funds' independent registered public
accounting firm had been engaged by the Manager to review the reasonableness of
the allocation methodologies solely for use by the Funds' Board in reference to
the profitability analysis. In reviewing and discussing such analysis,
management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary for the type of mutual fund operations
conducted by the Manager and its affiliates may not be fully reflected in the
expenses allocated to each Fund in determining its profitability, as well as the
fact that the level of profits, to a certain extent, reflected operational cost
savings and efficiencies initiated by management. The Board also took into
account management's expenditures in improving shareholder services provided the
Funds, as well as the need to meet additional regulatory and compliance
requirements resulting from the Sarbanes-Oxley Act and recent SEC and other
regulatory requirements. In addition, the Board considered a third-party study
comparing the profitability of the Manager's parent on an overall basis to other
publicly held managers broken down to show profitability from management
operations exclusive of distribution expenses, as well as profitability
including distribution expenses. The Board also considered the extent to which
the Manager and its affiliates might derive ancillary benefits from fund
operations, including
Annual Report | 63
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
its interest in a joint venture entity that financed up-front commissions paid
to brokers/dealers who sold fund Class B shares prior to February 2005 when the
offering of such shares was discontinued, as well as potential benefits
resulting from allocation of fund brokerage and the use of commission dollars to
pay for research. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to each Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board noted that
economies of scale were shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreements for both Funds contains breakpoints that continued to asset levels
that exceeded their asset size at December 31, 2009. In view of such fee
structure and the favorable expense comparisons of the Funds within their
respective expense groups, the Board believed that to the extent economies of
scale may be realized by the Manager of these Funds and its affiliates, there
was a sharing of benefits with each Fund and its shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager has established Proxy Voting Policies and
Procedures (Policies) that the Trust uses to determine how to vote proxies
relating to portfolio securities. Shareholders may view the Trust's complete
Policies online at franklintempleton.com. Alternatively, shareholders may
request copies of the Policies free of charge by calling the Proxy Group collect
at (954) 527-7678 or by sending a written request to: Franklin Templeton
Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are
also made available online at franklintempleton.com and posted on the U.S.
Securities and Exchange Commission's website at sec.gov and reflect the most
recent 12-month period ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling (800)
SEC-0330.
64 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
HOUSEHOLDING OF REPORTS AND PROSPECTUSES
You will receive the Fund's financial reports every six months as well as an
annual updated summary prospectus (prospectus available upon request). To reduce
Fund expenses, we try to identify related shareholders in a household and send
only one copy of the financial reports and summary prospectus. This process,
called "householding," will continue indefinitely unless you instruct us
otherwise. If you prefer not to have these documents householded, please call us
at (800) 632-2301. At any time you may view current prospectuses/summary
prospectuses and financial reports on our website. If you choose, you may
receive these documents through electronic delivery.
Annual Report | 65
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Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A SUMMARY PROSPECTUS AND/OR 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 A 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 DynaTech Fund
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 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 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 Conservative Allocation Fund(3)
Franklin Templeton Growth Allocation Fund(3)
Franklin Templeton Moderate Allocation Fund(3)
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(4)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(4)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(4)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(5)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)
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(7)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(8)
Michigan(8)
Minnesota(8)
Missouri
New Jersey
New York(7)
North Carolina
Ohio(8)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(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.) Effective 5/1/10, the Franklin Templeton Target Funds changed their name to
the Franklin Templeton Allocation Funds. The funds' investment goals and
principal investment strategies remained unchanged.
(4.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(5.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(6.) The fund invests primarily in insured municipal securities.
(7.) These funds are available in three or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and a money market portfolio (CA only).
(8.) 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 2/15/09.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
07/10 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC SERIES
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a summary
prospectus and/or prospectus. Investors should carefully consider a fund's
investment goals, risks, charges and expenses before investing. A prospectus
contains this and other information; please read it carefully before investing.
To 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.
(C) 2010 Franklin Templeton Investments. All rights reserved.
FSS2 A 06/10
APRIL 30, 2010
ANNUAL REPORT
AND SHAREHOLDER LETTER
A series of Franklin Strategic Series
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
FIXED INCOME
(GRAPHIC)
FRANKLIN
STRATEGIC INCOME FUND
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
(GRAPHIC)
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Franklin Strategic Income Fund ............................................ 3
Performance Summary ....................................................... 10
Your Fund's Expenses ...................................................... 16
Financial Highlights and Statement of Investments ......................... 18
Financial Statements ...................................................... 48
Notes to Financial Statements ............................................. 52
Report of Independent Registered Public Accounting Firm ................... 67
Tax Designation ........................................................... 68
Board Members and Officers ................................................ 69
Shareholder Information ................................................... 74
Shareholder Letter
Dear Shareholder:
During the year ended April 30, 2010, the U.S. economy showed signs of an
increasingly broad-based expansion while interest rates remained near all-time
lows and inflation was muted. Although corporate and global economic data
underscored some weak spots amid short-term improvements, by fourth quarter 2009
and into 2010, most companies beat consensus earnings estimates, aided by
government incentives and a wave of restructuring and cost-cutting initiatives.
U.S. equity markets enjoyed an unusually strong rally until first quarter 2010,
when volatility returned as investors began to heed signs of overvaluation. In
addition, concerns about some European countries' creditworthiness contributed
to significant market uncertainty. Investors also questioned the global
recovery's sustainability as some government stimulus measures began to wind
down. During the reporting period, U.S. Treasury yields rose and fell in
response to wavering investor sentiment. The yield curve reached historically
steep levels during the first quarter of 2010 and flattened only slightly by
period-end.
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. Although conditions remain challenging, our experience gives us
reason to be optimistic about the potential for future market stabilization and
economic recovery.
Franklin Strategic Income Fund's annual report goes into greater detail about
prevailing conditions during the period under review. In addition, you will find
performance data, financial information and a discussion from the portfolio
managers. Please remember that all securities markets fluctuate, as do mutual
fund share prices.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
If you would like more frequent updates, franklintempleton.com provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Although market conditions are constantly changing, we remain committed to our
disciplined strategy as we manage the Fund, keeping in mind the trust you have
placed in us. As always, we recommend investors consult their financial advisors
and review their portfolios to design a long-term strategy and portfolio
allocation that meet their individual needs, goals and risk tolerance. We firmly
believe that most people benefit from professional advice, and that advice is
invaluable as investors navigate current market conditions.
We thank you for investing with Franklin Templeton, welcome your questions and
comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Edward B. Jamieson
Edward B. Jamieson
President and Chief Executive Officer - Investment Management
Franklin Strategic Series
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF APRIL 30, 2010. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
2 | Not part of the annual report
Annual Report
Franklin Strategic Income Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Strategic Income Fund seeks a
high level of current income, with capital appreciation over the long term as a
secondary objective. The Fund uses an active asset allocation process and under
normal market conditions invests at least 65% of its assets in U.S. and foreign
debt securities, including those in emerging markets, which comprise all
varieties of fixed and floating rate income securities, such as bonds, mortgage
securities and other asset-backed securities, and convertible securities.
We are pleased to bring you Franklin Strategic Income Fund's annual report for
the fiscal year ended April 30, 2010.
PERFORMANCE OVERVIEW
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.
Franklin Strategic Income Fund - Class A delivered a +23.15% cumulative total
return for the 12 months under review. The Fund outperformed its benchmark, the
Barclays Capital (BC) U.S. Aggregate Index, which had a total return of +8.30%
for the same period.(1) The Fund underperformed its peers as measured by the
Lipper Multi-Sector Income Funds Classification Average's +26.77% total
return.(2) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 10.
(1.) Source: (C) 2010 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 and
nonconvertible, must have at least one year to final maturity and must be
rated investment grade (Baa3/BBB-/BBB-or higher) using the middle rating of
Moody's, Standard & Poor's, and Fitch, respectively. The index is unmanaged
and includes reinvestment of any income or distributions. One cannot invest
directly in an index, 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 12-month period ended
4/30/10, there were 150 funds in this category. Lipper calculations do not
include sales charges but include reinvestment of any income or
distributions. Fund performance relative to the average may have differed
if these or other factors had been considered. One cannot invest directly
in an 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 23.
Annual Report | 3
ECONOMIC AND MARKET OVERVIEW
The U.S. economy improved during the 12-month reporting period as corporate
profits, manufacturing, consumer spending, consumer confidence and exports
showed gains. The nation's economic activity as measured by gross domestic
product registered annualized quarterly rates of -0.7%, 2.2%, 5.6% in the last
three quarters of 2009, and an estimated 3.0% in 2010's first quarter.(3)
Remaining challenges to economic recovery included elevated debt concerns, a
still-weak housing sector and lack of job prospects for the unemployed as
federal stimulus measures began to wind down. The unemployment rate, which
peaked at 10.1% in October 2009, dipped to 9.9% by period-end.(4)
As economic conditions improved, demand for energy products increased and crude
oil prices rose from $51 per barrel in April 2009 to $86 at period-end. April's
inflation rate was an annualized 2.2%.(4) Core inflation, which excludes food
and energy costs, rose at a 0.9% annualized rate,(4) which was below the Federal
Reserve Board's (Fed's) informal target range of 1.5% to 2.0%. The core personal
consumption expenditures price index reported a 12-month increase of 1.3%.(3)
During the period under review, economic improvement and benign inflation trends
prompted Fed policymakers to maintain record-low interest rates and discontinue
certain stimulus plans. Noting that it believed the recession had ended, the Fed
left the federal funds target rate unchanged at a range of 0% to 0.25% and began
laying the groundwork for its exit strategy. The market anticipated an eventual
tightening of monetary policy and a gradual phase-out of the Fed's support and
liquidity programs.
Globally, the economic recovery strengthened while productivity gains and
continued slack in labor and manufacturing capacity left inflationary pressures
muted. However, increased differentiation between the economic performances of
countries began to emerge. Most notably, the economic recovery was strongest in
non-Japan Asia and Latin America, while Europe lagged the U.S. recovery. Some
central banks began tightening interest rates, although signs that the global
economic recovery could be sustainable were increasingly overshadowed by
investor concern over sovereign creditworthiness in advanced economies,
particularly some peripheral eurozone members.
In February 2010, investor fears about the Greek government's ability to finance
its budget deficit forced several companies to delay bond sales and prompted
investors to flee to safer assets such as U.S. Treasuries. Investor confidence
and
(3.) Source: Bureau of Economic Analysis.
(4.) Source: Bureau of Labor Statistics.
4 | Annual Report
the market plunged again after independent credit rating agency Standard &
Poor's slashed its credit ratings for Greece, Spain and Portugal, but rebounded
after the Federal Open Market Committee announced it would keep interest rates
stable and many companies released upbeat earnings reports.
Wary investors favored short-term Treasuries, and the Treasury yield curve
reached historically steep levels during the period. The spread between two-and
10-year Treasury yields increased from 225 basis points (100 basis points equal
one percentage point) at the beginning of the period to 272 basis points at
period-end. The two-year Treasury bill yield rose from 0.91% to 0.97% over the
12-month period, while the 10-year Treasury note yield rose from 3.16% to 3.69%.
INVESTMENT STRATEGY
The Fund uses an active asset allocation strategy, investing across the fixed
income market in sectors including high yield and investment grade corporate
bonds, international developed and emerging market bonds, U.S. government and
agency securities, mortgage and other asset-backed securities, corporate bank
loans, convertible securities and preferred stocks. In addition to our bottom-up
fundamental analysis of market sectors, industries and issuers, we evaluate
country risk, business cycles, yield curves, and values between and within
markets as part of our portfolio construction process.
MANAGER'S DISCUSSION
During the Fund's fiscal year, global fixed income markets delivered
exceptionally strong overall performance, driven by a significant and broad
recovery in credit markets. A combination of rebounding global economic growth,
led by many developing markets, stabilizing public credit markets, and
historically cheap valuations at the beginning of the period supported strong
performance across many fixed income sectors. In this environment, Franklin
Strategic Income Fund outperformed the BC U.S. Aggregate Index but lagged the
Lipper Multi-Sector Income Funds Classification Average. The Fund's relatively
higher spread sector allocation and lower weightings in the more U.S.
interest-rate sensitive fixed income sectors (i.e., U.S. Treasury securities,
agency bonds and mortgage-backed securities) aided Fund performance compared
with the BC U.S. Aggregate Index. Compared with the peer average, the Fund's
lower exposure to certain higher beta sectors (such as high yield corporate
bonds) and securities (including distressed bonds) hindered relative results.
Annual Report | 5
DIVIDEND DISTRIBUTIONS*
5/1/09-4/30/10
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
November 4.71 cents 4.38 cents 4.39 cents 4.51 cents 4.91 cents
December 4.50 cents 4.18 cents 4.16 cents 4.29 cents 4.71 cents
January 4.65 cents 4.30 cents 4.31 cents 4.44 cents 4.86 cents
February 4.40 cents 4.08 cents 4.09 cents 4.21 cents 4.59 cents
March 5.00 cents 4.66 cents 4.66 cents 4.79 cents 5.22 cents
April 4.52 cents 4.17 cents 4.18 cents 4.31 cents 4.73 cents
----------- ----------- ----------- ----------- -----------
TOTAL 52.65 CENTS 48.47 CENTS 48.60 CENTS 50.13 CENTS 55.19 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
During the reporting period, longer term U.S. Treasury yields rose and the yield
curve steepened. U.S. Treasury securities delivered modestly positive returns as
a result, generally below their coupon income. Although the Fed ended its debt
buyback program toward period-end, agency debentures and mortgage-backed
securities experienced some spread tightening relative to Treasuries and
outperformed comparable-maturity Treasuries. The Fund reduced its exposure to
these more U.S. interest-rate sensitive sectors during the fiscal year given
still exceptionally low longer term interest rates. In this environment,
Treasury Inflation Protected Securities (TIPS) outperformed fixed-rate
Treasuries as inflation expectations rose with improving prospects for future
U.S. economic growth. The Fund maintained a portion of its government bond
allocation in TIPS during the period, although, given TIPS' strong relative
performance, the Fund reduced its exposure by period-end. Asset-backed
securities (ABS) and commercial mortgage-backed securities (CMBS) also
experienced significant spread tightening during the Fund's fiscal year, aided
by government programs that encouraged private investment in these securities.
We reduced some ABS exposure, excluding collateralized loan obligations, given
the asset class's price appreciation, and we generally maintained our CMBS
exposure. Despite a challenging environment for the commercial real estate
market, we found what we believed were attractive valuations in certain CMBS and
focused on higher tier tranches within such structures to help reduce downside
risks if property delinquencies increase. We added to the Fund's municipal bond
allocation, with a
6 | Annual Report
PORTFOLIO BREAKDOWN
4/30/10
% OF TOTAL
NET ASSETS
----------
High Yield Corporate Bonds 27.5%
International Government & Agency Bonds (Non-$US) 19.2%
Floating Rate Bank Loans 14.4%
Investment Grade Corporate Bonds 11.8%
International Government & Agency Bonds ($US) 6.3%
Commercial Mortgage-Backed Securities 4.9%
Mortgage-Backed Securities 3.6%
Municipal Bonds 3.1%
U.S. Treasury Securities* 3.1%
Asset-Backed Securities 1.6%
U.S. Agency Securities 0.8%
Common Stocks 0.2%
Convertible Securities 0.0%**
Short-Term Investments & Other Net Assets 3.5%
* Includes 1.4% Treasury Inflation Protected Securities as of 4/30/10.
** Rounds to less than 0.1% of total net assets.
focus on certain Build America Bonds, which provide a higher level of taxable
income to investors than traditional tax-free municipal bonds.
The investment-grade and noninvestment-grade markets posted one of their
strongest annual returns during the Fund's fiscal year, with high yield
corporate bonds up 41.54% as measured by the Credit Suisse (CS) High Yield
Index.(5) Fundamentally, beginning in 2009's fourth quarter and continuing into
2010, corporate earnings experienced significant year-over-year increases. In
addition, the opening of the primary, new-issue market for corporate bonds as
the credit market improved allowed many issuers to refinance existing debt,
which pushed out near-term maturities and improved issuers' liquidity. Largely
as a result, the noninvestment-grade default rate declined and by period-end was
meaningfully lower than calendar year 2009 highs. We maintained significant
exposure to investment-grade and noninvestment-grade securities during the
fiscal year. In particular, we took some profits in some investment-grade
corporate securities in the period's latter half and added exposure to the
noninvestment-grade bank loan and high yield corporate bond sectors, which we
believe may benefit from
(5.) Source: (C) 2010 Morningstar. The CS High Yield Index is designed to mirror
the investible universe of the U.S. dollar-denominated high yield debt
market.
Annual Report | 7
improving fundamental credit trends. Overall, the corporate sector was a
significant contributor to Fund performance, and we had substantial exposure at
period-end given valuations we believed still offered potential long-term value
considering a positive outlook for credit fundamentals.
During the year under review, the U.S. dollar weakened versus a basket of
foreign currencies. As a result, the Fund's non-U.S. dollar bond and currency
positions helped results, as certain currencies experienced substantial gains
relative to the U.S. dollar. For example, the Fund's local currency positions in
South Korea, Brazil, Malaysia and Indonesia benefited the Fund's performance. We
added to the Fund's non-U.S. dollar exposure during the period given our outlook
that certain developing market countries may experience currency appreciation
versus the U.S. dollar. The Fund's long positions in Norway, Sweden and Poland,
which we sought to hedge in effect by shorting the euro, also benefited
performance largely due to the euro's significant weakness near period-end
caused by concerns regarding the creditworthiness of Greece and some other
European countries. In addition, we had a short position in the Japanese yen,
which reflected our outlook for continued lackluster economic growth in Japan
relative to the U.S. Similar to other spread sectors, the Fund's hard-currency,
U.S. dollar-denominated emerging market sovereign debt positions performed well
during the fiscal year. Although by period-end valuations were richer than
longer term averages, certain of these sovereign issuers' fundamental credit
quality had strengthened relative to prior periods.
