UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06243
Franklin Strategic Series
(Exact name of registrant as specified in charter)
One Franklin Parkway,
San Mateo, Ca 94403-1906
(Address of principal executive offices) (Zip code)
Craig S. Tyle,
One Franklin Parkway,
San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant’s telephone number, including area code: 650 312-2000
Date of fiscal year end: 4/30
Date of reporting period: 4/30/18
Item 1. Reports to Stockholders.
Franklin Templeton Investments
Why choose Franklin Templeton Investments?
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
During the 12 months ended April 30, 2018, mostly upbeat economic data, better US corporate earnings and generally supportive monetary policies, combined with the passage of the US Tax Reform bill, aided US markets. However, investor sentiment was dampened by Korean peninsula tensions, US political uncertainties, and a potentially quicker pace of US Federal Reserve (Fed) interest rate hikes due to strong US economic growth and rising inflation.
The Fed began reducing its balance sheet in October 2017 and raised its federal funds target rate in June and December 2017 and March 2018. It maintained its forecast of three rate increases in 2018. The 10-year US Treasury yield began the period at 2.29% and ended the period at 2.95%. Increased capital investment by leading US companies, particularly in information technology, encouraged equity investors, while US-China trade disputes, protectionist US trade policies and the potential for tougher consumer data privacy regulations caused concerns. Within this environment, US stocks, as measured by the Standard & Poor’s® 500 Index, generated a double-digit positive total return.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors
to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Strategic Series’ annual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
Not FDIC Insured | May Lose Value | No Bank Guarantee |
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Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
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The US economy grew during the 12 months under review. The economy strengthened in 2017’s second and third quarters but moderated in the next two quarters. The slower growth in 2018’s first quarter reflected a slowdown in consumer spending, residential fixed investment, exports, and state and local government spending. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 4.4% in April 2017 to 3.9% at period-end.1 Annual inflation, as measured by the Consumer Price Index, increased from 2.2% in April 2017 to 2.5% at period-end.1
The US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June and December 2017 meetings and began reducing its balance sheet in October as part of its ongoing effort to normalize monetary policy. In February 2018, new Fed Chair Jerome Powell spoke before Congress and indicated the Fed saw signs of a continued strong labor market and economic growth. He reiterated the Fed’s intention to gradually raise interest rates in an effort to keep the economy from overheating and as inflation increases toward the Fed’s target. However, he noted there was no evidence of the economy overheating and he had yet to see a clear upward move in wages. At its March meeting, the Fed raised its target range for the federal funds rate 0.25% to 1.50%–1.75% and maintained its forecast of three rate increases in 2018. Additionally, the Fed upgraded its economic forecasts for 2018 and 2019, and its rate projections indicated the number of rate hikes would increase in 2019 and 2020.
US equity markets rose overall during the period, benefiting from mostly upbeat economic data and better US corporate earnings. Markets were also supported in 2017 by the prospect for reforms in the European Union with Emmanuel Macron’s election as France’s president, the Fed’s indication of gradual rate hikes and the passage of the US tax reform bill. However, concerns about political uncertainties in the US, tensions between the US and North Korea, and the progress of the US tax reform bill curbed market sentiment at times. After reaching new all-time highs in January 2018, US stocks declined in February amid concerns that strong economic growth and rising inflation would lead the Fed to increase its target rate faster than expected. In March, markets were pressured further by a broad sell-off in information technology stocks due to a potential for tighter regulation in the sector arising from
concerns about consumer data privacy. The Trump administration’s protectionist policies and escalating trade tensions between the US and China also dampened investor sentiment. However, stocks rebounded amid the prospects for trade negotiations between the US and China, easing tensions in the Korean peninsula and strong first-quarter 2018 earnings results from many companies. In this environment, the broad US stock market, as measured by the Standard & Poor’s 500 Index, generated a +13.27% total return for the period.2
The foregoing information reflects our analysis and opinions as of April 30, 2018. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
1. Source: Bureau of Labor Statistics.
2. Source: Morningstar.
See www.franklintempletondatasources.com for additional data provider information.
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Franklin Focused Core Equity Fund
This annual report for Franklin Focused Core Equity Fund covers the fiscal year ended April 30, 2018. As previously communicated, effective June 1, 2018, the Fund changed its name to Franklin Select U.S. Equity Fund. Additionally, the Fund changed its investment strategy, but its goal remained the same.
Your Fund’s Goal and Main Investments
The Fund seeks capital appreciation by investing, under normal market conditions, at least 80% of its net assets in equity securities (predominantly common stocks). The Fund invests primarily to predominantly in equity securities of large capitalization companies, which are similar in size to those in the Standard & Poor’s 500 Index (S&P 500®).
Performance Overview
The Fund’s Class A shares delivered a +7.37% cumulative total return for the 12 months under review. In comparison, the S&P 500, which tracks the broad US stock market, generated a +13.27% total return.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 7.
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.
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 and various portfolio selection screens. We seek to take advantage of price dislocations that result from the market’s short-term focus. Our analysis includes a review 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. Nonetheless, we may regard an investment as worthwhile due to its future risk-return prospects even when it is not currently considered undervalued. We generally use a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate
Portfolio Composition
Based on Total Net Assets as of 4/30/18
companies. Our analysts help to identify and assess factors such as a company’s market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation.
Manager’s Discussion
During the 12 months under review, key contributors to the Fund’s absolute performance included holdings in the information technology (IT), financials and real estate sectors.
Within the IT sector, our investments in payment solutions firm Mastercard, software and IT services company Microsoft, and domain name registration and web hosting services provider
1. Source: Morningstar.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
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 37.
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FRANKLIN FOCUSED CORE EQUITY FUND
GoDaddy2 drove performance. Mastercard reported a stronger-than-expected fourth-quarter 2017 revenue growth, and management described its outlook for 2018 as slightly better than 2017. The company continued to benefit from the ongoing transition from cash toward card and electronic payments. Microsoft benefited performance due to demand for its suite of office and cloud-based products. The company is a beneficiary of healthy levels of corporate spending for the IT services industry.
In the financial sector, our position in financial services firm Charles Schwab and investment banking and financial services firm JPMorgan Chase2 aided results. Charles Schwab reported strong 2017 results highlighted by solid revenue, earnings and client asset growth.
In real estate, commercial real estate and investment services firm CBRE Group benefited Fund performance.2 Elsewhere, insurance products and services provider Aetna aided results.2
In contrast, key detractors from the Fund’s absolute performance included holdings in the consumer discretionary, health care and consumer staples sectors.
Within the consumer discretionary sector, our position in Altice, which operates as a cable, fiber, telecommunications, contents and media company, detracted from Fund performance.2 Shares of Netherlands-based Altice, which derives its revenue predominantly from France and the US, declined largely due to lower revenue in its French unit and investor concerns about the company’s debt level and cost-cutting ability.
In health care, our holdings in biopharmaceutical firm Allergan and pharmaceutical company Horizon Pharma hindered Fund performance.2 Allergan’s shares declined during the period despite the company’s good revenue and earnings performance, high profit margin and low capital model.
In the consumer staples sector, our position in health care services provider CVS Health hindered Fund performance.2
Other key individual detractors included our holdings in industrial conglomerate General Electric, oil and gas exploration and production company Anadarko Petroleum, and travel technology firm Sabre.2 General Electric struggled with lower-than-expected cash flow generation, ultimately resulting
Top 10 Holdings
4/30/18
Company Sector/Industry | % of Total Net Assets | |
Amazon.com Inc. | 4.4% | |
Consumer Discretionary
| ||
The Charles Schwab Corp. | 3.2% | |
Financials
| ||
Microsoft Corp. | 3.1% | |
Information Technology
| ||
Alphabet Inc. | 3.0% | |
Information Technology
| ||
BlackRock Inc. | 3.0% | |
Financials
| ||
Analog Devices Inc. | 2.9% | |
Information Technology
| ||
Raytheon Co. | 2.8% | |
Industrials
| ||
Alibaba Group Holding Ltd. (China) | 2.6% | |
Information Technology
| ||
UnitedHealth Group Inc. | 2.6% | |
Health Care
| ||
Mastercard Inc. | 2.6% | |
Information Technology
|
in a reduction in its dividend distribution, and its oil and gas and power segments remained challenged.
2. Not held at period-end.
See www.franklintempletondatasources.com for additional data provider information.
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FRANKLIN FOCUSED CORE EQUITY FUND
Thank you for your continued participation in Franklin Focused Core Equity Fund.
Serena Perin Vinton, CFA Lead Portfolio Manager | ||
Chris Anderson | ||
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, 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.
Serena Perin Vinton is a senior vice president and portfolio manager with Franklin Equity Group. Ms. Perin Vinton joined Franklin Templeton Investments in 1991. She served as an analyst and portfolio manager in the international fixed-income group for four years, before joining the Franklin Equity Group in 1995. Her prior equity research responsibilities include analysis of the consumer products and household goods, specialty retail, apparel/footwear/ textiles, paper and forest products, building materials and steel industries. Prior to joining Franklin Templeton, Ms. Perin Vinton worked as a research assistant for a British Member of Parliament in London. Ms. Perin Vinton earned her B.A. in business economics from Brown University. She is a Chartered Financial Analyst (CFA) charterholder and a member of the CFA Institute.
CFA® is a trademark owned by CFA Institute.
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FRANKLIN FOCUSED CORE EQUITY FUND
Performance Summary as of April 30, 2018
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. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class | Cumulative Total Return2 | Average Annual Total Return3 | ||
A | ||||
1-Year
| +7.37%
| +1.18%
| ||
5-Year
|
+64.39%
|
+9.15%
| ||
10-Year |
+122.55%
|
+7.69% | ||
Advisor
| ||||
1-Year
| +7.67%
| +7.67%
| ||
5-Year
|
+66.55%
|
+10.74%
| ||
10-Year
|
+128.30%
|
+8.61%
|
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.
See page 9 for Performance Summary footnotes.
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FRANKLIN FOCUSED CORE EQUITY FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 9 for Performance Summary footnotes.
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FRANKLIN FOCUSED CORE EQUITY FUND
PERFORMANCE SUMMARY
Total Annual Operating Expenses5
Share Class
| With Waiver
| Without Waiver
| ||||||
A
|
| 1.25%
|
|
| 1.47%
|
| ||
Advisor
|
| 1.00%
|
|
| 1.22%
|
|
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. The Fund may have investments in both growth and value stocks, or in stocks with characteristics of both. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. A value stock may not increase in price as anticipated by the investment manager if other investors fail to recognize the company’s value and bid up the price, the markets favor faster growing companies, or the factors that the investment manager believes will increase the price of the security do not occur. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction and a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the expense reduction and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. Source: Morningstar. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total US equity market performance.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
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FRANKLIN FOCUSED CORE EQUITY FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Account Value 4/30/18 | Expenses Paid During 11/1/17–4/30/181,2 | Net Annualized Ratio2 | ||||||||||
A | $1,000 | $1,045.50 | $ 6.34 | $1,018.60 | $6.26 | 1.25% | ||||||||||
C | $1,000 | $1,041.90 | $10.13 | $1,014.88 | $9.99 | 2.00% | ||||||||||
R | $1,000 | $1,043.50 | $ 7.70 | $1,017.26 | $7.60 | 1.52% | ||||||||||
R6 | $1,000 | $1,047.90 | $ 4.27 | $1,020.63 | $4.21 | 0.84% | ||||||||||
Advisor | $1,000 | $1,046.70 | $ 5.07 | $1,019.84 | $5.01 | 1.00% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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Franklin Growth Opportunities Fund
We are pleased to bring you Franklin Growth Opportunities Fund’s annual report for the fiscal year ended April 30, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks capital appreciation by investing, under normal conditions, predominantly in equity securities of companies demonstrating accelerating growth, increasing profitability, or above-average growth or growth potential as compared with the overall economy.
Performance Overview
The Fund’s Class A shares delivered a +20.43% cumulative total return for the 12 months under review. In comparison, the Fund’s narrow benchmark, the Russell 3000® Growth Index, which measures performance of Russell 3000® Index companies with relatively higher price-to-book ratios and higher forecasted growth values, generated a +18.78% total return.1 The Fund’s broad benchmark, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad US stock market, produced a +13.27% total return.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 14.
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.
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
Portfolio Composition
Based on Total Net Assets as of 4/30/18
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, most sectors represented in the Fund’s portfolio posted positive returns and contributed to absolute performance. Relative to the Russell 3000® Growth Index, key contributors to the Fund’s performance included stock selection and an overweighting in the information technology (IT) sector as well as stock selection and underweightings in the consumer staples and consumer discretionary sectors.
1. Source: Morningstar.
Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
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 44.
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FRANKLIN GROWTH OPPORTUNITIES FUND
In the IT sector, payment solutions provider Mastercard, enterprise IT management software provider SeviceNow, and digital marketing and digital media solutions provider Adobe Systems contributed to relative performance. Mastercard reported a stronger-than-expected fourth-quarter 2017 revenue growth, and management described its outlook for 2018 as slightly better than 2017. The company continued to benefit from the ongoing transition from cash toward card and electronic payments. Shares of ServiceNow rose amid better-than-expected earnings, revenue, operating margin, cash flow and billings, and higher revenue guidance. We believe ServiceNow is a high quality Software-as-a-Service company proving itself as a key partner in enterprise initiatives to drive productivity through digital transformation, while also delivering excellent unit economics.
In consumer staples, Constellation Brands, which produces, markets and distributes beverage alcohol products, contributed to relative results.
Within consumer discretionary, online retail shopping and cloud services provider Amazon.com drove relative performance. The company reported better-than-expected first-quarter 2018 revenue and operating profits, highlighted by accelerating growth at its market-leading cloud business, Amazon Web Services, and retail strength driven by advertising and its Prime service. Improved utilization in its fulfillment and data centers drove margin higher for the quarter, while the mix shift toward higher margin businesses continued to drive higher profitability over time. With e-commerce in its early days, we do not underestimate the growth and sustainability of Amazon.com, which continues to add new categories and countries to its footprint. The company also continues to see accelerated growth in its cloud computing business, which we consider a leader in Infrastructure-as-a-Service cloud computing.
Other key individual contributors to relative performance included investments in financial and banking holding company SVB Financial Group and medical devices firm ABIOMED.
In contrast, key detractors from the Fund’s relative performance included stock selection in the health care sector and an overweighting in the energy sector. To a lesser extent, stock selection in the telecommunication services sector detracted from relative results.
Top 10 Holdings
4/30/18
Company Sector/Industry | % of Total Net Assets | |||
Amazon.com Inc. | 8.0 | % | ||
Consumer Discretionary
| ||||
Mastercard Inc. | 5.0 | % | ||
Information Technology
| ||||
Apple Inc. | 5.0 | % | ||
Information Technology
| ||||
Microsoft Corp. | 4.0 | % | ||
Information Technology
| ||||
Visa Inc. | 3.9 | % | ||
Information Technology
| ||||
Facebook Inc. | 3.9 | % | ||
Information Technology
| ||||
Alphabet Inc. | 3.8 | % | ||
Information Technology
| ||||
UnitedHealth Group Inc. | 2.5 | % | ||
Health Care
| ||||
Raytheon Co. | 2.4 | % | ||
Industrials
| ||||
ServiceNow Inc. | 2.3 | % | ||
Information Technology
|
Within health care, our holdings in biopharmaceutical companies Celgene, Incyte2 and Allergan2 hindered relative performance. Celgene reported disappointing third-quarter 2017 results as revenues for its psoriasis medication Otezla came in significantly below expectations due to increased competition and discounting, although the drug rebounded during the period. Additionally, its cancer drug Revlimid faced patent litigation. Celgene underperformed during the period due to a number of disappointments in its drug pipeline. However, we continue to believe Celgene has one of the deepest drug pipelines in the industry, including for key oncology-related and inflammation/autoimmune-related treatments. Shares of Incyte declined after a rumored buyout did not materialize. Allergan’s shares declined during the period despite the company’s good revenue and earnings performance, high profit margin and low capital model.
In the energy sector, our position in oil and gas exploration and production company Anadarko Petroleum dampened relative performance.2,3
2. Not held at period-end.
3. Not part of the index.
See www.franklintempletondatasources.com for additional data provider information.
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FRANKLIN GROWTH OPPORTUNITIES FUND
In the industrials sector, our holding in Boeing, an aerospace company that manufactures commercial jetliners and defense, space and security systems, hurt relative results.
Other key individual detractors included positions in broadband communications services provider Charter Communications and retirement services provider Athene Holding3.
Thank you for your continued participation in Franklin Growth Opportunities Fund. We look forward to serving your future investment needs.
Grant Bowers Lead Portfolio Manager | ||
Sara Araghi, CFA | ||
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, 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.
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FRANKLIN GROWTH OPPORTUNITIES FUND
Performance Summary as of April 30, 2018
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. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class | Cumulative Total Return2 | Average Annual Total Return3 | ||
A
| ||||
1-Year
| +20.43%
| +13.52%
| ||
5-Year
| +88.43%
| +12.17%
| ||
10-Year
| +151.66%
| +9.02%
| ||
Advisor
| ||||
1-Year
| +20.71%
| +20.71%
| ||
5-Year
| +90.97%
| +13.81%
| ||
10-Year
| +159.02%
| +9.99%
|
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.
See page 16 for Performance Summary footnotes.
14 | Annual Report | franklintempleton.com |
FRANKLIN GROWTH OPPORTUNITIES FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 16 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 15 |
FRANKLIN GROWTH OPPORTUNITIES FUND
PERFORMANCE SUMMARY
Distributions (5/1/17–4/30/18)
Share Class
| Long-Term
| |||
A
|
|
$3.1594
|
| |
C
|
|
$3.1594
|
| |
R
|
|
$3.1594
|
| |
R6
|
|
$3.1594
|
| |
Advisor |
|
$3.1594
|
|
Total Annual Operating Expenses5
Share Class
| With Waiver
| Without Waiver
| ||||||
A
|
|
1.04%
|
|
|
1.05%
|
| ||
Advisor
|
|
0.79%
|
|
|
0.80%
|
|
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. 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. Historically, these securities have experienced more price volatility than larger company stocks, especially over the short term. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. Source: Morningstar. The Russell 3000 Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with relatively 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 US equity market performance.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
16 | Annual Report | franklintempleton.com |
FRANKLIN GROWTH OPPORTUNITIES FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Account Value 4/30/18 | Expenses Paid During 11/1/17–4/30/181,2 | Net Annualized Ratio2 | ||||||||||||
A | $1,000 | $1,078.50 | $4.90 | $1,020.08 | $4.76 | 0.95% | ||||||||||||
C | $1,000 | $1,074.40 | $8.74 | $1,016.36 | $8.50 | 1.70% | ||||||||||||
R | $1,000 | $1,077.00 | $6.03 | $1,018.99 | $5.86 | 1.17% | ||||||||||||
R6 | $1,000 | $1,080.60 | $2.99 | $1,021.92 | $2.91 | 0.58% | ||||||||||||
Advisor | $1,000 | $1,079.90 | $3.61 | $1,021.32 | $3.51 | 0.70% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
franklintempleton.com | Annual Report | 17 |
Franklin Small Cap Growth Fund
We are pleased to bring you Franklin Small Cap Growth Fund’s annual report for the period ended April 30, 2018. At the market close on February 12, 2015, the Fund closed to new investors with limited exceptions. Existing shareholders may add to their accounts. Effective April 28, 2017, the Fund opened Class R6 shares to new investors who are eligible to purchase Class R6 shares.
Your Fund’s Goal and Main Investments
The Fund seeks long-term capital growth by investing, under normal market conditions, at least 80% of its net assets in equity securities (predominantly common stocks) of small cap companies, which for this Fund are those with market capitalizations not exceeding $1.5 billion or that of the highest market capitalization in the Russell 2000® Index, whichever is greater, at the time of purchase.1
Performance Overview
The Fund’s Class A shares delivered a +19.71% cumulative total return for the 12 months under review. In comparison, the Russell 2000® Growth Index, which measures performance of small cap companies with relatively higher price-to-book ratios and higher forecasted growth values, generated a +16.60% total return.2 The Standard & Poor’s 500 Index (S&P 500), which tracks the broad US stock market, produced a +13.27% total return.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 21.
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.
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
Portfolio Composition
Based on Total Net Assets as of 4/30/18
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, nearly all sectors represented in the Fund’s portfolio posted positive returns and contributed to absolute performance. Relative to the Russell 2000® Growth Index, key contributors to the Fund’s
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: Morningstar.
The indexes are unmanaged and include reinvested dividends. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
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 52.
18 | Annual Report | franklintempleton.com |
FRANKLIN SMALL CAP GROWTH FUND
performance included stock selection in the information technology (IT), health care and materials sectors. An overweighting in IT and an underweighting in materials also benefited relative performance.
In the IT sector, performance drivers included 2U, Pure Storage and Callidus Software3. 2U, which provides cloud-based Software-as-a-Service (SaaS) solutions for non-profit colleges and universities, reported better-than-expected fourth-quarter 2018 earnings results. Additionally, 2U raised its 2018 outlook largely due to a stronger-than-expected start for first-quarter 2018 GetSmarter short courses. Flash-based storage solutions provider Pure Storage reported slightly better-than-expected fourth-quarter 2018 earnings results and provided an in-line 2018 revenue guidance. Management has increased its focus on larger enterprise and cloud-based SaaS customers, greater business productivity and an emerging partnership with computer graphics processors manufacturer NVIDIA.4 Shares of cloud-based sales and marketing solutions company Callidus Software rose following the announcement that it would be acquired by Germany-based enterprise application software and software-related services company SAP4.
In health care, notable contributors included medical devices company Spectranetics,3 commercial-stage digital healthcare company iRhythm Technologies and biotechnology company Heron Therapeutics. Elsewhere, restaurant operator and franchisor Wingstop aided relative results.
In contrast, key detractors from the Fund’s relative performance included stock selection in the consumer staples, industrials and consumer discretionary sectors. An overweighting in industrials also pressured relative results.
Within consumer staples, value-oriented food and everyday staples retailer Smart & Final and food manufacturer TreeHouse Foods5 hampered relative results. Smart & Final suffered from higher products costs and a very competitive pricing environment that contributed to slowing sales momentum. TreeHouse Foods reported a decline in operating profit for fourth-quarter 2017 and provided a weaker-than-expected 2018 guidance.
In the industrials sector, ultra low-cost, low-fare airline Spirit Airlines detracted from relative results.5 The airline’s shares were impacted by investor concerns about the industry’s West
Top 10 Holdings
4/30/18
Company Sector/Industry | % of Total Net Assets | |||
Nevro Corp. | 1.9 | % | ||
Health Care
| ||||
2U Inc. | 1.8 | % | ||
Information Technology
| ||||
DexCom Inc. | 1.7 | % | ||
Health Care
| ||||
US Ecology Inc. | 1.6 | % | ||
Industrials
| ||||
Zendesk Inc. | 1.6 | % | ||
Information Technology
| ||||
Integrated Device Technology Inc. | 1.6 | % | ||
Information Technology
| ||||
Allegiant Travel Co. | 1.5 | % | ||
Industrials
| ||||
iRhythm Technologies Inc. | 1.5 | % | ||
Health Care
| ||||
Wix.com Ltd. | 1.4 | % | ||
Information Technology
| ||||
Inphi Corp. | 1.4 | % | ||
Information Technology
|
Coast capacity growth, a legacy airline’s capacity growth and legacy airlines’ aggressive pricing in its markets.
In the consumer discretionary sectors, tiles and finishing pieces company Tile Shop Holdings3 and motion pictures technology company IMAX hampered relative results.
Other key individual detractors from the Fund’s relative performance included positions in semiconductor solutions company MACOM Technology Solutions Holdings and programmable logic products company Lattice Semiconductor.
3. Not held at period-end.
4. Not a Fund holding.
5. Not part of the index.
See www.franklintempletondatasources.com for additional data provider information.
franklintempleton.com | Annual Report | 19 |
FRANKLIN SMALL CAP GROWTH FUND
Thank you for your continued participation in Franklin Small Cap Growth Fund. We look forward to serving your future investment needs.
Michael P. McCarthy, CFA Lead Portfolio Manager | ||
Bradley T. Carris, CFA | ||
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, 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.
20 | Annual Report | franklintempleton.com |
FRANKLIN SMALL CAP GROWTH FUND
Performance Summary as of April 30, 2018
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. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class
| Cumulative Total Return2
| Average Annual Total Return3
| ||
A | ||||
1-Year
| +19.71%
| +12.80%
| ||
5-Year
| +82.30%
| +11.43%
| ||
10-Year
| +198.41%
| +10.90%
| ||
Advisor
| ||||
1-Year
| +19.97%
| +19.97%
| ||
5-Year
| +84.87%
| +13.08%
| ||
10-Year
| +207.04%
| +11.87%
|
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.
See page 23 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 21 |
FRANKLIN SMALL CAP GROWTH FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 23 for Performance Summary footnotes.