8 | Annual Report
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
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2010, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 9
Performance Summary as of 4/30/10
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FRSTX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$1.47 $10.30 $8.83
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.5265
CLASS B (SYMBOL: FKSBX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$1.48 $10.35 $8.87
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.4847
CLASS C (SYMBOL: FSGCX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$1.47 $10.30 $8.83
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.4860
CLASS R (SYMBOL: FKSRX) CHANGE 4/30/10 4/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$1.46 $10.27 $8.81
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.5013
ADVISOR CLASS (SYMBOL: FKSAX) CHANGE 4/30/10 4/30/09
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$1.47 $10.31 $8.84
DISTRIBUTIONS (5/1/09-4/30/10)
Dividend Income $0.5519
10 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS
R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ ---------
Cumulative Total Return(2) +23.15% +39.40% +110.31%
Average Annual Total Return(3) +17.94% +5.95% +7.25%
Avg. Ann. Total Return (3/31/10)(4) +21.73% +5.57% +7.01%
Distribution Rate(5) 4.89%
30-Day Standardized Yield(6) 4.87%
Total Annual Operating Expenses(7) 0.91%
CLASS B 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ ---------
Cumulative Total Return(2) +22.63% +36.64% +103.73%
Average Annual Total Return(3) +18.63% +6.13% +7.38%
Avg. Ann. Total Return (3/31/10)(4) +22.77% +5.77% +7.13%
Distribution Rate(5) 4.68%
30-Day Standardized Yield(6) 4.67%
Total Annual Operating Expenses(7) 1.31%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ ---------
Cumulative Total Return(2) +22.64% +36.64% +102.12%
Average Annual Total Return(3) +21.64% +6.44% +7.29%
Avg. Ann. Total Return (3/31/10)(4) +25.67% +6.07% +7.05%
Distribution Rate(5) 4.72%
30-Day Standardized Yield(6) 4.67%
Total Annual Operating Expenses(7) 1.31%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------- ------ ------ ---------
Cumulative Total Return(2) +22.77% +37.64% +88.04%
Average Annual Total Return(3) +22.77% +6.60% +7.88%
Avg. Ann. Total Return (3/31/10)(4) +26.94% +6.24% +7.77%
Distribution Rate(5) 4.88%
30-Day Standardized Yield(6) 4.83%
Total Annual Operating Expenses(7) 1.16%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------ ------ ---------
Cumulative Total Return(2) +23.45% +41.25% +115.76%
Average Annual Total Return(3) +23.45% +7.15% +7.99%
Avg. Ann. Total Return (3/31/10)(4) +27.51% +6.75% +7.75%
Distribution Rate(5) 5.35%
30-Day Standardized Yield(6) 5.33%
Total Annual Operating Expenses(7) 0.66%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, GO TO
franklintempleton.com OR CALL (800) 342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 4/30/10
- ------- -------
1-Year +17.94%
5-Year +5.95%
10-Year +7.25%
CLASS A (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL LIPPER MULTI-SECTOR
INCOME FUND - U.S. AGGREGATE INCOME CLASSIFICATION
DATE CLASS A INDEX AVERAGE
---- ------------------ ---------------- ---------------------
5/1/2000 $ 9,575 $10,000 $10,000
5/31/2000 $ 9,452 $ 9,995 $ 9,873
6/30/2000 $ 9,731 $10,203 $10,128
7/31/2000 $ 9,794 $10,296 $10,163
8/31/2000 $ 9,948 $10,445 $10,248
9/30/2000 $ 9,884 $10,511 $10,142
10/31/2000 $ 9,687 $10,580 $ 9,940
11/30/2000 $ 9,489 $10,753 $ 9,791
12/31/2000 $ 9,906 $10,953 $10,075
1/31/2001 $10,305 $11,132 $10,444
2/28/2001 $10,269 $11,229 $10,457
3/31/2001 $10,108 $11,285 $10,261
4/30/2001 $10,114 $11,239 $10,184
5/31/2001 $10,174 $11,306 $10,256
6/30/2001 $10,094 $11,349 $10,173
7/31/2001 $10,219 $11,603 $10,258
8/31/2001 $10,345 $11,736 $10,395
9/30/2001 $ 9,926 $11,872 $10,073
10/31/2001 $10,229 $12,121 $10,318
11/30/2001 $10,491 $11,954 $10,441
12/31/2001 $10,441 $11,878 $10,407
1/31/2002 $10,459 $11,974 $10,462
2/28/2002 $10,481 $12,090 $10,488
3/31/2002 $10,584 $11,889 $10,516
4/30/2002 $10,721 $12,120 $10,680
5/31/2002 $10,675 $12,223 $10,712
6/30/2002 $10,223 $12,328 $10,489
7/31/2002 $10,001 $12,477 $10,317
8/31/2002 $10,259 $12,688 $10,534
9/30/2002 $10,235 $12,893 $10,511
10/31/2002 $10,295 $12,835 $10,559
11/30/2002 $10,727 $12,831 $10,845
12/31/2002 $10,933 $13,096 $11,066
1/31/2003 $11,128 $13,107 $11,231
2/28/2003 $11,324 $13,289 $11,411
3/31/2003 $11,476 $13,279 $11,532
4/30/2003 $11,965 $13,388 $11,931
5/31/2003 $12,318 $13,638 $12,236
6/30/2003 $12,474 $13,611 $12,351
7/31/2003 $12,138 $13,153 $12,089
8/31/2003 $12,258 $13,240 $12,213
9/30/2003 $12,709 $13,591 $12,554
10/31/2003 $12,791 $13,464 $12,652
11/30/2003 $12,977 $13,496 $12,800
12/31/2003 $13,347 $13,634 $13,098
1/31/2004 $13,521 $13,744 $13,228
2/29/2004 $13,592 $13,892 $13,258
3/31/2004 $13,689 $13,996 $13,359
4/30/2004 $13,363 $13,632 $13,064
5/31/2004 $13,249 $13,578 $12,944
6/30/2004 $13,362 $13,654 $13,065
7/31/2004 $13,515 $13,790 $13,192
8/31/2004 $13,818 $14,053 $13,456
9/30/2004 $13,987 $14,091 $13,626
10/31/2004 $14,266 $14,209 $13,857
11/30/2004 $14,450 $14,096 $14,036
12/31/2004 $14,663 $14,225 $14,239
1/31/2005 $14,627 $14,315 $14,232
2/28/2005 $14,814 $14,230 $14,332
3/31/2005 $14,469 $14,157 $14,091
4/30/2005 $14,446 $14,349 $14,104
5/31/2005 $14,565 $14,504 $14,238
6/30/2005 $14,679 $14,583 $14,387
7/31/2005 $14,751 $14,450 $14,446
8/31/2005 $14,851 $14,636 $14,578
9/30/2005 $14,750 $14,485 $14,521
10/31/2005 $14,648 $14,370 $14,377
11/30/2005 $14,751 $14,434 $14,459
12/31/2005 $14,883 $14,571 $14,597
1/31/2006 $15,104 $14,572 $14,735
2/28/2006 $15,193 $14,620 $14,837
3/31/2006 $15,133 $14,477 $14,761
4/30/2006 $15,268 $14,450 $14,842
5/31/2006 $15,238 $14,435 $14,792
6/30/2006 $15,162 $14,466 $14,756
7/31/2006 $15,329 $14,661 $14,936
8/31/2006 $15,512 $14,886 $15,140
9/30/2006 $15,635 $15,016 $15,238
10/31/2006 $15,835 $15,116 $15,403
11/30/2006 $16,052 $15,291 $15,606
12/31/2006 $16,103 $15,202 $15,637
1/31/2007 $16,134 $15,196 $15,709
2/28/2007 $16,323 $15,431 $15,909
3/31/2007 $16,418 $15,431 $15,958
4/30/2007 $16,656 $15,514 $16,122
5/31/2007 $16,720 $15,397 $16,116
6/30/2007 $16,592 $15,351 $15,988
7/31/2007 $16,447 $15,479 $15,841
8/31/2007 $16,512 $15,669 $15,940
9/30/2007 $16,951 $15,788 $16,233
10/31/2007 $17,147 $15,930 $16,379
11/30/2007 $16,999 $16,216 $16,310
12/31/2007 $17,048 $16,262 $16,346
1/31/2008 $17,115 $16,535 $16,357
2/29/2008 $17,115 $16,558 $16,284
3/31/2008 $17,132 $16,614 $16,207
4/30/2008 $17,455 $16,579 $16,454
5/31/2008 $17,369 $16,458 $16,411
6/30/2008 $17,078 $16,445 $16,173
7/31/2008 $17,061 $16,431 $16,047
8/31/2008 $17,043 $16,587 $16,044
9/30/2008 $16,103 $16,364 $15,265
10/31/2008 $14,721 $15,978 $13,881
11/30/2008 $14,491 $16,498 $13,487
12/31/2008 $15,183 $17,114 $13,998
1/31/2009 $15,602 $16,963 $14,216
2/28/2009 $15,287 $16,899 $14,014
3/31/2009 $15,578 $17,134 $14,237
4/30/2009 $16,352 $17,216 $14,926
5/31/2009 $16,850 $17,340 $15,531
6/30/2009 $17,090 $17,439 $15,829
7/31/2009 $17,817 $17,720 $16,513
8/31/2009 $17,983 $17,904 $16,830
9/30/2009 $18,510 $18,092 $17,407
10/31/2009 $18,676 $18,181 $17,593
11/30/2009 $18,823 $18,417 $17,769
12/31/2009 $19,062 $18,129 $17,940
1/31/2010 $19,266 $18,406 $18,171
2/28/2010 $19,409 $18,474 $18,251
3/31/2010 $19,816 $18,452 $18,574
4/30/2010 $20,131 $18,644 $18,896
Total Returns 101.31% 86.44% 88.96%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 4/30/10
- ------- -------
1-Year +18.63%
5-Year +6.13%
10-Year +7.38%
CLASS B (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL LIPPER MULTI-SECTOR
INCOME FUND - U.S. AGGREGATE INCOME CLASSIFICATION
DATE CLASS B INDEX AVERAGE
---- ------------------ ---------------- ---------------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,868 $ 9,995 $ 9,873
6/30/2000 $10,155 $10,203 $10,128
7/31/2000 $10,217 $10,296 $10,163
8/31/2000 $10,374 $10,445 $10,248
9/30/2000 $10,314 $10,511 $10,142
10/31/2000 $10,106 $10,580 $ 9,940
11/30/2000 $ 9,897 $10,753 $ 9,791
12/31/2000 $10,326 $10,953 $10,075
1/31/2001 $10,727 $11,132 $10,444
2/28/2001 $10,697 $11,229 $10,457
3/31/2001 $10,526 $11,285 $10,261
4/30/2001 $10,518 $11,239 $10,184
5/31/2001 $10,587 $11,306 $10,256
6/30/2001 $10,491 $11,349 $10,173
7/31/2001 $10,616 $11,603 $10,258
8/31/2001 $10,743 $11,736 $10,395
9/30/2001 $10,306 $11,872 $10,073
10/31/2001 $10,616 $12,121 $10,318
11/30/2001 $10,883 $11,954 $10,441
12/31/2001 $10,840 $11,878 $10,407
1/31/2002 $10,843 $11,974 $10,462
2/28/2002 $10,875 $12,090 $10,488
3/31/2002 $10,977 $11,889 $10,516
4/30/2002 $11,104 $12,120 $10,680
5/31/2002 $11,065 $12,223 $10,712
6/30/2002 $10,582 $12,328 $10,489
7/31/2002 $10,349 $12,477 $10,317
8/31/2002 $10,612 $12,688 $10,534
9/30/2002 $10,597 $12,893 $10,511
10/31/2002 $10,643 $12,835 $10,559
11/30/2002 $11,097 $12,831 $10,845
12/31/2002 $11,293 $13,096 $11,066
1/31/2003 $11,490 $13,107 $11,231
2/28/2003 $11,689 $13,289 $11,411
3/31/2003 $11,855 $13,279 $11,532
4/30/2003 $12,341 $13,388 $11,931
5/31/2003 $12,714 $13,638 $12,236
6/30/2003 $12,869 $13,611 $12,351
7/31/2003 $12,507 $13,153 $12,089
8/31/2003 $12,639 $13,240 $12,213
9/30/2003 $13,099 $13,591 $12,554
10/31/2003 $13,178 $13,464 $12,652
11/30/2003 $13,351 $13,496 $12,800
12/31/2003 $13,740 $13,634 $13,098
1/31/2004 $13,915 $13,744 $13,228
2/29/2004 $13,983 $13,892 $13,258
3/31/2004 $14,078 $13,996 $13,359
4/30/2004 $13,739 $13,632 $13,064
5/31/2004 $13,617 $13,578 $12,944
6/30/2004 $13,728 $13,654 $13,065
7/31/2004 $13,880 $13,790 $13,192
8/31/2004 $14,186 $14,053 $13,456
9/30/2004 $14,354 $14,091 $13,626
10/31/2004 $14,635 $14,209 $13,857
11/30/2004 $14,832 $14,096 $14,036
12/31/2004 $15,045 $14,225 $14,239
1/31/2005 $15,004 $14,315 $14,232
2/28/2005 $15,176 $14,230 $14,332
3/31/2005 $14,818 $14,157 $14,091
4/30/2005 $14,790 $14,349 $14,104
5/31/2005 $14,921 $14,504 $14,238
6/30/2005 $15,032 $14,583 $14,387
7/31/2005 $15,100 $14,450 $14,446
8/31/2005 $15,183 $14,636 $14,578
9/30/2005 $15,089 $14,485 $14,521
10/31/2005 $14,966 $14,370 $14,377
11/30/2005 $15,065 $14,434 $14,459
12/31/2005 $15,209 $14,571 $14,597
1/31/2006 $15,429 $14,572 $14,735
2/28/2006 $15,499 $14,620 $14,837
3/31/2006 $15,433 $14,477 $14,761
4/30/2006 $15,580 $14,450 $14,842
5/31/2006 $15,529 $14,435 $14,792
6/30/2006 $15,462 $14,466 $14,756
7/31/2006 $15,627 $14,661 $14,936
8/31/2006 $15,807 $14,886 $15,140
9/30/2006 $15,927 $15,016 $15,238
10/31/2006 $16,109 $15,116 $15,403
11/30/2006 $16,339 $15,291 $15,606
12/31/2006 $16,370 $15,202 $15,637
1/31/2007 $16,412 $15,196 $15,709
2/28/2007 $16,597 $15,431 $15,909
3/31/2007 $16,688 $15,431 $15,958
4/30/2007 $16,923 $15,514 $16,122
5/31/2007 $16,982 $15,397 $16,116
6/30/2007 $16,846 $15,351 $15,988
7/31/2007 $16,693 $15,479 $15,841
8/31/2007 $16,753 $15,669 $15,940
9/30/2007 $17,191 $15,788 $16,233
10/31/2007 $17,384 $15,930 $16,379
11/30/2007 $17,229 $16,216 $16,310
12/31/2007 $17,273 $16,262 $16,346
1/31/2008 $17,334 $16,535 $16,357
2/29/2008 $17,328 $16,558 $16,284
3/31/2008 $17,339 $16,614 $16,207
4/30/2008 $17,659 $16,579 $16,454
5/31/2008 $17,573 $16,458 $16,411
6/30/2008 $17,278 $16,445 $16,173
7/31/2008 $17,260 $16,431 $16,047
8/31/2008 $17,243 $16,587 $16,044
9/30/2008 $16,292 $16,364 $15,265
10/31/2008 $14,893 $15,978 $13,881
11/30/2008 $14,661 $16,498 $13,487
12/31/2008 $15,360 $17,114 $13,998
1/31/2009 $15,785 $16,963 $14,216
2/28/2009 $15,465 $16,899 $14,014
3/31/2009 $15,760 $17,134 $14,237
4/30/2009 $16,543 $17,216 $14,926
5/31/2009 $17,047 $17,340 $15,531
6/30/2009 $17,289 $17,439 $15,829
7/31/2009 $18,026 $17,720 $16,513
8/31/2009 $18,193 $17,904 $16,830
9/30/2009 $18,726 $18,092 $17,407
10/31/2009 $18,895 $18,181 $17,593
11/30/2009 $19,043 $18,417 $17,769
12/31/2009 $19,285 $18,129 $17,940
1/31/2010 $19,492 $18,406 $18,171
2/28/2010 $19,636 $18,474 $18,251
3/31/2010 $20,048 $18,452 $18,574
4/30/2010 $20,373 $18,644 $18,896
Total Returns 103.73% 86.44% 88.96%
12 | Annual Report
Performance Summary (CONTINUED)
CLASS C (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL LIPPER MULTI-SECTOR
INCOME FUND - U.S. AGGREGATE INCOME CLASSIFICATION
DATE CLASS C INDEX AVERAGE
---- ------------------ ---------------- ---------------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,868 $ 9,995 $ 9,873
6/30/2000 $10,156 $10,203 $10,128
7/31/2000 $10,219 $10,296 $10,163
8/31/2000 $10,376 $10,445 $10,248
9/30/2000 $10,305 $10,511 $10,142
10/31/2000 $10,097 $10,580 $ 9,940
11/30/2000 $ 9,898 $10,753 $ 9,791
12/31/2000 $10,318 $10,953 $10,075
1/31/2001 $10,729 $11,132 $10,444
2/28/2001 $10,700 $11,229 $10,457
3/31/2001 $10,518 $11,285 $10,261
4/30/2001 $10,521 $11,239 $10,184
5/31/2001 $10,579 $11,306 $10,256
6/30/2001 $10,494 $11,349 $10,173
7/31/2001 $10,620 $11,603 $10,258
8/31/2001 $10,747 $11,736 $10,395
9/30/2001 $10,308 $11,872 $10,073
10/31/2001 $10,620 $12,121 $10,318
11/30/2001 $10,887 $11,954 $10,441
12/31/2001 $10,833 $11,878 $10,407
1/31/2002 $10,847 $11,974 $10,462
2/28/2002 $10,867 $12,090 $10,488
3/31/2002 $10,970 $11,889 $10,516
4/30/2002 $11,097 $12,120 $10,680
5/31/2002 $11,057 $12,223 $10,712
6/30/2002 $10,585 $12,328 $10,489
7/31/2002 $10,351 $12,477 $10,317
8/31/2002 $10,615 $12,688 $10,534
9/30/2002 $10,587 $12,893 $10,511
10/31/2002 $10,646 $12,835 $10,559
11/30/2002 $11,090 $12,831 $10,845
12/31/2002 $11,299 $13,096 $11,066
1/31/2003 $11,497 $13,107 $11,231
2/28/2003 $11,696 $13,289 $11,411
3/31/2003 $11,849 $13,279 $11,532
4/30/2003 $12,337 $13,388 $11,931
5/31/2003 $12,711 $13,638 $12,236
6/30/2003 $12,867 $13,611 $12,351
7/31/2003 $12,503 $13,153 $12,089
8/31/2003 $12,635 $13,240 $12,213
9/30/2003 $13,096 $13,591 $12,554
10/31/2003 $13,175 $13,464 $12,652
11/30/2003 $13,362 $13,496 $12,800
12/31/2003 $13,738 $13,634 $13,098
1/31/2004 $13,914 $13,744 $13,228
2/29/2004 $13,982 $13,892 $13,258
3/31/2004 $14,078 $13,996 $13,359
4/30/2004 $13,738 $13,632 $13,064
5/31/2004 $13,616 $13,578 $12,944
6/30/2004 $13,727 $13,654 $13,065
7/31/2004 $13,880 $13,790 $13,192
8/31/2004 $14,173 $14,053 $13,456
9/30/2004 $14,355 $14,091 $13,626
10/31/2004 $14,637 $14,209 $13,857
11/30/2004 $14,821 $14,096 $14,036
12/31/2004 $15,034 $14,225 $14,239
1/31/2005 $14,993 $14,315 $14,232
2/28/2005 $15,179 $14,230 $14,332
3/31/2005 $14,821 $14,157 $14,091
4/30/2005 $14,792 $14,349 $14,104
5/31/2005 $14,909 $14,504 $14,238
6/30/2005 $15,021 $14,583 $14,387
7/31/2005 $15,090 $14,450 $14,446
8/31/2005 $15,173 $14,636 $14,578
9/30/2005 $15,079 $14,485 $14,521
10/31/2005 $14,970 $14,370 $14,377
11/30/2005 $15,055 $14,434 $14,459
12/31/2005 $15,200 $14,571 $14,597
1/31/2006 $15,420 $14,572 $14,735
2/28/2006 $15,506 $14,620 $14,837
3/31/2006 $15,425 $14,477 $14,761
4/30/2006 $15,572 $14,450 $14,842
5/31/2006 $15,536 $14,435 $14,792
6/30/2006 $15,454 $14,466 $14,756
7/31/2006 $15,619 $14,661 $14,936
8/31/2006 $15,801 $14,886 $15,140
9/30/2006 $15,921 $15,016 $15,238
10/31/2006 $16,119 $15,116 $15,403
11/30/2006 $16,335 $15,291 $15,606
12/31/2006 $16,382 $15,202 $15,637
1/31/2007 $16,408 $15,196 $15,709
2/28/2007 $16,594 $15,431 $15,909
3/31/2007 $16,685 $15,431 $15,958
4/30/2007 $16,921 $15,514 $16,122
5/31/2007 $16,981 $15,397 $16,116
6/30/2007 $16,845 $15,351 $15,988
7/31/2007 $16,692 $15,479 $15,841
8/31/2007 $16,752 $15,669 $15,940
9/30/2007 $17,192 $15,788 $16,233
10/31/2007 $17,386 $15,930 $16,379
11/30/2007 $17,230 $16,216 $16,310
12/31/2007 $17,258 $16,262 $16,346
1/31/2008 $17,320 $16,535 $16,357
2/29/2008 $17,330 $16,558 $16,284
3/31/2008 $17,325 $16,614 $16,207
4/30/2008 $17,646 $16,579 $16,454
5/31/2008 $17,571 $16,458 $16,411
6/30/2008 $17,271 $16,445 $16,173
7/31/2008 $17,230 $16,431 $16,047
8/31/2008 $17,224 $16,587 $16,044
9/30/2008 $16,269 $16,364 $15,265
10/31/2008 $14,867 $15,978 $13,881
11/30/2008 $14,630 $16,498 $13,487
12/31/2008 $15,323 $17,114 $13,998
1/31/2009 $15,741 $16,963 $14,216
2/28/2009 $15,399 $16,899 $14,014
3/31/2009 $15,707 $17,134 $14,237
4/30/2009 $16,481 $17,216 $14,926
5/31/2009 $16,978 $17,340 $15,531
6/30/2009 $17,214 $17,439 $15,829
7/31/2009 $17,941 $17,720 $16,513
8/31/2009 $18,084 $17,904 $16,830
9/30/2009 $18,622 $18,092 $17,407
10/31/2009 $18,783 $18,181 $17,593
11/30/2009 $18,905 $18,417 $17,769
12/31/2009 $19,139 $18,129 $17,940
1/31/2010 $19,357 $18,406 $18,171
2/28/2010 $19,494 $18,474 $18,251
3/31/2010 $19,896 $18,452 $18,574
4/30/2010 $20,212 $18,644 $18,896
Total Returns 102.12% 86.44% 88.96%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 4/30/10
- ------- -------
1-Year +21.64%
5-Year +6.44%
10-Year +7.29%
CLASS R (1/1/02-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL LIPPER MULTI-SECTOR
INCOME FUND - U.S. AGGREGATE INCOME CLASSIFICATION
DATE CLASS R INDEX AVERAGE
---- ------------------ ---------------- ---------------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $ 9,974 $10,081 $10,053
2/28/2002 $ 9,983 $10,179 $10,078
3/31/2002 $10,078 $10,009 $10,105
4/30/2002 $10,207 $10,204 $10,263
5/31/2002 $10,172 $10,290 $10,294
6/30/2002 $ 9,739 $10,379 $10,079
7/31/2002 $ 9,514 $10,505 $ 9,913
8/31/2002 $ 9,758 $10,682 $10,123
9/30/2002 $ 9,745 $10,855 $10,100
10/31/2002 $ 9,788 $10,806 $10,147
11/30/2002 $10,209 $10,803 $10,421
12/31/2002 $10,403 $11,026 $10,633
1/31/2003 $10,575 $11,035 $10,792
2/28/2003 $10,760 $11,188 $10,965
3/31/2003 $10,915 $11,179 $11,082
4/30/2003 $11,366 $11,272 $11,465
5/31/2003 $11,712 $11,482 $11,757
6/30/2003 $11,857 $11,459 $11,868
7/31/2003 $11,524 $11,074 $11,616
8/31/2003 $11,647 $11,147 $11,736
9/30/2003 $12,062 $11,442 $12,063
10/31/2003 $12,150 $11,336 $12,158
11/30/2003 $12,312 $11,363 $12,300
12/31/2003 $12,661 $11,478 $12,586
1/31/2004 $12,836 $11,571 $12,711
2/29/2004 $12,901 $11,696 $12,740
3/31/2004 $12,979 $11,784 $12,837
4/30/2004 $12,667 $11,477 $12,553
5/31/2004 $12,568 $11,431 $12,438
6/30/2004 $12,660 $11,496 $12,555
7/31/2004 $12,803 $11,610 $12,677
8/31/2004 $13,088 $11,831 $12,930
9/30/2004 $13,245 $11,863 $13,093
10/31/2004 $13,508 $11,963 $13,316
11/30/2004 $13,680 $11,867 $13,487
12/31/2004 $13,879 $11,976 $13,683
1/31/2005 $13,842 $12,052 $13,676
2/28/2005 $14,016 $11,981 $13,772
3/31/2005 $13,686 $11,919 $13,540
4/30/2005 $13,662 $12,080 $13,553
5/31/2005 $13,772 $12,211 $13,681
6/30/2005 $13,877 $12,278 $13,825
7/31/2005 $13,942 $12,166 $13,882
8/31/2005 $14,035 $12,322 $14,008
9/30/2005 $13,936 $12,195 $13,953
10/31/2005 $13,837 $12,098 $13,815
11/30/2005 $13,930 $12,152 $13,894
12/31/2005 $14,053 $12,267 $14,026
1/31/2006 $14,259 $12,268 $14,159
2/28/2006 $14,340 $12,309 $14,257
3/31/2006 $14,281 $12,188 $14,184
4/30/2006 $14,405 $12,166 $14,262
5/31/2006 $14,373 $12,153 $14,214
6/30/2006 $14,299 $12,179 $14,180
7/31/2006 $14,454 $12,343 $14,353
8/31/2006 $14,624 $12,532 $14,548
9/30/2006 $14,737 $12,642 $14,642
10/31/2006 $14,923 $12,726 $14,801
11/30/2006 $15,125 $12,874 $14,996
12/31/2006 $15,156 $12,799 $15,026
1/31/2007 $15,196 $12,794 $15,095
2/28/2007 $15,371 $12,991 $15,287
3/31/2007 $15,458 $12,991 $15,334
4/30/2007 $15,664 $13,062 $15,492
5/31/2007 $15,736 $12,963 $15,486
6/30/2007 $15,612 $12,924 $15,364
7/31/2007 $15,457 $13,032 $15,222
8/31/2007 $15,531 $13,192 $15,317
9/30/2007 $15,941 $13,292 $15,598
10/31/2007 $16,122 $13,411 $15,739
11/30/2007 $15,980 $13,652 $15,673
12/31/2007 $16,008 $13,691 $15,707
1/31/2008 $16,067 $13,921 $15,718
2/29/2008 $16,064 $13,940 $15,647
3/31/2008 $16,076 $13,988 $15,574
4/30/2008 $16,377 $13,958 $15,811
5/31/2008 $16,309 $13,856 $15,769
6/30/2008 $16,031 $13,845 $15,541
7/31/2008 $15,996 $13,834 $15,420
8/31/2008 $15,976 $13,965 $15,417
9/30/2008 $15,105 $13,777 $14,669
10/31/2008 $13,803 $13,452 $13,338
11/30/2008 $13,584 $13,890 $12,960
12/31/2008 $14,231 $14,408 $13,451
1/31/2009 $14,622 $14,281 $13,661
2/28/2009 $14,323 $14,227 $13,467
3/31/2009 $14,593 $14,425 $13,681
4/30/2009 $15,317 $14,494 $14,343
5/31/2009 $15,765 $14,599 $14,924
6/30/2009 $16,003 $14,682 $15,210
7/31/2009 $16,683 $14,919 $15,867
8/31/2009 $16,817 $15,073 $16,172
9/30/2009 $17,323 $15,232 $16,727
10/31/2009 $17,475 $15,307 $16,906
11/30/2009 $17,591 $15,505 $17,075
12/31/2009 $17,812 $15,263 $17,239
1/31/2010 $17,999 $15,496 $17,461
2/28/2010 $18,130 $15,554 $17,538
3/31/2010 $18,525 $15,534 $17,848
4/30/2010 $18,804 $15,696 $18,157
Total Returns 88.04% 56.96% 81.57%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 4/30/10
- ------- -------
1-Year +22.77%
5-Year +6.60%
Since Inception (1/1/02) +7.88%
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 4/30/10
- ------------- -------
1-Year +23.45%
5-Year +7.15%
10-Year +7.99%
ADVISOR CLASS (5/1/00-4/30/10)
(PERFORMANCE GRAPH)
FRANKLIN STRATEGIC BARCLAYS CAPITAL LIPPER MULTI-SECTOR
INCOME FUND - U.S. AGGREGATE INCOME CLASSIFICATION
DATE ADVISOR CLASS INDEX AVERAGE
---- ------------------ ---------------- ---------------------
5/1/2000 $10,000 $10,000 $10,000
5/31/2000 $ 9,873 $ 9,995 $ 9,873
6/30/2000 $10,167 $10,203 $10,128
7/31/2000 $10,235 $10,296 $10,163
8/31/2000 $10,398 $10,445 $10,248
9/30/2000 $10,343 $10,511 $10,142
10/31/2000 $10,140 $10,580 $ 9,940
11/30/2000 $ 9,936 $10,753 $ 9,791
12/31/2000 $10,374 $10,953 $10,075
1/31/2001 $10,782 $11,132 $10,444
2/28/2001 $10,758 $11,229 $10,457
3/31/2001 $10,591 $11,285 $10,261
4/30/2001 $10,589 $11,239 $10,184
5/31/2001 $10,654 $11,306 $10,256
6/30/2001 $10,573 $11,349 $10,173
7/31/2001 $10,706 $11,603 $10,258
8/31/2001 $10,840 $11,736 $10,395
9/30/2001 $10,403 $11,872 $10,073
10/31/2001 $10,723 $12,121 $10,318
11/30/2001 $10,999 $11,954 $10,441
12/31/2001 $10,962 $11,878 $10,407
1/31/2002 $10,971 $11,974 $10,462
2/28/2002 $10,997 $12,090 $10,488
3/31/2002 $11,118 $11,889 $10,516
4/30/2002 $11,253 $12,120 $10,680
5/31/2002 $11,207 $12,223 $10,712
6/30/2002 $10,734 $12,328 $10,489
7/31/2002 $10,503 $12,477 $10,317
8/31/2002 $10,777 $12,688 $10,534
9/30/2002 $10,767 $12,893 $10,511
10/31/2002 $10,819 $12,835 $10,559
11/30/2002 $11,276 $12,831 $10,845
12/31/2002 $11,494 $13,096 $11,066
1/31/2003 $11,701 $13,107 $11,231
2/28/2003 $11,910 $13,289 $11,411
3/31/2003 $12,073 $13,279 $11,532
4/30/2003 $12,589 $13,388 $11,931
5/31/2003 $12,977 $13,638 $12,236
6/30/2003 $13,130 $13,611 $12,351
7/31/2003 $12,779 $13,153 $12,089
8/31/2003 $12,908 $13,240 $12,213
9/30/2003 $13,386 $13,591 $12,554
10/31/2003 $13,475 $13,464 $12,652
11/30/2003 $13,674 $13,496 $12,800
12/31/2003 $14,066 $13,634 $13,098
1/31/2004 $14,253 $13,744 $13,228
2/29/2004 $14,344 $13,892 $13,258
3/31/2004 $14,436 $13,996 $13,359
4/30/2004 $14,095 $13,632 $13,064
5/31/2004 $13,991 $13,578 $12,944
6/30/2004 $14,113 $13,654 $13,065
7/31/2004 $14,264 $13,790 $13,192
8/31/2004 $14,587 $14,053 $13,456
9/30/2004 $14,782 $14,091 $13,626
10/31/2004 $15,066 $14,209 $13,857
11/30/2004 $15,278 $14,096 $14,036
12/31/2004 $15,506 $14,225 $14,239
1/31/2005 $15,471 $14,315 $14,232
2/28/2005 $15,657 $14,230 $14,332
3/31/2005 $15,310 $14,157 $14,091
4/30/2005 $15,275 $14,349 $14,104
5/31/2005 $15,419 $14,504 $14,238
6/30/2005 $15,542 $14,583 $14,387
7/31/2005 $15,622 $14,450 $14,446
8/31/2005 $15,716 $14,636 $14,578
9/30/2005 $15,627 $14,485 $14,521
10/31/2005 $15,507 $14,370 $14,377
11/30/2005 $15,619 $14,434 $14,459
12/31/2005 $15,778 $14,571 $14,597
1/31/2006 $16,015 $14,572 $14,735
2/28/2006 $16,097 $14,620 $14,837
3/31/2006 $16,037 $14,477 $14,761
4/30/2006 $16,199 $14,450 $14,842
5/31/2006 $16,154 $14,435 $14,792
6/30/2006 $16,093 $14,466 $14,756
7/31/2006 $16,274 $14,661 $14,936
8/31/2006 $16,471 $14,886 $15,140
9/30/2006 $16,605 $15,016 $15,238
10/31/2006 $16,805 $15,116 $15,403
11/30/2006 $17,055 $15,291 $15,606
12/31/2006 $17,096 $15,202 $15,637
1/31/2007 $17,149 $15,196 $15,709
2/28/2007 $17,353 $15,431 $15,909
3/31/2007 $17,458 $15,431 $15,958
4/30/2007 $17,697 $15,514 $16,122
5/31/2007 $17,786 $15,397 $16,116
6/30/2007 $17,653 $15,351 $15,988
7/31/2007 $17,485 $15,479 $15,841
8/31/2007 $17,575 $15,669 $15,940
9/30/2007 $18,046 $15,788 $16,233
10/31/2007 $18,258 $15,930 $16,379
11/30/2007 $18,104 $16,216 $16,310
12/31/2007 $18,143 $16,262 $16,346
1/31/2008 $18,218 $16,535 $16,357
2/29/2008 $18,221 $16,558 $16,284
3/31/2008 $18,243 $16,614 $16,207
4/30/2008 $18,591 $16,579 $16,454
5/31/2008 $18,522 $16,458 $16,411
6/30/2008 $18,215 $16,445 $16,173
7/31/2008 $18,182 $16,431 $16,047
8/31/2008 $18,186 $16,587 $16,044
9/30/2008 $17,187 $16,364 $15,265
10/31/2008 $15,716 $15,978 $13,881
11/30/2008 $15,457 $16,498 $13,487
12/31/2008 $16,216 $17,114 $13,998
1/31/2009 $16,667 $16,963 $14,216
2/28/2009 $16,314 $16,899 $14,014
3/31/2009 $16,648 $17,134 $14,237
4/30/2009 $17,478 $17,216 $14,926
5/31/2009 $18,014 $17,340 $15,531
6/30/2009 $18,273 $17,439 $15,829
7/31/2009 $19,054 $17,720 $16,513
8/31/2009 $19,214 $17,904 $16,830
9/30/2009 $19,805 $18,092 $17,407
10/31/2009 $19,987 $18,181 $17,593
11/30/2009 $20,128 $18,417 $17,769
12/31/2009 $20,387 $18,129 $17,940
1/31/2010 $20,631 $18,406 $18,171
2/28/2010 $20,788 $18,474 $18,251
3/31/2010 $21,227 $18,452 $18,574
4/30/2010 $21,576 $18,644 $18,896
Total Returns 115.76% 86.44% 88.96%
14 | Annual 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 TECHNIQUES 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. If the manager had not taken this action, the Fund's total returns
would have been lower.
(2.) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3.) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4.) In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
(5.) Distribution rate is based on an annualization of the respective class's
April dividend and the maximum offering price (NAV for Classes B, C, R and
Advisor) per share on 4/30/10.
(6.) The 30-day standardized yield for the 30 days ended 4/30/10 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.
(8.) Source: (C) 2010 Morningstar. 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 and
nonconvertible, must have at least one year to final maturity and must be
rated investment grade (Baa3/BBB-/BBB- or above) using the middle rating of
Moody's, Standard & Poor's, and Fitch, respectively.
(9.) 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 period ended 4/30/10, there
were 150 funds in this category. Lipper calculations do not include sales
charges, but include reinvestment of any income or distributions. Fund
performance relative to the average may have differed if these and other
factors had been considered.
Annual Report | 15
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases fees;
and
- - Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
16 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES.
Therefore, the second line for each class is useful in comparing ongoing costs
only, and will not help you compare total costs of owning different funds. In
addition, if transaction costs were included, your total costs would have been
higher. Please refer to the Fund prospectus for additional information on
operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 11/1/09 VALUE 4/30/10 PERIOD* 11/1/09-4/30/10
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,078.20 $4.59
Hypothetical (5% return before expenses) $1,000 $1,020.38 $4.46
CLASS B
Actual $1,000 $1,075.70 $6.59
Hypothetical (5% return before expenses) $1,000 $1,018.45 $6.41
CLASS C
Actual $1,000 $1,076.10 $6.64
Hypothetical (5% return before expenses) $1,000 $1,018.40 $6.46
CLASS R
Actual $1,000 $1,076.00 $5.87
Hypothetical (5% return before expenses) $1,000 $1,019.14 $5.71
ADVISOR CLASS
Actual $1,000 $1,079.50 $3.30
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.89%; B: 1.28%; C: 1.29%; R: 1.14%; and
Advisor: 0.64%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Annual Report | 17
Franklin Strategic Series
FINANCIAL HIGHLIGHTS
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
---------------------------------------------------------------
CLASS A 2010 2009 2008 2007 2006
- ------- ---------- ---------- ---------- ---------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 8.83 $ 10.28 $ 10.48 $ 10.20 $ 10.24
---------- ---------- ---------- ---------- --------
Income from investment operations(a):
Net investment income(b) ......................... 0.55 0.51 0.56 0.53 0.51
Net realized and unrealized gains (losses) ....... 1.45 (1.20) (0.07) 0.35 0.05
---------- ---------- ---------- ---------- --------
Total from investment operations .................... 2.00 (0.69) 0.49 0.88 0.56
---------- ---------- ---------- ---------- --------
Less distributions from net investment income and net
foreign currency gains ........................... (0.53) (0.76) (0.69) (0.60) (0.60)
---------- ---------- ---------- ---------- --------
Redemption fees(c) .................................. -- --(d) --(d) --(d) --(d)
---------- ---------- ---------- ---------- --------
Net asset value, end of year ........................ $ 10.30 $ 8.83 $ 10.28 $ 10.48 $ 10.20
========== ========== ========== ========== ========
Total return(e) ..................................... 23.15% (6.32)% 4.80% 9.09% 5.69%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 0.88% 0.89% 0.89% 0.92% 0.91%
Net investment income ............................... 5.70% 5.67% 5.44% 5.22% 5.05%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $2,809,864 $2,060,179 $2,123,947 $1,521,459 $998,182
Portfolio turnover rate ............................. 55.79% 49.48% 31.71% 42.24% 34.10%
Portfolio turnover rate excluding mortgage
dollar rolls(g) .................................. 55.79% 49.48% 31.71% 41.50% 33.59%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
CLASS B 2010 2009 2008 2007 2006
- ------- ------- ------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 8.87 $ 10.32 $ 10.52 $ 10.24 $ 10.27
------- ------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ......................... 0.52 0.48 0.52 0.49 0.47
Net realized and unrealized gains (losses) ....... 1.44 (1.20) (0.07) 0.35 0.06
------- ------- -------- -------- --------
Total from investment operations .................... 1.96 (0.72) 0.45 0.84 0.53
------- ------- -------- -------- --------
Less distributions from net investment income and
net foreign currency gains ....................... (0.48) (0.73) (0.65) (0.56) (0.56)
------- ------- -------- -------- --------
Redemption fees(c) .................................. -- --(d) --(d) --(d) --(d)
------- ------- -------- -------- --------
Net asset value, end of year ........................ $ 10.35 $ 8.87 $ 10.32 $ 10.52 $ 10.24
======= ======= ======== ======== ========
Total return(e) ..................................... 22.63% (6.68)% 4.35% 8.62% 5.34%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 1.28% 1.29% 1.29% 1.32% 1.31%
Net investment income ............................... 5.30% 5.27% 5.04% 4.82% 4.65%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $71,036 $79,959 $105,620 $104,523 $104,477
Portfolio turnover rate ............................. 55.79% 49.48% 31.71% 42.24% 34.10%
Portfolio turnover rate excluding mortgage dollar
rolls(g) ......................................... 55.79% 49.48% 31.71% 41.50% 33.59%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
---------------------------------------------------------
CLASS C 2010 2009 2008 2007 2006
- ------- ---------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 8.83 $ 10.27 $ 10.48 $ 10.20 $ 10.24
---------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ......................... 0.52 0.48 0.52 0.49 0.47
Net realized and unrealized gains (losses) ....... 1.44 (1.19) (0.08) 0.35 0.05
---------- -------- -------- -------- --------
Total from investment operations .................... 1.96 (0.71) 0.44 0.84 0.52
---------- -------- -------- -------- --------
Less distributions from net investment income and
net foreign currency gains ....................... (0.49) (0.73) (0.65) (0.56) (0.56)
---------- -------- -------- -------- --------
Redemption fees(c) .................................. -- --(d) --(d) --(d) --(d)
---------- -------- -------- -------- --------
Net asset value, end of year ........................ $ 10.30 $ 8.83 $ 10.27 $ 10.48 $ 10.20
========== ======== ======== ======== ========
Total return(e) ..................................... 22.64% (6.60)% 4.28% 8.67% 5.27%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 1.28% 1.29% 1.29% 1.32% 1.31%
Net investment income ............................... 5.30% 5.27% 5.04% 4.82% 4.65%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $1,107,436 $773,337 $733,071 $437,026 $294,412
Portfolio turnover rate ............................. 55.79% 49.48% 31.71% 42.24% 34.10%
Portfolio turnover rate excluding mortgage dollar
rolls(g) ......................................... 55.79% 49.48% 31.71% 41.50% 33.59%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
CLASS R 2010 2009 2008 2007 2006
- ------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 8.81 $ 10.25 $ 10.46 $ 10.18 $ 10.22
-------- -------- -------- ------- -------
Income from investment operations(a):
Net investment income(b) ......................... 0.53 0.49 0.53 0.51 0.49
Net realized and unrealized gains (losses) ....... 1.43 (1.19) (0.08) 0.35 0.05
-------- -------- -------- ------- -------
Total from investment operations .................... 1.96 (0.70) 0.45 0.86 0.54
-------- -------- -------- ------- -------
Less distributions from net investment income and
net foreign currency gains ....................... (0.50) (0.74) (0.66) (0.58) (0.58)
-------- -------- -------- ------- -------
Redemption fees(c) .................................. -- --(d) --(d) --(d) --(d)
-------- -------- -------- ------- -------
Net asset value, end of year ........................ $ 10.27 $ 8.81 $ 10.25 $ 10.46 $ 10.18
======== ======== ======== ======= =======
Total return(e) ..................................... 22.77% (6.47)% 4.55% 8.74% 5.44%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ......................................... 1.13% 1.14% 1.14% 1.17% 1.16%
Net investment income ............................... 5.45% 5.42% 5.19% 4.97% 4.80%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $194,901 $115,811 $108,020 $65,527 $32,971
Portfolio turnover rate ............................. 55.79% 49.48% 31.71% 42.24% 34.10%
Portfolio turnover rate excluding mortgage dollar
rolls(g) ......................................... 55.79% 49.48% 31.71% 41.50% 33.59%
(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.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Franklin Strategic Series
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-----------------------------------------------------
ADVISOR CLASS 2010 2009 2008 2007 2006
- ------------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 8.84 $ 10.28 $ 10.49 $ 10.21 $ 10.24
-------- -------- -------- ------- -------
Income from investment operations(a):
Net investment income(b) ......................... 0.58 0.53 0.58 0.56 0.54
Net realized and unrealized gains (losses) ....... 1.44 (1.18) (0.07) 0.35 0.06
-------- -------- -------- ------- -------
Total from investment operations .................... 2.02 (0.65) 0.51 0.91 0.60
-------- -------- -------- ------- -------
Less distributions from net investment income and
net foreign currency gains ....................... (0.55) (0.79) (0.72) (0.63) (0.63)
-------- -------- -------- ------- -------
Redemption fees(c) .................................. -- --(d) --(d) --(d) --(d)
-------- -------- -------- ------- -------
Net asset value, end of year ........................ $ 10.31 $ 8.84 $ 10.28 $ 10.49 $ 10.21
======== ======== ======== ======= =======
Total return ........................................ 23.45% (5.98)% 5.05% 9.25% 6.05%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ......................................... 0.63% 0.64% 0.64% 0.67% 0.66%
Net investment income ............................... 5.95% 5.92% 5.69% 5.47% 5.30%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $346,585 $166,821 $111,346 $66,745 $57,367
Portfolio turnover rate ............................. 55.79% 49.48% 31.71% 42.24% 34.10%
Portfolio turnover rate excluding mortgage dollar
rolls(f) ......................................... 55.79% 49.48% 31.71% 41.50% 33.59%
(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) Benefit of expense reduction rounds to less than 0.01%.