22 | Annual Report | franklintempleton.com |
FRANKLIN SMALL CAP GROWTH FUND
PERFORMANCE SUMMARY
Distributions (5/1/17–4/30/18)
Share Class
| Long-Term Capital Gain
| |
A
| $0.4168
| |
C
| $0.4168
| |
R
| $0.4168
| |
R6
| $0.4168
| |
Advisor
| $0.4168
|
Total Annual Operating Expenses5
Share Class
| With Waiver
| Without Waiver
| ||||||
A
|
| 1.10%
|
|
| 1.12%
|
| ||
Advisor
|
| 0.85%
|
|
| 0.87%
|
|
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. 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. Historically, these securities have experienced more price volatility than larger company stocks, especially over the short term. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. From time to time, the trading market for a particular security or type of security in which the Fund invests may become less liquid or even illiquid. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. Source: Morningstar. The Russell 2000 Growth Index is market capitalization weighted and measures performance of those Russell 2000 Index companies with relatively 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 US equity market performance.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
franklintempleton.com | Annual Report | 23 |
FRANKLIN SMALL CAP GROWTH FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During 11/1/17–4/30/181,2 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Net Annualized Expense Ratio2 | ||||||||||||
A | $1,000 | $1,103.00 | $5.53 | $1,019.54 | $5.31 | 1.06% | ||||||||||||
C | $1,000 | $1,099.10 | $9.42 | $1,015.82 | $9.05 | 1.81% | ||||||||||||
R | $1,000 | $1,102.00 | $6.83 | $1,018.30 | $6.56 | 1.31% | ||||||||||||
R6 | $1,000 | $1,105.20 | $3.34 | $1,021.62 | $3.21 | 0.64% | ||||||||||||
Advisor | $1,000 | $1,104.50 | $4.23 | $1,020.78 | $4.06 | 0.81% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
24 | Annual Report | franklintempleton.com |
Franklin Small-Mid Cap Growth Fund
This annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year ended April 30, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks long-term capital growth by investing, under normal market conditions, 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™ Index at the time of purchase, and mid-cap companies as those within the market capitalization range of the Russell Midcap® Index, at the time of purchase.1
Performance Overview
The Fund’s Class A shares delivered a +14.28% cumulative total return for the 12 months under review. In comparison, the Russell Midcap® Growth Index, which measures performance of companies in the Russell Midcap® Index with relatively higher price-to-book ratios and higher forecasted growth values, generated a +16.87% total return.2 Also in comparison, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad US stock market, produced a +13.27% total return.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 28.
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.
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
Portfolio Composition
Based on Total Net Assets as of 4/30/18
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, most sectors represented in the Fund’s portfolio posted positive returns and contributed to absolute performance. Relative to the Russell Midcap® Growth Index, key contributors to the Fund’s performance included stock selection and an overweighting in the
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: Morningstar.
The indexes are unmanaged and include reinvested dividends. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 61.
franklintempleton.com | Annual Report | 25 |
FRANKLIN SMALL-MID CAP GROWTH FUND
information technology (IT) sector. To a lesser extent, stock selection in real estate contributed to relative results.
In the IT sector, cloud services company 2U,3 domain name registration and web hosting services provider GoDaddy and enterprise IT management software provider SeviceNow contributed to relative performance. 2U, which provides cloud-based Software-as-a-Service (SaaS) solutions for non-profit colleges and universities, reported better-than-expected fourth-quarter 2018 earnings results. Additionally, 2U raised its 2018 outlook largely due to a stronger-than-expected start for first-quarter 2018 GetSmarter short courses. GoDaddy reported stronger-than-expected revenue and free cash flow generation for 2017’s fourth quarter, driven by its domain and business application segments, and provided a solid revenue outlook for 2018. Shares of ServiceNow rose amid better-than-expected earnings, revenue, operating margin, cash flow and billings, and higher revenue guidance. We believe ServiceNow is a high quality SaaS company proving itself as a key partner in enterprise initiatives to drive productivity through digital transformation, while also delivering excellent unit economics.
Other key individual contributors to relative performance included investments in financial and banking holding company SVB Financial Group, information and marketing services provider CoStar Group and medical device company Insulet3.
In contrast, key detractors from the Fund’s relative performance included stock selection in the health care, consumer discretionary and industrials sectors.
Within health care, our position in Hologic, which develops, manufactures and supplies diagnostics products, medical imaging systems and surgical products, detracted from relative results.
In consumer discretionary, our position in consumer and commercial products manufacturer Newell Brands significantly hampered results. Cable services and wireless telecommunications holding company Liberty Broadband and motion pictures technology company IMAX4 also hindered performance.3 Newell Brands reported weak quarterly results and declining earnings guidance due in part to rising costs, retail mix, unfavorable pricing and worse-than-expected margins. Revenue was also affected due to destocking by retailers and store
Top 10 Holdings
4/30/18
Company Sector/Industry
| % of Total
| |||
Roper Technologies Inc. | 2.5 | % | ||
Industrials
| ||||
2U Inc. | 2.1 | % | ||
Information Technology
| ||||
Worldpay Inc. | 1.9 | % | ||
Information Technology
| ||||
Edwards Lifesciences Corp. | 1.8 | % | ||
Health Care
| ||||
ServiceNow Inc. | 1.8 | % | ||
Information Technology
| ||||
GoDaddy Inc. | 1.8 | % | ||
Information Technology
| ||||
SBA Communications Corp. | 1.6 | % | ||
Real Estate
| ||||
Rockwell Automation Inc. | 1.6 | % | ||
Industrials
| ||||
CoStar Group Inc. | 1.6 | % | ||
Industrials
| ||||
Autodesk Inc. | 1.5 | % | ||
Information Technology
|
closures of some important customers. Shares of Liberty Broadband, whose principal assets include its interest in cable services provider Charter Communications (not a Fund holding), were pressured by ongoing industry concerns about internet video competition, broadband growth, and merger and acquisition activities. Further pressuring Liberty’s shares were Charter’s first-quarter 2018 earnings results, which showed solid revenue and earnings but deteriorating subscriber trends after showing improvements in the previous quarter. Shares of IMAX were negatively affected by investor concerns about overall attendance trends outside of well-reviewed big budget movies and the potential for losing viewers to private label premium theaters.
In the industrials sector, industrial distributor HD Supply Holdings hampered relative results.4
Other key individual detractors included an underweighting in computer graphics processors manufacturer NVIDIA, whose shares rose during the period.4 Our position in cereals products manufacturer and distributor Post Holdings, whose shares declined, also hurt relative results.4
3. Not part of the index.
4. Not held at period-end.
See www.franklintempletondatasources.com for additional data provider information.
26 | Annual Report | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
Thank you for your continued participation in Franklin Small-Mid Cap Growth Fund. We look forward to serving your future investment needs.
Edward B. Jamieson Lead Portfolio Manager |
John P. Scandalios | ||
Michael P. McCarthy, CFA James Cross, CFA
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, 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.
franklintempleton.com | Annual Report | 27 |
FRANKLIN SMALL-MID CAP GROWTH FUND
Performance Summary as of April 30, 2018
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. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class
| Cumulative Total Return2
| Average Annual
Total Return3 | ||
A | ||||
1-Year
| +14.28%
| +7.69%
| ||
5-Year
| +68.88% | +9.74%
| ||
10-Year
| +128.17%
| +7.96%
| ||
Advisor | ||||
1-Year
| +14.57%
| +14.57%
| ||
5-Year
| +71.05%
| +11.33%
| ||
10-Year
| +134.04%
| +8.88%
|
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.
See page 30 for Performance Summary footnotes.
28 | Annual Report | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 30 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 29 |
FRANKLIN SMALL-MID CAP GROWTH FUND
PERFORMANCE SUMMARY
Distributions (5/1/17–4/30/18)
Share Class
| Short-Term
| Long-Term
| Total
| |||||||||||||||||
A
|
| $0.0630
|
|
| $3.0379
|
| $
| 3.1009
|
| |||||||||||
C
|
| $0.0630
|
|
| $3.0379
|
| $
| 3.1009
|
| |||||||||||
R
|
| $0.0630
|
|
| $3.0379
|
| $
| 3.1009
|
| |||||||||||
R6
|
| $0.0630
|
|
| $3.0379
|
| $
| 3.1009
|
| |||||||||||
Advisor
|
| $0.0630
|
|
| $3.0379
|
| $
| 3.1009
|
|
Total Annual Operating Expenses5
Share Class
| With Waiver
| Without Waiver
| ||||||
A
|
| 0.95%
|
|
| 0.96%
|
| ||
Advisor
|
| 0.70%
|
|
| 0.71%
|
|
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. 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. Historically, these securities have experienced more price volatility than larger company stocks, especially over the short term. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. From time to time, the trading market for a particular security or type of security in which the Fund invests may become less liquid or even illiquid. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. Source: Morningstar. The Russell Midcap Growth Index is market capitalization weighted and measures performance of those Russell Midcap Index companies with relatively 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 US equity market performance.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
30 | Annual Report | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Net Annualized Expense Ratio2 | ||||||||||||
A | $1,000 | $1,044.60 | $4.56 | $1,020.33 | $4.51 | 0.90% | ||||||||||||
C | $1,000 | $1,040.40 | $8.35 | $1,016.61 | $8.25 | 1.65% | ||||||||||||
R | $1,000 | $1,043.40 | $5.78 | $1,019.14 | $5.71 | 1.14% | ||||||||||||
R6 | $1,000 | $1,046.90 | $2.44 | $1,022.41 | $2.41 | 0.48% | ||||||||||||
Advisor | $1,000 | $1,046.00 | $3.30 | $1,021.57 | $3.26 | 0.65% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
franklintempleton.com | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
Franklin Focused Core Equity Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $15.20 | $13.12 | $15.29 | $13.38 | $10.63 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.04 | ) | (0.01 | ) | 0.07 | c | (0.01 | ) | 0.03 | |||||||||||
Net realized and unrealized gains (losses) | 1.16 | 2.09 | (1.83 | ) | 2.23 | 2.92 | ||||||||||||||
Total from investment operations | 1.12 | 2.08 | (1.76 | ) | 2.22 | 2.95 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | (0.06 | ) | — | (0.07 | ) | |||||||||||||
Net realized gains | — | — | (0.35 | ) | (0.31 | ) | (0.13 | ) | ||||||||||||
Total distributions | — | — | (0.41 | ) | (0.31 | ) | (0.20 | ) | ||||||||||||
Net asset value, end of year | $16.32 | $15.20 | $13.12 | $15.29 | $13.38 | |||||||||||||||
Total returnd | 7.37% | 15.85% | (11.70)% | 16.84% | 28.00% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.54% | 1.47% | 1.46% | 1.54% | 1.73% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.25% | e | 1.24% | e | 1.25% | 1.28% | 1.22% | |||||||||||||
Net investment income (loss) | (0.25)% | (0.04)% | 0.48% | c | (0.07)% | 0.23% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $65,565 | $77,733 | $100,483 | $92,612 | $40,372 | |||||||||||||||
Portfolio turnover rate | 93.43% | 17.45% | 35.56% | 25.55% | 43.30% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.02%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of expense reduction rounds to less than 0.01%.
32 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Focused Core Equity Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $14.46 | $12.58 | $14.73 | $12.98 | $10.36 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.15 | ) | (0.10 | ) | (0.04 | )c | (0.11 | ) | (0.06 | ) | ||||||||||
Net realized and unrealized gains (losses) | 1.11 | 1.98 | (1.76 | ) | 2.17 | 2.84 | ||||||||||||||
Total from investment operations | 0.96 | 1.88 | (1.80 | ) | 2.06 | 2.78 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | — | — | (0.03 | ) | ||||||||||||||
Net realized gains | — | — | (0.35 | ) | (0.31 | ) | (0.13 | ) | ||||||||||||
Total distributions | — | — | (0.35 | ) | (0.31 | ) | (0.16 | ) | ||||||||||||
Net asset value, end of year | $15.42 | $14.46 | $12.58 | $14.73 | $12.98 | |||||||||||||||
Total returnd | 6.64% | 14.94% | (12.31)% | 16.12% | 26.99% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 2.29% | 2.21% | 2.20% | 2.24% | 2.43% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 2.00% | e | 1.98% | e | 1.99% | 1.98% | 1.92% | |||||||||||||
Net investment income (loss) | (1.00)% | (0.78)% | (0.26)% | c | (0.77)% | (0.47)% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $18,103 | $20,341 | $25,119 | $18,758 | $6,666 | |||||||||||||||
Portfolio turnover rate | 93.43% | 17.45% | 35.56% | 25.55% | 43.30% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.72)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 33 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Focused Core Equity Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $15.01 | $12.98 | $15.15 | $13.28 | $10.56 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.06 | ) | (0.03 | ) | 0.03 | c | (0.04 | ) | 0.01 | |||||||||||
Net realized and unrealized gains (losses) | 1.13 | 2.06 | (1.81 | ) | 2.22 | 2.90 | ||||||||||||||
Total from investment operations | 1.07 | 2.03 | (1.78 | ) | 2.18 | 2.91 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | (0.04 | ) | — | (0.06 | ) | |||||||||||||
Net realized gains | — | — | (0.35 | ) | (0.31 | ) | (0.13 | ) | ||||||||||||
Total distributions | — | — | (0.39 | ) | (0.31 | ) | (0.19 | ) | ||||||||||||
Net asset value, end of year | $16.08 | $15.01 | $12.98 | $15.15 | $13.28 | |||||||||||||||
Total return | 7.13% | 15.64% | (11.91)% | 16.66% | 27.70% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.70% | 1.64% | 1.69% | 1.74% | 1.93% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.41% | d | 1.41% | d | 1.48% | 1.48% | 1.42% | |||||||||||||
Net investment income (loss) | (0.41)% | (0.21)% | 0.25% | c | (0.27)% | 0.03% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $137 | $166 | $273 | $169 | $124 | |||||||||||||||
Portfolio turnover rate | 93.43% | 17.45% | 35.56% | 25.55% | 43.30% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.21)%.
dBenefit of expense reduction rounds to less than 0.01%.
34 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Focused Core Equity Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $15.44 | $13.27 | $15.46 | $13.49 | $10.54 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment incomec | 0.11 | 0.05 | 0.12 | d | 0.05 | 0.07 | ||||||||||||||
Net realized and unrealized gains (losses) | 1.09 | 2.12 | (1.85 | ) | 2.27 | 3.11 | ||||||||||||||
Total from investment operations | 1.20 | 2.17 | (1.73 | ) | 2.32 | 3.18 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | (0.11 | ) | (0.04 | ) | (0.10 | ) | ||||||||||||
Net realized gains | — | — | (0.35 | ) | (0.31 | ) | (0.13 | ) | ||||||||||||
Total distributions | — | — | (0.46 | ) | (0.35 | ) | (0.23 | ) | ||||||||||||
Net asset value, end of year | $16.64 | $15.44 | $13.27 | $15.46 | $13.49 | |||||||||||||||
Total return | 7.77% | 16.35% | (11.32)% | 17.45% | 30.43% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.12% | 1.06% | 1.04% | 1.09% | 2.28% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.84% | e | 0.84% | e | 0.85% | 0.83% | 0.77% | |||||||||||||
Net investment income | 0.16% | 0.36% | 0.88% | d | 0.38% | 0.68% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $939 | $20,401 | $33,640 | $25,739 | $14 | |||||||||||||||
Portfolio turnover rate | 93.43% | 17.45% | 35.56% | 25.55% | 43.30% |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.42%.
eBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Focused Core Equity Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $15.39 | $13.25 | $15.44 | $13.48 | $10.70 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | — | c | 0.03 | 0.10 | d | 0.04 | 0.07 | |||||||||||||
Net realized and unrealized gains (losses) | 1.18 | 2.11 | (1.85 | ) | 2.25 | 2.93 | ||||||||||||||
Total from investment operations | 1.18 | 2.14 | (1.75 | ) | 2.29 | 3.00 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | (0.09 | ) | (0.02 | ) | (0.09 | ) | ||||||||||||
Net realized gains | — | — | (0.35 | ) | (0.31 | ) | (0.13 | ) | ||||||||||||
Total distributions | — | — | (0.44 | ) | (0.33 | ) | (0.22 | ) | ||||||||||||
Net asset value, end of year | $16.57 | $15.39 | $13.25 | $15.44 | $13.48 | |||||||||||||||
Total return | 7.67% | 16.15% | (11.45)% | 17.25% | 28.27% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.29% | 1.22% | 1.20% | 1.24% | 1.43% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.00% | e | 0.99% | e | 0.99% | 0.98% | 0.92% | |||||||||||||
Net investment income | —% | f | 0.21% | 0.74% | d | 0.23% | 0.53% | |||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $10,450 | $13,077 | $10,736 | $9,914 | $6,990 | |||||||||||||||
Portfolio turnover rate | 93.43% | 17.45% | 35.56% | 25.55% | 43.30% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dNet investment income per share includes approximately $0.06 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.28%.
eBenefit of expense reduction rounds to less than 0.01%.
fRounds to less than 0.01%.
36 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Focused Core Equity Fund
Country
| Shares
| Value
| ||||||||
Common Stocks 99.4% | ||||||||||
Consumer Discretionary 9.9% | ||||||||||
a Amazon.com Inc. | United States | 2,680 | $ | 4,197,229 | ||||||
Aptiv PLC | United States | 16,900 | 1,429,402 | |||||||
NIKE Inc., B | United States | 27,960 | 1,912,184 | |||||||
The Walt Disney Co. | United States | 18,900 | 1,896,237 | |||||||
|
| |||||||||
9,435,052 | ||||||||||
|
| |||||||||
Consumer Staples 6.5% | ||||||||||
Constellation Brands Inc., A | United States | 8,310 | 1,937,310 | |||||||
Estee Lauder Cos. Inc., A | United States | 9,400 | 1,392,046 | |||||||
Lamb Weston Holdings Inc. | United States | 23,000 | 1,502,360 | |||||||
a Monster Beverage Corp. | United States | 25,320 | 1,392,600 | |||||||
|
| |||||||||
6,224,316 | ||||||||||
|
| |||||||||
Energy 3.1% | ||||||||||
Cabot Oil & Gas Corp., A | United States | 61,140 | 1,461,857 | |||||||
a Concho Resources Inc. | United States | 9,700 | 1,524,937 | |||||||
|
| |||||||||
2,986,794 | ||||||||||
|
| |||||||||
Financials 10.2% | ||||||||||
BlackRock Inc. | United States | 5,440 | 2,836,960 | |||||||
The Charles Schwab Corp. | United States | 54,670 | 3,044,026 | |||||||
Intercontinental Exchange Inc. | United States | 26,800 | 1,941,928 | |||||||
S&P Global Inc. | United States | 10,080 | 1,901,088 | |||||||
|
| |||||||||
9,724,002 | ||||||||||
|
| |||||||||
Health Care 15.5% | ||||||||||
a ABIOMED Inc. | United States | 5,000 | 1,504,750 | |||||||
AstraZeneca PLC, ADR | United Kingdom | 53,400 | 1,897,302 | |||||||
a Illumina Inc. | United States | 6,200 | 1,493,766 | |||||||
a Mettler-Toledo International Inc. | United States | 3,400 | 1,903,762 | |||||||
Stryker Corp. | United States | 12,200 | 2,066,924 | |||||||
Teleflex Inc. | United States | 7,360 | 1,971,597 | |||||||
UnitedHealth Group Inc. | United States | 10,600 | 2,505,840 | |||||||
a Waters Corp. | United States | 7,300 | 1,375,393 | |||||||
|
| |||||||||
14,719,334 | ||||||||||
|
| |||||||||
Industrials 14.5% | ||||||||||
3M Co. | United States | 11,100 | 2,157,729 | |||||||
BWX Technologies Inc. | United States | 22,000 | 1,491,600 | |||||||
FedEx Corp. | United States | 7,730 | 1,910,856 | |||||||
Fortive Corp. | United States | 31,600 | 2,221,796 | |||||||
Raytheon Co. | United States | 13,100 | 2,684,714 | |||||||
Republic Services Inc. | United States | 21,200 | 1,371,216 | |||||||
a Verisk Analytics Inc. | United States | 18,140 | 1,931,003 | |||||||
|
| |||||||||
13,768,914 | ||||||||||
|
| |||||||||
Information Technology 32.2% | ||||||||||
a Alibaba Group Holding Ltd., ADR | China | 14,100 | 2,517,414 | |||||||
a Alphabet Inc., A | United States | 2,800 | 2,852,024 | |||||||
Amphenol Corp., A | United States | 17,200 | 1,439,812 | |||||||
Analog Devices Inc. | United States | 31,150 | 2,720,953 | |||||||
Apple Inc. | United States | 11,200 | 1,850,912 | |||||||
Applied Materials Inc. | United States | 34,020 | 1,689,773 | |||||||
Cognex Corp. | United States | 28,800 | 1,332,000 | |||||||
a Electronic Arts Inc. | United States | 16,000 | 1,887,680 |
franklintempleton.com | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Focused Core Equity Fund (continued)
Country
| Shares
| Value
| ||||||||
Common Stocks (continued) | ||||||||||
Information Technology (continued) | ||||||||||
a InterXion Holding NV | Netherlands | 30,900 | $ | 2,009,118 | ||||||
Mastercard Inc., A | United States | 13,910 | 2,479,736 | |||||||
Microsoft Corp. | United States | 31,400 | 2,936,528 | |||||||
NVIDIA Corp. | United States | 6,600 | 1,484,340 | |||||||
a Salesforce.com Inc. | United States | 16,300 | 1,972,137 | |||||||
a ServiceNow Inc. | United States | 11,600 | 1,927,224 | |||||||
a Tyler Technologies Inc. | United States | 6,900 | 1,510,548 | |||||||
|
| |||||||||
30,610,199 | ||||||||||
|
| |||||||||
Materials 3.1% | ||||||||||
Albemarle Corp. | United States | 10,300 | 998,688 | |||||||
Ecolab Inc. | United States | 13,500 | 1,954,395 | |||||||
|
| |||||||||
2,953,083 | ||||||||||
|
| |||||||||
Real Estate 1.9% | ||||||||||
a SBA Communications Corp., A | United States | 11,100 | 1,778,553 | |||||||
|
| |||||||||
Utilities 2.5% | ||||||||||
NextEra Energy Inc. | United States | 14,500 | 2,376,695 | |||||||
|
| |||||||||
Total Common Stocks (Cost $87,210,175) | 94,576,942 | |||||||||
|
| |||||||||
Short Term Investments (Cost $761,261) 0.8% | ||||||||||
Money Market Funds 0.8% | ||||||||||
b,c Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 761,261 | 761,261 | |||||||
|
| |||||||||
Total Investments (Cost $87,971,436) 100.2% | 95,338,203 | |||||||||
Other Assets, less Liabilities (0.2)% | (144,809 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 95,193,394 | ||||||||
|
|
aNon-income producing.
bSee Note 3(f) regarding investments in affiliated management investment companies.
cThe rate shown is the annualized seven-day effective yield at period end.
38 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Growth Opportunities Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $34.81 | $30.40 | $33.13 | $28.48 | $24.29 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.10 | ) | (0.09 | ) | (0.19 | ) | (0.19 | ) | (0.19 | ) | ||||||||||
Net realized and unrealized gains (losses) | 7.03 | 5.14 | (1.88 | ) | 5.50 | 5.11 | ||||||||||||||
Total from investment operations | 6.93 | 5.05 | (2.07 | ) | 5.31 | 4.92 | ||||||||||||||
Less distributions from net realized gains | (3.16 | ) | (0.64 | ) | (0.66 | ) | (0.66 | ) | (0.73 | ) | ||||||||||
Net asset value, end of year | $38.58 | $34.81 | $30.40 | $33.13 | $28.48 | |||||||||||||||
Total returnc | 20.43% | 16.88% | (6.36)% | 18.87% | 20.26% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.02% | 1.05% | 1.11% | 1.18% | 1.17% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.99% | d | 0.97% | d | 1.10% | 1.18% | e | 1.17% | d,e | |||||||||||
Net investment income (loss) | (0.27)% | (0.30)% | (0.58)% | (0.59)% | (0.70)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $2,428,175 | $2,272,831 | $548,871 | $457,619 | $349,343 | |||||||||||||||
Portfolio turnover rate | 22.68% | 47.75% | 25.56% | 40.64% | 36.64% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $30.12 | $26.59 | $29.27 | $25.41 | $21.89 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.33 | ) | (0.29 | ) | (0.37 | ) | (0.36 | ) | (0.35 | ) | ||||||||||
Net realized and unrealized gains (losses) | 6.04 | 4.46 | (1.65 | ) | 4.88 | 4.60 | ||||||||||||||
Total from investment operations | 5.71 | 4.17 | (2.02 | ) | 4.52 | 4.25 | ||||||||||||||
Less distributions from net realized gains | (3.16 | ) | (0.64 | ) | (0.66 | ) | (0.66 | ) | (0.73 | ) | ||||||||||
Net asset value, end of year | $32.67 | $30.12 | $26.59 | $29.27 | $25.41 | |||||||||||||||
Total returnc | 19.53% | 15.98% | (7.03)% | 18.04% | 19.42% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.77% | 1.80% | 1.85% | 1.88% | 1.87% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.74% | d | 1.72% | d | 1.84% | 1.88% | e | 1.87% | d,e | |||||||||||
Net investment income (loss) | (1.02)% | (1.05)% | (1.32)% | (1.29)% | (1.40)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $400,295 | $390,123 | $137,882 | $110,513 | $85,883 | |||||||||||||||
Portfolio turnover rate | 22.68% | 47.75% | 25.56% | 40.64% | 36.64% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
40 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $33.52 | $29.37 | $32.10 | $27.67 | $23.67 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.18 | ) | (0.17 | ) | (0.26 | ) | (0.24 | ) | (0.24 | ) | ||||||||||
Net realized and unrealized gains (losses) | 6.75 | 4.96 | (1.81 | ) | 5.33 | 4.97 | ||||||||||||||
Total from investment operations | 6.57 | 4.79 | (2.07 | ) | 5.09 | 4.73 | ||||||||||||||
Less distributions from net realized gains | (3.16 | ) | (0.64 | ) | (0.66 | ) | (0.66 | ) | (0.73 | ) | ||||||||||
Net asset value, end of year | $36.93 | $33.52 | $29.37 | $32.10 | $27.67 | |||||||||||||||
Total return | 20.14% | 16.62% | (6.60)% | 18.63% | 19.99% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.27% | 1.30% | 1.35% | 1.38% | 1.37% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.24% | c | 1.22% | c | 1.34% | 1.38% | d | 1.37% | c,d | |||||||||||
Net investment income (loss) | (0.52)% | (0.55)% | (0.82)% | (0.79)% | (0.90)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $36,582 | $50,429 | $39,786 | $48,266 | $42,953 | |||||||||||||||
Portfolio turnover rate | 22.68% | 47.75% | 25.56% | 40.64% | 36.64% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 41 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $37.30 | $32.39 | $35.09 | $29.98 | $24.99 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment income (loss)c | 0.07 | 0.05 | (0.05 | ) | (0.03 | ) | (0.07 | ) | ||||||||||||
Net realized and unrealized gains (losses) | 7.57 | 5.50 | (1.99 | ) | 5.80 | 5.79 | ||||||||||||||
Total from investment operations | 7.64 | 5.55 | (2.04 | ) | 5.77 | 5.72 | ||||||||||||||
Less distributions from net realized gains | (3.16 | ) | (0.64 | ) | (0.66 | ) | (0.66 | ) | (0.73 | ) | ||||||||||
Net asset value, end of year | $41.78 | $37.30 | $32.39 | $35.09 | $29.98 | |||||||||||||||
Total return | 20.98% | 17.42% | (5.94)% | 19.47% | 22.90% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.58% | 0.59% | 0.67% | 0.68% | 0.71% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.55% | d | 0.51% | d | 0.66% | 0.68% | e | 0.71% | d,e | |||||||||||
Net investment income (loss) | 0.17% | 0.16% | (0.14)% | (0.09)% | (0.24)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $369,688 | $291,825 | $235,620 | $246,911 | $180,843 | |||||||||||||||
Portfolio turnover rate | 22.68% | 47.75% | 25.56% | 40.64% | 36.64% |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
42 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $37.02 | $32.20 | $34.96 | $29.93 | $25.43 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.01 | ) | (0.02 | ) | (0.11 | ) | (0.10 | ) | (0.13 | ) | ||||||||||
Net realized and unrealized gains (losses) | 7.49 | 5.48 | (1.99 | ) | 5.79 | 5.36 | ||||||||||||||
Total from investment operations | 7.48 | 5.46 | (2.10 | ) | 5.69 | 5.23 | ||||||||||||||
Less distributions from net realized gains | (3.16 | ) | (0.64 | ) | (0.66 | ) | (0.66 | ) | (0.73 | ) | ||||||||||
Net asset value, end of year | $41.34 | $37.02 | $32.20 | $34.96 | $29.93 | |||||||||||||||
Total return | 20.71% | 17.21% | (6.11)% | 19.23% | 20.58% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.77% | 0.80% | 0.85% | 0.88% | 0.87% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.74% | c | 0.72% | c | 0.84% | 0.88% | d | 0.87% | c,d | |||||||||||
Net investment income (loss) | (0.02)% | (0.05)% | (0.32)% | (0.29)% | (0.40)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $583,509 | $537,193 | $256,377 | $269,887 | $224,469 | |||||||||||||||
Portfolio turnover rate | 22.68% | 47.75% | 25.56% | 40.64% | 36.64% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Growth Opportunities Fund
Country
| Shares
| Value
| ||||||||||
Common Stocks 98.6% | ||||||||||||
Consumer Discretionary 13.9% | ||||||||||||
a Amazon.com Inc. | United States | 195,869 | $ | 306,756,317 | ||||||||
Aptiv PLC | United States | 222,652 | 18,831,906 | |||||||||
a Booking Holdings Inc. | United States | 25,789 | 56,168,442 | |||||||||
a Charter Communications Inc., A | United States | 136,921 | 37,145,298 | |||||||||
Las Vegas Sands Corp. | United States | 602,866 | 44,208,164 | |||||||||
a Netflix Inc. | United States | 94,664 | 29,578,713 | |||||||||
The Walt Disney Co. | United States | 206,647 | 20,732,894 | |||||||||
Wynn Resorts Ltd. | United States | 103,579 | 19,285,374 | |||||||||
|
| |||||||||||
532,707,108 | ||||||||||||
|
| |||||||||||
Consumer Staples 3.8% | ||||||||||||
Constellation Brands Inc., A | United States | 262,061 | 61,094,281 | |||||||||
a Hostess Brands Inc., A | United States | 615,795 | 8,651,920 | |||||||||
a Monster Beverage Corp. | United States | 754,493 | 41,497,115 | |||||||||
Pinnacle Foods Inc. | United States | 564,626 | 34,103,410 | |||||||||
|
| |||||||||||
145,346,726 | ||||||||||||
|
| |||||||||||
Energy 1.0% | ||||||||||||
a Diamondback Energy Inc. | United States | 314,163 | 40,354,237 | |||||||||
|
| |||||||||||
Financials 7.0% | ||||||||||||
a Athene Holding Ltd., A | United States | 593,731 | 29,092,819 | |||||||||
The Charles Schwab Corp. | United States | 1,199,717 | 66,800,243 | |||||||||
Intercontinental Exchange Inc. | United States | 526,269 | 38,133,452 | |||||||||
MarketAxess Holdings Inc. | United States | 225,350 | 44,761,270 | |||||||||
S&P Global Inc. | United States | 206,927 | 39,026,432 | |||||||||
a SVB Financial Group | United States | 161,783 | 48,471,805 | |||||||||
|
| |||||||||||
266,286,021 | ||||||||||||
|
| |||||||||||
Health Care 10.0% | ||||||||||||
AbbVie Inc. | United States | 193,666 | 18,698,452 | |||||||||
a ABIOMED Inc. | United States | 130,198 | 39,183,088 | |||||||||
Bristol-Myers Squibb Co. | United States | 441,281 | 23,003,979 | |||||||||
a Celgene Corp. | United States | 425,927 | 37,098,242 | |||||||||
a Clovis Oncology Inc. | United States | 238,808 | 10,359,491 | |||||||||
a Edwards Lifesciences Corp. | United States | 380,596 | 48,472,707 | |||||||||
a Heron Therapeutics Inc. | United States | 1,043,980 | 31,632,594 | |||||||||
a Intuitive Surgical Inc. | United States | 73,172 | 32,252,754 | |||||||||
Medtronic PLC | United States | 220,100 | 17,636,613 | |||||||||
a Nevro Corp. | United States | 241,600 | 21,589,376 | |||||||||
a Revance Therapeutics Inc. | United States | 242,812 | 6,786,595 | |||||||||
UnitedHealth Group Inc. | United States | 397,500 | 93,969,000 | |||||||||
|
| |||||||||||
380,682,891 | ||||||||||||
|
| |||||||||||
Industrials 11.3% | ||||||||||||
Allegiant Travel Co. | United States | 45,773 | 7,335,123 | |||||||||
The Boeing Co. | United States | 165,252 | 55,121,457 | |||||||||
a CoStar Group Inc. | United States | 188,656 | 69,172,609 | |||||||||
Honeywell International Inc. | United States | 254,910 | 36,880,379 | |||||||||
a IHS Markit Ltd. | United States | 828,610 | 40,709,609 | |||||||||
Raytheon Co. | United States | 445,756 | 91,353,235 | |||||||||
Rockwell Automation Inc. | United States | 159,066 | 26,171,129 | |||||||||
Roper Technologies Inc. | United States | 97,063 | 25,643,074 | |||||||||
Stanley Black & Decker Inc. | United States | 213,132 | 30,177,360 | |||||||||
a Univar Inc. | United States | 669,022 | 18,438,246 |
44 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Growth Opportunities Fund (continued)
Country
| Shares
| Value
| ||||||||||
| ||||||||||||
Common Stocks (continued) | ||||||||||||
Industrials (continued) | ||||||||||||
a Verisk Analytics Inc. | United States | 271,350 | $ | 28,885,208 | ||||||||
|
| |||||||||||
429,887,429 | ||||||||||||
|
| |||||||||||
Information Technology 46.2% | ||||||||||||
a 2U Inc. | United States | 300,774 | 24,209,299 | |||||||||
a Adobe Systems Inc. | United States | 336,216 | 74,505,466 | |||||||||
a Alibaba Group Holding Ltd., ADR | China | 162,954 | 29,093,807 | |||||||||
a Alphabet Inc., C | United States | 141,218 | 143,665,308 | |||||||||
Amphenol Corp., A | United States | 104,868 | 8,778,500 | |||||||||
Analog Devices Inc. | United States | 302,239 | 26,400,577 | |||||||||
Apple Inc. | United States | 1,152,152 | 190,404,639 | |||||||||
Applied Materials Inc. | United States | 770,297 | 38,260,652 | |||||||||
a Autodesk Inc. | United States | 353,747 | 44,536,747 | |||||||||
Broadcom Inc. | United States | 233,151 | 53,489,502 | |||||||||
a Ceridian HCM Holding Inc. | United States | 50,900 | 1,607,422 | |||||||||
a DocuSign Inc. | United States | 68,000 | 2,626,840 | |||||||||
a Electronic Arts Inc. | United States | 273,347 | 32,249,479 | |||||||||
a Facebook Inc., A | United States | 857,491 | 147,488,452 | |||||||||
a Fiserv Inc. | United States | 403,466 | 28,589,601 | |||||||||
a InterXion Holding NV | Netherlands | 535,277 | 34,803,711 | |||||||||
Mastercard Inc., A | United States | 1,068,453 | 190,473,116 | |||||||||
Microsoft Corp. | United States | 1,654,321 | 154,712,100 | |||||||||
Monolithic Power Systems | United States | 184,899 | 21,651,673 | |||||||||
NVIDIA Corp. | United States | 275,919 | 62,054,183 | |||||||||
a Pagseguro Digital Ltd. | Brazil | 430,338 | 14,300,132 | |||||||||
a PayPal Holdings Inc. | United States | 369,633 | 27,578,318 | |||||||||
a Pivotal Software Inc., A | United States | 110,200 | 1,988,008 | |||||||||
a Salesforce.com Inc. | United States | 511,929 | 61,938,290 | |||||||||
a ServiceNow Inc. | United States | 534,542 | 88,808,808 | |||||||||
Tencent Holdings Ltd. | China | 708,729 | 35,306,871 | |||||||||
a Tyler Technologies Inc. | United States | 111,501 | 24,409,799 | |||||||||
Visa Inc., A | United States | 1,182,545 | 150,041,310 | |||||||||
Xilinx Inc. | United States | 353,548 | 22,711,923 | |||||||||
a Zendesk Inc. | United States | 587,963 | 28,663,196 | |||||||||
|
| |||||||||||
1,765,347,729 | ||||||||||||
|
| |||||||||||
Materials 1.5% | ||||||||||||
a Axalta Coating Systems Ltd. | United States | 402,526 | 12,438,054 | |||||||||
Ecolab Inc. | United States | 172,925 | 25,034,352 | |||||||||
a Ingevity Corp. | United States | 254,671 | 19,566,373 | |||||||||
|
| |||||||||||
57,038,779 | ||||||||||||
|
| |||||||||||
Real Estate 3.9% | ||||||||||||
American Tower Corp. | United States | 284,880 | 38,846,237 | |||||||||
Equinix Inc. | United States | 56,910 | 23,947,159 | |||||||||
a SBA Communications Corp., A | United States | 529,884 | 84,903,313 | |||||||||
|
| |||||||||||
147,696,709 | ||||||||||||
|
| |||||||||||
Total Common Stocks (Cost $1,918,519,599) | 3,765,347,629 | |||||||||||
|
|
franklintempleton.com | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Growth Opportunities Fund (continued)
Country
| Shares
| Value
| ||||||||||
| ||||||||||||
Preferred Stocks 0.7% | ||||||||||||
Consumer Discretionary 0.6% | ||||||||||||
a,b,c ClearMotion Inc., pfd., C | United States | 2,610,594 | $ | 5,664,511 | ||||||||
a,b,c Proterra Inc., pfd., 5, 144A | United States | 2,362,202 | 13,932,151 | |||||||||
a,b,c Proterra Inc., pfd., 6, 144A | United States | 596,775 | 3,519,750 | |||||||||
|
| |||||||||||
23,116,412 | ||||||||||||
|
| |||||||||||
Information Technology 0.1% | ||||||||||||
a,b,c Tanium Inc., pfd., G | United States | 805,800 | 5,074,222 | |||||||||
|
| |||||||||||
Total Preferred Stocks (Cost $24,702,901) | 28,190,634 | |||||||||||
|
| |||||||||||
Total Investments before Short Term Investments | 3,793,538,263 | |||||||||||
|
| |||||||||||
Short Term Investments (Cost $18,556,305) 0.5% | ||||||||||||
Money Market Funds 0.5% | ||||||||||||
d,e Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 18,556,305 | 18,556,305 | |||||||||
|
| |||||||||||
Total Investments (Cost $1,961,778,805) 99.8% | 3,812,094,568 | |||||||||||
Other Assets, less Liabilities 0.2% | 6,154,095 | |||||||||||
|
| |||||||||||
Net Assets 100.0% | $ | 3,818,248,663 | ||||||||||
|
|
See Abbreviations on page 87.
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
cSee Note 7 regarding restricted securities.
dSee Note 3(f) regarding investments in affiliated management investment companies.
eThe rate shown is the annualized seven-day effective yield at period end.
46 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $19.60 | $16.37 | $18.83 | $18.20 | $14.26 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.13 | ) | (0.11 | ) | (0.08 | ) | (0.12 | ) | (0.15 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.96 | 3.34 | (2.03 | ) | 1.57 | 4.75 | ||||||||||||||
Total from investment operations | 3.83 | 3.23 | (2.11 | ) | 1.45 | 4.60 | ||||||||||||||
Less distributions from net realized gains | (0.42 | ) | — | (0.35 | ) | (0.82 | ) | (0.66 | ) | |||||||||||
Net asset value, end of year | $23.01 | $19.60 | $16.37 | $18.83 | $18.20 | |||||||||||||||
Total returnc | 19.71% | 19.73% | (11.28 | )% | 8.34% | 32.40% | ||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.11% | 1.10% | 1.13% | 1.16% | 1.20% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.10% | d | 1.08% | d | 1.11% | d | 1.16% | e | 1.20% | e | ||||||||||
Net investment income (loss) | (0.61)% | (0.61)% | (0.44)% | (0.66)% | (0.85)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $665,251 | $719,752 | $792,072 | $1,164,218 | $851,317 | |||||||||||||||
Portfolio turnover rate | 29.82% | 29.93% | 43.99% | 30.15% | 40.35% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $16.71 | $14.07 | $16.36 | $16.03 | $12.70 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.25 | ) | (0.21 | ) | (0.18 | ) | (0.22 | ) | (0.24 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.37 | 2.85 | (1.76 | ) | 1.37 | 4.23 | ||||||||||||||
Total from investment operations | 3.12 | 2.64 | (1.94 | ) | 1.15 | 3.99 | ||||||||||||||
Less distributions from net realized gains | (0.42 | ) | — | (0.35 | ) | (0.82 | ) | (0.66 | ) | |||||||||||
Net asset value, end of year | $19.41 | $16.71 | $14.07 | $16.36 | $16.03 | |||||||||||||||
Total returnc | 18.79% | 18.76% | (11.95)% | 7.58% | 31.57% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.86% | 1.85% | 1.88% | 1.87% | 1.90% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.85% | d | 1.83% | d | 1.86% | d | 1.87% | e | 1.90% | e | ||||||||||
Net investment income (loss) | (1.36)% | (1.36)% | (1.19)% | (1.37)% | (1.55)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $132,116 | $142,539 | $157,175 | $225,105 | $187,271 | |||||||||||||||
Portfolio turnover rate | 29.82% | 29.93% | 43.99% | 30.15% | 40.35% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
48 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $18.74 | $15.70 | $18.11 | $17.57 | $13.81 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.17 | ) | (0.15 | ) | (0.12 | ) | (0.16 | ) | (0.18 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.78 | 3.19 | (1.94 | ) | 1.52 | 4.60 | ||||||||||||||
Total from investment operations | 3.61 | 3.04 | (2.06 | ) | 1.36 | 4.42 | ||||||||||||||
Less distributions from net realized gains | (0.42 | ) | — | (0.35 | ) | (0.82 | ) | (0.66 | ) | |||||||||||
Net asset value, end of year | $21.93 | $18.74 | $15.70 | $18.11 | $17.57 | |||||||||||||||
Total return | 19.37% | 19.36% | (11.46)% | 8.12% | 32.15% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.36% | 1.35% | 1.38% | 1.37% | 1.40% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.35% | c | 1.33% | c | 1.36% | c | 1.37% | d | 1.40% | d | ||||||||||
Net investment income (loss) | (0.86)% | (0.86)% | (0.69)% | (0.87)% | (1.05)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $71,398 | $79,995 | $79,929 | $92,455 | $51,190 | |||||||||||||||
Portfolio turnover rate | 29.82% | 29.93% | 43.99% | 30.15% | 40.35% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 49 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $21.06 | $17.52 | $20.02 | $19.21 | $14.64 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment income (loss)c | (0.03 | ) | (0.03 | ) | 0.01 | (0.03 | ) | (0.06 | ) | |||||||||||
Net realized and unrealized gains (losses) | 4.27 | 3.57 | (2.16 | ) | 1.66 | 5.29 | ||||||||||||||
Total from investment operations | 4.24 | 3.54 | (2.15 | ) | 1.63 | 5.23 | ||||||||||||||
Less distributions from net realized gains | (0.42 | ) | — | (0.35 | ) | (0.82 | ) | (0.66 | ) | |||||||||||
Net asset value, end of year | $24.88 | $21.06 | $17.52 | $20.02 | $19.21 | |||||||||||||||
Total return | 20.23% | 20.21% | (10.81)% | 8.91% | 35.80% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.65% | 0.63% | 0.63% | 0.66% | 0.72% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.63% | d | 0.61% | d | 0.61% | d | 0.66% | e | 0.72% | e | ||||||||||
Net investment income (loss) | (0.14)% | (0.14)% | 0.06% | (0.16)% | (0.37)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $935,509 | $858,972 | $846,724 | $844,293 | $87,777 | |||||||||||||||
Portfolio turnover rate | 29.82% | 29.93% | 43.99% | 30.15% | 40.35% |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
50 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $20.88 | $17.41 | $19.94 | $19.17 | $14.94 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.08 | ) | (0.07 | ) | (0.04 | ) | (0.07 | ) | (0.11 | ) | ||||||||||
Net realized and unrealized gains (losses) | 4.23 | 3.54 | (2.14 | ) | 1.66 | 5.00 | ||||||||||||||
Total from investment operations | 4.15 | 3.47 | (2.18 | ) | 1.59 | 4.89 | ||||||||||||||
Less distributions from net realized gains | (0.42 | ) | — | (0.35 | ) | (0.82 | ) | (0.66 | ) | |||||||||||
Net asset value, end of year | $24.61 | $20.88 | $17.41 | $19.94 | $19.17 | |||||||||||||||
Total return | 19.97% | 19.93% | (11.06)% | 8.65% | 32.87% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.86% | 0.85% | 0.88% | 0.87% | 0.90% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.85% | c | 0.83% | c | 0.86% | c | 0.87% | d | 0.90% | d | ||||||||||
Net investment income (loss) | (0.36)% | (0.36)% | (0.19)% | (0.37)% | (0.55)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $713,135 | $805,661 | $850,975 | $1,077,822 | $427,406 | |||||||||||||||
Portfolio turnover rate | 29.82% | 29.93% | 43.99% | 30.15% | 40.35% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 51 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Small Cap Growth Fund
Shares
| Value
| |||||||
Common Stocks 97.8% | ||||||||
Consumer Discretionary 13.0% | ||||||||
a At Home Group Inc. | 517,400 | $ | 18,207,306 | |||||
a Boot Barn Holdings Inc. | 1,347,935 | 26,379,088 | ||||||
a Dave & Buster’s Entertainment Inc. | 465,600 | 19,783,344 | ||||||
a,b,c DraftKings Inc. | 9,905,685 | 15,076,076 | ||||||
a,d Duluth Holdings Inc. | 1,161,942 | 20,159,694 | ||||||
a Five Below Inc. | 292,400 | 20,646,364 | ||||||
a Grand Canyon Education Inc. | 297,600 | 30,947,424 | ||||||
a IMAX Corp. | 1,003,600 | 23,283,520 | ||||||
a Laureate Education Inc., A | 1,098,800 | 15,515,056 | ||||||
Lithia Motors Inc. | 232,200 | 22,258,692 | ||||||
a M/I Homes Inc. | 798,176 | 24,328,404 | ||||||
a Shutterfly Inc. | 48,000 | 3,884,160 | ||||||
a,d,e Sportsman’s Warehouse Holdings Inc. | 4,162,000 | 20,768,380 | ||||||
a Taylor Morrison Home Corp., A | 806,600 | 19,164,816 | ||||||
Tenneco Inc. | 434,200 | 19,404,398 | ||||||
Wingstop Inc. | 591,529 | 28,902,107 | ||||||
|
| |||||||
328,708,829 | ||||||||
|
| |||||||
Consumer Staples 2.5% | ||||||||
a Hostess Brands Inc., A | 1,991,100 | 27,974,955 | ||||||
a The Simply Good Foods Co. | 480,800 | 6,231,168 | ||||||
a Smart & Final Stores Inc. | 3,626,062 | 18,492,916 | ||||||
a TreeHouse Foods Inc. | 262,200 | 10,094,700 | ||||||
|
| |||||||
62,793,739 | ||||||||
|
| |||||||
Energy 2.3% | ||||||||
a Callon Petroleum Co. | 1,333,200 | 18,544,812 | ||||||
a,d Liberty Oilfield Services Inc. | 1,051,700 | 20,970,898 | ||||||
a,d Resolute Energy Corp. | 432,100 | 14,427,819 | ||||||
a Superior Energy Services Inc. | 369,500 | 3,964,735 | ||||||
|
| |||||||
57,908,264 | ||||||||
|
| |||||||
Financials 9.1% | ||||||||
Chemical Financial Corp. | 447,223 | 24,548,071 | ||||||
Evercore Inc. | 231,400 | 23,429,250 | ||||||
a FGL Holdings., A | 1,305,200 | 12,438,556 | ||||||
Houlihan Lokey Inc. | 400,500 | 17,822,250 | ||||||
LegacyTexas Financial Group Inc. | 497,000 | 20,411,790 | ||||||
MB Financial Inc. | 680,100 | 28,985,862 | ||||||
a Metropolitan Bank Holding Corp. | 310,261 | 14,684,653 | ||||||
Pinnacle Financial Partners Inc. | 499,804 | 32,012,446 | ||||||
a PRA Group Inc. | 571,500 | 20,345,400 | ||||||
a Western Alliance Bancorp | 593,600 | 35,010,528 | ||||||
|
| |||||||
229,688,806 | ||||||||
|
| |||||||
Health Care 23.6% | ||||||||
a Aclaris Therapeutics Inc. | 841,758 | 14,941,205 | ||||||
a American Renal Associates Holdings Inc. | 863,800 | 12,654,670 | ||||||
a Amicus Therapeutics Inc. | 1,198,900 | 16,964,435 | ||||||
a,e Aratana Therapeutics Inc. | 2,697,019 | 13,889,648 | ||||||
a Argenx SE, ADR (Netherlands) | 89,300 | 7,824,466 | ||||||
a Array BioPharma Inc. | 1,507,500 | 20,441,700 | ||||||
a Ascendis Pharma AS, ADR (Denmark) | 115,900 | 7,302,859 | ||||||