(f) See Note 1(e) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
22 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010
FRANKLIN STRATEGIC INCOME FUND COUNTRY SHARES VALUE
------------------------------ ---------------- ---------------- ------------------
COMMON STOCKS 0.2%
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 --
------------------
CONSUMER DURABLES & APPAREL 0.0%
(b, c) Comfort Co., Inc. ........................................ United States 17,900 --
------------------
CONSUMER SERVICES 0.1%
(a, b, d) Turtle Bay Resort ........................................ United States 5,579,939 5,579,939
------------------
MEDIA 0.1%
(b) Charter Communications Inc., A ........................... United States 21,302 807,346
(b) Dex One Corp. ............................................ United States 118,809 3,601,101
------------------
4,408,447
------------------
TOTAL COMMON STOCKS (COST $10,446,967) ................... 9,988,386
------------------
CONVERTIBLE PREFERRED STOCKS (COST $6,060,000) 0.0%(e)
BANKS 0.0%(e)
(b) Fannie Mae, 8.75%, cvt. pfd. ............................. United States 121,200 227,250
------------------
PREFERRED STOCKS 0.0%(e)
BANKS 0.0%(e)
(b) Freddie Mac, 8.375%, pfd., Z ............................. United States 200,000 322,000
------------------
DIVERSIFIED FINANCIALS 0.0%(e)
(f) GMAC Inc., 7.00%, pfd., 144A ............................. United States 2,081 1,767,484
------------------
TOTAL PREFERRED STOCKS (COST $5,738,755) ................. 2,089,484
------------------
PRINCIPAL
AMOUNT(g)
----------------
(h, i) SENIOR FLOATING RATE INTERESTS 14.4%
AUTOMOBILES & COMPONENTS 0.5%
Federal-Mogul Corp.,
Term Loan B, 2.188% - 2.198%, 12/27/14 ................ United States 20,453,080 18,748,663
Term Loan C, 2.188% - 2.198%, 12/27/15 ................ United States 5,345,094 4,899,671
------------------
23,648,334
------------------
CAPITAL GOODS 0.7%
BE Aerospace Inc., Term Loan B, 5.75%, 7/28/14 ........... United States 2,897,523 2,925,290
RBS Global Inc. (Rexnord),
Incremental Tranche B-2, 2.438%, 7/22/13 .............. United States 6,197,598 5,986,495
Tranche B-1 Term Loan B, 2.813%, 7/22/13 .............. United States 14,234,198 13,931,722
TransDigm Inc., Term Loan B, 2.278%, 6/23/13 ............. United States 8,083,032 7,978,623
------------------
30,822,130
------------------
COMMERCIAL & PROFESSIONAL SERVICES 0.8%
ARAMARK Corp.,
Extended Synthetic L/C, 3.53%, 7/26/16 ................ United States 599,462 596,800
Synthetic L/C, 2.317%, 1/26/14 ........................ United States 341,382 335,952
Term Loan B, 2.165%, 1/26/14 .......................... United States 5,060,281 4,979,792
Term Loan B Extended, 3.54%, 7/26/16 .................. United States 9,115,201 9,074,730
Diversey Inc., Tranche B Dollar Term Loan, 5.50%,
11/24/15 .............................................. United States 8,845,223 8,922,619
Annual Report | 23
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
(h, i) SENIOR FLOATING RATE INTERESTS (CONTINUED)
COMMERCIAL & PROFESSIONAL SERVICES (CONTINUED)
Duratek Inc. (EnergySolutions), Term Loan B, 4.15%,
6/07/13 ............................................... United States 3,292,222 $ 3,252,442
EnergySolutions LLC,
Synthetic A Deposit, 4.15%, 6/07/13 ................... United States 126,535 125,006
Synthetic L/C, 2.69%, 6/07/13 ......................... United States 489,021 483,112
Term Loan B, 4.03%, 6/07/13 ........................... United States 6,862,010 6,779,097
(j, k) EnviroSolutions Inc., Initial Term Loan, PIK, 4.75%,
7/07/12 ............................................... United States 4,119,669 3,350,663
------------------
37,900,213
------------------
CONSUMER DURABLES & APPAREL 0.4%
Jarden Corp.,
Term Loan B1, 2.04%, 1/24/12 .......................... United States 2,425,850 2,418,919
Term Loan B2, 2.04%, 1/24/12 .......................... United States 1,259,258 1,254,851
Term Loan B4, 3.54%, 1/26/15 .......................... United States 8,621,438 8,661,433
Jostens IH Corp. (Visant Holding Corp.), Term Loan C,
2.251%, 10/04/11 ...................................... United States 4,981,842 4,953,819
(c, j, l) Sleep Innovations Inc., Term Loan, PIK, 10.25%, 3/05/15 .. United States 2,305,824 1,706,310
------------------
18,995,332
------------------
CONSUMER SERVICES 1.0%
CCM Merger Inc. (MotorCity Casino), Term Loan B, 8.50%,
7/13/12 ............................................... United States 3,829,966 3,800,445
Education Management LLC, Term Loan C, 2.063%, 6/01/13 ... United States 16,026,960 15,712,094
Penn National Gaming Inc., Term Loan B, 2.00% - 2.07%,
10/03/12 .............................................. United States 13,995,997 13,876,415
(d) Turtle Bay Holdings LLC,
Term Loan A, 10.25%, 3/01/13 .......................... United States 5,424,464 5,234,608
(c, j) Term Loan B, PIK, 3.00%, 2/09/15 ...................... United States 11,315,266 8,846,274
------------------
47,469,836
------------------
FOOD & STAPLES RETAILING 0.8%
SUPERVALU Inc.,
Term Loan B, 1.523%, 6/02/12 .......................... United States 4,649,542 4,592,162
Term Loan B-2, 3.023%, 10/15/15 ....................... United States 8,235,741 8,217,689
Wm. Wrigley Jr. Co.,
Term Loan B1, 3.063%, 12/17/12 ........................ United States 5,681,650 5,724,245
Term Loan B2, 3.313%, 10/06/14 ........................ United States 15,616,219 15,733,294
------------------
34,267,390
------------------
FOOD, BEVERAGE & TOBACCO 0.3%
Constellation Brands Inc.,
Extend Term Loan B, 3.00%, 6/05/15 .................... United States 1,085,754 1,095,594
Term Loan B, 1.75%, 6/05/13 ........................... United States 5,127,626 5,090,543
Dean Foods Co., Term Loan B, 1.675%, 4/02/14 ............. United States 8,246,949 8,087,148
------------------
14,273,285
------------------
HEALTH CARE EQUIPMENT & SERVICES 2.0%
Carestream Health Inc., Second Lien Term Loan, 5.523%,
10/30/13 .............................................. United States 1,178,451 1,118,547
24 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
(h, i) SENIOR FLOATING RATE INTERESTS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES (CONTINUED)
Community Health Systems Inc.,
Delayed Draw Term Loan, 2.502%, 7/25/14 ............... United States 1,397,388 $ 1,360,267
Term Loan, 2.502%, 7/25/14 ............................ United States 27,284,608 26,559,792
DaVita Inc., Term Loan B-1, 1.75% - 1.80%, 10/05/12 ...... United States 10,738,373 10,639,934
DJO Finance LLC, Term Loan B, 3.273%, 5/20/14 ............ United States 13,577,496 13,243,720
Fresenius Medical Care Holdings Inc., Term Loan B, 1.631% -
1.665%, 3/31/13 ....................................... Germany 5,466,556 5,394,807
HCA Inc.,
Term Loan A-1, 1.54%, 11/19/12 ........................ United States 3,452,083 3,354,599
Term Loan B-1, 2.54%, 11/18/13 ........................ United States 4,859,834 4,735,607
Tranche B-2 Term Loan, 3.54%, 3/31/17 ................. United States 11,654,848 11,594,149
LifePoint Hospitals Inc., Term B-2 Loan, 3.01%, 4/15/15 .. United States 10,939,819 10,910,763
------------------
88,912,185
------------------
MATERIALS 2.1%
Anchor Glass Container Corp., Second Lien Term Loan, 10.00%,
9/02/16 ............................................... United States 16,957,300 16,872,514
(l) Ashland Inc., Term Loan B, 6.65%, 5/13/14 ................ United States 1,182,266 1,194,945
Celanese U.S. Holdings LLC, Dollar Term Loan, 2.042%,
4/02/14 ............................................... United States 16,051,244 15,759,400
(l) Georgia-Pacific LLC,
Term Loan B, 2.254% - 2.338%, 12/20/12 ................ United States 5,905,674 5,879,837
Term Loan C, 3.504% - 3.588%, 12/23/14 ................ United States 6,174,547 6,196,257
Hexion Specialty Chemicals BV, Tranche C-2B Term Loan,
4.063%, 5/03/15 ....................................... Netherlands 1,867,558 1,802,972
Hexion Specialty Chemicals Inc., Tranche C-1B Term Loan,
4.063%, 5/03/15 ....................................... United States 3,935,661 3,799,554
Nalco Co.,
Term Loan, 6.50%, 5/13/16 ............................. United States 9,748,964 9,844,425
Term Loan B, 2.063%, 11/04/10 ......................... United States 2,357,971 2,361,657
Novelis Corp., U.S. Term Loan, 2.28% - 2.30%, 7/07/14 .... United States 7,029,987 6,821,288
Rockwood Specialties Group Inc., Term Loan H, 6.00%,
5/15/14 ............................................... United States 24,186,358 24,395,473
------------------
94,928,322
------------------
MEDIA 2.6%
Cinemark USA Inc., Extend Term Loan, 3.50% - 3.56%,
4/30/16 ............................................... United States 11,924,075 11,940,411
(l) CSC Holdings Inc. (Cablevision), Incremental Term Loan B-2,
2.004%, 3/29/16 ....................................... United States 22,551,702 22,588,349
DIRECTV Holdings LLC, Term Loan B, 1.773%, 4/13/13 ....... United States 5,494,851 5,503,994
Discovery Communications Inc.,
Term Loan B, 2.29%, 5/14/14 ........................... United States 4,302,646 4,306,006
(l) Term Loan C, 5.25%, 5/14/14 ........................... United States 3,093,331 3,124,747
(k, l) Metro-Goldwyn-Mayer Inc., Term Loan B, 20.50%, 4/08/12 ... United States 34,509,087 16,025,157
R.H. Donnelley Inc., Term Loan B, 9.25%, 10/24/14 ........ United States 20,730,524 20,238,174
Regal Cinemas Corp., Term Loan, 3.79%, 10/27/13 .......... United States 6,102,852 6,125,433
Univision Communications Inc., Initial Term Loan, 2.54%,
9/29/14 ............................................... United States 22,397,286 20,459,921
Annual Report | 25
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
(h, i) SENIOR FLOATING RATE INTERESTS (CONTINUED)
MEDIA (CONTINUED)
UPC Financing Partnership, Term Loan T, 3.93%, 12/31/16 .. Netherlands 8,303,412 $ 8,214,150
------------------
118,526,342
------------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.5%
Mylan Inc., Term Loan B, 3.563%, 10/02/14 ................ United States 22,691,267 22,699,073
------------------
RETAILING 0.3%
Dollar General Corp., Tranche B-1 Term Loan, 3.006% -
3.088%, 7/07/14 ....................................... United States 13,356,256 13,187,033
------------------
SOFTWARE & SERVICES 0.5%
First Data Corp.,
Term Loan B-1, 5.00%, 9/24/14 ......................... United States 9,230,769 8,322,092
Term Loan B-2, 5.00%, 9/24/14 ......................... United States 2,946,128 2,651,842
Term Loan B-3, 5.00%, 9/24/14 ......................... United States 2,946,128 2,652,620
Lender Processing Services Inc., Term Loan B, 2.773%,
7/02/14 ............................................... United States 4,468,218 4,486,837
SunGard Data Systems Inc., Tranche B U.S. Term Loan,
3.874% - 3.895%, 2/28/16 .............................. United States 4,927,877 4,908,077
------------------
23,021,468
------------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.2%
Flextronics International USA Inc.,
A Closing Date Loan, 2.541% - 2.554%, 10/01/14 ........ United States 3,568,204 3,446,439
A-1-A Delayed Draw Term Loan, 2.553%, 10/01/14 ........ United States 376,551 363,701
A-1-B Delayed Draw Term Loan, 2.54%, 10/01/14 ......... United States 1,712,012 1,653,590
A-3 Delayed Draw Term Loan, 2.523%, 10/01/14 .......... United States 2,394,568 2,298,785
------------------
7,762,515
------------------
TELECOMMUNICATION SERVICES 0.8%
Intelsat Corp. (PanAmSat),
Incremental Term Loan B-2-A, 2.792%, 1/03/14 .......... United States 273,493 268,643
Incremental Term Loan B-2-B, 2.792%, 1/03/14 .......... United States 273,409 268,561
Incremental Term Loan B-2-C, 2.792%, 1/03/14 .......... United States 273,409 268,561
Tranche B-2-A, 2.792%, 1/03/14 ........................ United States 7,382,060 7,251,147
Tranche B-2-B, 2.792%, 1/03/14 ........................ United States 7,379,791 7,248,917
Tranche B-2-C, 2.792%, 1/03/14 ........................ United States 7,379,791 7,248,917
NTELOS Inc., Term Loan B, 5.75%, 8/07/15 ................. United States 5,773,090 5,812,779
Windstream Corp., Tranche B-2 Term Loan, 3.06%,
12/17/15 .............................................. United States 5,816,713 5,823,984
------------------
34,191,509
------------------
UTILITIES 0.9%
(l) NRG Energy Inc.,
Credit Link, 2.04%, 2/01/13 ........................... United States 9,417,279 9,249,802
Term Loan, 2.023% - 2.04%, 2/01/13 .................... United States 14,276,332 14,022,442
Texas Competitive Electric Holdings Co. LLC, Term Loan B-2,
3.751% - 3.79%, 10/10/14 .............................. United States 22,436,770 18,454,243
------------------
41,726,487
------------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $633,456,441) ................................... 652,331,454
------------------
26 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS 39.3%
AUTOMOBILES & COMPONENTS 0.9%
Arvinmeritor Inc., senior note, 10.625%, 3/15/18 ......... United States 4,700,000 $ 5,064,250
Ford Motor Credit Co. LLC, senior note,
9.875%, 8/10/11 ....................................... United States 5,000,000 5,292,770
7.50%, 8/01/12 ........................................ United States 7,000,000 7,239,064
7.00%, 4/15/15 ........................................ United States 6,000,000 6,107,958
8.125%, 1/15/20 ....................................... United States 4,000,000 4,245,076
(f) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 ... United States 11,000,000 11,137,500
------------------
39,086,618
------------------
BANKS 1.7%
BB&T Capital Trust IV, junior sub. bond, 6.82%, 6/12/77 .. United States 10,000,000 9,567,694
(f, m) BNP Paribas, 144A, 7.195%, Perpetual ..................... France 10,000,000 9,500,000
Regions Financial Corp., senior note,
7.75%, 11/10/14 ....................................... United States 10,000,000 10,808,960
5.75%, 6/15/15 ........................................ United States 1,200,000 1,202,500
Royal Bank of Scotland Group PLC, senior note, 6.40%,
10/21/19 .............................................. United Kingdom 11,600,000 11,914,051
UBS AG Stamford, senior note, 5.875%, 12/20/17 ........... United States 10,000,000 10,593,700
Wells Fargo & Co., senior note, 5.625%, 12/11/17 ......... United States 5,000,000 5,392,800
(m) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ......... United States 8,000,000 8,360,000
(m) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ........... United States 6,700,000 7,537,500
------------------
74,877,205
------------------
CAPITAL GOODS 1.5%
(f) Allison Transmission Inc., senior note, 144A, 11.00%,
11/01/15 .............................................. United States 12,000,000 13,020,000
Case New Holland Inc., senior note,
7.125%, 3/01/14 ....................................... United States 9,350,000 9,607,125
(f) 144A, 7.75%, 9/01/13 .................................. United States 2,000,000 2,115,000
Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 ....... United States 3,200,000 3,056,000
L-3 Communications Corp., senior sub. note, 5.875%,
1/15/15 ............................................... United States 4,500,000 4,590,000
(f) Libbey Glass Inc., senior secured note, 144A, 10.00%,
2/15/15 ............................................... United States 4,100,000 4,351,125
Manitowoc Co. Inc., senior note, 9.50%, 2/15/18 .......... United States 6,400,000 6,752,000
(f) Oshkosh Corp., senior note, 144A,
8.25%, 3/01/17 ........................................ United States 1,400,000 1,480,500
8.50%, 3/01/20 ........................................ United States 1,300,000 1,378,000
(f) RBS Global & Rexnord Corp., senior note, 144A, 8.50%,
5/01/18 ............................................... United States 10,700,000 10,740,125
(f) RSC Equipment Rental Inc./RSC Holdings, senior note, 144A,
10.25%, 11/15/19 ...................................... United States 1,000,000 1,047,500
RSC Equipment Rental Inc., senior note, 9.50%,
12/01/14 .............................................. United States 11,000,000 11,357,500
------------------
69,494,875
------------------
Annual Report | 27
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
COMMERCIAL & PROFESSIONAL SERVICES 0.2%
(f) Casella Waste Systems Inc., senior secured note, 144A,
11.00%, 7/15/14 ....................................... United States 1,750,000 $ 1,907,500
(f, j) JohnsonDiversey Holdings Inc., senior note, 144A, PIK,
10.50%, 5/15/20 ....................................... United States 7,200,000 7,718,400
------------------
9,625,900
------------------
CONSUMER DURABLES & APPAREL 0.7%
Jarden Corp., senior sub. note, 7.50%,
5/01/17 ............................................... United States 10,000,000 10,275,000
1/15/20 ............................................... United States 1,700,000 1,751,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ..... United States 11,000,000 11,096,250
KB Home, senior note,
6.25%, 6/15/15 ........................................ United States 6,000,000 5,902,500
7.25%, 6/15/18 ........................................ United States 1,000,000 986,250
------------------
30,011,000
------------------
CONSUMER SERVICES 2.5%
(f, l) Cirsa Funding Luxembourg SA, senior bond, 144A, 8.75%,
5/15/18 ............................................... Spain 2,700,000 EUR 3,558,698
(f, k) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ........... United States 8,000,000 150,000
Harrah's Operating Co. Inc., senior secured note, 11.25%,
6/01/17 ............................................... United States 18,000,000 19,710,000
Host Hotels & Resorts LP, senior note,
K, 7.125%, 11/01/13 ................................... United States 10,000,000 10,225,000
S, 6.875%, 11/01/14 ................................... United States 1,000,000 1,021,250
MGM MIRAGE,
senior note, 6.625%, 7/15/15 .......................... United States 16,000,000 13,880,000
senior note, 7.50%, 6/01/16 ........................... United States 1,000,000 887,500
(f) senior secured note, 144A, 9.00%, 3/15/20 ............. United States 3,000,000 3,165,000
(f) Norwegian Cruise Line Ltd., senior secured note, 144A,
11.75%, 11/15/16 ...................................... United States 11,000,000 12,265,000
Pinnacle Entertainment Inc.,
(f) senior note, 144A, 8.625%, 8/01/17 .................... United States 5,000,000 5,250,000
senior sub. note, 8.25%, 3/15/12 ...................... United States 2,132,000 2,145,325
senior sub. note, 7.50%, 6/15/15 ...................... United States 4,000,000 3,870,000
Royal Caribbean Cruises Ltd., senior deb., 7.25%,
3/15/18 ............................................... United States 10,000,000 10,075,000
(f) Shingle Springs Tribal Gaming, senior note, 144A, 9.375%,
6/15/15 ............................................... United States 5,100,000 4,360,500
Starwood Hotels & Resorts Worldwide Inc., senior note,
6.75%, 5/15/18 ........................................ United States 10,000,000 10,350,000
7.15%, 12/01/19 ....................................... United States 2,000,000 2,085,000
(k) Station Casinos Inc.,
senior note, 6.00%, 4/01/12 ........................... United States 900,000 69,750
senior note, 7.75%, 8/15/16 ........................... United States 4,500,000 272,813
senior sub. note, 6.50%, 2/01/14 ...................... United States 500,000 6,875
senior sub. note, 6.875%, 3/01/16 ..................... United States 3,800,000 52,440
28 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
(f) Universal City Development,
senior note, 144A, 8.875%, 11/15/15 ................... United States 7,000,000 $ 7,210,000
senior sub. note, 144A, 10.875%, 11/15/16 ............. United States 1,000,000 1,067,500
------------------
111,677,651
------------------
DIVERSIFIED FINANCIALS 3.8%
American Express Co., senior note, 7.00%, 3/19/18 ........ United States 6,000,000 6,871,038
Bank of America Corp.,
(m) pfd., sub. bond, M, 8.125%, Perpetual ................. United States 15,000,000 15,187,500
senior note, 5.65%, 5/01/18 ........................... United States 5,000,000 5,068,790
(f) Cantor Fitzgerald LP, 144A, 7.875%, 10/15/19 ............. United States 2,000,000 2,055,993
Capital One Capital V, pfd., junior sub. note, 10.25%,
8/15/39 ............................................... United States 4,800,000 5,790,000
Citigroup Inc.,
senior note, 6.125%, 11/21/17 ......................... United States 5,000,000 5,203,095
sub. note, 5.00%, 9/15/14 ............................. United States 10,000,000 10,132,430
The Export-Import Bank of Korea, senior note, 8.125%,
1/21/14 ............................................... South Korea 7,905,000 9,207,127
General Electric Capital Corp., senior note, A, 8.50%,
4/06/18 ............................................... United States 170,000,000 MXN 13,012,111
GMAC Inc.,
senior note, 6.875%, 9/15/11 .......................... United States 8,000,000 8,180,000
senior note, 6.875%, 8/28/12 .......................... United States 7,000,000 7,166,250
sub. note, 8.00%, 12/31/18 ............................ United States 3,000,000 3,018,750
The Goldman Sachs Group Inc., senior bond, 5.375%,
3/15/20 ............................................... United States 20,000,000 19,463,240
Jefferies Group Inc., senior bond, 8.50%, 7/15/19 ........ United States 12,000,000 13,660,248
JPMorgan Chase & Co.,
6.00%, 1/15/18 ........................................ United States 5,000,000 5,399,490
(m) junior sub. note, 1, 7.90%, Perpetual ................. United States 5,000,000 5,268,740
JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 ... United States 14,000,000 13,263,740
(k) Lehman Brothers Holdings Inc., senior note, 6.20%,
9/26/14 ............................................... United States 16,000,000 3,600,000
Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 .... United States 10,000,000 10,512,750
Morgan Stanley, senior note, 6.00%, 4/28/15 .............. United States 12,000,000 12,836,940
------------------
174,898,232
------------------
ENERGY 5.6%
(f) Antero Resources Finance, senior note, 144A, 9.375%,
12/01/17 .............................................. United States 10,000,000 10,400,000
Berry Petroleum Co., senior note, 10.25%, 6/01/14 ........ United States 6,600,000 7,342,500
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ....................................... United States 1,500,000 1,561,875
9.50%, 2/15/15 ........................................ United States 1,000,000 1,101,250
6.625%, 1/15/16 ....................................... United States 4,500,000 4,455,000
6.25%, 1/15/18 ........................................ United States 8,000,000 7,760,000
7.25%, 12/15/18 ....................................... United States 1,000,000 1,005,000
Annual Report | 29
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ........................................ France 7,000,000 $ 7,122,500
9.50%, 5/15/16 ........................................ France 600,000 653,712
7.75%, 5/15/17 ........................................ France 5,000,000 5,075,000
(f) Consol Energy Inc., senior note, 144A,
8.00%, 4/01/17 ........................................ United States 2,000,000 2,122,500
8.25%, 4/01/20 ........................................ United States 2,200,000 2,354,000
Copano Energy LLC, senior note,
8.125%, 3/01/16 ....................................... United States 11,000,000 11,220,000
7.75%, 6/01/18 ........................................ United States 2,000,000 2,020,000
(f) Crosstex Energy LP/ Crosstex Energy Finance Corp.,
senior note, 144A, 8.875%, 2/15/18 .................... United States 2,600,000 2,717,000
Denbury Resources Inc., senior sub. note, 8.25%,
2/15/20 ............................................... United States 3,590,000 3,868,225
El Paso Corp., senior note,
12.00%, 12/12/13 ...................................... United States 9,000,000 10,755,612
7.00%, 6/15/17 ........................................ United States 3,500,000 3,613,355
(h) Enterprise Products Operating LLC, junior sub. note, FRN,
7.034%, 1/15/68 ....................................... United States 12,000,000 11,611,884
(f) Expro Finance Luxembourg, senior secured note, 144A, 8.50%,
12/15/16 .............................................. United Kingdom 10,000,000 10,247,130
(f) General Maritime Corp., senior note, 144A, 12.00%,
11/15/17 .............................................. United States 7,100,000 7,703,500
(f) Holly Corp., senior note, 144A, 9.875%, 6/15/17 .......... United States 6,173,000 6,450,785
(f) Linn Energy Corp., senior note, 144A, 8.625%, 4/15/20 .... United States 8,000,000 8,340,000
Mariner Energy Inc., senior note,
7.50%, 4/15/13 ........................................ United States 1,600,000 1,664,000
11.75%, 6/30/16 ....................................... United States 2,000,000 2,570,000
MarkWest Energy Partners LP, senior note,
6.875%, 11/01/14 ...................................... United States 8,000,000 7,900,000
8.75%, 4/15/18 ........................................ United States 800,000 833,000
B, 6.875%, 11/01/14 ................................... United States 700,000 689,500
(f) Martin Midstream Partners LP, senior note, 144A, 8.875%,
4/01/18 ............................................... United States 2,500,000 2,550,000
(f) OPTI Canada Inc., senior secured note, 144A, 9.00%,
12/15/12 .............................................. Canada 3,000,000 3,090,000
Peabody Energy Corp., senior note,
7.375%, 11/01/16 ...................................... United States 2,000,000 2,130,000
B, 6.875%, 3/15/13 .................................... United States 10,000,000 10,175,000
Petrohawk Energy Corp., senior note, 10.50%, 8/01/14 ..... United States 9,500,000 10,545,000
Petroleos de Venezuela SA, senior bond, zero cpn.,
7/10/11 ............................................... Venezuela 18,290,000 15,889,437
(f) Petroplus Finance Ltd., senior note, 144A, 6.75%,
5/01/14 ............................................... Switzerland 6,300,000 6,016,500
Plains Exploration & Production Co., senior note,
7.75%, 6/15/15 ........................................ United States 2,000,000 2,055,000
10.00%, 3/01/16 ....................................... United States 1,000,000 1,112,500
7.625%, 6/01/18 ....................................... United States 9,000,000 9,213,750
8.625%, 10/15/19 ...................................... United States 1,000,000 1,062,500
30 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Quicksilver Resources Inc., senior note,
8.25%, 8/01/15 ........................................ United States 10,000,000 $ 10,350,000
11.75%, 1/01/16 ....................................... United States 500,000 582,500
9.125%, 8/15/19 ....................................... United States 1,000,000 1,077,500
(f) SandRidge Energy Inc., senior note, 144A,
8.00%, 6/01/18 ........................................ United States 10,500,000 10,368,750
8.75%, 1/15/20 ........................................ United States 1,300,000 1,313,000
Teekay Corp., senior note, 8.50%, 1/15/20 ................ Marshall Islands 2,700,000 2,872,125
Tesoro Corp., senior note,
6.25%, 11/01/12 ....................................... United States 500,000 506,250
6.50%, 6/01/17 ........................................ United States 11,000,000 10,395,000
Weatherford International Ltd., senior note,
6.00%, 3/15/18 ........................................ United States 8,000,000 8,589,016
9.625%, 3/01/19 ....................................... United States 2,000,000 2,590,684
------------------
255,641,840
------------------
FOOD & STAPLES RETAILING 0.3%
Rite Aid Corp., senior secured note, 9.75%, 6/12/16 ...... United States 7,284,000 8,057,925
SUPERVALU Inc., senior note, 8.00%, 5/01/16 .............. United States 3,700,000 3,783,250
------------------
11,841,175
------------------
FOOD, BEVERAGE & TOBACCO 1.4%
(f) Alliance One International Inc., senior note, 144A, 10.00%,
7/15/16 ............................................... United States 2,203,000 2,346,195
Altria Group Inc.,
senior bond, 9.25%, 8/06/19 ........................... United States 3,300,000 4,083,097
senior note, 9.70%, 11/10/18 .......................... United States 7,000,000 8,816,591
(f) Anheuser-Busch InBev NV, senior note, 144A, 7.75%,
1/15/19 ............................................... United States 10,000,000 12,056,080
(f) CEDC Finance Corp. International Inc., senior secured note,
144A, 9.125%, 12/01/16 ................................ United States 8,100,000 8,626,500
(f) Cott Beverages Inc., senior note, 144A, 8.375%,
11/15/17 .............................................. United States 4,500,000 4,713,750
Dole Food Co. Inc., senior secured note, 13.875%,
3/15/14 ............................................... United States 6,077,000 7,383,555
(f) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 ......... United States 9,000,000 10,417,500
(f) Pinnacle Foods Finance LLC, senior note, 144A, 9.25%,
4/01/15 ............................................... United States 6,150,000 6,426,750
------------------
64,870,018
------------------
HEALTH CARE EQUIPMENT & SERVICES 2.6%
Boston Scientific Corp., senior note, 6.00%, 1/15/20 ..... United States 12,000,000 11,880,912
Coventry Health Care Inc., senior note,
6.30%, 8/15/14 ........................................ United States 5,200,000 5,484,591
5.95%, 3/15/17 ........................................ United States 5,000,000 4,882,255
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ............ United States 12,000,000 12,300,000
FMC Finance III SA, senior note, 6.875%, 7/15/17 ......... Germany 7,500,000 7,818,750
Fresenius Medical Care Capital Trust IV, 7.875%,
6/15/11 ............................................... Germany 2,500,000 2,637,500
(f) Fresenius US Finance II, senior note, 144A, 9.00%,
7/15/15 ............................................... Germany 7,000,000 7,910,000
Annual Report | 31
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
HEALTH CARE EQUIPMENT & SERVICES (CONTINUED)
HCA Inc.,
senior note, 6.50%, 2/15/16 ........................... United States 3,000,000 $ 2,936,250
senior secured note, 9.125%, 11/15/14 ................. United States 10,000,000 10,662,500
(f) senior secured note, 144A, 7.25%, 9/15/20 ............. United States 1,700,000 1,782,875
(j) senior secured note, PIK, 9.625%, 11/15/16 ............ United States 7,000,000 7,630,000
(f) Tenet Healthcare Corp., senior secured note, 144A,
9.00%, 5/01/15 ........................................ United States 2,500,000 2,734,375
10.00%, 5/01/18 ....................................... United States 3,650,000 4,174,687
8.875%, 7/01/19 ....................................... United States 4,500,000 4,978,125
(j) United Surgical Partners International Inc., senior sub.
note, PIK, 9.25%, 5/01/17 ............................. United States 9,000,000 9,495,000
(h, j) US Oncology Holdings Inc., senior note, PIK, FRN, 7.178%,
3/15/12 ............................................... United States 10,109,000 9,618,350
US Oncology Inc., senior secured note, 9.125%, 8/15/17 ... United States 800,000 840,000
(f) Vanguard Health Holding Co. II LLC, senior bond, 144A,
8.00%, 2/01/18 ........................................ United States 10,000,000 9,950,000
------------------
117,716,170
------------------
INSURANCE 1.3%
American International Group Inc., senior note, 5.60%,
10/18/16 .............................................. United States 10,000,000 9,453,880
Lincoln National Corp., senior note,
8.75%, 7/01/19 ........................................ United States 10,000,000 12,494,980
6.25%, 2/15/20 ........................................ United States 3,600,000 3,855,017
(f, h) MetLife Capital Trust X, secured bond, 144A, FRN, 9.25%,
4/08/68 ............................................... United States 1,900,000 2,232,500
(h) MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 ..... United States 8,000,000 7,699,369
Reinsurance Group of America Inc., senior note, 6.45%,
11/15/19 .............................................. United States 10,000,000 10,596,400
Willis North America Inc., senior note, 7.00%, 9/29/19 ... United States 10,000,000 10,591,740
------------------
56,923,886
------------------
MATERIALS 3.1%
Ball Corp., senior note,
7.125%, 9/01/16 ....................................... United States 1,500,000 1,601,250
7.375%, 9/01/19 ....................................... United States 1,500,000 1,586,250
(f) Building Materials Corp. of America, senior note, 144A,
7.50%, 3/15/20 ........................................ United States 4,000,000 4,010,000
CF Industries Holdings Inc., senior note, 6.875%,
5/01/18 ............................................... United States 5,100,000 5,335,875
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%,
4/01/17 ............................................... United States 9,000,000 10,104,669
Huntsman International LLC,
(f) senior note, 144A, 5.50%, 6/30/16 ..................... United States 600,000 549,000
senior sub. note, 7.875%, 11/15/14 .................... United States 11,000,000 11,220,000
(f) Ineos Group Holdings PLC, senior secured note, 144A,
8.50%, 2/15/16 ........................................ United Kingdom 8,000,000 7,160,000
(f) Kerling PLC, senior secured note, 144A, 10.625%,
1/28/17 ............................................... United Kingdom 5,800,000 EUR 8,223,787
(f) LBI Escrow Corp., senior secured note, 144A, 8.00%,
11/01/17 .............................................. United States 3,300,000 3,427,875
(f) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 ... United States 10,100,000 10,478,750
32 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
MATERIALS (CONTINUED)
Nalco Co.,
(f) senior note, 144A, 8.25%, 5/15/17 ..................... United States 1,000,000 $ 1,077,500
senior sub. note, 8.875%, 11/15/13 .................... United States 9,000,000 9,315,000
NewPage Corp., senior secured note, 11.375%, 12/31/14 .... United States 12,000,000 12,390,000
Novelis Inc., senior note,
7.25%, 2/15/15 ........................................ Canada 4,400,000 4,356,000
11.50%, 2/15/15 ....................................... Canada 1,000,000 1,105,000
Owens-Brockway Glass Container Inc., senior note,
6.75%, 12/01/14 ....................................... United States 8,000,000 8,240,000
7.375%, 5/15/16 ....................................... United States 1,000,000 1,065,000
Owens-Illinois Inc., senior note, 7.80%, 5/15/18 ......... United States 1,000,000 1,057,500
Solo Cup Co.,
senior secured note, 10.50%, 11/01/13 ................. United States 1,700,000 1,819,000
senior sub. note, 8.50%, 2/15/14 ...................... United States 9,000,000 9,090,000
Teck Resources Ltd., senior secured note, 10.75%,
5/15/19 ............................................... Canada 7,300,000 9,125,000
Weyerhaeuser Co., senior note, 7.375%, 10/01/19 .......... United States 6,500,000 7,108,680
(f) Xstrata Finance Canada Ltd., 144A, 5.80%, 11/15/16 ....... United Kingdom 10,000,000 10,719,960
------------------
140,166,096
------------------
MEDIA 4.1%
(f) Cablevision Systems Corp., senior note, 144A, 8.625%,
9/15/17 ............................................... United States 3,000,000 3,180,000
CCH II LLC/CCH II Capital Corp., senior note,
13.50%, 12/02/16 ...................................... United States 3,000,000 3,645,000
(f) 144A, 13.50%, 11/30/16 ................................ United States 7,333,779 8,837,204
(f) CCO Holdings LLC, senior note, 144A,
7.875%, 4/30/18 ....................................... United States 1,900,000 1,942,750
8.125%, 4/30/20 ....................................... United States 1,800,000 1,849,500
(f) Clear Channel Worldwide Holdings Inc., senior note,
A, 144A, 9.25%, 12/15/17 .............................. United States 1,200,000 1,287,000
B, 144A, 9.25%, 12/15/17 .............................. United States 4,800,000 5,166,000
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 .......................... United States 6,000,000 6,330,000
senior note, 6.75%, 4/15/12 ........................... United States 600,000 633,000
(f) senior note, 144A, 8.50%, 4/15/14 ..................... United States 3,000,000 3,232,500
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ....... United States 7,500,000 8,382,097
EchoStar DBS Corp., senior note,
7.75%, 5/31/15 ........................................ United States 5,000,000 5,275,000
7.125%, 2/01/16 ....................................... United States 10,000,000 10,200,000
Lamar Media Corp.,
senior note, 9.75%, 4/01/14 ........................... United States 1,000,000 1,117,500
(f) senior sub. note, 144A, 7.875%, 4/15/18 ............... United States 3,800,000 3,904,500
senior sub. note, B, 6.625%, 8/15/15 .................. United States 1,500,000 1,462,500
Liberty Media Corp., senior note, 5.70%, 5/15/13 ......... United States 10,000,000 10,100,000
LIN Television Corp.,
(f) senior note, 144A, 8.375%, 4/15/18 .................... United States 800,000 830,000
senior sub. note, 6.50%, 5/15/13 ...................... United States 10,000,000 9,950,000
(f) Media General Inc., senior secured note, 144A, 11.75%,
2/15/17 ............................................... United States 7,600,000 8,151,000
Annual Report | 33
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
(d) Radio One Inc., senior sub. note, 6.375%, 2/15/13 ........ United States 8,000,000 $ 6,740,000
(f) Seat Pagine Gialle SpA, senior secured note, 144A, 10.50%,
1/31/17 ............................................... Italy 8,000,000 EUR 10,522,103
(f) Sinclair Television Group Inc., senior secured note, 144A,
9.25%, 11/01/17 ....................................... United States 11,000,000 11,742,500
(f) Sitel LLC, senior note, 144A, 11.50%, 4/01/18 ............ United States 6,600,000 6,732,000
Time Warner Inc., 7.625%, 4/15/31 ........................ United States 9,000,000 10,489,887
(f) UPC Germany GmbH, senior sub. note, 144A, 9.625%,
12/01/19 .............................................. Germany 2,100,000 EUR 3,012,512
(f) 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 10,973,190
(f) Virgin Media Secured Finance, senior secured note, 144A,
6.50%, 1/15/18 ........................................ United Kingdom 5,600,000 5,698,564
(f) WMG Acquisition Corp., senior secured note, 144A, 9.50%,
6/15/16 ............................................... United States 11,000,000 11,935,000
(f, l) Ziggo Bond Co., senior bond, 144A, 8.00%, 5/15/18 ........ Netherlands 7,600,000 EUR 10,194,147
------------------
186,165,454
------------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.1%
(f) Talecris Biotherapeutics Holdings Corp., senior note,
144A, 7.75%, 11/15/16 ................................. United States 5,500,000 5,582,500
------------------
REAL ESTATE 2.0%
Boston Properties LP, senior note, 5.625%, 11/15/20 ...... United States 15,000,000 15,420,810
(f) Dexus Finance Property Ltd., 144A, 7.125%, 10/15/14 ...... Australia 12,000,000 13,274,004
(f) Digital Realty Trust LP, 144A, 5.875%, 2/01/20 ........... United States 8,500,000 8,554,442
Duke Realty LP, senior note, 8.25%, 8/15/19 .............. United States 12,000,000 13,656,852
ERP Operating LP, 5.75%, 6/15/17 ......................... United States 3,300,000 3,543,956
FelCor Lodging LP, senior secured note, 10.00%,
10/01/14 .............................................. United States 5,650,000 5,932,500
Forest City Enterprises Inc., senior note, 7.625%,
6/01/15 ............................................... United States 8,500,000 7,947,500
Healthcare Realty Trust Inc., senior note, 6.50%,
1/17/17 ............................................... United States 12,000,000 12,582,888
Kimco Realty Corp., senior note, 6.875%, 10/01/19 ........ United States 10,000,000 11,312,240
------------------
92,225,192
------------------
RETAILING 0.9%
Dollar General Corp., senior note, 10.625%, 7/15/15 ...... United States 10,000,000 11,162,500
(f, h) Edcon Holdings, 144A, FRN, 6.15%, 6/15/15 ................ South Africa 5,000,000 EUR 4,612,177
(f, h) Edcon Proprietary Ltd., senior secured note, 144A, FRN,
3.90%, 6/15/14 ........................................ South Africa 7,000,000 EUR 7,304,119
Michaels Stores Inc., senior note, 10.00%, 11/01/14 ...... United States 11,100,000 11,821,500
(f) QVC Inc., senior secured note, 144A, 7.50%, 10/01/19 ..... United States 4,400,000 4,521,000
------------------
39,421,296
------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.3%
(f) Advanced Micro Devices Inc., senior note, 144A, 8.125%,
12/15/17 .............................................. United States 2,200,000 2,277,000
Freescale Semiconductor Inc., senior note,
8.875%, 12/15/14 ...................................... United States 12,500,000 12,375,000
10.125%, 12/15/16 ..................................... United States 300,000 289,875
------------------
14,941,875
------------------
34 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
SOFTWARE & SERVICES 0.4%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 .......................... United States 6,000,000 $ 6,187,500
senior sub. note, 10.25%, 8/15/15 ..................... United States 10,000,000 10,587,500
------------------
16,775,000
------------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.4%
Jabil Circuit Inc., senior note, 7.75%, 7/15/16 .......... United States 5,200,000 5,538,000
Sanmina-SCI Corp.,
(f, h) senior note, 144A, FRN, 3.007%, 6/15/14 ............... United States 2,000,000 1,920,000
senior sub. note, 6.75%, 3/01/13 ...................... United States 4,300,000 4,300,000
senior sub. note, 8.125%, 3/01/16 ..................... United States 4,000,000 4,070,000
(f) ViaSat Inc., senior note, 144A, 8.875%, 9/15/16 .......... United States 2,100,000 2,163,000
------------------
17,991,000
------------------
TELECOMMUNICATION SERVICES 3.0%
(f) America Movil SAB de CV, senior note, 144A, 5.00%,
3/30/20 ............................................... Mexico 13,300,000 13,457,818
Crown Castle International Corp.,
senior bond, 7.125%, 11/01/19 ......................... United States 400,000 404,000
senior note, 9.00%, 1/15/15 ........................... United States 8,000,000 8,630,000
(f) Digicel Group Ltd., senior note, 144A,
8.875%, 1/15/15 ....................................... Jamaica 11,000,000 11,096,250
8.25%, 9/01/17 ........................................ Jamaica 1,000,000 1,027,500
(f) Integra Telecom Inc., senior secured note, 144A, 10.75%,
4/15/16 ............................................... United States 5,200,000 5,330,000
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 ...... Bermuda 10,000,000 10,875,000
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.50%,
1/15/13 ............................................... Bermuda 10,000,000 10,225,000
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 ..... United States 11,000,000 11,467,500
Millicom International Cellular SA, senior note, 10.00%,
12/01/13 .............................................. Luxembourg 10,000,000 10,425,000
(f) New Communications Holdings, senior note, 144A,
8.25%, 4/15/17 ........................................ United States 1,700,000 1,759,500
8.50%, 4/15/20 ........................................ United States 1,900,000 1,966,500
8.75%, 4/15/22 ........................................ United States 4,300,000 4,450,500
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 ........................................ United States 10,000,000 10,225,000
(f) SBA Telecommunications Inc., senior note, 144A, 8.25%,
8/15/19 ............................................... United States 3,900,000 4,202,250
Sprint Nextel Corp., senior note, 8.375%, 8/15/17 ........ United States 12,000,000 12,465,000
Verizon New York Inc., senior deb., B, 7.375%, 4/01/32 ... United States 1,500,000 1,670,512
(f) Wind Acquisition Finance SA, senior note, 144A,
12.00%, 12/01/15 ...................................... Italy 10,000,000 10,725,000
11.75%, 7/15/17 ....................................... Italy 1,000,000 1,123,750
(f, j) Wind Acquisition Holding, senior secured note, 144A, PIK,
12.25%, 7/15/17 .......................................... Italy 2,000,000 EUR 2,593,638
------------------
134,119,718
------------------
Annual Report | 35
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
CORPORATE BONDS (CONTINUED)
TRANSPORTATION 0.4%
(f) Ceva Group PLC, senior secured note, 144A,
11.625%, 10/01/16 ..................................... United Kingdom 400,000 $ 436,500
11.50%, 4/01/18 ....................................... United Kingdom 8,700,000 9,406,875
(f) Delta Air Lines Inc., senior secured note, 144A, 9.50%,
9/15/14 ............................................... United States 8,753,000 9,387,592
------------------
19,230,967
------------------
UTILITIES 2.1%
Ameren Corp., senior note, 8.875%, 5/15/14 ............... United States 10,000,000 11,689,780
CenterPoint Energy Inc., senior note,
6.125%, 11/01/17 ...................................... United States 7,500,000 8,150,355
6.50%, 5/01/18 ........................................ United States 1,500,000 1,637,817
CMS Energy Corp., senior note, 8.75%, 6/15/19 ............ United States 5,400,000 6,207,516
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ....... United States 12,000,000 10,620,000
(f) Enogex LLC, senior note, 144A, 6.25%, 3/15/20 ............ United States 12,000,000 12,367,452
(f) Infinis PLC, senior note, 144A, 9.125%, 12/15/14 ......... United Kingdom 1,525,000 GBP 2,425,114
(f) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ... Netherlands 12,000,000 12,600,000
NRG Energy Inc., senior note,
7.25%, 2/01/14 ........................................ United States 2,500,000 2,540,625
7.375%, 2/01/16 ....................................... United States 10,000,000 9,925,000
7.375%, 1/15/17 ....................................... United States 2,500,000 2,468,750
Texas Competitive Electric Holdings Co. LLC, senior note,
A, 10.25%, 11/01/15 ................................... United States 20,000,000 15,050,000
------------------
95,682,409
------------------
TOTAL CORPORATE BONDS (COST $1,653,308,601) .............. 1,778,966,077
------------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES 6.5%
BANKS 4.8%
(h) Banc of America Commercial Mortgage Inc., 2005-6, A4, FRN,
5.178%, 9/10/47 ....................................... United States 8,000,000 8,449,986
(h) Citibank Credit Card Issuance Trust, 2005-A3, A3, FRN,
0.333%, 4/24/14 ....................................... United States 3,000,000 2,991,623
Citigroup Commercial Mortgage Trust,
(h) 2007-C6, AM, FRN, 5.70%, 6/10/17 ...................... United States 3,500,000 3,167,536
2008-C7, A4, 6.298%, 12/10/49 ......................... United States 19,150,000 19,671,052
Citigroup/Deutsche Bank Commercial Mortgage Trust,
2006-CD3, A5, 5.617%, 10/15/48 ........................ United States 22,000,000 22,663,557
Countrywide Asset-Backed Certificates, 2005-11, AF4,
5.21%, 3/25/34 ........................................ United States 2,800,000 1,447,642
GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%,
1/10/38 ............................................... United States 1,827,831 1,923,122
Greenwich Capital Commercial Funding Corp.,
2004-GG1, A7, 5.317%, 6/10/36 ......................... United States 15,546,036 16,455,285
2005-GG5, A5, 5.224%, 4/10/37 ......................... United States 29,320,000 29,826,913
(h) 2006-GG7, A4, FRN, 5.888%, 7/10/38 .................... United States 12,000,000 12,497,628
36 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (CONTINUED)
BANKS (CONTINUED)
GS Mortgage Securities Corp. II,
2003-C1, A3, 4.608%, 1/10/40 .......................... United States 3,965,000 $ 4,132,410
(h) 2006-GG6, A4, FRN, 5.553%, 4/10/38 .................... United States 17,420,000 17,865,381
2006-GG8, A4, 5.56%, 11/10/39 ......................... United States 5,000,000 5,005,780
LB-UBS Commercial Mortgage Trust,
(h) 2002-C2, A4, FRN, 5.594%, 6/15/31 ..................... United States 5,000,000 5,310,813
2005-C5, A4, 4.954%, 9/15/30 .......................... United States 13,000,000 13,430,412
2006-C1, A4, 5.156%, 2/15/31 .......................... United States 13,250,000 13,638,679
(h) Morgan Stanley Capital I Trust, 2004-IQ7, A4, FRN, 5.537%,
6/15/38 ............................................... United States 7,000,000 7,379,935
(f, h) Schiller Park CLO Ltd., 2007-1A, A2, 144A, FRN, 0.556%,
4/25/21 ............................................... United States 12,300,000 11,019,078
(f, h) Wachovia Bank Commercial Mortgage Trust, 2007-WHL8, A1,
144A, FRN, 0.334%, 6/15/20 ............................ United States 21,269,898 18,904,792
------------------
215,781,624
------------------
DIVERSIFIED FINANCIALS 1.7%
(h) American Express Credit Account Master Trust, 2008-1, A,
FRN, 0.704%, 8/15/13 .................................. United States 8,200,000 8,222,211
(f, h) Armstrong Loan Funding Ltd., 2008-1A, B, 144A, FRN,
1.249%, 8/10/16 ....................................... Cayman Islands 16,689,980 15,689,666
(f, h) Babson CLO Ltd., 2005-2A, A1, 144A, FRN, 0.499%,
7/20/19 ............................................... Cayman Islands 6,233,446 5,729,347
(f, h) Cent CDO Ltd., 2007-15A, A2B, 144A, FRN, 0.596%,
3/11/21 ............................................... Cayman Islands 3,881,000 3,396,263
(h) Chase Issuance Trust, sub. note, 2006-A7, A, FRN, 0.264%,
2/15/13 ............................................... United States 4,000,000 3,997,327
(f, h) Columbus Nova CLO Ltd., 2007-2A, A2, 144A, FRN, 1.303%,
10/15/21 .............................................. Cayman Islands 2,680,000 2,170,478
JPMorgan Chase Commercial Mortgage Securities Corp.,
(h) 2004-CB9, A4, FRN, 5.371%, 6/12/41 .................... United States 8,871,306 9,214,571
2004-LN2, A2, 5.115%, 7/15/41 ......................... United States 807,292 826,097
2005-LDP2, AM, 4.78%, 7/15/42 ......................... United States 2,200,000 2,092,097
(h) 2005-LDP5, A4, FRN, 5.344%, 12/15/44 .................. United States 8,280,000 8,707,464
(f, h) MAPS CLO Fund LLC, 2005-1A, B, 144A, FRN, 0.771%,
12/21/17 .............................................. United States 4,400,000 3,690,500
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%,
4/25/32 ............................................... United States 146,797 142,882
(f, h) Westchester CLO Ltd., 2007-1A, A1A, 144A, FRN, 0.474%,
8/01/22 ............................................... Cayman Islands 15,808,011 14,180,576
------------------
78,059,479
------------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $279,055,319) ........ 293,841,103
------------------
MORTGAGE-BACKED SECURITIES 3.6%
(h) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE
0.0%(e)
FHLMC, 2.598%, 1/01/33 ................................... United States 259,496 270,581
------------------
Annual Report | 37
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.3%
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 ............ United States 4,044,830 $ 4,258,479
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 7/01/22 ............ United States 5,478,468 5,838,991
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 2/01/19 ............. United States 580,681 625,925
FHLMC Gold 15 Year, 6.50%, 4/01/11 ....................... United States 122 127
FHLMC Gold 15 Year, 7.00%, 9/01/11 ....................... United States 164 171
FHLMC Gold 30 Year, 5.00%, 3/01/34 - 6/01/38 ............. United States 15,577,300 16,207,286
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/36 ............. United States 10,177,226 10,783,900
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 2/01/39 ............. United States 17,356,533 18,654,351
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 6/01/36 ............ United States 2,051,736 2,233,926
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 ............. United States 175,307 196,339
FHLMC Gold 30 Year, 7.50%, 1/01/26 - 1/01/31 ............. United States 29,777 33,947
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 ............ United States 620 714
FHLMC Gold 30 Year, 9.00%, 12/01/24 ...................... United States 290 339
------------------
58,834,495
------------------
(h) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE
RATE 0.0%(e)
FNMA, 2.732%, 12/01/34 ................................... United States 884,398 927,178
FNMA, 2.776%, 4/01/20 .................................... United States 199,411 207,394
------------------
1,134,572
------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 2.1%
FNMA 15 Year, 4.50%, 3/01/20 ............................. United States 918,630 966,130
FNMA 15 Year, 5.00%, 1/01/18 - 6/01/18 ................... United States 1,185,259 1,265,213
FNMA 15 Year, 5.50%, 3/01/14 - 4/01/21 ................... United States 3,813,410 4,091,849
FNMA 15 Year, 6.00%, 4/01/13 - 10/01/16 .................. United States 109,671 118,330
FNMA 15 Year, 6.50%, 4/01/11 - 6/01/13 ................... United States 8,452 9,115
FNMA 15 Year, 7.50%, 10/01/14 ............................ United States 9,151 10,005
FNMA 30 Year, 4.50%, 4/01/39 ............................. United States 15,694,008 15,841,532
FNMA 30 Year, 5.00%, 4/01/34 - 6/01/38 ................... United States 25,379,674 26,344,536
FNMA 30 Year, 5.50%, 9/01/33 - 1/01/37 ................... United States 15,439,143 16,337,653
FNMA 30 Year, 6.00%, 6/01/34 - 11/01/37 .................. United States 20,596,718 22,069,091