a AveXis Inc. | 99,685 | 21,199,012 |
52 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small Cap Growth Fund (continued)
Shares
| Value
| |||||||
Common Stocks (continued) | ||||||||
Health Care (continued) | ||||||||
a Clovis Oncology Inc. | 211,700 | $ | 9,183,546 | |||||
a Collegium Pharmaceutical Inc. | 394,700 | 9,334,655 | ||||||
a Corium International Inc. | 851,750 | 8,415,290 | ||||||
a DexCom Inc. | 582,600 | 42,634,668 | ||||||
a Dynavax Technologies Corp. | 837,600 | 14,197,320 | ||||||
a Foamix Pharmaceuticals Ltd. (Israel) | 457,580 | 2,191,808 | ||||||
a G1 Therapeutics Inc. | 148,800 | 5,706,480 | ||||||
a Global Blood Therapeutics Inc. | 173,300 | 7,651,195 | ||||||
a HealthEquity Inc. | 236,316 | 15,518,872 | ||||||
a Heron Therapeutics Inc. | 940,793 | 28,506,028 | ||||||
a Integer Holdings Corp. | 597,700 | 32,813,730 | ||||||
a Iovance Biotherapeutics Inc. | 1,384,500 | 20,075,250 | ||||||
a iRhythm Technologies Inc. | 645,997 | 37,564,726 | ||||||
a Karyopharm Therapeutics Inc. | 767,086 | 10,033,485 | ||||||
a Loxo Oncology Inc. | 77,458 | 9,752,737 | ||||||
a Neogen Corp. | 457,266 | 31,162,678 | ||||||
a NeoGenomics Inc. | 1,397,500 | 13,388,050 | ||||||
a,d Neos Therapeutics Inc. | 608,738 | 5,052,525 | ||||||
a Nevro Corp. | 532,800 | 47,611,008 | ||||||
a,d Odonate Therapeutics Inc. | 383,200 | 8,077,856 | ||||||
a Penumbra Inc. | 147,500 | 18,341,625 | ||||||
a Pfenex Inc. | 1,175,631 | 6,536,508 | ||||||
a Revance Therapeutics Inc. | 871,492 | 24,358,201 | ||||||
a Sage Therapeutics Inc. | 135,700 | 19,529,944 | ||||||
a TG Therapeutics Inc. | 875,000 | 12,556,250 | ||||||
a,d TherapeuticsMD Inc. | 2,522,400 | 13,873,200 | ||||||
a Tivity Health Inc. | 680,778 | 24,473,969 | ||||||
|
| |||||||
593,759,599 | ||||||||
|
| |||||||
Industrials 17.4% | ||||||||
Allegiant Travel Co. | 238,948 | 38,291,417 | ||||||
Altra Industrial Motion Corp. | 666,400 | 27,755,560 | ||||||
a Astronics Corp. | 924,019 | 33,800,615 | ||||||
a Beacon Roofing Supply Inc. | 624,700 | 30,579,065 | ||||||
Cubic Corp. | 536,300 | 33,116,525 | ||||||
a Echo Global Logistics Inc. | 681,825 | 18,613,823 | ||||||
Granite Construction Inc. | 369,143 | 19,335,710 | ||||||
Kennametal Inc. | 755,700 | 27,545,265 | ||||||
a,e The KeyW Holding Corp. | 3,430,282 | 26,550,383 | ||||||
a Mercury Systems Inc. | 1,056,900 | 33,905,352 | ||||||
Mobile Mini Inc. | 672,300 | 28,236,600 | ||||||
a SAIA Inc. | 266,400 | 17,595,720 | ||||||
a Spirit Airlines Inc. | 809,100 | 28,901,052 | ||||||
Steelcase Inc., A | 251,083 | 3,326,850 | ||||||
a Univar Inc. | 1,080,532 | 29,779,462 | ||||||
US Ecology Inc. | 760,065 | 40,511,464 | ||||||
|
| |||||||
437,844,863 | ||||||||
|
| |||||||
Information Technology 27.6% | ||||||||
a 2U Inc. | 557,172 | 44,846,774 | ||||||
a Alarm.com Holdings Inc. | 652,924 | 26,365,071 | ||||||
a Altair Engineering Inc. | 134,762 | 3,905,403 | ||||||
a Ceridian HCM Holding Inc. | 34,100 | 1,076,878 |
franklintempleton.com | Annual Report | 53 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small Cap Growth Fund (continued)
Shares
| Value
| |||||||
| ||||||||
Common Stocks (continued) | ||||||||
Information Technology (continued) | ||||||||
a Envestnet Inc. | 558,522 | $ | 30,327,745 | |||||
a Guidewire Software Inc. | 405,700 | 34,330,334 | ||||||
a Hubspot Inc. | 306,229 | 32,429,651 | ||||||
a Inphi Corp. | 1,237,700 | 35,373,466 | ||||||
a Integrated Device Technology Inc. | 1,428,100 | 39,744,023 | ||||||
a InterXion Holding NV (Netherlands) | 543,395 | 35,331,543 | ||||||
a Lattice Semiconductor Corp. | 4,343,900 | 23,543,938 | ||||||
a,d MACOM Technology Solutions Holdings Inc. | 345,463 | 5,741,595 | ||||||
ManTech International Corp., A | 403,000 | 23,813,270 | ||||||
Monolithic Power Systems | 222,200 | 26,019,620 | ||||||
a Nanometrics Inc. | 804,500 | 19,967,690 | ||||||
a Orbotech Ltd. (Israel) | 379,300 | 22,158,706 | ||||||
a Paylocity Holding Corp. | 517,032 | 28,245,458 | ||||||
a Pure Storage Inc., A | 1,078,500 | 21,818,055 | ||||||
a Q2 Holdings Inc. | 686,900 | 33,829,825 | ||||||
a RealPage Inc. | 518,100 | 27,718,350 | ||||||
a Smartsheet Inc. A | 52,800 | 1,019,040 | ||||||
a Twilio Inc., A | 769,602 | 32,484,900 | ||||||
a ViaSat Inc. | 492,183 | 31,489,868 | ||||||
a WEX Inc. | 181,000 | 29,307,520 | ||||||
a Wix.com Ltd. (Israel) | 446,200 | 36,699,950 | ||||||
a Zendesk Inc. | 828,814 | 40,404,683 | ||||||
a,d Zscaler Inc. | 196,300 | 5,867,407 | ||||||
|
| |||||||
693,860,763 | ||||||||
|
| |||||||
Materials 1.0% | ||||||||
a Ingevity Corp. | 333,800 | 25,645,854 | ||||||
|
| |||||||
Real Estate 1.3% | ||||||||
Coresite Realty Corp. | 315,700 | 32,864,370 | ||||||
|
| |||||||
Total Common Stocks (Cost $1,805,482,367) | 2,463,075,087 | |||||||
|
| |||||||
Preferred Stocks 1.7% | ||||||||
Consumer Discretionary 1.0% | ||||||||
a,b,c Proterra Inc., pfd., 5, 144A | 1,787,047 | 10,539,916 | ||||||
a,b,c Proterra Inc., pfd., 6, 144A | 1,310,834 | 7,731,235 | ||||||
a,b,c Tula Technology Inc., E | 3,611,111 | 6,750,780 | ||||||
|
| |||||||
25,021,931 | ||||||||
|
| |||||||
Information Technology 0.7% | ||||||||
a,b,c Smule Inc., pfd., G, 144A | 1,542,673 | 13,537,775 | ||||||
a,b,c Smule Inc., pfd., H, 144A | 352,675 | 3,240,948 | ||||||
|
| |||||||
16,778,723 | ||||||||
|
| |||||||
Total Preferred Stocks (Cost $36,861,829) | 41,800,654 | |||||||
|
| |||||||
Total Investments before Short Term Investments (Cost $1,842,344,196) | 2,504,875,741 | |||||||
|
| |||||||
Short Term Investments 3.6% | ||||||||
Money Market Funds (Cost $15,082,060) 0.6% | ||||||||
f,g Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 15,082,060 | 15,082,060 | ||||||
|
|
54 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small Cap Growth Fund (continued)
Shares
| Value
| |||||||
| ||||||||
Short Term Investments (continued) | ||||||||
h Investments from Cash Collateral Received for Loaned Securities (Cost $76,587,584) 3.0% | ||||||||
Money Market Funds 3.0% | ||||||||
f,g Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 76,587,584 | $ | 76,587,584 | |||||
|
| |||||||
Total Investments (Cost $1,934,013,840) 103.1% | 2,596,545,385 | |||||||
Other Assets, less Liabilities (3.1)% | (79,136,215 | ) | ||||||
|
| |||||||
Net Assets 100.0% | $ | 2,517,409,170 | ||||||
|
|
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
cSee Note 7 regarding restricted securities.
dA portion or all of the security is on loan at April 30, 2018. See Note 1(d).
eSee Note 9 regarding holdings of 5% voting securities.
fSee Note 3(f) regarding investments in affiliated management investment companies.
gThe rate shown is the annualized seven-day effective yield at period end.
hSee Note 1(d) regarding securities on loan.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 55 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small-Mid Cap Growth Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $34.35 | $31.84 | $38.38 | $40.42 | $38.01 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.15 | ) | (0.11 | ) | (0.03 | )c | (0.14 | ) | (0.20 | ) | ||||||||||
Net realized and unrealized gains (losses) | 4.97 | 4.73 | (3.37 | ) | 5.71 | 8.39 | ||||||||||||||
Total from investment operations | 4.82 | 4.62 | (3.40 | ) | 5.57 | 8.19 | ||||||||||||||
Less distributions from net realized gains | (3.10 | ) | (2.11 | ) | (3.14 | ) | (7.61 | ) | (5.78 | ) | ||||||||||
Net asset value, end of year | $36.07 | $34.35 | $31.84 | $38.38 | $40.42 | |||||||||||||||
Total returnd | 14.28% | 15.01% | (9.02)% | 15.78% | 21.99% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.02% | 0.95% | 0.96% | 0.94% | 0.96% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.00% | e | 0.94% | e | 0.95% | e | 0.94% | f | 0.96% | e,f | ||||||||||
Net investment income (loss) | (0.41)% | (0.34)% | (0.08)% | c | (0.35)% | (0.48)% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $2,262,471 | $2,303,113 | $2,231,822 | $2,535,853 | $2,371,448 | |||||||||||||||
Portfolio turnover rate | 38.35% | 35.46% | 38.72% | 47.98% | 40.82% |
aThe 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’s shares in relation to income earned, and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.38)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
56 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $25.59 | $24.40 | $30.43 | $33.78 | $32.80 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.31 | ) | (0.27 | ) | (0.23 | )c | (0.36 | ) | (0.43) | |||||||||||
Net realized and unrealized gains (losses) | 3.66 | 3.57 | (2.66 | ) | 4.62 | 7.19 | ||||||||||||||
Total from investment operations | 3.35 | 3.30 | (2.89 | ) | 4.26 | 6.76 | ||||||||||||||
Less distributions from net realized gains | (3.10 | ) | (2.11 | ) | (3.14 | ) | (7.61 | ) | (5.78 | ) | ||||||||||
Net asset value, end of year | $25.84 | $25.59 | $24.40 | $30.43 | $33.78 | |||||||||||||||
Total returnd | 13.39% | 14.15% | (9.72)% | 14.96% | 21.04% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.77% | 1.70% | 1.71% | 1.69% | 1.71% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.75% | e | 1.69% | e | 1.70% | e | 1.69% | f | 1.71% | e,f | ||||||||||
Net investment income (loss) | (1.16)% | (1.09)% | (0.83)% | c | (1.10)% | (1.23)% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $334,769 | $371,262 | $377,024 | $448,722 | $404,923 | |||||||||||||||
Portfolio turnover rate | 38.35% | 35.46% | 38.72% | 47.98% | 40.82% |
aThe 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’s shares in relation to income earned, and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (1.13)%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 57 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $31.87 | $29.75 | $36.18 | $38.61 | $36.61 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.22 | ) | (0.18 | ) | (0.11 | )c | (0.23 | ) | (0.29 | ) | ||||||||||
Net realized and unrealized gains (losses) | 4.60 | 4.41 | (3.18 | ) | 5.41 | 8.07 | ||||||||||||||
Total from investment operations | 4.38 | 4.23 | (3.29 | ) | 5.18 | 7.78 | ||||||||||||||
Less distributions from net realized gains | (3.10 | ) | (2.11 | ) | (3.14 | ) | (7.61 | ) | (5.78 | ) | ||||||||||
Net asset value, end of year | $33.15 | $31.87 | $29.75 | $36.18 | $38.61 | |||||||||||||||
Total return | 14.00% | 14.70% | (9.24)% | 15.52% | 21.66% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.26% | 1.19% | 1.21% | 1.19% | 1.21% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.24% | d | 1.18% | d | 1.20% | d | 1.19% | e | 1.21% | d,e | ||||||||||
Net investment income (loss) | (0.65)% | (0.58)% | (0.33)% | c | (0.60)% | (0.73)% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $70,692 | $81,864 | $86,989 | $96,593 | $85,921 | |||||||||||||||
Portfolio turnover rate | 38.35% | 35.46% | 38.72% | 47.98% | 40.82% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.63)%.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
58 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $37.51 | $34.43 | $41.04 | $42.53 | $38.96 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment incomec | 0.05 | 0.05 | 0.15 | d | 0.05 | 0.01 | ||||||||||||||
Net realized and unrealized gains (losses) | 5.45 | 5.14 | (3.62 | ) | 6.07 | 9.34 | ||||||||||||||
Total from investment operations | 5.50 | 5.19 | (3.47 | ) | 6.12 | 9.35 | ||||||||||||||
Less distributions from net realized gains | (3.10 | ) | (2.11 | ) | (3.14 | ) | (7.61 | ) | (5.78 | ) | ||||||||||
Net asset value, end of year | $39.91 | $37.51 | $34.43 | $41.04 | $42.53 | |||||||||||||||
Total return | 14.90% | 15.51% | (8.54)% | 16.32% | 24.43% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.50% | 0.48% | 0.48% | 0.48% | 0.47% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.47% | e | 0.47% | e | 0.47% | e | 0.48% | f | 0.47% | e,f | ||||||||||
Net investment income | 0.12% | 0.13% | 0.40% | d | 0.11% | 0.01% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $275,835 | $222,577 | $242,237 | $206,548 | $157,153 | |||||||||||||||
Portfolio turnover rate | 38.35% | 35.46% | 38.72% | 47.98% | 40.82% |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.10%.
eBenefit of expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 59 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $37.11 | $34.15 | $40.83 | $42.44 | $39.56 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.06 | ) | (0.03 | ) | 0.06 | c | (0.04 | ) | (0.10 | ) | ||||||||||
Net realized and unrealized gains (losses) | 5.38 | 5.10 | (3.60 | ) | 6.04 | 8.76 | ||||||||||||||
Total from investment operations | 5.32 | 5.07 | (3.54 | ) | 6.00 | 8.66 | ||||||||||||||
Less distributions from net realized gains | (3.10 | ) | (2.11 | ) | (3.14 | ) | (7.61 | ) | (5.78 | ) | ||||||||||
Net asset value, end of year | $39.33 | $37.11 | $34.15 | $40.83 | $42.44 | |||||||||||||||
Total return | 14.57% | 15.28% | (8.79 | )% | 16.09% | 22.30% | ||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.77% | 0.70% | 0.71% | 0.69% | 0.71% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.75% | d | 0.69% | d | 0.70% | d | 0.69% | e | 0.71% | d,e | ||||||||||
Net investment income (loss) | (0.16)% | (0.09)% | 0.17%c | (0.10)% | (0.23)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $520,842 | $584,840 | $551,176 | $708,617 | $650,426 | |||||||||||||||
Portfolio turnover rate | 38.35% | 35.46% | 38.72% | 47.98% | 40.82% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been (0.13)%.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
60 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Small-Mid Cap Growth Fund
Shares
| Value
| |||||||
Common Stocks 96.9% | ||||||||
Consumer Discretionary 14.8% | ||||||||
Aptiv PLC | 508,000 | $ | 42,966,640 | |||||
a Burlington Stores Inc. | 236,200 | 32,087,770 | ||||||
a Dollar Tree Inc. | 492,500 | 47,225,825 | ||||||
Dominos Pizza Inc. | 151,000 | 36,501,230 | ||||||
a,b,c DraftKings Inc. | 7,974,537 | 12,136,942 | ||||||
Expedia Group Inc. | 258,500 | 29,763,690 | ||||||
a Grand Canyon Education Inc. | 369,000 | 38,372,310 | ||||||
Hasbro Inc. | 141,000 | 12,420,690 | ||||||
a Liberty Broadband Corp., C | 294,500 | 20,877,105 | ||||||
MGM Resorts International | 270,000 | 8,483,400 | ||||||
Newell Brands Inc. | 409,376 | 11,311,059 | ||||||
a Norwegian Cruise Line Holdings Ltd. | 335,800 | 17,955,226 | ||||||
a NVR Inc. | 14,000 | 43,400,000 | ||||||
a O’Reilly Automotive Inc. | 103,300 | 26,452,031 | ||||||
Ross Stores Inc. | 587,700 | 47,515,545 | ||||||
Thor Industries Inc. | 176,500 | 18,733,710 | ||||||
Tractor Supply Co. | 261,900 | 17,809,200 | ||||||
Vail Resorts Inc. | 99,500 | 22,816,345 | ||||||
Wynn Resorts Ltd. | 144,000 | 26,811,360 | ||||||
|
| |||||||
513,640,078 | ||||||||
|
| |||||||
Consumer Staples 3.2% | ||||||||
Church & Dwight Co. Inc. | 721,800 | 33,347,160 | ||||||
a Hostess Brands Inc., A | 716,300 | 10,064,015 | ||||||
Lamb Weston Holdings Inc. | 180,000 | 11,757,600 | ||||||
a Monster Beverage Corp. | 538,900 | 29,639,500 | ||||||
Pinnacle Foods Inc. | 442,000 | 26,696,800 | ||||||
|
| |||||||
111,505,075 | ||||||||
|
| |||||||
Energy 2.3% | ||||||||
Cabot Oil & Gas Corp., A | 779,010 | 18,626,129 | ||||||
a Concho Resources Inc. | 171,700 | 26,992,957 | ||||||
a,d Jagged Peak Energy Inc. | 1,560,000 | 22,354,800 | ||||||
d RPC Inc. | 567,000 | 10,211,670 | ||||||
|
| |||||||
78,185,556 | ||||||||
|
| |||||||
Financials 8.6% | ||||||||
Affiliated Managers Group Inc. | 61,100 | 10,072,946 | ||||||
Arthur J. Gallagher & Co. | 659,000 | 46,123,410 | ||||||
CBOE Global Markets Inc. | 272,000 | 29,044,160 | ||||||
First Republic Bank | 350,000 | 32,504,500 | ||||||
MarketAxess Holdings Inc. | 151,500 | 30,092,445 | ||||||
Moody’s Corp. | 211,000 | 34,224,200 | ||||||
MSCI Inc. | 64,000 | 9,589,120 | ||||||
The Progressive Corp. | 436,000 | 26,286,440 | ||||||
a SVB Financial Group | 149,100 | 44,671,851 | ||||||
a Western Alliance Bancorp. | 175,000 | 10,321,500 | ||||||
Willis Towers Watson PLC | 154,000 | 22,870,540 | ||||||
|
| |||||||
295,801,112 | ||||||||
|
| |||||||
Health Care 12.9% | ||||||||
a ABIOMED Inc. | 47,500 | 14,295,125 | ||||||
a Agios Pharmaceuticals Inc. | 50,000 | 4,195,500 | ||||||
a Alkermes PLC | 154,000 | 6,817,580 |
franklintempleton.com | Annual Report | 61 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small-Mid Cap Growth Fund (continued)
Shares
| Value
| |||||||
Common Stocks (continued) | ||||||||
Health Care (continued) | ||||||||
a Alnylam Pharmaceuticals Inc. | 70,000 | $ | 6,617,100 | |||||
a BioMarin Pharmaceutical Inc. | 200,766 | 16,765,969 | ||||||
a Centene Corp. | 127,000 | 13,789,660 | ||||||
a Cerner Corp. | 458,502 | 26,707,741 | ||||||
a DexCom Inc. | 308,314 | 22,562,419 | ||||||
a Edwards Lifesciences Corp. | 494,600 | 62,992,256 | ||||||
a Exelixis Inc. | 356,600 | 7,424,411 | ||||||
a Hologic Inc. | 860,000 | 33,359,400 | ||||||
a Illumina Inc. | 165,000 | 39,753,450 | ||||||
a Incyte Corp. | 196,614 | 12,178,271 | ||||||
a Insulet Corp. | 284,217 | 24,442,662 | ||||||
a Ionis Pharmaceuticals Inc. | 107,000 | 4,604,210 | ||||||
a iRhythm Technologies Inc. | 191,450 | 11,132,818 | ||||||
a Jazz Pharmaceuticals PLC | 61,000 | 9,274,440 | ||||||
a Mettler-Toledo International Inc. | 71,500 | 40,034,995 | ||||||
a Neurocrine Biosciences Inc. | 152,342 | 12,351,889 | ||||||
a Nevro Corp. | 221,500 | 19,793,240 | ||||||
a Penumbra Inc. | 136,647 | 16,992,054 | ||||||
a Revance Therapeutics Inc. | 344,100 | 9,617,595 | ||||||
a Seattle Genetics Inc. | 94,500 | 4,837,455 | ||||||
a Waters Corp. | 146,000 | 27,507,860 | ||||||
|
| |||||||
448,048,100 | ||||||||
|
| |||||||
Industrials 18.1% | ||||||||
Allegiant Travel Co. | 71,609 | 11,475,342 | ||||||
BWX Technologies Inc. | 334,000 | 22,645,200 | ||||||
a CoStar Group Inc. | 147,000 | 53,899,020 | ||||||
Fortive Corp. | 393,100 | 27,638,861 | ||||||
Heico Corp. | 127,375 | 11,189,894 | ||||||
Hexcel Corp. | 597,809 | 39,736,364 | ||||||
IDEX Corp. | 175,000 | 23,390,500 | ||||||
a IHS Markit Ltd. | 861,815 | 42,340,971 | ||||||
J.B. Hunt Transport Services Inc. | 281,000 | 32,997,830 | ||||||
a Mercury Systems Inc. | 343,000 | 11,003,440 | ||||||
Old Dominion Freight Line Inc. | 143,000 | 19,141,980 | ||||||
Republic Services Inc. | 427,000 | 27,618,360 | ||||||
Rockwell Automation Inc. | 331,000 | 54,459,430 | ||||||
Roper Technologies Inc. | 327,530 | 86,530,151 | ||||||
Stanley Black & Decker Inc. | 234,000 | 33,132,060 | ||||||
Textron Inc. | 329,800 | 20,493,772 | ||||||
a TransUnion | 65,000 | 4,219,150 | ||||||
a Univar Inc. | 922,000 | 25,410,320 | ||||||
a Verisk Analytics Inc. | 483,000 | 51,415,350 | ||||||
a WABCO Holdings Inc. | 226,000 | 29,151,740 | ||||||
|
| |||||||
627,889,735 | ||||||||
|
| |||||||
Information Technology 29.9% | ||||||||
a 2U Inc. | 920,000 | 74,050,800 | ||||||
a Alarm.com Holdings Inc. | 402,000 | 16,232,760 | ||||||
Amphenol Corp., A | 440,000 | 36,832,400 | ||||||
Analog Devices Inc. | 514,000 | 44,897,900 | ||||||
a ANSYS Inc. | 108,000 | 17,459,280 | ||||||
a Arista Networks Inc. | 20,000 | 5,291,000 |
62 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small-Mid Cap Growth Fund (continued)
Shares
| Value
| |||||||
Common Stocks (continued) | ||||||||
Information Technology (continued) | ||||||||
a Atlassian Corp. PLC (Australia) | 275,200 | $ | 15,405,696 | |||||
a Autodesk Inc. | 415,000 | 52,248,500 | ||||||
a Black Knight Inc. | 220,000 | 10,703,000 | ||||||
a Ceridian HCM Holding Inc. | 46,600 | 1,471,628 | ||||||
Cognex Corp. | 861,000 | 39,821,250 | ||||||
a Coherent Inc. | 43,000 | 7,233,460 | ||||||
a DocuSign Inc. | 62,500 | 2,414,375 | ||||||
DXC Technology Co. | 307,000 | 31,639,420 | ||||||
a FleetCor Technologies Inc. | 172,000 | 35,652,160 | ||||||
a GoDaddy Inc., A | 956,800 | 61,771,008 | ||||||
a Guidewire Software Inc. | 244,000 | 20,647,280 | ||||||
a,d Inphi Corp. | 595,000 | 17,005,100 | ||||||
a Integrated Device Technology Inc. | 667,000 | 18,562,610 | ||||||
a InterXion Holding NV (Netherlands) | 356,000 | 23,147,120 | ||||||
KLA-Tencor Corp. | 335,000 | 34,082,900 | ||||||
Lam Research Corp. | 216,000 | 39,972,960 | ||||||
LogMeIn Inc. | 228,000 | 25,125,600 | ||||||
Microchip Technology Inc. | 550,000 | 46,013,000 | ||||||
Monolithic Power Systems | 190,000 | 22,249,000 | ||||||
a Q2 Holdings Inc. | 181,700 | 8,948,725 | ||||||
a Red Hat Inc. | 219,000 | 35,710,140 | ||||||
a ServiceNow Inc. | 379,000 | 62,967,060 | ||||||
Skyworks Solutions Inc. | 81,000 | 7,027,560 | ||||||
a Smartsheet Inc. A | 71,700 | 1,383,810 | ||||||
a Square Inc., A | 459,000 | 21,729,060 | ||||||
Symantec Corp. | 624,000 | 17,340,960 | ||||||
a Synopsys Inc. | 112,000 | 9,577,120 | ||||||
a Trimble Inc. | 98,000 | 3,390,800 | ||||||
a,d ViaSat Inc. | 442,050 | 28,282,359 | ||||||
a Wix.com Ltd. (Israel) | 242,000 | 19,904,500 | ||||||
a Workday Inc., A | 350,000 | 43,694,000 | ||||||
a Worldpay Inc., A | 818,700 | 66,494,814 | ||||||
Xilinx Inc. | 80,000 | 5,139,200 | ||||||
a Zscaler Inc. | 182,000 | 5,439,980 | ||||||
|
| |||||||
1,036,960,295 | ||||||||
|
| |||||||
Materials 3.8% | ||||||||
Albemarle Corp. | 140,000 | 13,574,400 | ||||||
Avery Dennison Corp. | 197,000 | 20,647,570 | ||||||
a Axalta Coating Systems Ltd. | 940,203 | 29,052,273 | ||||||
a Ingevity Corp. | 276,780 | 21,265,007 | ||||||
Packaging Corp. of America | 179,500 | 20,766,355 | ||||||
Vulcan Materials Co. | 232,000 | 25,912,080 | ||||||
|
| |||||||
131,217,685 | ||||||||
|
| |||||||
Real Estate 3.3% | ||||||||
a CBRE Group Inc. | 677,100 | 30,679,401 | ||||||
Equinix Inc. | 68,778 | 28,941,095 | ||||||
a SBA Communications Corp., A | 340,000 | 54,478,200 | ||||||
|
| |||||||
114,098,696 | ||||||||
|
| |||||||
Total Common Stocks (Cost $2,291,601,856) | 3,357,346,332 | |||||||
|
|
franklintempleton.com | Annual Report | 63 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small-Mid Cap Growth Fund (continued)
Shares
| Value
| |||||||
Preferred Stocks (Cost $7,135,914) 0.3% | ||||||||
Consumer Discretionary 0.3% | ||||||||
a,b,c Proterra Inc., pfd., 5, 144A | 1,416,913 | $ | 8,356,883 | |||||
|
| |||||||
Total Investments before Short Term Investments (Cost $2,298,737,770) | 3,365,703,215 | |||||||
|
| |||||||
Short Term Investments 4.1% | ||||||||
Money Market Funds (Cost $114,742,583) 3.3% | ||||||||
e,f Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 114,742,583 | 114,742,583 | ||||||
|
| |||||||
g Investments from Cash Collateral Received for Loaned Securities (Cost $28,485,775) 0.8% | ||||||||
Money Market Funds 0.8% | ||||||||
e,f Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 28,485,775 | 28,485,775 | ||||||
|
| |||||||
Total Investments (Cost $2,441,966,128) 101.3% | 3,508,931,573 | |||||||
Other Assets, less Liabilities (1.3)% | (44,322,359 | ) | ||||||
|
| |||||||
Net Assets 100.0% | $ | 3,464,609,214 | ||||||
|
|
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
cSee Note 7 regarding restricted securities.
dA portion or all of the security is on loan at April 30, 2018. See Note 1(d).
eSee Note 3(f) regarding investments in affiliated management investment companies.
fThe rate shown is the annualized seven-day effective yield at period end.
gSee Note 1(d) regarding securities on loan.