FNMA 30 Year, 6.50%, 1/01/24 - 10/01/37 .................. United States 6,215,989 6,753,056
FNMA 30 Year, 7.50%, 10/01/29 ............................ United States 28,211 31,882
FNMA 30 Year, 8.00%, 1/01/25 - 6/01/26 ................... United States 14,631 16,923
FNMA 30 Year, 8.50%, 7/01/25 ............................. United States 705 818
------------------
93,856,133
------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED
RATE 0.2%
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 .............. United States 1,060,886 1,114,860
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 .............. United States 3,288,342 3,516,807
GNMA I SF 30 Year, 6.00%, 8/15/36 ........................ United States 412,299 443,788
GNMA I SF 30 Year, 6.50%, 3/15/24 - 3/15/32 .............. United States 251,446 277,653
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 ............. United States 50,783 56,962
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 .............. United States 11,347 12,812
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 .............. United States 12,707 14,613
GNMA I SF 30 Year, 8.50%, 8/15/24 ........................ United States 131 152
GNMA I SF 30 Year, 9.00%, 1/15/25 ........................ United States 453 525
38 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE
(CONTINUED)
GNMA I SF 30 Year, 9.50%, 6/15/25 ........................ United States 688 $ 804
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 ............ United States 1,495,304 1,569,638
GNMA II SF 30 Year, 5.50%, 6/20/34 ....................... United States 740,802 791,586
GNMA II SF 30 Year, 6.00%, 11/20/34 ...................... United States 615,422 668,273
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 ............ United States 285,122 315,832
GNMA II SF 30 Year, 7.50%, 8/20/16 - 4/20/32 ............. United States 157,849 175,206
------------------
8,959,511
------------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $154,000,071) ................................... 163,055,292
------------------
U.S. GOVERNMENT AND AGENCY SECURITIES 3.9%
FHLMC,
5.625%, 3/15/11 ....................................... United States 8,000,000 8,350,128
senior note, 4.75%, 3/05/12 ........................... United States 9,000,000 9,603,459
FNMA,
1.375%, 4/28/11 ....................................... United States 15,500,000 15,624,821
4.125%, 4/15/14 ....................................... United States 2,000,000 2,150,084
U.S. Treasury Bond,
4.50%, 2/15/16 ........................................ United States 13,100,000 14,386,459
4.50%, 5/15/17 ........................................ United States 16,000,000 17,457,504
5.25%, 2/15/29 ........................................ United States 1,750,000 1,950,977
6.25%, 8/15/23 ........................................ United States 4,000,000 4,891,876
6.88%, 8/15/25 ........................................ United States 1,000,000 1,302,500
7.125%, 2/15/23 ....................................... United States 3,000,000 3,926,718
7.875%, 2/15/21 ....................................... United States 7,200,000 9,807,754
U.S. Treasury Note,
3.375%, 6/30/13 ....................................... United States 2,000,000 2,111,720
4.00%, 11/15/12 ....................................... United States 1,850,000 1,979,935
4.125%, 8/15/10 ....................................... United States 2,900,000 2,932,964
4.25%, 8/15/13 ........................................ United States 1,000,000 1,085,078
4.25%, 11/15/14 ....................................... United States 700,000 762,727
4.375%, 8/15/12 ....................................... United States 1,000,000 1,075,235
4.50%, 9/30/11 ........................................ United States 1,500,000 1,581,738
4.75%, 8/15/17 ........................................ United States 7,000,000 7,740,467
5.00%, 8/15/11 ........................................ United States 2,100,000 2,220,259
(n) Index Linked, 1.625%, 1/15/15 ............................ United States 24,971,894 26,392,171
(n) Index Linked, 1.875%, 7/15/15 ............................ United States 2,228,570 2,390,315
(n) Index Linked, 2.00%, 1/15/16 ............................. United States 12,012,103 12,963,690
(n) Index Linked, 2.50%, 7/15/16 ............................. United States 20,927,857 23,298,585
------------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $167,188,671) ................................... 175,987,164
------------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 24.1%
(f) Arab Republic of Egypt, 144A, 5.75%, 4/29/20 ............. Egypt 3,375,000 3,420,562
(h, o) Government of Argentina, senior bond, FRN, 0.389%,
8/03/12 ............................................... Argentina 142,168,000 48,123,868
Government of Australia, TB123, 5.75%, 4/15/12 ........... Australia 59,940,000 AUD 56,225,286
Annual Report | 39
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Hungary, 6.25%, 1/29/20 .................... Hungary 18,690,000 $ 19,530,957
Government of Indonesia,
FR19, 14.25%, 6/15/13 ................................. Indonesia 63,035,000,000 IDR 8,275,512
FR20, 14.275%, 12/15/13 ............................... Indonesia 28,415,000,000 IDR 3,792,334
FR26, 11.00%, 10/15/14 ................................ Indonesia 4,500,000,000 IDR 553,780
FR28, 10.00%, 7/15/17 ................................. Indonesia 10,200,000,000 IDR 1,230,852
FR34, 12.80%, 6/15/21 ................................. Indonesia 108,710,000,000 IDR 15,579,861
FR39, 11.75%, 8/15/23 ................................. Indonesia 29,150,000,000 IDR 3,887,158
FR42, 10.25%, 7/15/27 ................................. Indonesia 86,000,000,000 IDR 10,035,409
FR44, 10.00%, 9/15/24 ................................. Indonesia 92,490,000,000 IDR 10,926,907
FR47, 10.00%, 2/15/28 ................................. Indonesia 28,000,000,000 IDR 3,191,149
(f) senior bond, 144A, 6.625%, 2/17/37 .................... Indonesia 940,000 972,430
(f) senior bond, 144A, 7.75%, 1/17/38 ..................... Indonesia 11,270,000 13,216,892
(f) senior bond, 144A, 8.50%, 10/12/35 .................... Indonesia 945,000 1,191,881
Government of Israel, 2680, 7.00%, 4/29/11 ............... Israel 38,745,000 ILS 10,880,574
Government of Malaysia,
3.461%, 7/31/13 ....................................... Malaysia 28,900,000 MYR 9,147,968
(l) 3.756%, 4/28/11 ....................................... Malaysia 131,400,000 MYR 41,732,194
3.833%, 9/28/11 ....................................... Malaysia 100,550,000 MYR 32,061,262
4.24%, 2/07/18 ........................................ Malaysia 64,800,000 MYR 20,765,171
Government of Mexico,
M 10, 8.00%, 12/17/15 ................................. Mexico 725,000(p)MXN 6,187,600
M 20, 10.00%, 12/05/24 ................................ Mexico 4,945,000(p)MXN 48,333,317
Government of Norway, 6.00%, 5/16/11 ..................... Norway 489,570,000 NOK 86,148,721
Government of Poland,
4.25%, 5/24/11 ........................................ Poland 3,685,000 PLN 1,253,152
4.75%, 4/25/12 ........................................ Poland 108,930,000 PLN 37,200,225
5.75%, 4/25/14 ........................................ Poland 24,040,000 PLN 8,364,759
5.75%, 9/23/22 ........................................ Poland 38,200,000 PLN 12,995,499
6.25%, 10/24/15 ....................................... Poland 44,475,000 PLN 15,838,253
senior note, 6.375%, 7/15/19 .......................... Poland 18,000,000 19,713,780
(f) Government of Russia, 144A, 7.50%, 3/31/30 ............... Russia 57,682,160 66,193,163
Government of South Africa,
6.875%, 5/27/19 ....................................... South Africa 10,820,000 12,164,385
senior note, 5.875%, 5/30/22 .......................... South Africa 10,000,000 10,356,250
Government of Sri Lanka, A,
8.50%, 1/15/13 ........................................ Sri Lanka 152,900,000 LKR 1,283,331
11.00%, 8/01/15 ....................................... Sri Lanka 601,300,000 LKR 5,198,269
11.25%, 7/15/14 ....................................... Sri Lanka 528,200,000 LKR 4,666,799
12.00%, 7/15/11 ....................................... Sri Lanka 43,390,000 LKR 390,942
13.50%, 2/01/13 ....................................... Sri Lanka 178,300,000 LKR 1,685,744
Government of Sweden,
5.25%, 3/15/11 ........................................ Sweden 640,860,000 SEK 91,989,262
5.50%, 10/08/12 ....................................... Sweden 24,960,000 SEK 3,783,264
Government of Venezuela,
10.75%, 9/19/13 ....................................... Venezuela 23,150,000 22,543,470
(q) senior bond, Reg S, 5.375%, 8/07/10 ................... Venezuela 7,755,000 7,708,315
(f) Government of Vietnam, 144A, 6.75%, 1/29/20 .............. Vietnam 16,625,000 17,352,344
Korea Development Bank, senior note, 8.00%, 1/23/14 ...... South Korea 11,695,000 13,551,289
40 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Korea Treasury Bond,
0400-1206, 4.00%, 6/10/12 ............................. South Korea 86,238,140,000 KRW $ 78,670,183
0475-1112, 4.75%, 12/10/11 ............................ South Korea 53,898,700,000 KRW 49,774,722
0525-1209, 5.25%, 9/10/12 ............................. South Korea 21,000,000,000 KRW 19,655,261
0525-1303, 5.25%, 3/10/13 ............................. South Korea 767,400,000 KRW 719,317
0550-1106, 5.50%, 6/10/11 ............................. South Korea 7,842,350,000 KRW 7,286,187
New South Wales Treasury Corp., senior note, 5.50%,
3/01/17 ............................................... Australia 12,025,000 AUD 10,834,804
Nota Do Tesouro Nacional,
10.00%, 1/01/12 ....................................... Brazil 20,645(r)BRL 11,481,090
10.00%, 1/01/14 ....................................... Brazil 5,200(r)BRL 2,771,474
10.00%, 1/01/17 ....................................... Brazil 70,650(r)BRL 36,365,983
(s) Index Linked, 6.00%, 5/15/15 .......................... Brazil 22,830(r)BRL 24,492,476
(s) Index Linked, 6.00%, 5/15/45 .......................... Brazil 3,570(r)BRL 3,905,268
Province of Manitoba, 6.375%, 9/01/15 .................... Canada 3,000,000 NZD 2,247,976
Province of Ontario, 6.25%, 6/16/15 ...................... Canada 2,826,000 NZD 2,115,212
Queensland Treasury Corp.,
11, 6.00%, 6/14/11 .................................... Australia 17,845,000 AUD 16,691,581
13, 6.00%, 8/14/13 .................................... Australia 2,045,000 AUD 1,911,118
17, 6.00%, 9/14/17 .................................... Australia 4,090,000 AUD 3,784,438
(f) 144A, 7.125%, 9/18/17 ................................. Australia 8,945,000 NZD 6,921,602
------------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $1,016,693,978) ................................. 1,089,272,832
------------------
MUNICIPAL BONDS 3.1%
California State GO,
7.625%, 3/01/40 ....................................... United States 6,200,000 6,895,950
Build America Bonds, Various Purpose, 7.55%, 4/01/39 .. United States 26,670,000 29,474,084
Refunding, 5.00%, 4/01/38 ............................. United States 35,000,000 34,583,150
Various Purpose, 6.00%, 4/01/38 ....................... United States 20,000,000 21,751,800
Various Purpose, Refunding, 3/01/33 ................... United States 15,425,000 17,012,387
Various Purpose, Refunding, 5.25%, 3/01/38 ............ United States 7,220,000 7,297,904
Clovis USD, GO, Capital Appreciation, Election of 2004,
Series A, NATL RE, FGIC Insured, zero cpn.,
8/01/25 ............................................... United States 7,720,000 3,327,320
8/01/26 ............................................... United States 3,985,000 1,604,839
8/01/27 ............................................... United States 5,315,000 1,996,899
8/01/29 ............................................... United States 5,315,000 1,729,979
(f) New York City IDA, 144A, 11.00%, 3/01/29 ................. United States 1,800,000 2,056,554
New York City Municipal Water Finance Authority Water and
Sewer Revenue, Build America Bonds, Second General,
Refunding, Series EE, 6.491%, 6/15/42 ................. United States 6,100,000 6,324,114
Poway USD, GO, Election of 2008, ID 07-1-A, zero cpn.,
8/01/27 ............................................... United States 1,025,000 385,103
8/01/30 ............................................... United States 1,025,000 311,036
8/01/32 ............................................... United States 1,280,000 337,856
8/01/33 ............................................... United States 675,000 166,307
Annual Report | 41
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
PRINCIPAL
FRANKLIN STRATEGIC INCOME FUND COUNTRY AMOUNT(g) VALUE
------------------------------ ---------------- ---------------- ------------------
MUNICIPAL BONDS (CONTINUED)
San Diego County Water Authority Financing Agency Water
Revenue, Build America Bonds, San Diego Water, Series B,
6.138%, 5/01/49 ....................................... United States 6,650,000 $ 7,150,811
San Mateo County Community College District GO, Election of
2001, Series C, NATL Insured, zero cpn.,
9/01/30 ............................................... United States 2,475,000 800,836
3/01/31 ............................................... United States 675,000 209,864
------------------
TOTAL MUNICIPAL BONDS (COST $133,087,189) ................ 143,416,793
------------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $4,059,035,992) ................................. 4,309,175,835
------------------
SHORT TERM INVESTMENTS 4.8%
FOREIGN GOVERNMENT AND AGENCY SECURITIES 1.4%
(t) Egypt Treasury Bill,
8/03/10 - 3/08/11 ..................................... Egypt 96,850,000 EGP 16,516,383
364, 2/08/11 .......................................... Egypt 84,650,000 EGP 14,078,083
(t) Israel Treasury Bill, 10/06/10 - 1/05/11 ................. Israel 98,080,000 ILS 25,913,732
(l, t) Malaysia Treasury Bill,
10/15/10 - 1/27/11 .................................... Malaysia 25,350,000 MYR 7,811,718
1810, 11/02/10 ........................................ Malaysia 1,410,000 MYR 436,404
------------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $65,213,700) .................................... 64,756,320
------------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $4,124,249,692) ................................. 4,373,932,155
==================
SHARES
----------------
MONEY MARKET FUNDS (COST $153,470,058) 3.4%
(u) Institutional Fiduciary Trust Money Market Portfolio,
0.00% ................................................. United States 153,470,058 153,470,058
------------------
TOTAL INVESTMENTS (COST $4,277,719,750) 99.9% ............ 4,527,402,213
OTHER ASSETS, LESS LIABILITIES 0.1% ...................... 2,419,566
------------------
NET ASSETS 100.0% ........................................ $ 4,529,821,779
------------------
See Abbreviations on page 66.
42 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
(a) See Note 9 regarding restricted securities.
(b) Non-income producing.
(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At April 30, 2010, the aggregate value of these
securities was $10,552,584, representing 0.23% of net assets.
(d) See Note 12 regarding other considerations.
(e) Rounds to less than 0.1% of net assets.
(f) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under the
Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30, 2010,
the aggregate value of these securities was $744,453,088, representing
16.43% of net assets.
(g) The principal amount is stated in U.S. dollars unless otherwise indicated.
(h) The coupon rate shown represents the rate at period end.
(i) See Note 1(f) regarding senior floating rate interests.
(j) Income may be received in additional securities and/or cash.
(k) See Note 8 regarding defaulted securities.
(l) A portion or all of the security purchased on a when-issued, delayed
delivery, or TBA basis. See Note 1(c).
(m) Perpetual security with no stated maturity date.
(n) Principal amount of security is adjusted for inflation. See Note 1(h).
(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. This
security has been deemed liquid under guidelines approved by the Trust's
Board of Trustees. At April 30, 2010, the value of this security was
$7,708,315, representing 0.17% 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.
At April 30, 2010, 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
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
Euro ................. DBAB Sell 2,050,692 3,064,759 5/20/10 $ 334,345 $ --
Indian Rupee ......... DBAB Buy 81,531,000 1,661,220 6/01/10 174,544 --
Indian Rupee ......... HSBC Buy 2,417,000 49,835 6/02/10 4,581 --
Indian Rupee ......... HSBC Buy 11,961,000 249,188 6/03/10 20,075 --
Indian Rupee ......... HSBC Buy 79,838,000 1,661,215 6/04/10 135,892 --
Indian Rupee ......... DBAB Buy 39,919,000 830,608 6/07/10 67,678 --
Indian Rupee ......... DBAB Buy 20,136,000 417,759 6/08/10 35,310 --
Indian Rupee ......... HSBC Buy 16,031,000 332,249 6/08/10 28,456 --
Indian Rupee ......... DBAB Buy 16,259,000 334,203 6/10/10 31,559 --
Indian Rupee ......... HSBC Buy 16,292,000 334,195 6/11/10 32,274 --
Indian Rupee ......... BZWS Buy 24,313,000 501,299 6/11/10 45,592 --
Indian Rupee ......... DBAB Buy 40,697,000 835,496 6/16/10 79,479 --
Indian Rupee ......... DBAB Buy 37,071,000 751,947 6/21/10 81,092 --
Euro ................. UBSW Sell 9,972,000 13,906,353 6/29/10 627,483 --
New Zealand Dollar ... DBAB Sell 29,251,645 18,000,000 7/06/10 -- (3,168,290)
Annual Report | 43
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
New Zealand Dollar ... DBAB Buy 4,551,645 3,330,439 7/06/10 $ -- $ (36,588)
New Zealand Dollar ... DBAB Buy 24,700,000 17,117,100 7/06/10 757,339 --
New Zealand Dollar ... DBAB Sell 2,611,615 1,680,574 7/30/10 -- (206,253)
New Zealand Dollar ... DBAB Buy 2,611,615 1,906,479 7/30/10 -- (19,652)
New Zealand Dollar ... DBAB Sell 2,601,679 1,671,189 8/03/10 -- (207,853)
New Zealand Dollar ... BZWS Sell 1,018,449 653,844 8/03/10 -- (81,722)
New Zealand Dollar ... BZWS Buy 1,018,449 740,005 8/03/10 -- (4,438)
New Zealand Dollar ... DBAB Buy 2,601,679 1,836,525 8/03/10 42,516 --
New Zealand Dollar ... DBAB Sell 1,030,760 658,552 8/04/10 -- (85,845)
New Zealand Dollar ... BZWS Sell 1,026,315 658,894 8/04/10 -- (82,294)
New Zealand Dollar ... DBAB Buy 1,030,760 752,145 8/04/10 -- (7,748)
New Zealand Dollar ... BZWS Buy 1,026,315 722,115 8/04/10 19,073 --
New Zealand Dollar ... HSBC Sell 30,300,000 19,598,040 8/05/10 -- (2,282,358)
New Zealand Dollar ... HSBC Buy 30,300,000 22,094,760 8/05/10 -- (214,362)
New Zealand Dollar ... CITI Sell 2,583,681 1,687,208 8/05/10 -- (178,533)
New Zealand Dollar ... DBAB Sell 1,532,902 999,146 8/05/10 -- (107,802)
New Zealand Dollar ... CITI Buy 2,583,681 1,820,281 8/05/10 45,461 --
New Zealand Dollar ... DBAB Buy 1,532,902 1,097,865 8/05/10 9,083 --
Indonesian Rupiah .... HSBC Buy 144,620,000,000 14,000,000 8/06/10 1,768,795 --
New Zealand Dollar ... CITI Sell 2,023,648 1,322,484 8/06/10 -- (138,725)
New Zealand Dollar ... FBCO Sell 1,009,952 657,732 8/06/10 -- (71,522)
New Zealand Dollar ... CITI Sell 1,996,763 1,312,792 8/09/10 -- (128,656)
New Zealand Dollar ... DBAB Sell 2,005,773 1,319,398 8/09/10 -- (128,555)
New Zealand Dollar ... FBCO Sell 1,973,988 1,300,759 8/09/10 -- (124,247)
New Zealand Dollar ... CITI Buy 1,996,763 1,406,380 8/09/10 35,068 --
New Zealand Dollar ... DBAB Buy 2,005,773 1,436,134 8/09/10 11,819 --
New Zealand Dollar ... FBCO Sell 1,977,450 1,313,284 8/11/10 -- (113,992)
New Zealand Dollar ... DBAB Sell 10,891,433 7,097,928 8/12/10 -- (762,611)
New Zealand Dollar ... DBAB Buy 10,891,433 7,684,995 8/12/10 175,544 --
New Zealand Dollar ... DBAB Sell 5,501,000 3,570,699 8/13/10 -- (399,149)
New Zealand Dollar ... DBAB Buy 5,501,000 3,881,231 8/13/10 88,618 --
New Zealand Dollar ... DBAB Sell 5,802,000 3,829,900 8/16/10 -- (356,155)
Brazilian Real ....... DBAB Buy 731,000 35,502,477 JPY 8/17/10 31,390 --
Japanese Yen ......... UBSW Sell 101,506,000 1,070,106 8/17/10 -- (11,547)
New Israeli Shekel ... CITI Buy 7,916,000 2,088,985 8/17/10 32,098 --
Brazilian Real ....... DBAB Buy 540,000 26,001,000 JPY 8/18/10 25,504 --
Chilean Peso ......... JPHQ Buy 4,247,280,800 7,760,000 8/18/10 419,120 --
Japanese Yen ......... JPHQ Sell 50,440,000 535,059 8/18/10 -- (2,441)
Brazilian Real ....... DBAB Buy 810,000 38,074,860 JPY 8/19/10 48,006 --
Chilean Peso ......... JPHQ Buy 1,399,090,000 2,530,000 8/19/10 164,236 --
Japanese Yen ......... HSBC Sell 50,206,000 533,652 8/19/10 -- (1,361)
New Israeli Shekel ... CITI Buy 7,920,000 2,086,547 8/19/10 35,544 --
New Israeli Shekel ... DBAB Buy 793,000 208,904 8/19/10 3,573 --
Euro ................. UBSW Sell 4,900,000 6,907,285 8/20/10 382,221 --
44 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
Euro ................. BZWS Sell 5,663,000 8,002,102 8/20/10 $ 460,992 $ --
Japanese Yen ......... DBAB Sell 50,397,000 533,652 8/20/10 -- (3,405)
Japanese Yen ......... BZWS Sell 50,333,000 534,445 8/20/10 -- (1,930)
New Israeli Shekel ... CITI Buy 3,038,500 794,982 8/20/10 19,144 --
Euro ................. UBSW Sell 4,900,000 6,930,854 8/23/10 405,794 --
Japanese Yen ......... CITI Sell 100,563,000 1,068,881 8/23/10 -- (2,818)
Japanese Yen ......... FBCO Sell 99,826,000 1,068,887 8/23/10 5,042 --
New Israeli Shekel ... CITI Buy 5,185,400 1,359,855 8/23/10 29,443 --
Japanese Yen ......... JPHQ Sell 100,349,000 1,068,879 8/24/10 -- (556)
Japanese Yen ......... BZWS Sell 100,015,000 1,068,879 8/24/10 3,004 --
New Zealand Dollar ... FBCO Sell 4,934,741 3,253,870 8/24/10 -- (304,176)
Japanese Yen ......... DBAB Sell 49,740,000 534,436 8/25/10 4,342 --
New Zealand Dollar ... DBAB Sell 4,911,000 3,283,004 8/27/10 -- (257,069)
New Zealand Dollar ... DBAB Buy 4,911,000 3,512,347 8/27/10 27,725 --
Brazilian Real ....... DBAB Buy 541,000 25,277,143 JPY 8/31/10 32,696 --
Euro ................. DBAB Sell 4,170,000 5,979,780 9/01/10 426,833 --
Japanese Yen ......... JPHQ Sell 49,853,000 534,442 9/01/10 3,089 --
Mexican Peso ......... DBAB Sell 105,094,654 7,538,531 9/01/10 -- (880,526)
Brazilian Real ....... DBAB Buy 811,000 37,498,207 JPY 9/02/10 52,966 --
Japanese Yen ......... HSBC Sell 49,331,000 534,446 9/02/10 8,649 --
Euro ................. BZWS Sell 8,005,000 11,402,322 9/07/10 742,542 --
Japanese Yen ......... HSBC Sell 74,296,000 801,657 9/09/10 9,688 --
Japanese Yen ......... DBAB Sell 60,895,000 663,373 9/10/10 14,244 --
Japanese Yen ......... HSBC Sell 74,042,000 801,667 9/10/10 12,394 --
Japanese Yen ......... UBSW Sell 50,584,000 552,806 9/13/10 13,567 --
Brazilian Real ....... DBAB Buy 1,217,000 56,745,424 JPY 9/15/10 72,001 --
Japanese Yen ......... HSBC Sell 40,245,000 442,243 9/15/10 13,208 --