64 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statements of Assets and Liabilities
April 30, 2018
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap | Franklin Small-Mid Cap Growth Fund | |||||||||||||
Assets: | ||||||||||||||||
+Investments in securities: | ||||||||||||||||
Cost - Unaffiliated issuers | $87,210,175 | $1,943,222,500 | $1,740,869,131 | $2,298,737,770 | ||||||||||||
Cost - Non-controlled affiliates (Note 3f and 9) | 761,261 | 18,556,305 | 193,144,709 | 143,228,358 | ||||||||||||
|
| |||||||||||||||
Value - Unaffiliated issuers | $94,576,942 | $3,793,538,263 | $2,443,667,330 | $3,365,703,215 | ||||||||||||
Value - Non-controlled affiliates (Note 3f and 9) | 761,261 | 18,556,305 | 152,878,055 | 143,228,358 | ||||||||||||
Receivables: | ||||||||||||||||
Investment securities sold | — | 12,570,839 | 2,404,342 | 5,428,715 | ||||||||||||
Capital shares sold | 8,052 | 2,198,972 | 2,943,668 | 4,631,228 | ||||||||||||
Dividends | 8,982 | 1,020,914 | 254,993 | 186,198 | ||||||||||||
Other assets | 68 | 3,233 | 2,167 | 3,016 | ||||||||||||
|
| |||||||||||||||
Total assets | 95,355,305 | 3,827,888,526 | 2,602,150,555 | 3,519,180,730 | ||||||||||||
|
| |||||||||||||||
Liabilities: | ||||||||||||||||
Payables: | ||||||||||||||||
Investment securities purchased | — | 1,972,000 | 2,913,925 | 14,467,857 | ||||||||||||
Capital shares redeemed | 57,843 | 3,296,829 | 2,749,755 | 5,952,601 | ||||||||||||
Management fees | 51,129 | 1,702,770 | 1,276,949 | 1,270,106 | ||||||||||||
Distribution fees | 28,639 | 842,370 | 279,557 | 778,804 | ||||||||||||
Transfer agent fees | 11,758 | 1,687,903 | 838,456 | 3,449,897 | ||||||||||||
Payable upon return of securities loaned | — | — | 76,587,584 | 28,485,775 | ||||||||||||
Accrued expenses and other liabilities | 12,542 | 137,991 | 95,159 | 166,476 | ||||||||||||
|
| |||||||||||||||
Total liabilities | 161,911 | 9,639,863 | 84,741,385 | 54,571,516 | ||||||||||||
|
| |||||||||||||||
Net assets, at value | $95,193,394 | $3,818,248,663 | $2,517,409,170 | $3,464,609,214 | ||||||||||||
|
| |||||||||||||||
Net assets consist of: | ||||||||||||||||
Paid-in capital | $75,167,018 | $1,804,660,295 | $1,648,203,228 | $2,222,418,316 | ||||||||||||
Accumulated net investment loss | (243,541 | ) | (4,268,478 | ) | (2,644,648 | ) | — | |||||||||
Net unrealized appreciation (depreciation) | 7,366,767 | 1,850,315,763 | 662,531,545 | 1,066,965,445 | ||||||||||||
Accumulated net realized gain (loss) | 12,903,150 | 167,541,083 | 209,319,045 | 175,225,453 | ||||||||||||
|
| |||||||||||||||
Net assets, at value | $95,193,394 | $3,818,248,663 | $2,517,409,170 | $3,464,609,214 | ||||||||||||
|
| |||||||||||||||
+Includes securities loaned | $ — | $ — | $ 74,361,292 | $ 27,587,752 |
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 65 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Assets and Liabilities (continued)
April 30, 2018
Franklin Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||||||
Class A: | ||||||||||||||||
Net assets, at value | $65,564,676 | $2,428,175,151 | $665,251,476 | $2,262,471,038 | ||||||||||||
Shares outstanding | 4,017,631 | 62,939,697 | 28,912,172 | 62,723,460 | ||||||||||||
Net asset value per sharea | $16.32 | $38.58 | $23.01 | $36.07 | ||||||||||||
Maximum offering price per share (net asset value per share ÷ 94.25%) | $17.32 | $40.93 | $24.41 | $38.27 | ||||||||||||
Class C: | ||||||||||||||||
Net assets, at value | $18,102,689 | $ 400,294,964 | $132,115,595 | $ 334,769,149 | ||||||||||||
Shares outstanding | 1,174,219 | 12,253,585 | 6,806,928 | 12,956,921 | ||||||||||||
Net asset value and maximum offering price per sharea | $15.42 | $32.67 | $19.41 | $25.84 | ||||||||||||
Class R: | ||||||||||||||||
Net assets, at value | $ 136,556 | $ 36,581,803 | $ 71,398,126 | $ 70,692,328 | ||||||||||||
Shares outstanding | 8,490 | 990,478 | 3,256,031 | 2,132,687 | ||||||||||||
Net asset value and maximum offering price per share | $16.08 | $36.93 | $21.93 | $33.15 | ||||||||||||
Class R6: | ||||||||||||||||
Net assets, at value | $ 939,265 | $ 369,688,172 | $935,509,456 | $ 275,835,180 | ||||||||||||
Shares outstanding | 56,454 | 8,849,260 | 37,597,733 | 6,911,864 | ||||||||||||
Net asset value and maximum offering price per share | $16.64 | $41.78 | $24.88 | $39.91 | ||||||||||||
Advisor Class: | ||||||||||||||||
Net assets, at value | $10,450,208 | $ 583,508,573 | $713,134,517 | $ 520,841,519 | ||||||||||||
Shares outstanding | 630,700 | 14,114,220 | 28,974,416 | 13,242,210 | ||||||||||||
Net asset value and maximum offering price per share | $16.57 | $41.34 | $24.61 | $39.33 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
66 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations
for the year ended April 30, 2018
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||||||||||
Investment income: | ||||||||||||||||||||
Dividends: | ||||||||||||||||||||
Unaffiliated issuers | $ 1,033,216 | $ 26,387,305 | $ 10,103,830 | $ 20,116,012 | ||||||||||||||||
Non-controlled affiliates (Note 3f and 9) | 11,532 | 179,631 | 274,041 | 775,712 | ||||||||||||||||
Interest: | ||||||||||||||||||||
Unaffiliated issuers | — | — | — | 8,968 | ||||||||||||||||
Income from securities loaned (net of fees and rebates) | — | 54,353 | 2,025,570 | 333,966 | ||||||||||||||||
Other income | — | — | 42,949 | 42,629 | ||||||||||||||||
|
| |||||||||||||||||||
Total investment income | 1,044,748 | 26,621,289 | 12,446,390 | 21,277,287 | ||||||||||||||||
|
| |||||||||||||||||||
Expenses: | ||||||||||||||||||||
Management fees (Note 3a) | 990,051 | 20,300,651 | 15,923,403 | 16,365,146 | ||||||||||||||||
Distribution fees: (Note 3c) | ||||||||||||||||||||
Class A | 175,467 | 5,914,629 | 1,729,721 | 5,849,712 | ||||||||||||||||
Class C | 190,785 | 3,973,705 | 1,344,823 | 3,509,166 | ||||||||||||||||
Class R | 745 | 223,150 | 371,868 | 384,604 | ||||||||||||||||
Transfer agent fees: (Note 3e) | ||||||||||||||||||||
Class A | 142,175 | 4,819,289 | 1,571,231 | 6,692,176 | ||||||||||||||||
Class C | 38,745 | 809,475 | 305,322 | 1,003,655 | ||||||||||||||||
Class R | 365 | 91,525 | 169,546 | 222,962 | ||||||||||||||||
Class R6 | 749 | 46,097 | 206,560 | 64,931 | ||||||||||||||||
Advisor Class | 25,101 | 1,160,834 | 1,738,551 | 1,569,804 | ||||||||||||||||
Custodian fees (Note 4) | 3,703 | 42,234 | 21,197 | 29,500 | ||||||||||||||||
Reports to shareholders | 12,964 | 314,878 | 95,222 | 288,413 | ||||||||||||||||
Registration and filing fees | 80,023 | 130,429 | 104,316 | 161,043 | ||||||||||||||||
Professional fees | 44,534 | 75,177 | 84,457 | 83,521 | ||||||||||||||||
Trustees’ fees and expenses | 1,184 | 38,443 | 27,832 | 37,906 | ||||||||||||||||
Other | 7,746 | 69,964 | 51,718 | 65,560 | ||||||||||||||||
|
| |||||||||||||||||||
Total expenses | 1,714,337 | 38,010,480 | 23,745,767 | 36,328,099 | ||||||||||||||||
Expense reductions (Note 4) | (152 | ) | (2,262 | ) | (1,085 | ) | (23 | ) | ||||||||||||
Expenses waived/paid by affiliates (Note 3f and 3g) | (309,896 | ) | (1,125,366 | ) | (462,951 | ) | (480,505 | ) | ||||||||||||
|
| |||||||||||||||||||
Net expenses | 1,404,289 | 36,882,852 | 23,281,731 | 35,847,571 | ||||||||||||||||
|
| |||||||||||||||||||
Net investment income (loss) | (359,541 | ) | (10,261,563 | ) | (10,835,341 | ) | (14,570,284 | ) | ||||||||||||
|
| |||||||||||||||||||
Realized and unrealized gains (losses): | ||||||||||||||||||||
Net realized gain (loss) from: | ||||||||||||||||||||
Investments: | ||||||||||||||||||||
Unaffiliated issuers | 23,059,805 | 289,836,956 | 347,278,699 | 393,654,159 | ||||||||||||||||
Written options | 7,133 | — | — | — | ||||||||||||||||
Foreign currency transactions | 3,864 | 3,377 | — | 36 | ||||||||||||||||
|
| |||||||||||||||||||
Net realized gain (loss) | 23,070,802 | 289,840,333 | 347,278,699 | 393,654,195 | ||||||||||||||||
|
| |||||||||||||||||||
Net change in unrealized appreciation (depreciation) on: Investments: | ||||||||||||||||||||
Unaffiliated issuers | (15,755,359 | ) | 405,837,652 | 135,306,576 | 100,694,860 | |||||||||||||||
Non-controlled affiliates (Note 3f and 9) | — | — | (3,652,123 | ) | — | |||||||||||||||
|
| |||||||||||||||||||
Net change in unrealized appreciation (depreciation) | (15,755,359 | ) | 405,837,652 | 131,654,453 | 100,694,860 | |||||||||||||||
|
| |||||||||||||||||||
Net realized and unrealized gain (loss) | 7,315,443 | 695,677,985 | 478,933,152 | 494,349,055 | ||||||||||||||||
|
|
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 67 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations (continued)
for the year ended April 30, 2018
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $6,955,902 | $685,416,422 | $468,097,811 | $479,778,771 | ||||||||||||||||
|
|
68 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | |||||||||||||||
Year Ended April 30, | Year Ended April 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Increase (decrease) in net assets: | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | $ | (359,541 | ) | $ | (90,591 | ) | $ | (10,261,563 | ) | $ | (8,309,467 | ) | ||||
Net realized gain (loss) | 23,070,802 | (314,124 | ) | 289,840,333 | 270,084,144 | |||||||||||
Net change in unrealized appreciation (depreciation) | (15,755,359 | ) | 20,899,832 | 405,837,652 | 141,390,491 | |||||||||||
Net increase (decrease) in net assets resulting from operations | 6,955,902 | 20,495,117 | 685,416,422 | 403,165,168 | ||||||||||||
Distributions to shareholders from: | ||||||||||||||||
Net realized gains: | ||||||||||||||||
Class A | — | — | (189,384,206 | ) | (44,859,072 | ) | ||||||||||
Class C | — | — | (36,890,234 | ) | (8,913,159 | ) | ||||||||||
Class R | — | — | (3,861,226 | ) | (1,075,523 | ) | ||||||||||
Class R6 | — | — | (26,495,718 | ) | (5,023,963 | ) | ||||||||||
Advisor Class | — | — | (42,059,463 | ) | (9,033,594 | ) | ||||||||||
Total distributions to shareholders | — | — | (298,690,847 | ) | (68,905,311 | ) | ||||||||||
Capital share transactions: (Note 2) | ||||||||||||||||
Class A | (17,113,814 | ) | (35,011,790 | ) | (91,864,958 | ) | 1,519,824,161 | |||||||||
Class C | (3,442,504 | ) | (7,689,560 | ) | (23,626,956 | ) | 218,581,841 | |||||||||
Class R | (43,959 | ) | (130,011 | ) | (18,366,509 | ) | 4,640,014 | |||||||||
Class R6 | (19,406,366 | ) | (16,295,505 | ) | 41,353,334 | 22,457,460 | ||||||||||
Advisor Class | (3,475,298 | ) | 100,080 | (18,372,365 | ) | 224,101,152 | ||||||||||
Total capital share transactions | (43,481,941 | ) | (59,026,786 | ) | (110,877,454 | ) | 1,989,604,628 | |||||||||
Net increase (decrease) in net assets | (36,526,039 | ) | (38,531,669 | ) | 275,848,121 | 2,323,864,485 | ||||||||||
Net assets: | ||||||||||||||||
Beginning of year | 131,719,433 | 170,251,102 | 3,542,400,542 | 1,218,536,057 | ||||||||||||
End of year | $ | 95,193,394 | $ | 131,719,433 | $ | 3,818,248,663 | $ | 3,542,400,542 | ||||||||
Accumulated net investment loss included in net assets: | ||||||||||||||||
End of year | $ | (243,541 | ) | $ | (57,895 | ) | $ | (4,268,478 | ) | $ | (3,796,709 | ) |
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 69 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets (continued)
Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||||||||
Year Ended April 30, | Year Ended April 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Increase (decrease) in net assets: | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | $ | (10,835,341 | ) | $ | (11,583,844 | ) | $ | (14,570,284 | ) | $ | (12,367,765 | ) | ||||
Net realized gain (loss) | 347,278,699 | 111,251,692 | 393,654,195 | 296,137,194 | ||||||||||||
Net change in unrealized appreciation (depreciation) | 131,654,453 | 397,379,604 | 100,694,860 | 204,507,795 | ||||||||||||
Net increase (decrease) in net assets resulting from operations | 468,097,811 | 497,047,452 | 479,778,771 | 488,277,224 | ||||||||||||
Distributions to shareholders from: | ||||||||||||||||
Net realized gains: | ||||||||||||||||
Class A | (13,026,727 | ) | — | (188,183,859 | ) | (136,505,889 | ) | |||||||||
Class C | (2,968,851 | ) | — | (37,764,936 | ) | (29,638,216 | ) | |||||||||
Class R | (1,455,647 | ) | — | (6,640,970 | ) | (5,497,412 | ) | |||||||||
Class R6 | (16,214,723 | ) | — | (21,566,773 | ) | (12,322,477 | ) | |||||||||
Advisor Class | (13,459,989 | ) | — | (39,628,357 | ) | (31,556,678 | ) | |||||||||
Total distributions to shareholders | (47,125,937 | ) | — | (293,784,895 | ) | (215,520,672 | ) | |||||||||
Capital share transactions: (Note 2) | ||||||||||||||||
Class A | (165,302,683 | ) | (210,965,256 | ) | (165,123,618 | ) | (104,570,061 | ) | ||||||||
Class C | (30,398,855 | ) | (40,612,322 | ) | (43,224,469 | ) | (25,199,072 | ) | ||||||||
Class R | (20,277,000 | ) | (14,134,257 | ) | (14,958,409 | ) | (11,196,875 | ) | ||||||||
Class R6 | (75,776,145 | ) | (157,322,943 | ) | 39,199,957 | (42,853,407 | ) | |||||||||
Advisor Class | (218,726,187 | ) | (193,970,739 | ) | (100,935,015 | ) | (14,527,511 | ) | ||||||||
Total capital share transactions | (510,480,870 | ) | (617,005,517 | ) | (285,041,554 | ) | (198,346,926 | ) | ||||||||
Net increase (decrease) in net assets | (89,508,996 | ) | (119,958,065 | ) | (99,047,678 | ) | 74,409,626 | |||||||||
Net assets: | ||||||||||||||||
Beginning of year | 2,606,918,166 | 2,726,876,231 | 3,563,656,892 | 3,489,247,266 | ||||||||||||
End of year | $ | 2,517,409,170 | $ | 2,606,918,166 | $ | 3,464,609,214 | $ | 3,563,656,892 | ||||||||
Accumulated net investment loss included in net assets: | ||||||||||||||||
End of year | $ | (2,644,648 | ) | $ | (4,025,448 | ) | $ | — | $ | (2,048,836 | ) |
70 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds, four of which are included in this report (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Funds offer five classes of shares: Class A, Class C, Class R, Class R6, and Advisor Class. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
Franklin Small Cap Growth Fund was closed to new investors with limited exceptions effective at the close of market February 12, 2015. Effective April 28, 2017, the fund opened Class R6 shares to new investors who are eligible to purchase Class R6 shares.
On June 1, 2018, Franklin Focused Core Equity Fund was renamed Franklin Select U.S. Equity Fund.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments listed on an 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. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities 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 NAV.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Funds’ business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies (continued)
a. Financial Instrument Valuation (continued)
the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Funds’ portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC 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 Depositary 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 that may call into question the reliability of the values of the foreign securities held by the Funds. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Funds’ NAV is not calculated, which could result in differences between the value of the Funds’ portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes.
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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Board.
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 in the Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
Certain or all Funds invested in derivative financial instruments in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statements of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statements of Operations.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities.
Certain or all Funds purchased or wrote exchange traded option contracts primarily to manage and/or gain exposure to equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the
72 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Note 8 regarding other derivative information.
d. Securities Lending
Certain or all Funds participate in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair 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 deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Funds. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statements of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At April 30, 2018, the Franklin Growth Opportunities Fund had no securities on loan.
e. Income and Deferred Taxes
It is each Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which the Funds invest. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is determined to apply, certain or all Funds record an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
Each Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of April 30, 2018, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
f. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Funds. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
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.
franklintempleton.com | Annual Report | 73 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies (continued)
f. Security Transactions, Investment Income, Expenses and Distributions (continued)
Realized and unrealized gains and losses and net investment income, excluding class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions by class are generally due to differences in class specific expenses.
g. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At April 30, 2018, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
Franklin Focused Core | Franklin Growth | |||||||||||||||
Equity Fund | Opportunities Fund | |||||||||||||||
|
| |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
| ||||||||||||||||
Class A Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 503,310 | $ | 8,051,742 | 7,166,896 | $ | 269,822,921 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 4,805,055 | 175,240,189 | ||||||||||||
Shares redeemed | (1,600,612 | ) | (25,165,556 | ) | (14,319,505 | ) | (536,928,068) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (1,097,302 | ) | $ | (17,113,814 | ) | (2,347,554 | ) | $ | (91,864,958) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 766,686 | $ | 10,993,989 | 8,855,024 | $ | 285,856,595 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 1,336,770 | 41,439,884 | ||||||||||||
Shares issued on reorganization | — | — | 55,853,813 | 1,797,934,327 | ||||||||||||
Shares redeemed | (3,313,236 | ) | (46,005,779 | ) | (18,813,942 | ) | (605,406,645) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (2,546,550 | ) | $ | (35,011,790 | ) | 47,231,665 | $ | 1,519,824,161 | ||||||||
|
|
74 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Focused Core | Franklin Growth | |||||||||||||||
Equity Fund | Opportunities Fund | |||||||||||||||
|
| |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
| ||||||||||||||||
Class C Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 169,798 | $ | 2,570,525 | 1,416,968 | $ | 45,670,045 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 1,171,816 | 36,291,145 | ||||||||||||
Shares redeemed | (401,846 | ) | (6,013,029 | ) | (3,285,529 | ) | (105,588,146) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (232,048 | ) | $ | (3,442,504 | ) | (696,745 | ) | $ | (23,626,956) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 210,816 | $ | 2,860,457 | 905,877 | $ | 25,435,592 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 320,376 | 8,618,123 | ||||||||||||
Shares issued on reorganization | — | — | 10,841,658 | 304,433,926 | ||||||||||||
Shares redeemed | (801,361 | ) | (10,550,017 | ) | (4,303,742 | ) | (119,905,800) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (590,545 | ) | $ | (7,689,560 | ) | 7,764,169 | $ | 218,581,841 | ||||||||
|
| |||||||||||||||
Class R Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 5,129 | $ | 77,884 | 184,889 | $ | 6,657,157 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 109,382 | 3,821,807 | ||||||||||||
Shares redeemed | (7,727 | ) | (121,843 | ) | (808,089 | ) | (28,845,473) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (2,598 | ) | $ | (43,959 | ) | (513,818 | ) | $ | (18,366,509) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 1,428 | $ | 19,514 | 11,331 | $ | 316,184 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 35,650 | 1,065,216 | ||||||||||||
Shares issued on reorganization | — | — | 783,369 | 24,339,319 | ||||||||||||
Shares redeemed | (11,363 | ) | (149,525 | ) | (680,834 | ) | (21,080,705) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (9,935 | ) | $ | (130,011 | ) | 149,516 | $ | 4,640,014 | ||||||||
|
| |||||||||||||||
Class R6 Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 85,528 | $ | 1,360,151 | 1,719,083 | $ | 70,340,588 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 516,029 | 20,352,194 | ||||||||||||
Shares redeemed | (1,350,483 | ) | (20,766,517 | ) | (1,209,156 | ) | (49,339,448) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (1,264,955 | ) | $ | (19,406,366 | ) | 1,025,956 | $ | 41,353,334 | ||||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 403,349 | $ | 5,673,073 | 854,113 | $ | 29,053,360 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 113,533 | 3,764,740 | ||||||||||||
Shares issued on reorganization | — | — | 5,075,827 | 174,304,065 | ||||||||||||
Shares redeemed | (1,616,859 | ) | (21,968,578 | ) | (5,495,669 | ) | (184,664,705) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (1,213,510 | ) | $ | (16,295,505 | ) | 547,804 | $ | 22,457,460 | ||||||||
|
|
franklintempleton.com | Annual Report | 75 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest (continued)
Franklin Focused Core | Franklin Growth | |||||||||||||||
Equity Fund | Opportunities Fund | |||||||||||||||
|
| |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
| ||||||||||||||||
Advisor Class Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 224,083 | $ | 3,543,200 | 2,255,020 | $ | 89,869,837 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 1,049,408 | 40,968,889 | ||||||||||||
Shares redeemed | (442,950 | ) | (7,018,498 | ) | (3,702,910 | ) | (149,211,091) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (218,867 | ) | $ | (3,475,298 | ) | (398,482 | ) | $ | (18,372,365) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 870,779 | $ | 12,465,363 | 3,995,406 | $ | 136,490,569 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 268,379 | 8,837,733 | ||||||||||||
Shares issued on reorganization | — | — | 9,066,575 | 309,442,413 | ||||||||||||
Shares redeemed | (831,228 | ) | (12,365,283 | ) | (6,779,384 | ) | (230,669,563) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | 39,551 | $ | 100,080 | 6,550,976 | $ | 224,101,152 | ||||||||||
|
| |||||||||||||||
Franklin Small Cap | Franklin Small-Mid Cap | |||||||||||||||
Growth Fund | Growth Fund | |||||||||||||||
|
| |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
| ||||||||||||||||
Class A Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 3,189,012 | $ | 67,849,901 | 10,215,023 | $ | 369,305,768 | ||||||||||
Shares issued in reinvestment of distributions | 547,334 | 11,920,682 | 5,062,829 | 177,806,171 | ||||||||||||
Shares redeemed | (11,554,343 | ) | (245,073,266 | ) | (19,601,669 | ) | (712,235,557) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (7,817,997 | ) | $ | (165,302,683 | ) | (4,323,817 | ) | $ | (165,123,618) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 4,458,478 | $ | 81,421,221 | 12,398,150 | $ | 412,209,497 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 3,813,303 | 122,521,421 | ||||||||||||
Shares redeemed | (16,103,736 | ) | (292,386,477 | ) | (19,264,077 | ) | (639,300,979) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (11,645,258 | ) | $ | (210,965,256 | ) | (3,052,624 | ) | $ | (104,570,061) | |||||||
|
| |||||||||||||||
Class C Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 279,449 | $ | 5,088,767 | 1,315,525 | $ | 34,824,098 | ||||||||||
Shares issued in reinvestment of distributions | 156,063 | 2,874,674 | 1,482,639 | 37,392,153 | ||||||||||||
Shares redeemed | (2,157,881 | ) | (38,362,296 | ) | (4,350,045 | ) | (115,440,720) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (1,722,369 | ) | $ | (30,398,855 | ) | (1,551,881 | ) | $ | (43,224,469) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 428,443 | $ | 6,699,404 | 1,514,724 | $ | 38,005,629 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 1,158,597 | 27,806,305 | ||||||||||||
Shares redeemed | (3,071,150 | ) | (47,311,726 | ) | (3,618,908 | ) | (91,011,006) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (2,642,707 | ) | $ | (40,612,322 | ) | (945,587 | ) | $ | (25,199,072) | |||||||
|
|
76 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Small Cap | Franklin Small-Mid Cap | |||||||||||||||
Growth Fund | Growth Fund | |||||||||||||||
|
| |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
| ||||||||||||||||
Class R Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 642,577 | $ | 13,280,250 | 564,940 | $ | 18,785,330 | ||||||||||
Shares issued in reinvestment of distributions | 69,237 | 1,438,739 | 197,203 | 6,369,651 | ||||||||||||
Shares redeemed | (1,724,856 | ) | (34,995,989 | ) | (1,198,049 | ) | (40,113,390) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (1,013,042 | ) | $ | (20,277,000 | ) | (435,906 | ) | $ | (14,958,409) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 925,913 | $ | 16,178,854 | 667,776 | $ | 20,604,680 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 177,385 | 5,293,167 | ||||||||||||
Shares redeemed | (1,749,128 | ) | (30,313,111 | ) | (1,200,302 | ) | (37,094,722) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (823,215 | ) | $ | (14,134,257 | ) | (355,141 | ) | $ | (11,196,875) | |||||||
|
| |||||||||||||||
Class R6 Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 9,126,555 | $ | 210,441,655 | 2,883,707 | $ | 115,938,495 | ||||||||||
Shares issued in reinvestment of distributions | 599,648 | 14,103,732 | 509,486 | 19,762,976 | ||||||||||||
Shares redeemed | (12,909,982 | ) | (300,321,532 | ) | (2,414,377 | ) | (96,501,514) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (3,183,779 | ) | $ | (75,776,145 | ) | 978,816 | $ | 39,199,957 | ||||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 13,928,123 | $ | 275,768,482 | 3,167,526 | $ | 112,096,496 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 337,444 | 11,820,661 | ||||||||||||
Shares redeemed | (21,481,423 | ) | (433,091,425 | ) | (4,607,797 | ) | (166,770,564) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (7,553,300 | ) | $ | (157,322,943 | ) | (1,102,827 | ) | $ | (42,853,407) | |||||||
|
| |||||||||||||||
Advisor Class Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 5,063,743 | $ | 115,186,325 | 2,962,038 | $ | 115,876,935 | ||||||||||
Shares issued in reinvestment of distributions | 516,706 | 12,028,914 | 979,925 | 37,482,152 | ||||||||||||
Shares redeemed | (15,186,221 | ) | (345,941,426 | ) | (6,459,038 | ) | (254,294,102) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (9,605,772 | ) | $ | (218,726,187 | ) | (2,517,075 | ) | $ | (100,935,015) | |||||||
|
| |||||||||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 9,430,468 | $ | 185,643,970 | 4,591,094 | $ | 165,044,336 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 844,407 | 29,284,034 | ||||||||||||
Shares redeemed | (19,741,159 | ) | (379,614,709 | ) | (5,814,226 | ) | (208,855,881) | |||||||||
|
| |||||||||||||||
Net increase (decrease) | (10,310,691 | ) | $ | (193,970,739 | ) | (378,725 | ) | $ | (14,527,511) | |||||||
|
|
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 |
franklintempleton.com | Annual Report | 77 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
a. Management Fees
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 | |
0.950% | Up to and including $500 million | |
0.850% | Over $500 million, up to and including $1 billion | |
0.800% | Over $1 billion, up to and including $1.5 billion | |
0.750% | Over $1.5 billion, up to and including $6.5 billion | |
0.725% | Over $6.5 billion, up to and including $11.5 billion | |
0.700% | Over $11.5 billion, up to and including $16.5 billion | |
0.690% | Over $16.5 billion, up to and including $19 billion | |
0.680% | Over $19 billion, up to and including $21.5 billion | |
0.670% | In excess of $21.5 billion |
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 | |
0.700% | Up to and including $500 million | |
0.600% | Over $500 million, up to and including $1 billion | |
0.550% | Over $1 billion, up to and including $1.5 billion | |
0.500% | Over $1.5 billion, up to and including $6.5 billion | |
0.475% | Over $6.5 billion, up to and including $11.5 billion | |
0.450% | Over $11.5 billion, up to and including $16.5 billion | |
0.440% | Over $16.5 billion, up to and including $19 billion | |
0.430% | Over $19 billion, up to and including $21.5 billion | |
0.420% | In excess of $21.5 billion |
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 | |
0.750% | 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 |
78 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Small-Mid 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 | |
0.625% | 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 |
For the year ended April 30, 2018, each Fund’s gross effective investment management fee rate based on average daily net assets was as follows:
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||
0.950% | 0.547% | 0.618% | 0.457% |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on each of the Funds’ average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and 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 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 plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each Fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||||||||||||||
Reimbursement Plans: | ||||||||||||||||||||||||
Class A | 0.35% | 0.35% | 0.35% | 0.25% | ||||||||||||||||||||
Compensation Plans: | ||||||||||||||||||||||||
Class C | 1.00% | 1.00% | 1.00% | 1.00% | ||||||||||||||||||||
Class R | 0.50% | 0.50% | 0.50% | 0.50% |
For Franklin Focused Core Equity Fund, Franklin Growth Opportunities Fund and Franklin Small Cap Growth Fund, the Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
franklintempleton.com | Annual Report | 79 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Funds. These charges are deducted from the proceeds of sales of fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the year:
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||||||||||||||
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | $15,040 | $398,686 | $30,026 | $557,678 | ||||||||||||||||||||
CDSC retained | $ 1,399 | $ 18,468 | $ 2,348 | $ 33,317 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. Effective November 1, 2017, the fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. Prior to November 1, 2017, the fees were account based fees that varied based on fund or account type. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the year ended April 30, 2018, 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 | ||||||||||||||
Focused Core | Franklin Growth | Small Cap | Small-Mid Cap | |||||||||||||
Equity Fund | Opportunities Fund | Growth Fund | Growth Fund | |||||||||||||
Transfer agent fees | $85,134 | $2,987,249 | $1,544,173 | $3,128,324 |
f. Investments in Affiliated Management Investment Companies
Certain or all Funds invest in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Funds are waived on assets invested in the affiliated management investment companies, as noted in the Statements of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the year ended April 30, 2018, investments in affiliated management investment companies were as follows:
Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Held at End | Value at End of Year | Dividend Income | Realized (Loss) | Net Change in Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
Franklin Focused Core Equity Fund Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market | 2,075,737 | 23,141,315 | (24,455,791 | ) | 761,261 | $ 761,261 | $ 11,532 | $ — | $ — | |||||||||||||||||||||||
Franklin Growth Opportunities Fund Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market | 55,627,362 | 739,901,589 | (776,972,646 | ) | 18,556,305 | $ 18,556,305 | $179,631 | $ — | $ — |
80 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Held at End | Value at End of Year | Dividend Income | Realized (Loss) | Net Change in Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
Franklin Small Cap Growth Fund Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 106,566,728 | 1,053,959,836 | (1,068,856,920 | ) | 91,669,644 | $ 91,669,644 | $274,041 | $ — | $ — | |||||||||||||||||||||||
Franklin Small-Mid Cap Growth Fund Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 133,872,460 | 1,065,847,737 | (1,056,491,839 | ) | 143,228,358 | $143,228,358 | $775,712 | $ — | $ — |
g. Waiver and Expense Reimbursements
Advisers and Investor 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 Franklin Focused Core Equity Fund so that the expenses (excluding distribution fees, and acquired fund fees and expenses) for Class A, Class C, Class R and Advisor Class of the Fund does not exceed 1.00%, and Class R6 does not exceed 0.84% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until August 31, 2018. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end.
Additionally, Advisers had contractually agreed to waive or limit its fees so that the management fees paid by Franklin Growth Opportunities Fund did not exceed an annual rate of 0.46% of the fund’s average daily net assets through August 31, 2017. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end. Effective September 1, 2017, the contractual waiver was eliminated.
For Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund, Investor Services has voluntarily agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.02%. Investor Services may discontinue this waiver in the future.
h. Other Affiliated Transactions
At April 30, 2018, one or more of the funds in Franklin Fund Allocator Series owned a percentage of the following Funds’ outstanding shares:
Franklin Growth | Franklin | |
Opportunities | Small Cap | |
Fund | Growth Fund | |
5.6% | 2.2% |
i. Interfund Transactions
Certain or all Funds engaged in purchases and sales of investments with funds or other accounts that have common investment managers (or affiliated investment managers), directors, trustees or officers. These purchases and sales for the year ended April 30, 2018, were as follows:
Franklin | Franklin | |||||||||||
Franklin Growth | Small Cap | Small-Mid Cap | ||||||||||
Opportunities Fund | Growth Fund | Growth Fund | ||||||||||
Purchases | $6,005,512 | $ — | $ — | |||||||||
Sales | $ — | $5,306,073 | $7,894,824 |
franklintempleton.com | Annual Report | 81 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
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, 2018, the custodian fees were reduced as noted in the Statements of Operations.
5. Income Taxes
During the year ended April 30, 2018, the Funds utilized capital loss carryforwards as follows:
Franklin | Franklin | |
Focused Core | Small Cap | |
Equity Fund | Growth Fund | |
$8,194,966 | $86,283,108 |
For tax purposes, the Funds may elect to defer any portion of a late-year ordinary loss to the first day of the following fiscal year. At April 30, 2018, the deferred late-year ordinary losses were as follows:
Franklin | Franklin | |||||||||||
Focused Core | Franklin Growth | Small Cap | ||||||||||
Equity Fund | Opportunities Fund | Growth Fund | ||||||||||
Late-year ordinary losses | $243,544 | $4,273,095 | $2,644,651 |
The tax character of distributions paid during the years ended April 30, 2018 and 2017, was as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Distributions paid from: | ||||||||||||||||||||||||
Ordinary income | $ | — | $ | — | $ | — | $ | 5,968,734 | $ | 15,010,212 | ||||||||||||||
Long term capital gain | 298,690,847 | 68,905,311 | 47,125,937 | — | 287,816,161 | 200,510,460 | ||||||||||||||||||
$ | 298,690,847 | $ | 68,905,311 | $ | 47,125,937 | $ | — | $ | 293,784,895 | $ | 215,520,672 |
At April 30, 2018, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
Franklin | Franklin | Franklin | ||||||||||||||
Focused Core | Franklin Growth | Small Cap | Small-Mid Cap | |||||||||||||
Equity Fund | Opportunities Fund | Growth Fund | Growth Fund | |||||||||||||
Cost of investments | $ | 87,971,436 | $ | 1,965,477,798 | $ | 1,939,435,761 | $ | 2,443,639,715 | ||||||||
Unrealized appreciation | $ | 8,907,691 | $ | 1,874,842,247 | $ | 808,917,647 | $ | 1,121,762,304 | ||||||||
Unrealized depreciation | (1,540,924 | ) | (28,225,477 | ) | (151,808,023 | ) | (56,470,446 | ) | ||||||||
Net unrealized appreciation (depreciation) | $ | 7,366,767 | $ | 1,846,616,770 | $ | 657,109,624 | $ | 1,065,291,858 | ||||||||
Undistributed ordinary income | — | — | — | 26,220,410 | ||||||||||||
Undistributed long term capital gains | 12,903,150 | 171,240,075 | 214,740,965 | 150,678,636 | ||||||||||||
Distributable earnings | $ | 12,903,150 | $ | 171,240,075 | $ | 214,740,965 | $ | 176,899,046 |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of wash sales.
82 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
The Funds utilized a tax accounting practice to treat a portion of the proceeds from capital shares redeemed as a distribution from realized capital gains.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities ) for the year ended April 30, 2018, were as follows:
Franklin | Franklin | Franklin | ||||||||||||||
Focused Core | Franklin Growth | Small Cap | Small-Mid Cap | |||||||||||||
Equity Fund | Opportunities Fund | Growth Fund | Growth Fund | |||||||||||||
Purchases | $ 97,289,665 | $ 836,631,066 | $ 758,000,079 | $1,332,363,869 | ||||||||||||
Sales | $139,768,451 | $1,242,011,243 | $1,302,870,702 | $1,909,021,375 |
At April 30, 2018, in connection with securities lending transactions, certain or all Funds loaned investments and received cash collateral as follows:
Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||
Securities lending transactionsa: | ||||||
Equity investmentsb | $76,587,584 | $28,485,775 |
aThe agreements can be terminated at any time.
bThe gross amount of recognized liability for such transactions is included in payable upon return of securities loaned in the Statements of Assets and Liabilities.
7. Restricted Securities
Certain or all Funds invest in securities that are restricted under the Securities Act of 1933 (1933 Act). 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, 2018, investments in restricted securities, excluding securities exempt from registration under the 1933 Act deemed to be liquid, were as follows:
Shares | Issuer | Acquisition Date | Cost | Value | ||||||||||
Franklin Growth Opportunities Fund | ||||||||||||||
2,610,594 | ClearMotion Inc., pfd., C | 11/06/17 | $ | 5,500,000 | $ | 5,664,511 | ||||||||
2,362,202 | Proterra Inc., pfd., 5, 144A | 9/21/16 - 1/13/17 | 11,896,616 | 13,932,151 | ||||||||||
596,775 | Proterra Inc., pfd., 6, 144A | 6/07/17 | 3,306,052 | 3,519,750 | ||||||||||
805,800 | Tanium Inc., pfd., G | 9/14/15 | 4,000,233 | 5,074,222 | ||||||||||
Total Restricted Securities (Value is 0.7% of Net Assets) | $ | 24,702,901 | $ | 28,190,634 | ||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||
9,905,685 | DraftKings Inc. | 8/07/15 - 3/02/17 | $ | 26,627,302 | $ | 15,076,076 | ||||||||
1,787,047 | Proterra Inc., pfd., 5, 144A | 9/21/16 - 1/13/17 | 8,999,998 | 10,539,916 | ||||||||||
1,310,834 | Proterra Inc., pfd., 6, 144A | 6/07/17 - 1/02/18 | 7,261,842 | 7,731,235 | ||||||||||
1,542,673 | Smule Inc., pfd., G, 144A | 5/31/16 | 11,099,995 | 13,537,775 | ||||||||||
352,675 | Smule Inc., pfd., H, 144A | 4/27/17 | 2,999,994 | 3,240,948 | ||||||||||
3,611,111 | Tula Technology Inc., E | 9/08/17 | 6,500,000 | 6,750,780 | ||||||||||
Total Restricted Securities (Value is 2.3% of Net Assets) | $ | 63,489,131 | $ | 56,876,730 | ||||||||||
Franklin Small-Mid Cap Growth Fund | ||||||||||||||
7,974,537 | DraftKings Inc. | 8/07/15 - 3/02/17 | $ | 21,380,303 | $ | 12,136,942 | ||||||||
1,416,913 | Proterra Inc., pfd., 5, 144A | 9/21/16 | 7,135,914 | 8,356,883 |
franklintempleton.com | Annual Report | 83 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
7. Restricted Securities (continued)
Shares Issuer | Acquisition Date | Cost | Value | |||||||||||
Franklin Small-Mid Cap Growth Fund (continued) | ||||||||||||||
Total Restricted Securities (Value is 0.6% of Net Assets) | $ | 28,516,217 | $ | 20,493,825 |
8. Other Derivative Information
For the year ended April 30, 2018, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Location | Net Realized Gain (Loss) for �� the Year | Statement of Operations Location | Net Change in Unrealized Appreciation (Depreciation) for the Year | ||||
Net realized gain (loss) from: | Net change in unrealized appreciation (depreciation) on: | |||||||
Franklin Focused Core Equity Fund | ||||||||
Equity Contracts | Written options | $7,133 | Written options | $- |
For the year ended April 30, 2018, the average month end notional amount of options represented $0.
See Note 1(c) regarding derivative financial instruments.
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. During the year ended April 30, 2018, investments in “affiliated companies” were as follows:
Name of Issuer | Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of at End of Year | Value at End of Year | Dividend Income | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||
Aratana Therapeutics Inc. | 2,697,019 | — | — | 2,697,019 | $13,889,648 | $ — | $ — | $(2,831,870 | ) | |||||||||||||||||||||
The KeyW Holding Corp. | 3,006,882 | 423,400 | — | 3,430,282 | 26,550,383 | — | — | (4,208,903 | ) | |||||||||||||||||||||
Pfenex Inc. | 1,175,631 | — | — | 1,175,631 | — | a | — | — | — | a | ||||||||||||||||||||
Sportsman’s Warehouse Holdings Inc. | 3,944,700 | 217,300 | — | 4,162,000 | 20,768,380 | — | — | 3,388,650 | ||||||||||||||||||||||
Total Affiliated Securities (Value is | $61,208,411 | $ — | $ — | $(3,652,123 | ) |
aAs of April 30, 2018, no longer an affiliate.
10. 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 $2 billion (Global Credit Facility) which matures on February 8, 2019. 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.
84 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
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 their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statements of Operations. During the year ended April 30, 2018, the Funds did not use the Global Credit Facility.
11. Fair Value Measurements
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ financial instruments and are summarized in the following fair value hierarchy:
• | Level 1 – quoted prices in active markets for identical financial instruments |
• | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
• | Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments) |
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of April 30, 2018, in valuing the Funds’ assets carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Franklin Focused Core Equity Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments | $ | 94,576,942 | $ | — | $ | — | $ | 94,576,942 | ||||||||
Short Term Investments | 761,261 | — | — | 761,261 | ||||||||||||
Total Investments in Securities
|
$
|
95,338,203
|
|
$
|
—
|
|
$
|
—
|
|
$
|
95,338,203
|
| ||||
Franklin Growth Opportunities Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Consumer Discretionary | $ | 532,707,108 | $ | — | $ | 23,116,412 | $ | 555,823,520 | ||||||||
Information Technology | 1,765,347,729 | — | 5,074,222 | 1,770,421,951 | ||||||||||||
All Other Equity Investments | 1,467,292,792 | — | — | 1,467,292,792 | ||||||||||||
Short Term Investments | 18,556,305 | — | — | 18,556,305 | ||||||||||||
Total Investments in Securities
|
$
|
3,783,903,934
|
|
$
|
—
|
|
$
|
28,190,634
|
|
$
|
3,812,094,568
|
|
franklintempleton.com | Annual Report | 85 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
11. Fair Value Measurements (continued)
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Consumer Discretionary | $ | 313,632,753 | $ | — | $ | 40,098,007 | $ | 353,730,760 | ||||||||
Information Technology | 693,860,763 | — | 16,778,723 | 710,639,486 | ||||||||||||
All Other Equity Investments | 1,440,505,495 | — | — | 1,440,505,495 | ||||||||||||
Short Term Investments | 91,669,644 | — | — | 91,669,644 | ||||||||||||
Total Investments in Securities
|
$
|
2,539,668,655
|
| $ | — |
$
|
56,876,730
|
|
$
|
2,596,545,385
|
| |||||
Franklin Small-Mid Cap Growth Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Consumer Discretionary | $ | 501,503,136 | $ | — | $ | 20,493,825 | $ | 521,996,961 | ||||||||
All Other Equity Investments | 2,843,706,254 | — | — | 2,843,706,254 | ||||||||||||
Short Term Investments | 143,228,358 | — | — | 143,228,358 | ||||||||||||
Total Investments in Securities
|
$
|
3,488,437,748
|
|
$
|
—
|
|
$
|
20,493,825
|
|
$
|
3,508,931,573
|
|
aFor detailed categories, see the accompanying Statement of Investments.
bIncludes common and preferred stocks.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the beginning and/or end of the year. At April 30, 2018, the reconciliation of assets are as follows:
Net Change in | ||||||||||||||||||||||||||||||||||||
Unrealized | ||||||||||||||||||||||||||||||||||||
Appreciation | ||||||||||||||||||||||||||||||||||||
Net | Net | (Depreciation) | ||||||||||||||||||||||||||||||||||
Balance at | Transfer | Realized | Unrealized | Balance | on Assets | |||||||||||||||||||||||||||||||
Beginning of | Into (Out of) | Cost Basis | Gain | Appreciation | at End | Held at | ||||||||||||||||||||||||||||||
Year | Purchases | Sales | Level 3 | Adjustments | (Loss) | (Depreciation) | of Year | Year End | ||||||||||||||||||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||
Equity Investmentsa: | ||||||||||||||||||||||||||||||||||||
Consumer Discretionary | $28,079,771 | $13,761,842 | $— | $— | $— | $— | $(1,743,606 | ) | $40,098,007 | $(1,743,606 | ) | |||||||||||||||||||||||||
Information Technology | 16,122,588 | — | — | — | — | — | 656,135 | 16,778,723 | 656,135 | |||||||||||||||||||||||||||
Total Investments in Securities
|
|
$44,202,359
|
|
|
$13,761,842
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$(1,087,471
|
)
|
|
$56,876,730
|
|
|
$(1,087,471
|
)
|
aIncludes preferred stocks.
86 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Significant unobservable valuation inputs for material Level 3 financial instruments and impact to fair value as a result of changes in unobservable valuation inputs as of April 30, 2018, are as follows:
Description | Fair Value at End of Year | Valuation Technique | Unobservable Input | Amount | Impact to Fair Value if Input Increasesa | |||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||||
Assets: | ||||||||||||||||||
Investments in Securities: | ||||||||||||||||||
Equity Investments:b | ||||||||||||||||||
Consumer Discretionary | $40,098,007 | Discounted cash flow | Forward EBITDA | 4.0% | Increase | c | ||||||||||||
growth rate | ||||||||||||||||||
Free cash flow | $2,000(mil) | Increase | d | |||||||||||||||
Discount rate | 11.5% - 17.4% | Decrease | c | |||||||||||||||
Discount for lack of | 5.1% - 15.2% | Decrease | d | |||||||||||||||
marketability | ||||||||||||||||||
Market Comparables | EV / EBITDA multiple | 6.4x - 22.2x | Increase | |||||||||||||||
EV / revenue multiple | 12.3x | Increase | d | |||||||||||||||
Volatility | 35.3% | Increase | ||||||||||||||||
Discount for lack of | 21.4% | Decrease | d | |||||||||||||||
marketability | ||||||||||||||||||
Information Technology | 16,778,723 | Market Comparables | EV / revenue multiple | 4.0x | Increase | c | ||||||||||||
Discount for lack of | 12.1% | Decrease | d | |||||||||||||||
marketability | ||||||||||||||||||
Volatility | 33.1% | Increase | ||||||||||||||||
Total | $56,876,730 |
aRepresents the directional change in the fair value of the Level 3 financial instruments that would result from a significant and reasonable increase in the corresponding input. A significant and reasonable decrease in the input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.
bIncludes preferred stocks.
cRepresents a significant impact to fair value and net assets.
dRepresents a significant impact to fair value but not net assets.