Japanese Yen ......... UBSW Sell 59,943,000 663,372 9/15/10 24,345 --
Japanese Yen ......... BZWS Sell 39,800,000 442,247 9/15/10 17,955 --
Japanese Yen ......... HSBC Sell 59,697,000 663,374 9/16/10 26,959 --
Japanese Yen ......... DBAB Sell 20,012,000 221,127 9/16/10 7,784 --
New Zealand Dollar ... DBAB Sell 2,908,311 1,983,468 9/16/10 -- (109,603)
New Zealand Dollar ... DBAB Buy 2,908,311 2,076,244 9/16/10 16,827 --
Japanese Yen ......... DBAB Sell 1,722,350,000 19,000,000 9/17/10 638,190 --
United States
Dollar ............ UBSW Buy 20,000,000 13,632,336 EUR 9/20/10 1,846,687 --
Japanese Yen ......... HSBC Sell 19,844,000 221,128 9/21/10 9,560 --
Japanese Yen ......... JPHQ Sell 40,023,000 442,243 9/21/10 15,537 --
Japanese Yen ......... JPHQ Sell 9,657,000 106,713 9/24/10 3,750 --
Japanese Yen ......... JPHQ Sell 960,000 10,668 9/27/10 432 --
Euro ................. UBSW Sell 8,180,000 11,954,252 10/04/10 1,061,502 --
Philippine Peso ...... DBAB Buy 63,030,000 1,306,430 10/04/10 86,070 --
Philippine Peso ...... HSBC Buy 50,559,000 1,045,147 10/04/10 71,834 --
Philippine Peso ...... HSBC Buy 75,377,000 1,567,720 10/05/10 97,388 --
Philippine Peso ...... DBAB Buy 75,358,000 1,567,705 10/05/10 96,983 --
Annual Report | 45
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
Philippine Peso ...... JPHQ Buy 19,908,000 418,060 10/06/10 $ 21,671 $ --
Philippine Peso ...... DBAB Buy 61,862,000 1,306,428 10/07/10 59,849 --
Euro ................. BZWS Sell 8,197,000 12,070,083 10/08/10 1,154,705 --
Philippine Peso ...... HSBC Buy 49,596,000 1,045,149 10/08/10 50,111 --
Philippine Peso ...... JPHQ Buy 24,697,000 522,566 10/08/10 22,833 --
Philippine Peso ...... CITI Buy 24,762,000 522,581 10/08/10 24,254 --
Philippine Peso ...... DBAB Buy 49,502,000 1,045,140 10/08/10 48,045 --
Philippine Peso ...... DBAB Buy 14,740,000 313,550 10/12/10 11,830 --
Philippine Peso ...... HSBC Buy 24,577,000 522,581 10/13/10 19,892 --
Philippine Peso ...... JPHQ Buy 54,934,000 1,173,812 10/13/10 38,714 --
Euro ................. DBAB Sell 6,090,000 9,057,048 10/19/10 947,437 --
Japanese Yen ......... DBAB Sell 2,075,980,000 23,000,000 10/19/10 857,775 --
Philippine Peso ...... JPHQ Buy 712,650,000 15,000,000 10/22/10 715,502 --
Chinese Yuan ......... HSBC Buy 19,992,188 3,036,573 10/25/10 -- (76,572)
Japanese Yen ......... JPHQ Sell 993,630,000 11,000,000 10/25/10 401,094 --
Chinese Yuan ......... HSBC Buy 33,924,068 5,138,298 10/26/10 -- (115,251)
Euro ................. BZWS Sell 5,986,000 8,955,655 10/26/10 984,546 --
Chinese Yuan ......... HSBC Buy 20,270,115 3,064,034 10/27/10 -- (62,499)
Euro ................. UBSW Sell 9,398,000 14,073,975 10/27/10 1,559,364 --
Chinese Yuan ......... HSBC Buy 200,100,000 30,000,000 10/29/10 -- (367,238)
Japanese Yen ......... JPHQ Sell 1,081,080,000 12,000,000 11/02/10 466,570 --
Euro ................. UBSW Sell 3,997,188 5,941,980 11/17/10 619,105 --
Philippine Peso ...... JPHQ Buy 526,020,000 11,000,000 11/26/10 562,150 --
Euro ................. DBAB Buy 13,400,000 17,950,640 11/29/10 -- (106,234)
Euro ................. DBAB Sell 15,647,857 23,323,131 11/29/10 2,485,316 --
Japanese Yen ......... BOFA Sell 1,772,250,000 20,000,000 11/29/10 1,082,767 --
Euro ................. UBSW Sell 5,950,000 8,891,383 12/02/10 967,908 --
Japanese Yen ......... BZWS Sell 859,300,000 10,000,000 12/02/10 827,173 --
Mexican Peso ......... CITI Sell 12,522,000 922,023 12/02/10 -- (69,967)
Japanese Yen ......... UBSW Sell 1,055,280,000 12,000,000 12/10/10 733,348 --
Euro ................. UBSW Sell 9,520,000 13,968,982 12/13/10 1,291,273 --
British Pound ........ DBAB Sell 1,525,000 2,469,738 12/15/10 139,095 --
Euro ................. DBAB Sell 1,947,500 2,839,260 12/15/10 245,784 --
Euro ................. UBSW Sell 3,226,000 4,717,057 12/16/10 421,005 --
Euro ................. CITI Sell 10,316,000 15,083,643 12/16/10 1,345,863 --
Euro ................. UBSW Sell 6,411,937 9,291,858 12/17/10 753,096 --
Philippine Peso ...... HSBC Buy 476,600,000 10,000,000 12/28/10 445,264 --
Japanese Yen ......... HSBC Sell 642,460,000 7,000,000 1/07/11 137,000 --
Chilean Peso ......... DBAB Buy 6,367,400,000 13,000,000 1/10/11 -- (770,679)
Euro ................. UBSW Sell 16,770,000 24,101,006 1/10/11 1,767,858 --
Indian Rupee ......... HSBC Buy 512,050,000 11,000,000 1/10/11 312,480 --
Euro ................. DBAB Sell 7,289,000 10,412,337 1/12/11 705,320 --
Euro ................. BZWS Sell 5,148,050 7,408,043 1/12/11 552,206 --
Euro ................. JPHQ Sell 3,605,906 5,219,639 1/13/11 417,523 --
46 | Annual Report
Franklin Strategic Series
STATEMENT OF INVESTMENTS, APRIL 30, 2010 (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
FORWARD EXCHANGE CONTRACTS (CONTINUED)
COUNTER- CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CURRENCY PARTY TYPE QUANTITY AMOUNT(a) DATE APPRECIATION DEPRECIATION
- -------- -------- ---- --------------- -------------- ---------- ------------ ------------
Japanese Yen ......... BZWS Sell 1,289,890,000 14,000,000 1/13/11 $ 219,271 $ --
Philippine Peso ...... JPHQ Buy 107,531,000 2,312,158 1/13/11 41,075 --
Philippine Peso ...... HSBC Buy 17,260,000 369,040 1/14/11 8,647 --
Euro ................. BZWS Sell 7,281,540 10,444,277 1/19/11 747,123 --
Japanese Yen ......... DBAB Sell 815,040,000 9,000,000 1/19/11 291,366 --
Euro ................. BZWS Sell 2,962,111 4,178,265 1/26/11 233,442 --
Euro ................. DBAB Sell 9,546,786 13,479,585 1/27/11 765,479 --
Euro ................. DBAB Sell 7,579,934 10,561,122 2/04/11 465,966 --
Chilean Peso ......... BZWS Buy 1,361,100,000 2,511,023 2/08/11 100,373 --
Chilean Peso ......... JPHQ Buy 1,352,200,000 2,511,003 2/08/11 83,318 --
Chilean Peso ......... DBAB Buy 2,030,000,000 3,766,234 2/08/11 128,508 --
Indian Rupee ......... HSBC Buy 513,580,000 11,000,021 2/08/11 320,182 --
Chilean Peso ......... BZWS Buy 2,803,300,000 5,222,729 2/09/11 155,390 --
Euro ................. UBSW Sell 6,497,000 8,894,393 2/11/11 241,185 --
Euro ................. DBAB Sell 3,967,734 5,415,164 2/16/11 130,483 --
Euro ................. UBSW Sell 10,330,000 13,956,347 3/01/11 196,696 --
Japanese Yen ......... HSBK Sell 286,000,000 3,202,795 3/01/11 143,619 --
Japanese Yen ......... UBSW Sell 319,100,000 3,587,086 3/01/11 173,858 --
Japanese Yen ......... JPHQ Sell 286,100,000 3,202,086 3/01/11 141,840 --
Indian Rupee ......... DBAB Buy 59,919,000 1,320,238 4/11/11 -- (6,053)
Indian Rupee ......... DBAB Buy 128,487,000 2,830,734 4/12/11 -- (12,894)
Indian Rupee ......... JPHQ Buy 86,303,000 1,906,827 4/13/11 -- (14,273)
Indian Rupee ......... JPHQ Buy 84,715,000 1,871,741 4/15/11 -- (14,307)
Indian Rupee ......... JPHQ Buy 42,318,000 931,089 4/19/11 -- (3,534)
Indian Rupee ......... DBAB Buy 29,785,000 656,057 4/19/11 -- (3,209)
Euro ................. DBAB Sell 7,544,596 10,004,134 4/21/11 -- (48,141)
Euro ................. DBAB Sell 2,643,100 3,512,944 4/21/11 23,012 --
Chilean Peso ......... MSCO Buy 881,530,000 1,678,274 4/25/11 6,608 --
Indian Rupee ......... DBAB Buy 60,176,000 1,328,682 4/26/11 -- (10,439)
Chilean Peso ......... JPHQ Buy 937,202,000 1,784,297 4/27/11 6,812 --
Indian Rupee ......... JPHQ Buy 8,585,000 189,431 4/27/11 -- (1,379)
Chilean Peso ......... CITI Buy 1,510,671,000 2,894,006 4/28/11 -- (7,070)
Indian Rupee ......... JPHQ Buy 42,592,000 939,806 4/28/11 -- (6,915)
Indian Rupee ......... JPHQ Buy 42,633,000 941,126 4/29/11 -- (7,411)
Chilean Peso ......... DBAB Buy 6,734,000,000 13,000,000 5/04/11 -- (95,885)
Euro ................. DBAB Sell 10,590,000 14,064,579 5/04/11 80,616 --
Philippine Peso ...... JPHQ Buy 456,800,000 10,000,000 5/04/11 -- (117,474)
----------- ------------
Unrealized appreciation (depreciation) .............................................. 40,073,129 (12,400,206)
----------- ------------
Net unrealized appreciation (depreciation) ....................................... $27,672,923
===========
(a) In U.S. dollars unless otherwise indicated.
See Abbreviations on page 66.
The accompanying notes are an integral part of these financial statements.
Annual Report | 47
Franklin Strategic Series
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2010
FRANKLIN
STRATEGIC
INCOME FUND
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................. $4,124,249,692
Cost - Sweep Money Fund (Note 7) ........................ 153,470,058
--------------
Total cost of investments ............................... $4,277,719,750
==============
Value - Unaffiliated issuers ............................ $4,373,932,155
Value - Sweep Money Fund (Note 7) ....................... 153,470,058
--------------
Total value of investments .............................. 4,527,402,213
Cash ....................................................... 1,514,978
Foreign currency, at value (cost $8,487,080) ............... 8,512,434
Receivables:
Investment securities sold .............................. 26,100,132
Capital shares sold ..................................... 18,224,579
Dividends and interest .................................. 62,741,822
Unrealized appreciation on forward exchange contracts ...... 40,073,129
Unrealized appreciation on unfunded loan commitments ....... 55,584
Other assets ............................................... 9,233
--------------
Total assets ......................................... 4,684,634,104
--------------
Liabilities:
Payables:
Investment securities purchased ......................... 121,885,440
Capital shares redeemed ................................. 12,410,807
Affiliates .............................................. 3,230,969
Distributions to shareholders ........................... 3,861,137
Unrealized depreciation on forward exchange contracts ...... 12,400,206
Accrued expenses and other liabilities ..................... 1,023,766
--------------
Total liabilities .................................... 154,812,325
--------------
Net assets, at value .............................. $4,529,821,779
==============
Net assets consist of:
Paid-in capital ............................................ $4,407,948,098
Distributions in excess of net investment income ........... (5,923,405)
Net unrealized appreciation (depreciation) ................. 277,317,390
Accumulated net realized gain (loss) ....................... (149,520,304)
--------------
Net assets, at value .............................. $4,529,821,779
==============
The accompanying notes are an integral part of these financial statements.
48 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2010
FRANKLIN
STRATEGIC
INCOME FUND
--------------
CLASS A:
Net assets, at value ....................................... $2,809,864,128
==============
Shares outstanding ......................................... 272,866,655
==============
Net asset value per share(a) ............................... $ 10.30
==============
Maximum offering price per share (net asset value per
share / 95.75%) ......................................... $ 10.76
==============
CLASS B:
Net assets, at value ....................................... $ 71,035,734
==============
Shares outstanding ......................................... 6,863,028
==============
Net asset value and maximum offering price per share(a) .... $ 10.35
==============
CLASS C:
Net assets, at value ....................................... $1,107,435,608
==============
Shares outstanding ......................................... 107,553,629
==============
Net asset value and maximum offering price per share(a) .... $ 10.30
==============
CLASS R:
Net assets, at value ....................................... $ 194,901,372
==============
Shares outstanding ......................................... 18,975,884
==============
Net asset value and maximum offering price per share ....... $ 10.27
==============
ADVISOR CLASS:
Net assets, at value ....................................... $ 346,584,937
==============
Shares outstanding ......................................... 33,630,115
==============
Net asset value and maximum offering price per share ....... $ 10.31
==============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 49
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended April 30, 2010
FRANKLIN
STRATEGIC
INCOME FUND
------------
Investment income:
Dividends:
Unaffiliated issuers .................................... $ 146,502
Sweep Money Fund (Note 7) ............................... 3,811
Interest ................................................... 260,441,698
------------
Total investment income .............................. 260,592,011
------------
Expenses:
Management fees (Note 3a) .................................. 17,769,133
Distribution fees: (Note 3c)
Class A ................................................. 6,236,541
Class B ................................................. 507,059
Class C ................................................. 6,287,237
Class R ................................................. 785,048
Transfer agent fees (Note 3e) .............................. 5,575,004
Custodian fees (Note 4) .................................... 508,210
Reports to shareholders .................................... 365,928
Registration and filing fees ............................... 191,132
Professional fees .......................................... 252,807
Trustees' fees and expenses ................................ 78,601
Other ...................................................... 141,575
------------
Total expenses ....................................... 38,698,275
Expense reductions (Note 4) .......................... (987)
------------
Net expenses ...................................... 38,697,288
------------
Net investment income .......................... 221,894,723
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................. 80,650,922
Foreign currency transactions ........................... 3,355,944
------------
Net realized gain (loss) ....................... 84,006,866
------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................. 484,978,444
Translation of other assets and liabilities denominated
in foreign currencies ................................ 5,769,144
------------
Net change in unrealized appreciation
(depreciation) .............................. 490,747,588
------------
Net realized and unrealized gain (loss) ....................... 574,754,454
------------
Net increase (decrease) in net assets resulting
from operations ............................................ $796,649,177
============
The accompanying notes are an integral part of these financial statements.
50 | Annual Report
Franklin Strategic Series
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN STRATEGIC INCOME FUND
YEAR ENDED APRIL 30,
-------------------------------
2010 2009
-------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 221,894,723 $ 168,461,244
Net realized gain (loss) from investments and foreign
currency transactions ................................ 84,006,866 (170,022,370)
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies ........ 490,747,588 (219,185,882)
-------------- --------------
Net increase (decrease) in net assets resulting from
operations ........................................ 796,649,177 (220,747,008)
-------------- --------------
Distributions to shareholders from net investment income
and net foreign currency gains:
Class A ................................................. (135,337,171) (164,958,880)
Class B ................................................. (3,856,701) (7,067,919)
Class C ................................................. (48,482,556) (57,173,330)
Class R ................................................. (8,167,048) (8,712,653)
Advisor Class ........................................... (15,117,174) (10,950,834)
-------------- --------------
Total distributions to shareholders ........................ (210,960,650) (248,863,616)
-------------- --------------
Capital share transactions: (Note 2)
Class A ................................................. 379,515,044 247,701,680
Class B ................................................. (21,198,856) (10,236,429)
Class C ................................................. 191,108,075 151,132,374
Class R ................................................. 56,333,277 23,995,492
Advisor Class ........................................... 142,268,432 71,110,577
-------------- --------------
Total capital share transactions ........................... 748,025,972 483,703,694
-------------- --------------
Redemption fees ............................................ -- 9,563
-------------- --------------
Net increase (decrease) in net assets ................ 1,333,714,499 14,102,633
Net assets:
Beginning of year .......................................... 3,196,107,280 3,182,004,647
-------------- --------------
End of year ................................................ $4,529,821,779 $3,196,107,280
============== ==============
Distributions in excess of net investment income included in
net assets:
End of year ................................................ $ (5,923,405) $ (11,458,487)
============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 51
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as an open-end investment company, consisting of
eight separate funds. The Franklin Strategic Income Fund (Fund) is included in
this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers five classes of shares: Class A, Class B,
Class C, Class R, and Advisor Class. Each class of shares differs by its initial
sales load, contingent deferred sales charges, distribution fees, voting rights
on matters affecting a single class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
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 or
52 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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. The Fund may enter
into foreign currency exchange contracts to facilitate transactions denominated
in a foreign currency. 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
Annual Report | 53
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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 generally enters into forward exchange contracts in order to manage
and/or 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 contracts, cash or securities may be required to be
deposited as collateral. Unrestricted cash received may be invested according to
the Fund's investment objectives.
See Note 11 regarding other derivative information.
54 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (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
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. As a result, no provision for federal
income taxes is required. The Fund files U.S. income tax returns as well as tax
returns in certain other jurisdictions. As of April 30, 2010, and for all open
tax years, the Fund has determined that no provision for income tax is required
in the Fund's financial statements. Open tax years are those that remain subject
to examination by such taxing authorities, which in the case of the U.S. is
three years after the filing of a fund's tax return.
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
Annual Report | 55
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
regulations (tax basis). Distributable earnings determined on a tax basis may
differ from earnings recorded in accordance with accounting principles generally
accepted in the United States of America. These differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts to
reflect their tax character. These reclassifications have no impact on net
assets or the results of operations. Temporary differences are not reclassified,
as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.
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.
56 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, 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 April 30, 2010, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
YEAR ENDED APRIL 30,
---------------------------------------------------------
2010 2009
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES:
Shares sold .................... 96,756,165 $ 936,783,436 89,966,491 $ 809,736,545
Shares issued in reinvestment of
distributions ............... 11,144,263 108,298,370 14,281,669 124,892,924
Shares redeemed ................ (68,294,232) (665,566,762) (77,662,451) (686,927,789)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 39,606,196 $ 379,515,044 26,585,709 $ 247,701,680
=========== ============= =========== =============
CLASS B SHARES:
Shares sold .................... 1,271,012 $ 12,244,216 3,223,884 $ 29,661,456
Shares issued in reinvestment of
distributions ............... 291,857 2,834,214 540,736 4,759,007
Shares redeemed ................ (3,712,612) (36,277,286) (4,987,063) (44,656,892)
----------- ------------- ----------- -------------
Net increase (decrease) ........ (2,149,743) $ (21,198,856) (1,222,443) $ (10,236,429)
=========== ============= =========== =============
CLASS C SHARES:
Shares sold .................... 37,034,411 $ 357,543,374 38,790,729 $ 351,484,801
Shares issued in reinvestment of
distributions ............... 3,713,298 36,108,025 4,622,193 40,270,851
Shares redeemed ................ (20,775,721) (202,543,324) (27,181,977) (240,623,278)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 19,971,988 $ 191,108,075 16,230,945 $ 151,132,374
=========== ============= =========== =============
CLASS R SHARES:
Shares sold .................... 9,413,428 $ 91,379,881 5,861,272 $ 52,624,182
Shares issued in reinvestment of
distributions ............... 790,779 7,684,253 927,934 8,059,242
Shares redeemed ................ (4,374,374) (42,730,857) (4,178,690) (36,687,932)
----------- ------------- ----------- -------------
Net increase (decrease) ........ 5,829,833 $ 56,333,277 2,610,516 $ 23,995,492
=========== ============= =========== =============
Annual Report | 57
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
YEAR ENDED APRIL 30,
---------------------------------------------------------
2010 2009
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
ADVISOR CLASS SHARES:
Shares sold .................... 20,020,563 $194,255,595 10,210,308 $ 89,961,976
Shares issued in reinvestment of
distributions ............... 1,231,770 12,020,140 1,093,583 9,458,220
Shares redeemed ................ (6,494,586) (64,007,303) (3,258,282) (28,309,619)
----------- ------------ ----------- ------------
Net increase (decrease) ........ 14,757,747 $142,268,432 8,045,609 $ 71,110,577
=========== ============ =========== ============
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.
58 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the 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.