Abbreviations List
EBITDA | Earnings before interest, taxes, depreciation and amortization | |
EV | Enterprise value |
12. 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, other than those already disclosed in the financial statements.
Abbreviations
Selected Portfolio
ADR American Depositary Receipt
franklintempleton.com | Annual Report | 87 |
FRANKLIN STRATEGIC SERIES
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Franklin Strategic Series and Shareholders of Franklin Focused Core Equity Fund, Franklin Growth Opportunities Fund, Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund
Opinions on the Financial Statements
We have audited the accompanying statements of assets and liabilities, including the statements of investments, of Franklin Focused Core Equity Fund, Franklin Growth Opportunities Fund, Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund (the “Funds”) as of April 30, 2018, the related statements of operations for the year ended April 30, 2018, the statements of changes in net assets for each of the two years in the period ended April 30, 2018, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Funds as of April 30, 2018, 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 ended April 30, 2018 and each of the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinions
These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of April 30, 2018 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2018
We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.
88 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds hereby report the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended April 30, 2018:
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||
| ||||||||||||
$991,423 | $299,260,042 | $47,729,478 | $288,729,756 |
Under Section 871(k)(2)(C) of the Code, Franklin Small-Mid Cap Growth Fund hereby reports the maximum amount allowable but no less than $5,968,734 as a short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2018.
Under Section 854(b)(1)(A) of the Code, Franklin Small-Mid Cap Growth Fund hereby reports 100.00% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended April 30, 2018.
Under Section 854(b)(1)(B) of the Code, the Funds hereby report 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, 2018:
Franklin Focused Core Equity Fund | Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | |||||||||
| ||||||||||||
$827,358 | $22,024,353 | $9,362,042 | $18,749,233 |
Distributions, including qualified dividend income, paid during calendar year 2018 will be reported to shareholders on Form 1099-DIV by mid-February 2019. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
franklintempleton.com | Annual Report | 89 |
FRANKLIN STRATEGIC SERIES
Special Meeting of Shareholders
MEETING OF SHAREHOLDERS: OCTOBER 30, 2017 AND RECONVENED ON DECEMBER 15, 2017 AND DECEMBER 29, 2017
(UNAUDITED)
A Special Meeting of Shareholders of Franklin Strategic Series was held at the offices of Franklin Templeton Investments, One Franklin Parkway, San Mateo, California on October 30, 2017 and reconvened on December 15, 2017 and December 29, 2017. The purpose of the meeting was to elect Trustees of Franklin Strategic Series and to vote on the following proposals: for each Fund, to approve the use of a “manager of managers” structure whereby the Fund’s investment manager would be able to hire and replace subadvisers without shareholder approval; for each Fund, to approve an amended fundamental investment restriction regarding investments in commodities; and for Franklin Small-Mid Cap Growth Fund, (a) to approve an amended fundamental investment restriction regarding lending; (b) to approve amendments to certain fundamental investment restrictions (includes six sub-proposals); and (c) to approve the elimination of certain other fundamental investment restrictions (includes eight sub-proposals). At the meeting, (i) the following persons were elected by the shareholders to serve as Trustees of Franklin Strategic Series: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, Gregory E. Johnson, Rupert H. Johnson, Jr., J. Michael Luttig, Larry D. Thompson, and John B. Wilson; (ii) the proposals to use a “manager of managers” structure and to approve an amended fundamental investment restriction regarding investments in commodities were approved by shareholders of each Fund, except for Franklin Small Cap Growth Fund; and (iii) for Franklin Small-Mid Cap Growth Fund, the proposals to approve an amended fundamental investment restriction regarding lending, to approve amendments to certain fundamental investment restrictions, and to approve the elimination of certain fundamental investment restrictions were approved by shareholders of that Fund. No other business was transacted at the meeting.
In connection with the meeting, management is aware that some shareholders received from the proxy solicitor numerous calls and mailings that may have been distracting. Management is taking steps to ensure that, in the future, for any new shareholder meeting solicitations that occur, such activity is not repeated. Management apologizes for any inconvenience that may have been caused as a result of such calls and mailings.
The results of the voting at the meeting are as follows:
Proposal 1. To elect a Board of Trustees:
Name | For | Withheld | ||||||
Harris J. Ashton | 598,070,781 | 20,352,982 | ||||||
Terrence J. Checki | 598,448,935 | 19,974,827 | ||||||
Mary C. Choksi | 598,960,351 | 19,463,411 | ||||||
Edith E. Holiday | 598,977,253 | 19,446,508 | ||||||
Gregory E. Johnson | 598,637,629 | 19,786,057 | ||||||
Rupert H. Johnson, Jr. | 598,128,852 | 20,294,908 | ||||||
J. Michael Luttig | 598,807,794 | 19,616,557 | ||||||
Larry D. Thompson | 598,633,435 | 19,785,269 | ||||||
John B. Wilson | 598,721,357 | 19,697,837 |
Total Trust Shares Outstanding*: 1,025,185,272
* As of the record date.
90 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
Proposal 2. | To approve the use of a “manager of managers” structure whereby the Fund’s investment manager would be able to hire and replace subadvisers without shareholder approval: |
Franklin Focused Core Equity Fund
Shares | ||||
For | 2,989,219 | |||
Against | 183,300 | |||
Abstain | 179,133 | |||
Broker Non-Votes | 1,084,127 | |||
Total Fund Shares Voted | 4,435,778 | |||
Total Fund Shares Outstanding* | 6,840,159 | |||
Franklin Growth Opportunities Fund | ||||
Shares | ||||
For | 48,091,828 | |||
Against | 2,028,325 | |||
Abstain | 1,640,038 | |||
Broker Non-Votes | 10,753,660 | |||
Total Fund Shares Voted | 62,513,851 | |||
Total Fund Shares Outstanding* | 98,182,039 | |||
Franklin Small Cap Growth Fund | ||||
Shares | ||||
For | 31,202,520 | |||
Against | 1,477,347 | |||
Abstain | 783,234 | |||
Broker Non-Votes | 14,717,522 | |||
Total Fund Shares Voted | 48,180,622 | |||
Total Fund Shares Outstanding* | 121,711,656 | |||
Franklin Small-Mid Cap Growth Fund | ||||
Shares | ||||
For | 40,365,873 | |||
Against | 2,359,454 | |||
Abstain | 1,322,016 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
Proposal 3. | To approve an amended fundamental investment restriction regarding investments in commodities: |
Franklin Focused Core Equity Fund
Shares | ||||
For | 3,007,405 | |||
Against | 124,224 | |||
Abstain | 220,022 | |||
Broker Non-Votes | 1,084,127 | |||
Total Fund Shares Voted | 4,435,778 | |||
Total Fund Shares Outstanding* | 6,840,159 |
franklintempleton.com | Annual Report | 91 |
FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
Franklin Growth Opportunities Fund | ||||
Shares | ||||
For | 48,244,234 | |||
Against | 1,698,874 | |||
Abstain | 1,817,083 | |||
Broker Non-Votes | 10,753,660 | |||
Total Fund Shares Voted | 62,513,851 | |||
Total Fund Shares Outstanding* | 98,182,039 | |||
Franklin Small Cap Growth Fund | ||||
Shares | ||||
For | 31,083,224 | |||
Against | 1,218,151 | |||
Abstain | 1,161,724 | |||
Broker Non-Votes | 14,717,522 | |||
Total Fund Shares Voted | 48,180,622 | |||
Total Fund Shares Outstanding* | 121,711,656 | |||
Franklin Small-Mid Cap Growth Fund | ||||
Shares | ||||
For | 40,521,079 | |||
Against | 2,089,790 | |||
Abstain | 1,436,469 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
Proposal 4. | For Franklin Small-Mid Cap Growth Fund, to approve an amended fundamental investment restriction regarding lending: |
Shares | ||||
For | 40,427,022 | |||
Against | 2,094,799 | |||
Abstain | 1,525,521 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
Proposal 5. | For Franklin Small-Mid Cap Growth Fund, to approve amendments to certain fundamental investment restrictions of the Fund (includes six (6) sub-proposals) as follows: |
(a) | To amend the fundamental investment restriction regarding borrowing: |
Shares | ||||
For | 40,055,510 | |||
Against | 2,362,344 | |||
Abstain | 1,629,488 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
92 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
(b) | To amend the fundamental investment restriction regarding underwriting: |
Shares | ||||
For | 40,269,988 | |||
Against | 2,121,168 | |||
Abstain | 1,656,186 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(c) | To amend the fundamental investment restriction regarding investments in real estate: |
Shares | ||||
For | 40,428,893 | |||
Against | 2,063,751 | |||
Abstain | 1,554,700 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(d) | To amend the fundamental investment restriction regarding issuing senior securities: |
Shares | ||||
For | 40,259,795 | |||
Against | 2,170,853 | |||
Abstain | 1,616,690 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(e) | To amend the fundamental investment restriction regarding industry concentration: |
Shares | ||||
For | 40,201,128 | |||
Against | 2,181,105 | |||
Abstain | 1,665,107 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(f) | To amend the fundamental investment restriction regarding diversification of investments: |
Shares | ||||
For | 40,428,291 | |||
Against | 1,988,380 | |||
Abstain | 1,630,668 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
franklintempleton.com | Annual Report | 93 |
FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
Proposal 6. | For Franklin Small-Mid Cap Growth Fund, to approve the elimination of certain fundamental investment restrictions (includes eight (8) sub-proposals) as follows: |
(a) | To eliminate the fundamental investment restriction regarding |
engaging in short sales and use of margin: |
Shares | ||||
For | 39,587,134 | |||
Against | 2,851,481 | |||
Abstain | 1,608,725 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(b) | To eliminate the fundamental investment restriction regarding |
investments in oil, gas and other mineral programs: |
Shares | ||||
For | 40,104,028 | |||
Against | 2,417,872 | |||
Abstain | 1,525,440 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(c) | To eliminate the fundamental investment restriction regarding use of options: |
Shares | ||||
For | 39,860,330 | |||
Against | 2,533,982 | |||
Abstain | 1,653,030 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(d) | To eliminate the fundamental investment restriction regarding |
investment in restricted securities: |
Shares | ||||
For | 39,766,905 | |||
Against | 2,547,454 | |||
Abstain | 1,732,983 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
94 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
(e) | To eliminate the fundamental investment restriction regarding |
investment in unseasoned issuers: |
Shares | ||||
For | 39,510,806 | |||
Against | 2,838,597 | |||
Abstain | 1,697,933 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(f) | To eliminate the fundamental investment restriction regarding |
investing for purposes of exercising control: |
Shares | ||||
For | 39,713,656 | |||
Against | 2,681,316 | |||
Abstain | 1,652,369 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(g) | To eliminate the fundamental investment restriction regarding |
investing in other investment companies: |
Shares | ||||
For | 40,005,277 | |||
Against | 2,445,459 | |||
Abstain | 1,596,606 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
(h) | To eliminate the fundamental investment restriction regarding |
management ownership of securities and principal |
transactions with management: |
Shares | ||||
For | 39,485,695 | |||
Against | 2,851,383 | |||
Abstain | 1,710,260 | |||
Broker Non-Votes | 12,987,911 | |||
Total Fund Shares Voted | 57,035,249 | |||
Total Fund Shares Outstanding* | 101,853,182 |
franklintempleton.com | Annual Report | 95 |
FRANKLIN STRATEGIC SERIES
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of US registered 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
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held
| ||||
| ||||||||
Harris J. Ashton (1932) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1991 | 137 | Bar-S Foods (meat packing company) (1981-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
| ||||||||
| ||||||||
Terrence J. Checki (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since December 2017 | 112 | Hess Corporation (exploration of oil and gas) (2014-present). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Member of the Council on Foreign Relations (1996-present); Member of the National Committee on U.S.-China Relations (1999-present); member of the Board of Trustees of the Economic Club of New York (2013-present); member of the Board of Trustees of the Foreign Policy Association (2005-present) and member of various other boards of trustees and advisory boards; and formerly, Executive Vice President of the Federal Reserve Bank of New York and Head of its Emerging Markets and Internal Affairs Group and Member of Management Committee (1995-2014); and Visiting Fellow at the Council on Foreign Relations (2014).
| ||||||||
| ||||||||
Mary C. Choksi (1950) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2014 | 137 | Avis Budget Group Inc. (car rental) (2007-present), Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (2017-present). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Founder and Senior Advisor, Strategic Investment Group (investment management group) (2015-2017); Founding Partner and Senior Managing Director, Strategic Investment Group (1987-2015); Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987).
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Edith E. Holiday (1952) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1998 | 137 | Hess Corporation (exploration of oil and gas) (1993-present), Canadian National Railway (railroad) (2001-present), White Mountains Insurance Group, Ltd. (holding company) (2004-present), Santander Consumer USA Holdings, Inc. (consumer finance) (2016-present), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison – United States Treasury Department (1988-1989).
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J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2009 | 137 | Boeing Capital Corporation (aircraft financing) (2006-2013). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).
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Independent Board Members (continued)
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held
| ||||
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Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 137 | The Southern Company (energy company) (2014-present; previously 2010-2012), Graham Holdings Company (education and media organization) (2011-present) and Cbeyond, Inc. (business communications provider) (2010-2012). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; Counsel, Finch McCranie, LLP (law firm) (2015-present); Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of automobiles and commercial vehicles) (2017-present); John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; previously 2011-2012); and formerly, Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-2014); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
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John B. Wilson (1959) One Franklin Parkway San Mateo, CA 94403-1906 | Lead Independent Trustee | Trustee since 2006 and Lead Independent Trustee since 2008 | 112 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing) (2002-present); Senior Advisor, McKinsey & Co. (consulting) (2017-present); serves on private and non-profit boards; and formerly, President, Staples International and Head of Global Transformation (office supplies) (2012-2016); Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (1992-1996); Senior Vice President – Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
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Interested Board Members and Officers
| ||||||||
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
| ||||||||
**Gregory E. Johnson (1961) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2013 | 151 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).
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**Rupert H. Johnson, Jr. (1940) One Franklin Parkway San Mateo, CA 94403-1906 | Chairman of the Board and Trustee | Chairman of the Board since 2013 and Trustee | 137 | None | ||||
since 1991 | ||||||||
Principal Occupation During at Least the 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 41 of the investment companies in Franklin Templeton Investments.
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Alison E. Baur (1964) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2012 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
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Interested Board Members and Officers (continued)
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held
| ||||
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Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 | Chief Financial Officer, Chief Accounting Officer and Treasurer | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments. | ||||||||
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Aliya S. Gordon (1973) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
| ||||||||
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
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Matthew T. Hinkle (1971) One Franklin Parkway San Mateo, CA 94403-1906 | Chief Executive Officer – Finance and Administration | Since 2017 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton Investments (2009-2017). | ||||||||
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Edward B. Jamieson (1948) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive Officer – Investment Management | Since 2010 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and 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. | ||||||||
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Robert Lim (1948) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President – AML Compliance | Since 2016 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
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Christopher J. Molumphy (1962) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2000 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments. | ||||||||
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Interested Board Members and Officers (continued)
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held
| ||||
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Kimberly H. Novotny (1972) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
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Robert C. Rosselot (1960) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Chief Compliance Officer | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013). | ||||||||
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Karen L. Skidmore (1952) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President and Secretary | Since 2006 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
| ||||||||
Navid J. Tofigh (1972) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2015 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
| ||||||||
Craig S. Tyle (1960) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2005 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
| ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2011 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
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*We base the number of portfolios on each separate series of the US registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated 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/342-5236 to request the SAI.
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Board Approval of Investment Management Agreements
FRANKLIN STRATEGIC SERIES
Franklin Focused Core Equity Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
(each a Fund)
At an in-person meeting held on April 17, 2018 (Meeting), the Board of Trustees (Board) of Franklin Strategic Series (Trust), including a majority of the trustees who are not “interested persons” as defined in the Investment Company Act of 1940 (Independent Trustees), reviewed and approved the continuance of the investment management agreement between Franklin Advisers, Inc. (Manager) and the Trust, on behalf of each Fund (each a Management Agreement) for an additional one-year period. The Independent Trustees received advice from and met separately with Independent Trustee counsel in considering whether to approve the continuation of each Management Agreement. Although the Management Agreements for the Funds were considered at the same Board meeting, the Board considered the information provided to it about the Funds together and with respect to each Fund separately as the Board deemed appropriate.
In considering the continuation of each Management Agreement, the Board reviewed and considered information provided by the Manager at the Meeting and throughout the year at meetings of the Board and its committees. The Board also reviewed and considered information provided in response to a detailed set of requests for information submitted to the Manager by Independent Trustee counsel on behalf of the Independent Trustees in connection with the annual contract renewal process. In addition, prior to the Meeting, the Independent Trustees held a telephonic contract renewal meeting at which the Independent Trustees conferred amongst themselves and Independent Trustee counsel about contract renewal matters. The Board reviewed and considered all of the factors it deemed relevant in approving the continuance of each Management Agreement, including, but not limited to: (i) the nature, extent and quality of the services provided by the Manager; (ii) the investment performance of each Fund; (iii) the costs of the services provided and profits realized by the Manager and its affiliates from the relationship with each Fund; (iv) the extent to which economies of scale are realized as each Fund grows; and (v) whether fee levels reflect these economies of scale for the benefit of Fund investors.
In approving the continuance of each Management Agreement, the Board, including a majority of the Independent Trustees, determined that the terms of the Management Agreement are fair and reasonable and that the continuance of such Management Agreement is in the interests of the applicable Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s determination.
Nature, Extent and Quality of Services
The Board reviewed and considered information regarding the nature, extent and quality of investment management services provided by the Manager and its affiliates to the Funds and their shareholders. This information included, among other things, the qualifications, background and experience of the senior management and investment personnel of the Manager; the structure of investment personnel compensation; oversight of third-party service providers; investment performance reports and related financial information for each Fund; reports on expenses, shareholder services, marketing support payments made to financial intermediaries and third party servicing arrangements; legal and compliance matters; risk controls; pricing and other services provided by the Manager and its affiliates; and management fees charged by the Manager and its affiliates to U.S. funds and other accounts, including management’s explanation of differences among accounts where relevant. The Board also reviewed and considered an annual report on payments made by Franklin Templeton Investments (FTI) or the Funds to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a guidance update in 2016 from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees. The Board noted management’s continuing efforts and expenditures in establishing effective business continuity plans and developing strategies to address areas of heightened concern in the mutual fund industry, such as cybersecurity and liquidity risk management. The Board also recognized management’s commitment to facilitating Board oversight of particular areas, including derivatives and payments to intermediaries, by enhanced reporting.
The Board also reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the Franklin Templeton family of funds. The Board noted the financial position of Franklin Resources, Inc. (FRI), the Manager’s parent, and its commitment to the mutual fund business as evidenced by its continued introduction of new funds, reassessment of the fund offerings in response to the
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market environment and project initiatives and capital investments relating to the services provided to the Funds by the FTI organization.
Following consideration of such information, the Board was satisfied with the nature, extent and quality of services provided by the Manager and its affiliates to the Funds and their shareholders.
Fund Performance
The Board reviewed and considered the performance results of each Fund over various time periods ended January 31, 2018. The Board considered the performance returns for each Fund in comparison to the performance returns of mutual funds deemed comparable to the Fund included in a universe (Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company data. The Board received a description of the methodology used by Broadridge to select the mutual funds included in a Performance Universe. The Board also reviewed and considered Fund performance reports provided and discussions that occurred with portfolio managers at Board meetings throughout the year. A summary of each Fund’s performance results is below.
Franklin Focused Core Equity Fund - The Performance Universe for this Fund included the Fund and all retail and institutional multi-cap core funds. The Board noted that the Fund’s annualized total return for the one-, three-, five- and 10-year periods was below the median of its Performance Universe. The Board discussed this performance with management and management explained that given the Fund’s focused nature, from time to time, on particular sectors or types of investments, performance can at times be more volatile than more diversified portfolios. Management further explained that the Fund had been managed with an emphasis on valuation, which had underperformed growth over the last one-, three-and five-year periods, and that underperformance over these periods was primarily related to stock selection and lack of exposure to higher growth companies. Management then explained that the Fund will seek to invest in high quality sustainable growth businesses that the Fund can own for the long term, and avoid biases towards specific sectors. The Board also noted that effective December 2017, the lead portfolio manager of the Fund had changed and that effective June 1, 2018, the Fund will change its name to the Franklin Select U.S. Equity Fund to indicate the change in portfolio management.
Franklin Growth Opportunities Fund - The Performance Universe for this Fund included the Fund and all retail and
institutional large-cap growth funds. The Board noted that the Fund’s annualized total return for the one-, three- and five-year periods was below the median of its Performance Universe, but for the 10-year period was above the median of its Performance Universe. The Board concluded that the Fund’s performance was acceptable, noting its positive longer-term performance. In doing so, the Board noted management’s explanation that on December 31, 2017, the Fund was moved from its historical multi-cap peer group to the large-cap peer group. The Board also noted management’s further explanation that the Fund has historically maintained a higher allocation to small and mid-cap companies compared to the large-cap peer group, and that large cap companies outperformed small and mid-cap companies during the time periods under review, contributing to the Fund’s performance drag relative to the Performance Universe. The Board further noted management’s explanation that in its view many of the Fund’s investments are poised to benefit from multi-year growth trends, and that the Fund has outperformed its benchmark and peer group year to date in 2018. In addition, the Board noted that the Fund’s annualized total return for each period was positive and for the one-year period, while below the median, exceeded 32%.
Franklin Small Cap Growth Fund - The Performance Universe for this Fund included the Fund and all retail and institutional small-cap growth funds. The Board noted that the Fund’s annualized total return for the one- and three-year periods was below the median of its Performance Universe, but for the five-and 10-year periods was above the median and in the first (the best) or second quintile of its Performance Universe. The Board concluded that the Fund’s performance was satisfactory. In doing so, the Board noted management’s explanation that the Fund’s greater exposure to smaller cap stocks relative to its peers hurt the Fund’s relative performance over the one- and three-year periods. The Board also noted that the Fund is currently closed to new investors, except for certain types of investors, and that effective on or about April 28, 2017, the Fund is expected to reopen Class R6 shares to new investors who are eligible to purchase Class R6 shares. In addition, the Board noted that the Fund’s annualized total return for the one-and three-year periods, while below the median, exceeded 23.2% and 10.8%, respectively.
Franklin Small-Mid Cap Growth Fund - The Performance Universe for this Fund included the Fund and all retail and institutional mid-cap growth funds. The Board noted that the Fund’s annualized total return for the one-, three-, five- and 10-year periods was below the median of its Performance Universe. The Board discussed this performance with
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SHAREHOLDER INFORMATION
management and management explained that the Fund’s positions in the healthcare, consumer discretionary, and industrial sectors were a primary detractor from relative performance over the one-, three-, and five-year periods. Management also explained that it has reduced the Fund’s exposure to stock selection risk in those industries. Management further explained that consequently, since January 31, 2018, the Fund has recovered approximately 150 basis points in relative performance for the one-year period and that such performance is approximately even with that of its benchmark and the peer average year-to-date. The Board noted management’s attention to portfolio management and that the Fund’s annualized total return for each period, while below the median, was positive and for the one-year period exceeded 22.3%.
Comparative Fees and Expenses
The Board reviewed and considered information regarding each Fund’s actual total expense ratio and its various components, including, as applicable, management fees; transfer agent expenses; underlying fund expenses; Rule 12b-1 and non-Rule 12b-1 service fees; and other non-management fees. The Board also noted the quarterly and annual reports it receives on all marketing support payments made by FTI to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers (Management Rate), if any, of each Fund in comparison to the median expense ratio and median Management Rate, respectively, of other mutual funds deemed comparable to and with a similar expense structure as the Fund selected by Broadridge (Expense Group). Broadridge fee and 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 and Management Rates generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Broadridge to be an appropriate measure of comparative fees and expenses. The Broadridge Management Rate includes administrative charges, and the actual total expense ratio, for comparative consistency, was shown for Class A shares for funds with multiple classes of shares. The Board received a description of the methodology used by Broadridge to select the mutual funds included in an Expense Group.
Franklin Focused Core Equity Fund - The Expense Group for this Fund included the Fund and 16 other multi-cap core funds.
The Board noted that the Management Rate and actual total expense ratio for this Fund were slightly above the medians of its Expense Group. The Board concluded that the Management Rate charged to the Fund is reasonable. The Board also noted that the Fund’s actual total expense ratio reflected a fee waiver from management.
Franklin Growth Opportunities Fund, Franklin Small Cap Growth Fund, and Franklin Small-Mid Cap Growth Fund - The Expense Group for the Franklin Growth Opportunities Fund included the Fund and 18 other large-cap growth funds. The Expense Group for the Franklin Small Cap Growth Fund included the Fund and 11 other small-cap growth funds. The Expense Group for the Franklin Small-Mid Cap Growth Fund included the Fund and 11 other mid-cap growth funds. The Board noted that the Management Rates and actual total expense ratios for these Funds were below the medians of their respective Expense Groups. The Board concluded that the Management Rates charged to these Funds are reasonable.