In addition, under the Fund's Class B, C, and R compensation distribution plans,
the Fund pays Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate
for each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A .. 0.25%
Class B .. 0.65%
Class C .. 0.65%
Class R .. 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ............................................ $1,675,908
Contingent deferred sales charges retained ................... $ 184,001
E. TRANSFER AGENT FEES
For the year ended April 30, 2010, the Fund paid transfer agent fees of
$5,575,004, of which $3,146,322 was retained by Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended April 30, 2010, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 59
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At April 30, 2010, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2011 ............................... $ 10,885,854
2017 ............................... 104,722,915
2018 ............................... 32,677,012
------------
$148,285,781
============
The tax character of distributions paid during the years ended April 30, 2010
and 2009, was as follows:
2010 2009
------------ ------------
Distributions paid from
ordinary income .... $210,960,650 $248,863,616
At April 30, 2010, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ........................................ $4,289,513,429
==============
Unrealized appreciation .................................... $ 286,876,120
Unrealized depreciation .................................... (48,987,336)
--------------
Net unrealized appreciation (depreciation) ................. $ 237,888,784
==============
Distributable earnings - undistributed ordinary income ..... $ 32,692,877
==============
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, straddles, regulatory settlement, 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, payments-in-kind, bond
discounts and premiums and defaulted securities.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2010, aggregated $2,758,891,707 and $2,113,741,122,
respectively.
60 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
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. Pursuant
to a SEC exemptive order specific to the Fund's investment in the Sweep Money
Fund, 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 April 30, 2010, the Fund had 45.40% of its portfolio invested in high yield,
senior secured floating rate notes, or other securities rated below investment
grade. These securities may be more sensitive to economic conditions causing
greater price volatility and are potentially subject to a greater risk of loss
due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At April 30, 2010, the aggregate value of these
securities was $23,527,698, representing 0.52% 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 April 30, 2010, the Fund held investments in restricted securities, excluding
144A securities deemed to be liquid, as follows:
ACQUISITION
SHARES ISSUER DATE COST VALUE
- ------ -------------------------------------- ----------------- ---------- ----------
516,372 Cambridge Industries Liquidating Trust
Interest .......................... 1/09/02 $ -- $ --
5,579,939(a) Turtle Bay Resort .................... 8/18/08 - 6/03/09 5,996,181 5,579,939
64,666 VS Holdings Inc. ..................... 12/06/01 64,666 --
----------
TOTAL RESTRICTED SECURITIES (0.12% of Net Assets) .................. $5,579,939
==========
(a) The Fund also invests in unrestricted securities of the issuer, valued at
$14,080,882 as of April 30, 2010.
Annual Report | 61
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
10. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At April 30, 2010, unfunded commitments were as follows:
UNFUNDED
BORROWER COMMITMENT
- -------- ----------
EnviroSolutions Real Property Holdings Inc., DIP Revolver .. $1,781,666
==========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
11. OTHER DERIVATIVE INFORMATION
At April 30, 2010, 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 $40,073,129 contracts $12,400,206
For the year ended April 30, 2010, the effect of derivative contracts on the
Fund's Statement of Operations was as follows:
CHANGE IN AVERAGE
UNREALIZED AMOUNT
DERIVATIVE CONTRACTS REALIZED GAIN APPRECIATION OUTSTANDING
NOT ACCOUNTED FOR AS STATEMENT OF GAIN (LOSS) (DEPRECIATION) DURING THE
HEDGING INSTRUMENTS OPERATIONS LOCATIONS FOR THE YEAR FOR THE YEAR YEAR(a)
- -------------------- ----------------------------------------- ------------- -------------- ------------
Foreign exchange
contracts ....... Net realized gain (loss) from foreign
currency transactions/Net change in
unrealized appreciation (depreciation)
on translation of other assets and
liabilities denominated in foreign
currencies $1,904,103 $6,068,434 $626,263,434
(a) Represents the average notional amount for other derivative contracts
outstanding during the period. For derivative contracts denominated in
foreign currencies, notional amounts are converted into U.S. dollars.
See Note 1(d) regarding derivative financial instruments.
62 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
12. OTHER CONSIDERATIONS
For Turtle Bay, officers, directors or employees of the Fund's Investment
Manager, may serve from time to time as members of boards of directors of
companies in which the funds invest. Such participation may result in the
possession by the Investment Manager of material non-public information which,
pursuant to the Fund's policies and the requirements of applicable securities
laws, could prevent the Fund from trading in the securities of such companies
for limited or extended periods of time.
For Radio One, 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.
13. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds
(collectively "Borrowers"), managed by Franklin Templeton Investments, are
borrowers in a joint syndicated senior unsecured credit facility totaling $750
million (Global Credit Facility) which matures on January 21, 2011. This Global
Credit Facility provides a source of funds to the Borrowers for temporary and
emergency purposes, including the ability to meet future unanticipated or
unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to
interest charged on any borrowings made by the Fund and other costs incurred by
the Fund, pay its share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility, based upon its
relative share of the aggregate net assets of all of the Borrowers, including an
annual commitment fee of 0.10% based upon the unused portion of the Global
Credit Facility, which is reflected in other expenses on the Statement of
Operations. During the year ended April 30, 2010, the Fund did not utilize the
Global Credit Facility.
Annual Report | 63
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
14. 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.
The following is a summary of the inputs used as of April 30, 2010, 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)
Banks ......................... $ 322,000 $ 227,250 $ -- $ 549,250
Consumer Services ............. -- -- 5,579,939 5,579,939
Diversified Financials ........ -- 1,767,484 -- 1,767,484
Other Equity Investments(b) ... 4,408,447 -- --(c) 4,408,447
Senior Floating Rate
Interests ..................... -- 641,778,870 10,552,584 652,331,454
Corporate Bonds .................. -- 1,778,966,077 -- 1,778,966,077
Asset-Backed Securities and
Commercial Mortgage-Backed
Securities .................... -- 293,841,103 -- 293,841,103
Mortgage-Backed Securities ....... -- 163,055,292 -- 163,055,292
U.S. Government and Agency
Securities .................... -- 175,987,164 -- 175,987,164
Foreign Government and
Agency Securities ............. -- 1,089,272,832 -- 1,089,272,832
Municipal Bonds .................. -- 143,416,793 -- 143,416,793
Short Term Investments ........... 153,470,058 64,756,320 -- 218,226,378
------------ -------------- ----------- --------------
Total Investments in
Securities ................. $158,200,505 $4,353,069,185 $16,132,523(c) $4,527,402,213
============ ============== =========== ==============
Forward Exchange Contracts .......... -- 40,073,129 -- 40,073,129
Unfunded Loan Commitments ........... -- 55,584 -- 55,584
LIABILITIES:
Forward Exchange Contracts .......... -- 12,400,206 -- 12,400,206
(a) Includes common, preferred, and convertible 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 April 30, 2010.
64 | Annual Report
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
14. FAIR VALUE MEASUREMENTS (CONTINUED)
At April 30, 2010, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:
NET CHANGE IN
UNREALIZED
NET CHANGE APPRECIATION
BALANCE AT NET IN UNREALIZED NET TRANSFER IN (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES (OUT OF) BALANCE AT ON ASSETS HELD
OF YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 END OF YEAR AT YEAR END
---------- ----------- -------------- ----------- ----------- ----------- --------------
ASSETS:
Equity Investments:
Consumer
Services ........ $-- $-- $(416,242) $ 5,996,181 $-- $ 5,579,939 $(416,242)
Senior Floating
Rate Interests ..... -- -- 727,315 9,825,269 -- 10,552,584 727,315
--- --- --------- ----------- --- ----------- ---------
Total ........... $-- $-- $ 311,073 $15,821,450 $-- $16,132,523 $ 311,073
=== === ========= =========== === =========== =========
15. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board issued an Accounting
Standards Update which enhances and clarifies existing fair value measurement
disclosure requirements and is effective for interim and annual periods
beginning after December 15, 2009. The Fund believes the adoption of this
Accounting Standards Update will not have a material impact on its financial
statements.
16. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial
statements and determined that no events have occurred that require disclosure.
Annual Report | 65
Franklin Strategic Series
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
ABBREVIATIONS
COUNTERPARTY
BOFA - Bank of America N.A
BZWS - Barclays Bank PLC
CITI - Citibank N.A.
DBAB - Deutsche Bank AG
FBCO - Credit Suisse International
HSBC - HSBC Bank USA
HSBK - HSBC BANK PLC
JPHQ - JPMorgan Chase Bank, N.A.
MSCO - Morgan Stanley and Co., Inc.
UBSW - UBS AG
CURRENCY
AUD - Australian Dollar
BRL - Brazilian Real
EGP - Egyptian Pound
EUR - Euro
GBP - British Pound
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
CDO - Collateralized Debt Obligation
CLO - Collateralized Loan Obligation
FGIC - Financial Guaranty Insurance Co.
FRN - Floating Rate Note
GO - General Obligation
ID - Improvement District
IDA - Industrial Development Authority/Agency
L/C - Letter of Credit
LOC - Letter of Credit
NATL - National Public Financial Guarantee Corp.
NATL RE - National Public Financial Guarantee Corp. Reinsured
PIK - Payment-In-Kind
SF - Single Family
USD - Unified/Union School District
66 | Annual Report
Franklin Strategic Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FRANKLIN STRATEGIC INCOME FUND
TO THE BOARD OF TRUSTEES OF FRANKLIN STRATEGIC SERIES AND SHAREHOLDERS OF THE
FRANKLIN STRATEGIC INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin Strategic Income Fund
(one of the funds constituting the Franklin Strategic Series, hereafter referred
to as the "Fund") at April 30, 2010, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 2010 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 16, 2010
Annual Report | 67
Franklin Strategic Series
TAX DESIGNATION (UNAUDITED)
FRANKLIN STRATEGIC INCOME FUND
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
the maximum amount allowable but no less than $37,229 as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended April 30, 2010. Distributions, including qualified dividend income,
paid during calendar year 2010 will be reported to shareholders on Form 1099-DIV
in January 2011. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
68 | Annual Report
Franklin Strategic Series
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------- -------------- ------------------ --------------------- -------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1991 131 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
SAM GINN (1937) Trustee Since 2007 108 ICO Global Communications
One Franklin Parkway (Holdings) Limited (satellite company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 131 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains
Insurance Group, Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison - United States Treasury Department (1988-1989).
FRANK W.T. LAHAYE (1929) Trustee Since 1991 107 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
Annual Report | 69
NUMBER OF
PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------- -------------- ------------------ --------------------- -------------------------------------------
J. MICHAEL LUTTIG (1954) Trustee Since 131 Boeing Capital Corporation (aircraft
One Franklin Parkway December 2009 financing).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President, General Counsel and member of Executive Council, The Boeing Company; and FORMERLY, Federal Appeals Court
Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).
FRANK A. OLSON (1932) Trustee Since 2007 131 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 139 Cbeyond, Inc. (business
One Franklin Parkway communications provider).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 108 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial
Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President -
Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting
firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------- -------------- ------------------ --------------------- -------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 131 None
One Franklin Parkway Chairman of 1991 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies
in Franklin Templeton Investments.
70 | Annual Report
NUMBER OF
PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------- -------------- ------------------ --------------------- -------------------------------------------
**RUPERT H. JOHNSON, JR. Trustee Since 1991 51 None
(1940)
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior
Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 25 of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
LAURA F. FERGERSON (1962) Chief Since 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant
Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin
Templeton Services, LLC (1997-2003).
GASTON GARDEY (1967) Treasurer, Since 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton
Investments.
ALIYA S. GORDON (1973) Vice President Since 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
Annual Report | 71
NUMBER OF
PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------- -------------- ------------------ --------------------- -------------------------------------------
STEVEN J. GRAY (1955) Vice President Since August 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and
officer of 45 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) President and Since April 2010 Not Applicable Not Applicable
One Franklin Parkway Chief
San Mateo, CA 94403-1906 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and
of 10 of the investment companies in Franklin Templeton Investments.
CHRISTOPHER J. MOLUMPHY Vice President Since 2000 Not Applicable Not Applicable
(1962)
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC;
and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 22 of the investment companies in Franklin
Templeton Investments.
ROBERT C. ROSSELOT (1960) Vice President Since August 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale,
FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President
and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of
the South; and officer of 45 of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin
Templeton Investments.
72 | Annual Report
NUMBER OF
PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------- -------------- ------------------ --------------------- -------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer
of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Partner,
Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
Annual Report | 73
Franklin Strategic Series
SHAREHOLDER INFORMATION
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 13, 2010, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds within the Trust,
including Franklin Strategic Income Fund (Fund(s)). In reaching this decision,
the Board took into account information furnished throughout the year at regular
Board meetings, as well as information prepared specifically in connection with
the annual renewal review process. Information furnished and discussed
throughout the year included investment performance reports and related
financial information for each Fund, as well as periodic reports on shareholder
services, legal, compliance, pricing, brokerage commissions and execution and
other services provided by the Investment Manager (Manager) and its affiliates.
Information furnished specifically in connection with the renewal process
included a report for each Fund prepared by Lipper, Inc. (Lipper), an
independent organization, as well as additional material, including a Fund
profitability analysis report prepared by management. The Lipper reports
compared each Fund's investment performance and expenses with those of other
mutual funds deemed comparable to the Fund as selected by Lipper. The Fund
profitability analysis report discussed the profitability to Franklin Templeton
Investments from its overall U.S. fund operations, as well as on an individual
fund-by-fund basis. Included with such profitability analysis report was
information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates to U.S. mutual funds and other accounts, including
management's explanation of differences where relevant and a three-year expense
analysis with an explanation for any increase in expense ratios. Additional
material accompanying such report was a memorandum prepared by management
describing project initiatives and capital investments relating to the services
provided to the Funds by the Franklin Templeton Investments organization, as
well as a memorandum relating to economies of scale and a comparative analysis
concerning transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
74 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted that such systems and
procedures had functioned smoothly during the Florida hurricanes and blackouts
experienced in recent years. Among other factors taken into account by the Board
were the Manager's best execution trading policies, including a favorable report
by an independent portfolio trading analytical firm. Consideration was also
given to the experience of the Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of a portfolio
manager's bonus compensation was the relative investment performance of the
funds he or she managed and that a portion of such bonus was required to be
invested in a predesignated list of funds within such person's fund management
area so as to be aligned with the interests of Fund shareholders. The Board also
took into account the quality of transfer agent and shareholder services
provided Fund shareholders by an affiliate of the Manager, noting continuing
expenditures by management to increase and improve the scope of such services,
periodic favorable reports on such service conducted by third parties, and the
continuous enhancements to and high industry ranking given the Franklin
Templeton website. Particular attention was given to management's conservative
approach and diligent risk management procedures, including continuous
monitoring of counterparty credit risk and attention given to derivatives and
other complex instruments. The Board also took into account, among other things,
management's efforts in establishing a global credit facility for the benefit of
the Fund and other accounts managed by Franklin Templeton Investments to provide
a source of cash for temporary and emergency purposes or to meet unusual
redemption requests as well as the strong financial position of the Manager's
parent company and its commitment to the mutual fund business as evidenced by
its subsidization of money market funds. The Board also noted management's
efforts to minimize any negative impact on the nature and quality of services
provided the Fund arising from Franklin Templeton Investments' implementation of
a hiring freeze and employee reductions in response to market conditions during
the latter part of 2008 and early 2009.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings throughout the year, particular attention in
assessing performance was given to the Lipper reports furnished for the
Annual Report | 75
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
agreement renewal. The Lipper reports prepared for the Fund showed the
investment performance of its Class A shares in comparison to a performance
universe selected by Lipper. Comparative performance for the Fund was shown for
the one-year period ended January 31, 2010, and previous periods ended that date
of up to 10 years. The following summarizes the performance results for the Fund
and the Board's view of such performance.
The performance universe for the Fund consisted of the Fund and all retail and
institutional multisector income funds as selected by Lipper. The Lipper report
comparison showed that for the one-year period both the Fund's income return and
the Fund's total return were in the second-lowest quintile of such performance
universe, but that on an annualized basis both the Fund's income return and the
Fund's total return were in the highest or second-highest quintile of such
universe during each of the previous three-, five- and 10-year periods. In
discussing the one-year performance, management explained that it reflected the
Fund's strategy of generally being underweighted in high yield corporates and
other lesser quality issues compared to many of its peers, which type of
securities had performed well during such period. The Board was satisfied with
the Fund's investment performance as set forth in the Lipper report, noting
management's explanation, the Fund's strong long-term performance, and the fact
that the Fund's actual income and total return for the one-year period as shown
in such report were 5.56% and 23.48%, respectively.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group.
Lipper expense data is based upon information taken from each fund's most recent
annual report, which reflects historical asset levels that may be quite
different from those currently existing, particularly in a period of market
volatility. While recognizing such inherent limitation and the fact that expense
ratios generally increase as assets decline and decrease as assets grow, the
Board believed the independent analysis conducted by Lipper to be an appropriate
measure of comparative expenses. In reviewing comparative costs, Lipper provides
information on the Fund's contractual investment management fee in comparison
with the investment management fee that would have been charged by other funds
within its Lipper expense group assuming they were similar in size to the Fund,
as well as the actual total expense ratio of the Fund in comparison with those
of its Lipper expense group. The Lipper contractual investment management fee
analysis includes administrative charges as being part of the investment
management fee, and actual total expenses, for comparative consistency, are
shown by Lipper for Fund Class A shares. The results of such expense comparisons
showed the contractual investment management fee rate and actual total expense
ratio for the Fund to be in the least expensive quintile of its Lipper expense
group. The Board was satisfied with the contractual management fees and total
expense ratio of the Fund in comparison to its expense group as shown in the
Lipper reports.
76 | Annual Report
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
the Fund during the 12-month period ended September 30, 2009, being the most
recent fiscal year-end for Franklin Resources, Inc., the Manager's parent. In
reviewing the analysis, attention was given to the methodology followed in
allocating costs to the Fund, it being recognized that allocation methodologies
are inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the Manager's
own cost accounting, the allocation methodology was consistent with that
followed in profitability report presentations for the Fund made in prior years
and that the Fund's independent registered public accounting firm had been
engaged by the Manager to review the reasonableness of the allocation
methodologies solely for use by the Fund's Board in reference to the
profitability analysis. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in establishing the
infrastructure necessary for the type of mutual fund operations conducted by the
Manager and its affiliates may not be fully reflected in the expenses allocated
to the Fund in determining its profitability, as well as the fact that the level
of profits, to a certain extent, reflected operational cost savings and
efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Fund,
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory
requirements. In addition, the Board considered a third-party study comparing
the profitability of the Manager's parent on an overall basis to other publicly
held managers broken down to show profitability from management operations
exclusive of distribution expenses, as well as profitability including
distribution expenses. The Board also considered the extent to which the Manager
and its affiliates might derive ancillary benefits from fund operations,
including its interest in a joint venture entity that financed up-front
commissions paid to brokers/dealers who sold fund Class B shares prior to
February 2005 when the offering of such shares was discontinued, as well as
potential benefits resulting from allocation of fund brokerage and the use of
commission dollars to pay for research. Based upon its consideration of all
these factors, the Board determined that the level of profits realized by the
Manager and its affiliates from providing services to the Fund was not excessive
in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin
Annual Report | 77
Franklin Strategic Series
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN STRATEGIC INCOME FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
on management services provided such a fund. The Board noted that economies of
scale were shared with the Fund and its shareholders through management fee
breakpoints so that as a Fund grows in size, its effective management fee rate
declines. The fee structure under the investment management agreement for the
Fund contains breakpoints that continued to asset levels that exceeded their
asset size at December 31, 2009. In view of such fee structure and the favorable
expense comparisons of the Fund within its expense group, the Board believed
that to the extent economies of scale may be realized by the Manager of the Fund
and its affiliates, there was a sharing of benefits with the Fund and its
shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager has established Proxy Voting Policies and
Procedures (Policies) that the Trust uses to determine how to vote proxies
relating to portfolio securities. Shareholders may view the Trust's complete
Policies online at franklintempleton.com. Alternatively, shareholders may
request copies of the Policies free of charge by calling the Proxy Group collect
at (954) 527-7678 or by sending a written request to: Franklin Templeton
Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are
also made available online at franklintempleton.com and posted on the U.S.
Securities and Exchange Commission's website at sec.gov and reflect the most
recent 12-month period ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling (800)
SEC-0330.
HOUSEHOLDING OF REPORTS AND PROSPECTUSES
You will receive the Fund's financial reports every six months as well as an
annual updated summary prospectus (prospectus available upon request). To reduce
Fund expenses, we try to identify related shareholders in a household and send
only one copy of the financial reports and prospectuses. This process, called
"householding," will continue indefinitely unless you instruct us otherwise. If
you prefer not to have these documents householded, please call us at (800)
632-2301. At any time you may view current prospectuses/summary prospectuses and
financial reports on our website. If you choose, you may receive these documents
through electronic delivery.
78 | Annual Report
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Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A SUMMARY PROSPECTUS AND/OR 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 A 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 DynaTech Fund
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 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 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 Conservative Allocation Fund(3)
Franklin Templeton Growth Allocation Fund(3)
Franklin Templeton Moderate Allocation Fund(3)
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(4)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(4)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(4)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(5)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(6)
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(7)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(8)
Michigan(8)
Minnesota(8)
Missouri
New Jersey
New York(7)
North Carolina
Ohio(8)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(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.) Effective 5/1/10, the Franklin Templeton Target Funds changed their name to
the Franklin Templeton Allocation Funds. The funds' investment goals and
principal investment strategies remained unchanged.
(4.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(5.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(6.) The fund invests primarily in insured municipal securities.
(7.) These funds are available in three or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and a money market portfolio (CA only).
(8.) 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 2/15/09.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
07/10 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY
on franklintempleton.com
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN STRATEGIC INCOME FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(800) 632-2301
Authorized for distribution only when accompanied or preceded by a summary
prospectus and/or prospectus. Investors should carefully consider a fund's
investment goals, risks, charges and expenses before investing. A prospectus
contains this and other information; please read it carefully before investing.
To 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.
(C) 2010 Franklin Templeton Investments. All rights reserved.
194 A 06/10
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is John B. Wilson and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the
principal accountant in connection with statutory and regulatory filings or
engagements were $284,609 for the fiscal year ended April 30, 2010 and
$301,396 for the fiscal year ended April 30, 2009.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that
are reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $762 for the fiscal year ended
April 30, 2010 and $6,000 for the fiscal year ended April 30, 2009. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended April 30,
2010 and $10,704 for the fiscal year ended April 30, 2009. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant other than
services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal
year ended April 30, 2010 and $273,373 for the fiscal year ended April 30,
2009. The services for which these fees were paid included review of materials
provided to the fund Board in connection with the investment management
contract renewalprocess.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a
designated member or members of the committee; provided the policies and
procedures aredetailed as to the particular service and the committee is
informed of eachservice and such policies and procedures do not include
delegation of audit committee responsibilities, as contemplated under
the Securities Exchange Act of 1934, to management; subject, in the case of
(ii) through (iv), to any waivers,exceptions or exemptions that may be
available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $762 for the fiscal year ended April 30, 2010 and $290,077 for
the fiscal year ended April 30, 2009.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) CHANGES IN INTERNAL CONTROLS.
There have been no significant changes in the Registrant's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN STRATEGIC SERIES
By /s/Laura F. Fergerson
------------------
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date June 25, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/Laura F. Fergerson
------------------
Laura F. Fergerson
Chief Executive Officer - Finance and Administration
Date June 25, 2010
By /s/Gaston Gardey
---------------------
Gaston Gardey
Chief Financial Officer and Chief Accounting Officer
Date June 25, 2010