Profitability
The Board reviewed and considered information regarding the profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board considered the Fund profitability analysis provided by the Manager that addresses the overall profitability of FTI’s U.S. fund business, as well as its profits in providing investment management and other services to each of the individual funds during the 12-month period ended September 30, 2017, being the most recent fiscal year-end for FRI. The Board noted that although management continually makes refinements to its methodologies used in calculating profitability in response to organizational and product-related changes, the overall methodology has remained consistent with that used in the Funds’ profitability report presentations from prior years. Additionally, PricewaterhouseCoopers LLP, auditor to Franklin Resources, Inc. and certain Franklin Templeton funds, has been engaged by the Manager to periodically review and assess the allocation methodologies to be used solely by the Funds’ Board with respect to the profitability analysis.
The Board noted management’s 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 noted management’s expenditures in improving
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SHAREHOLDER INFORMATION
shareholder services provided to the Funds, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from recent SEC and other regulatory requirements.
The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services, potential benefits resulting from personnel and systems enhancements necessitated by fund growth, as well as increased leverage with service providers and counterparties. Based upon its consideration of all these factors, the Board concluded 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, extent and quality of services provided to each Fund.
Economies of Scale
The Board reviewed and considered the extent to which the Manager may realize economies of scale, if any, as each Fund grows larger and whether the Fund’s management fee structure reflects any economies of scale for the benefit of shareholders. With respect to possible economies of scale, the Board noted the existence of management fee breakpoints, which operate generally to share any economies of scale with a Fund’s shareholders by reducing the Fund’s effective management fees as the Fund grows in size. The Board considered the Manager’s view that any analyses of potential economies of scale in managing a particular fund are inherently limited in light of the joint and common costs and investments the Manager incurs across the Franklin Templeton family of funds as a whole. The Board noted that the Franklin Focused Core Equity Fund has not yet reached an asset size that would likely enable the Fund to achieve economies of scale, but concluded that to the extent economies of scale may be realized by the Manager and its affiliates, each Fund’s management fee structure provided a sharing of benefits with the Fund and its shareholders as the Fund grows.
Conclusion
Based on its review, consideration and evaluation of all factors it believed relevant, including the above-described factors and conclusions, the Board unanimously approved the continuation of each Management Agreement for an additional one-year period.
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, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the US 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 US 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 each 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.
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Annual Report and Shareholder Letter | ||||
Franklin Strategic Series | ||||
Investment Manager | ||||
Franklin Advisers, Inc. | ||||
Distributor | ||||
Franklin Templeton Distributors, Inc. | ||||
(800) DIAL BEN® / 342-5236 | ||||
franklintempleton.com | ||||
Shareholder Services | ||||
(800) 632-2301 |
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Franklin Templeton Investments
Why choose Franklin Templeton Investments?
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
During the 12 months ended April 30, 2018, mostly upbeat economic data, better US corporate earnings and generally supportive monetary policies, combined with the passage of the US Tax Reform bill, aided US markets. However, investor sentiment was dampened by Korean peninsula tensions, US political uncertainties, and a potentially quicker pace of US Federal Reserve (Fed) interest rate hikes due to strong US economic growth and rising inflation.
The Fed began reducing its balance sheet in October 2017 and raised its federal funds target rate in June and December 2017 and March 2018. It maintained its forecast of three rate increases in 2018. The 10-year US Treasury yield began the period at 2.29% and ended the period at 2.95%. Increased capital investment by leading US companies, particularly in information technology, encouraged equity investors, while US-China trade disputes, protectionist US trade policies and the potential for tougher consumer data privacy regulations caused concerns. Within this environment, US stocks, as measured by the Standard & Poor’s® 500 Index, generated a double-digit positive total return.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors
to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Strategic Series’ annual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
Not FDIC Insured | May Lose Value | No Bank Guarantee |
franklintempleton.com | Not part of the annual report | 1 |
Visit franklintempleton.com for fund updates,
to access your account, or to find helpful
financial planning tools.
2 | Annual Report | franklintempleton.com |
The US economy grew during the 12 months under review. The economy strengthened in 2017’s second and third quarters but moderated in the next two quarters. The slower growth in 2018’s first quarter reflected a slowdown in consumer spending, residential fixed investment, exports, and state and local government spending. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 4.4% in April 2017 to 3.9% at period-end.1 Annual inflation, as measured by the Consumer Price Index, increased from 2.2% in April 2017 to 2.5% at period-end.1
The US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June and December 2017 meetings and began reducing its balance sheet in October as part of its ongoing effort to normalize monetary policy. In February 2018, new Fed Chair Jerome Powell spoke before Congress and indicated the Fed saw signs of a continued strong labor market and economic growth. He reiterated the Fed’s intention to gradually raise interest rates in an effort to keep the economy from overheating and as inflation increases toward the Fed’s target. However, he noted there was no evidence of the economy overheating and he had yet to see a clear upward move in wages. At its March meeting, the Fed raised its target range for the federal funds rate 0.25% to 1.50%–1.75% and maintained its forecast of three rate increases in 2018. Additionally, the Fed upgraded its economic forecasts for 2018 and 2019, and its rate projections indicated the number of rate hikes would increase in 2019 and 2020.
US equity markets rose overall during the period, benefiting from mostly upbeat economic data and better US corporate earnings. Markets were also supported in 2017 by the prospect for reforms in the European Union with Emmanuel Macron’s election as France’s president, the Fed’s indication of gradual rate hikes and the passage of the US tax reform bill. However, concerns about political uncertainties in the US, tensions between the US and North Korea, and the progress of the US tax reform bill curbed market sentiment at times. After reaching new all-time highs in January 2018, US stocks declined in February amid concerns that strong economic growth and rising inflation would lead the Fed to increase its target rate faster than expected. In March, markets were pressured further by a broad sell-off in information technology stocks due to a potential for tighter regulation in the sector arising from
concerns about consumer data privacy. The Trump administration’s protectionist policies and escalating trade tensions between the US and China also dampened investor sentiment. However, stocks rebounded amid the prospects for trade negotiations between the US and China, easing tensions in the Korean peninsula and strong first-quarter 2018 earnings results from many companies. In this environment, the broad US stock market, as measured by the Standard & Poor’s 500 Index, generated a +13.27% total return for the period.2
The foregoing information reflects our analysis and opinions as of April 30, 2018. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
1. Source: US Bureau of Labor Statistics.
2. Source: Morningstar.
See www.franklintempletondatasources.com for additional data provider information.
franklintempleton.com | Annual Report | 3 |
Franklin Biotechnology Discovery Fund
This annual report for Franklin Biotechnology Discovery Fund covers the fiscal year ended April 30, 2018.
Your Fund’s Goal and Main Investments
The 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 US and other countries.
Performance Overview
The Fund’s Class A shares delivered a +1.69% cumulative total return for the 12 months under review. In comparison, the NASDAQ Biotechnology Index®, which tracks US and international-based biotechnology stocks, generated a +5.00% total return.1 Also in comparison, the Standard & Poor’s 500 Index (S&P 500®), which is a broad measure of the US stock market, produced a +13.27% total return.1 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 6.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Investment Strategy
We are research-driven, fundamental investors, pursuing a growth strategy. As bottom-up investors focusing primarily on individual securities, we choose companies that have identifiable drivers of future earnings growth and that present, in our opinion, the best trade-off between earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages, such as a particular product niche, proven technology, sound financial position and strong management, are all factors we believe may contribute to strong growth potential.
Portfolio Composition
Based on Total Net Assets as of 4/30/18
*Includes escrows and litigation trusts securities.
Manager’s Discussion
During the 12 months under review, the biotechnology industry experienced significant volatility in response to uncertainty about the future of the Affordable Care Act. Please keep in mind that volatility is not uncommon in the biotechnology industry, and we seek to take advantage of short-term volatility by initiating positions or adding to existing holdings in companies we believe are undervalued.
Key contributors to the Fund’s absolute performance during the reporting period included Heron Therapeutics, Neurocrine Biosciences and Illumina. Biotechnology company Heron Therapeutics, which develops pharmaceutical products for patients suffering from cancer or pain, bolstered results as the company’s pain medicine Sustol had better-than-expected revenues. Additionally, Heron’s Phase 3 trials for a post-operative pain medicine were encouraging, in our view. Biopharmaceutical company Neurocrine Biosciences reported better-than-expected revenues for its new drug that treats a neurological disorder. Illumina develops, manufactures and markets integrated systems for the analysis of genetic variation and function. The company benefited from revenues that came in above analyst expectations. Additionally, its earnings were aided by healthy operating margins and a lower tax rate.
In contrast, key detractors from the Fund’s absolute performance included Celgene, Incyte and TESARO (not held at period-end). Biopharmaceutical company Celgene detracted from results as the company reported disappointing third quarter results. Revenues for its psoriasis medication Otezla
1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 22.
4 | Annual Report | franklintempleton.com |
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Top 10 Holdings
4/30/18
Company Sector/Industry | % of Total Net Assets | |
Alexion Pharmaceuticals Inc. | 7.7% | |
Biotechnology
| ||
Celgene Corp. | 6.9% | |
Biotechnology
| ||
Vertex Pharmaceuticals Inc. | 5.0% | |
Biotechnology
| ||
Biogen Inc. | 4.9% | |
Biotechnology
| ||
Illumina Inc. | 4.1% | |
Life Sciences Tools & Services
| ||
Regeneron Pharmaceuticals Inc. | 3.5% | |
Biotechnology
| ||
Gilead Sciences Inc. | 3.4% | |
Biotechnology
| ||
Amgen Inc. | 3.3% | |
Biotechnology
| ||
Heron Therapeutics Inc. | 3.3% | |
Biotechnology
| ||
BioMarin Pharmaceutical Inc. | 2.8% | |
Biotechnology
|
came in significantly below expectations due to increased competition and discounting, although the drug rebounded during the period. Additionally, its cancer drug Revlimid faced patent litigation. Shares of biopharmaceutical company Incyte declined after a rumored buyout did not materialize. Lastly, oncology-focused biopharmaceutical company TESARO experienced weak performance. Its third quarter results were disappointing as the company reduced guidance on its ovarian cancer treatment drug Zejula. The company attributed Zejula’s slower-than-expected growth to the overall size of the second-line maintenance ovarian cancer market being smaller than predicted, although we believe its competition may have been a factor.
Thank you for your continued participation in Franklin Biotechnology Discovery Fund. We look forward to serving your future investment needs.
Evan McCulloch, CFA Lead Portfolio Manager | ||
Steven Kornfeld, CFA | ||
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
franklintempleton.com | Annual Report | 5 |
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Performance Summary as of April 30, 2018
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. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class
| Cumulative Total Return2
| Average Annual Total Return3
| ||
A
| ||||
1-Year
| +1.69%
| -4.16%
| ||
5-Year
|
+78.91%
|
+11.02%
| ||
10-Year
|
+300.53%
|
+14.21%
| ||
Advisor4
| ||||
1-Year
| +1.94%
| +1.94%
| ||
5-Year
|
+81.24%
|
+12.63%
| ||
10-Year |
+310.03%
|
+15.15% |
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.
See page 8 for Performance Summary footnotes.
6 | Annual Report | franklintempleton.com |
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 8 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 7 |
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
PERFORMANCE SUMMARY
Distributions (5/1/17–4/30/18)
Share Class
| Short-Term Capital Gain
| Long-Term Capital Gain
| Total
| |||||||||
A
|
|
$1.0883
|
|
|
$2.5086
|
|
|
$3.5969
|
| |||
C
|
|
$1.0883
|
|
|
$2.5086
|
|
|
$3.5969
|
| |||
R6
|
|
$1.0883
|
|
|
$2.5086
|
|
|
$3.5969
|
| |||
Advisor
|
|
$1.0883
|
|
|
$2.5086
|
|
|
$3.5969
|
|
Total Annual Operating Expenses6
Share Class
| With Waiver
| Without Waiver
| ||||||
A |
|
1.04%
|
|
|
1.06%
|
| ||
Advisor
|
|
0.79%
|
|
|
0.81%
|
|
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. The Fund 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 is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. 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 9/1/09, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 9/1/09 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +293.48% and +17.14%.
5. Source: Morningstar. The NASDAQ Biotechnology Index is a modified capitalization-weighted index designed to measure 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 US equity market performance.
6. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
8 | Annual Report | franklintempleton.com |
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Value 11/1/17 | Ending Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Net Annualized Ratio2 | ||||||||||||
A | $1,000 | $995.40 | $5.00 | $1,019.79 | $5.06 | 1.01% | ||||||||||||
C | $1,000 | $991.60 | $8.69 | $1,016.07 | $8.80 | 1.76% | ||||||||||||
R6 | $1,000 | $997.20 | $3.12 | $1,021.67 | $3.16 | 0.63% | ||||||||||||
Advisor | $1,000 | $996.50 | $3.76 | $1,021.03 | $3.81 | 0.76% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
franklintempleton.com | Annual Report | 9 |
Franklin Natural Resources Fund
This annual report for Franklin Natural Resources Fund covers the fiscal year ended April 30, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks high total return (total return consists of capital appreciation and current dividend and interest income) by investing, under normal market conditions, 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.
Performance Overview
The Fund’s Class A shares had a +12.74% cumulative total return for the 12 months under review. In comparison, the Standard & Poor’s (S&P®) North American Natural Resources Sector Index, which tracks companies involved in industries such as mining, energy, timber and forestry services, and the production of pulp and paper, generated a +10.48% total return.1 Also in comparison, the S&P 500, which is a broad measure of the US stock market, generated a +13.27% total return.1 Please note index performance information is provided for reference and we do not attempt to track any index but rather undertake investments on the basis of fundamental research. The Fund’s strategy, which focuses on companies with higher long-term growth potential, differs from the natural resources index’s large weighting in income-oriented companies that we believe typically provide more limited opportunities for growth. This difference may occasionally lead to wide performance discrepancies, especially in periods when investors focus on short-term safety and yield or, conversely, when investors focus more heavily on companies with stronger growth prospects and greater commodity price leverage. You can find the Fund’s long-term performance data in the Performance Summary beginning on page 14.
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.
Geographic Composition
Based on Total Net Assets as of 4/30/18
Investment Strategy
We are research-driven, fundamental investors, pursuing a growth strategy. As bottom-up investors focusing primarily on individual securities, we choose companies that have identifiable drivers of future earnings growth and that present, in our opinion, the best trade-off between earnings growth, business and financial risk, and valuation. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages likely to lead to growth in earnings and/or share price. Competitive advantages, such as a particular product niche, proven technology, sound financial position and strong management, are all factors we believe may contribute to strong growth potential.
Sector Overview
Global commodity prices experienced volatility during the 12-month period, with multiple crosscurrents impacting commodity prices and commodity-linked equity values. Although oil and certain metals rose, several commodities, such as natural gas and silver, declined. Following an overall downtrend in the period’s first two months and a temporary decline in February 2018, global commodities overall benefited from generally synchronized global economic growth, improved demand outlooks for some metals and energy products, and a weaker US dollar. However, commodity prices
1. Source: Morningstar.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
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 29.
10 | Annual Report | franklintempleton.com |
FRANKLIN NATURAL RESOURCES FUND
declined in February amid concerns about rising US inflation and interest rates, as well as worries that the US Federal Reserve (Fed) might raise its target range for the federal funds rate more quickly than anticipated. The potential unwinding of other central banks’ accommodative monetary policies and slowdown in China’s economy added to investor concerns. Toward period-end, stronger demand and rising global tensions, including proposed US tariffs on some countries, trade war fears and a flare-up in the Syrian conflict helped spark a commodities rally, sending prices for oil and other commodities to new multiyear highs.
Crude oil prices posted strong gains for the period amid solid global demand trends. After declining early in the period, crude oil prices rallied in late June after US producers appeared to curtail their drilling activity and US gasoline inventories decreased as demand increased. In 2017’s third quarter, crude oil prices rose as supply-and-demand fundamentals tightened due partly to US-Iran tensions and the potential for export disruption out of Iraqi Kurdistan. Somewhat surprisingly, the Organization of the Petroleum Exporting Countries and its partners, including Russia, extended their previously agreed-upon production curbs. Such curbs were enhanced by natural production declines in Mexico, China and elsewhere along with troubles in Venezuela, causing rapidly falling oil production. These factors eased worries about growing US oil production and exports. The oil industry was also affected by ongoing concerns about long-term oil demand related to electric vehicle market penetration and pollution control efforts, such as discussions about banning gasoline and diesel vehicles in California and certain cities. After declining again in February due to inflation and interest rate worries, oil prices rebounded amid rising demand and various geopolitical tensions, including unrest in Middle East oil-producing countries and the potential for the reinstatement of sanctions on Iran.
US natural gas prices declined during the period, due in part to a long stretch of temperate North American weather, although short bouts of colder weather increased demand at times. Natural gas production continued to rise, with producers sometimes reducing natural gas rig counts due to lower prices. Nonetheless, the total US rig count increased for the period, and the US became a net exporter of natural gas in late 2017. Growing demand for US natural gas exports helped to keep US inventories below recent average levels, but market concerns about production growth, including natural gas output associated with oil production, as well as new pipelines in the Northeast that could potentially increase supply reinforced lower prices.
Portfolio Composition
Based on Total Net Assets as of 4/30/18
*Includes convertible preferred stock.
Gold prices rose for the period amid US dollar weakness and geopolitical concerns. Fears about higher inflation, rising interest rates and the pace of Fed rate hikes also helped gold prices. Among other precious metals, platinum prices declined, while palladium prices rose amid tight global supplies and stronger demand for its emissions-control use in gasoline vehicles. Silver prices declined, though the metal’s demand in industrial and technical applications continued to grow. Among industrial metals, price gains for copper, aluminum and zinc were countered by a price decline in iron ore near period-end.
Manager’s Discussion
During the 12 months under review, global economic growth contributed to healthy demand for commodities, despite somewhat elevated volatility. At the company level, cost reductions combined with rising commodity prices led to improving returns.
On an absolute basis, oil and gas exploration and production (E&P) was the biggest contributor to the Fund’s performance due to strong returns driven by a rise in oil prices. Top
franklintempleton.com | Annual Report | 11 |
FRANKLIN NATURAL RESOURCES FUND
contributors were Permian oil-focused producers EOG Resources, Concho Resources and Diamondback Energy, along with diversified producer ConocoPhillips.
Integrated oil and gas holdings including Royal Dutch, Occidental Petroleum and Suncor Energy also contributed to absolute returns.
The Fund’s holdings in the diversified metals and mining industry contributed to absolute results, driven by healthy supply and demand fundamentals for various metals that led to robust pricing on a select basis (i.e., copper and zinc rose significantly, but iron ore did not). Several companies posted solid gains, including large producers such as BHP Billiton and Rio Tinto, which were significant contributors. Smaller copper producers Sandfire Resources and First Quantum also generated robust returns.
In contrast, detractors from absolute returns oil and gas storage and transportation as well as the gold industry, where Kinder Morgan and Tahoe Resources were large detractors, respectively.
Relative to the S&P North American Natural Resources Sector Index, significant overweightings and stock selection in diversified metals and mining contributed to the Fund’s performance. Stocks that contributed to relative performance in the metals markets, also listed previously as absolute contributors, were off-benchmark holdings.
Stock selection in integrated oil and gas contributed to relative returns, driven by several off-benchmark European-based integrated companies and an underweighting in Exxon Mobil.
Oil and gas storage and transportation benefited relative performance due to an underweighting that offset security selection.
A significant overweighting and stock selection in E&P contributed to relative results, driven by strong performance from SRC Energy2, Diamondback Energy and Matador3, while we avoided several underperformers. Although the Fund had a few relative detractors, they were more than offset by the contributors.
In contrast, an underweighted allocation offset the positive effects of stock selection in oil and gas refining and marketing and hindered relative results. Examples include an underweighting in Valero and a lack of exposure to Andeavor.
Top 10 Holdings
4/30/18
Company Sector/Industry
| % of Total
| |||
Schlumberger Ltd. Oil & Gas Equipment & Services
|
|
3.9% |
| |
Exxon Mobil Corp. Integrated Oil & Gas
|
|
3.4% |
| |
Halliburton Co. Oil & Gas Equipment & Services
|
|
3.3% |
| |
Noble Energy Inc. Oil & Gas Exploration & Production
|
|
2.8% |
| |
Chevron Corp. Integrated Oil & Gas
|
|
2.8% |
| |
Anadarko Petroleum Corp. Oil & Gas Exploration & Production
|
|
2.7% |
| |
Royal Dutch Shell PLC Integrated Oil & Gas
|
|
2.6% |
| |
EOG Resources Inc. Oil & Gas Exploration & Production
|
|
2.5% |
| |
Occidental Petroleum Corp. Integrated Oil & Gas
|
|
2.5% |
| |
TechnipFMC PLC Oil & Gas Equipment & Services
|
|
2.5% |
|
Gold also detracted from relative Fund performance, largely due to significant declines in shares of Tahoe Resources, Alamos Gold and Guyana Goldfields.2
It is important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the US dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer US dollars. This can have a negative effect on Fund performance. Conversely, when the US dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended April 30, 2018, the US dollar declined in value relative to most currencies. As a result, the Fund’s performance was positively affected by the portfolio’s significant investment in securities with non-US currency exposure. However, one cannot expect the same result in future periods. Whether the US dollar goes up or weakens compared with foreign currencies, company-specific factors may offset the effects of the currency movements on the value of individual investments and, possibly, the Fund’s performance overall.
2. | Not part of the index. |
3. | Not held at period-end. |
12 | Annual Report | franklintempleton.com |
FRANKLIN NATURAL RESOURCES FUND
Thank you for your continued participation in Franklin Natural Resources Fund. We look forward to serving your future investment needs.
Frederick G. Fromm, CFA | ||
Matthew J. Adams, CFA | ||
Stephen M. Land, CFA | ||
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, 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.
franklintempleton.com | Annual Report | 13 |
FRANKLIN NATURAL RESOURCES FUND
Performance Summary as of April 30, 2018
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. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class
| Cumulative Total Return2
| Average Annual Total Return3
| ||
A
| ||||
1-Year
| +12.74%
| +6.27%
| ||
5-Year
|
-11.53%
|
-3.57%
| ||
10-Year
|
-28.38%
|
-3.85%
| ||
Advisor
| ||||
1-Year
|
+13.04%
|
+13.04%
| ||
5-Year
|
-10.31%
|
-2.15%
| ||
10-Year
|
-26.31%
|
-3.01%
|
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 16 for Performance Summary footnotes.
14 | Annual Report | franklintempleton.com |
FRANKLIN NATURAL RESOURCES FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 16 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 15 |
FRANKLIN NATURAL RESOURCES FUND
PERFORMANCE SUMMARY
Distributions | (5/1/17–4/30/18) |
Share Class | Net Investment Income | |||
A
|
|
$0.3123
|
| |
R6
|
|
$0.5995
|
| |
Advisor
|
|
$0.4497
|
|
Total Annual Operating Expenses5
Share Class | With Waiver | Without Waiver | ||||||
A |
|
1.06%
|
|
|
1.07%
|
| ||
Advisor
|
|
0.81%
|
|
|
0.82%
|
|
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. 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. 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 is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized
4. Source: Morningstar. The S&P North American Natural Resources Index is a modified 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. The S&P 500 is a market capitalization-weighted index of 500 stocks designed to measure total US equity market performance.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
16 | Annual Report | franklintempleton.com |
FRANKLIN NATURAL RESOURCES FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Net Annualized Expense Ratio2 | ||||||||||||
A | $1,000 | $1,132.00 | $5.39 | $1,019.74 | $5.11 | 1.02% | ||||||||||||
C | $1,000 | $1,127.90 | $9.29 | $1,016.07 | $8.80 | 1.76% | ||||||||||||
R6 | $1,000 | $1,134.60 | $2.96 | $1,022.02 | $2.81 | 0.56% | ||||||||||||
Advisor | $1,000 | $1,133.70 | $4.07 | $1,020.98 | $3.86 | 0.77% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
franklintempleton.com | Annual Report | 17 |
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $147.22 | $128.19 | $182.30 | $129.27 | $ 105.95 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.80 | ) | (0.79 | ) | (0.94 | ) | (1.09 | ) | (1.07 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.32 | 25.75 | (39.39 | ) | 60.79 | 33.18 | ||||||||||||||
Total from investment operations | 2.52 | 24.96 | (40.33 | ) | 59.70 | 32.11 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | (1.73 | ) | — | — | — | ||||||||||||||
Net realized gains | (3.60 | ) | (4.20 | ) | (13.78 | ) | (6.67 | ) | (8.79 | ) | ||||||||||
Total distributions | (3.60 | ) | (5.93 | ) | (13.78 | ) | (6.67 | ) | (8.79 | ) | ||||||||||
Net asset value, end of year | $146.14 | $147.22 | $128.19 | $182.30 | $129.27 | |||||||||||||||
Total returnc | 1.69% | 20.02% | (23.55)% | 46.81% | 30.60% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.05% | 1.04% | 0.99% | 1.00% | 1.10% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.03% | 1.02% | 0.98% | 1.00% | e | 1.10% | e | |||||||||||||
Net investment income (loss) | (0.53)% | (0.58)% | (0.56)% | (0.67)% | (0.82)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $1,081,883 | $1,176,687 | $1,074,903 | $1,601,906 | $1,141,890 | |||||||||||||||
Portfolio turnover rate | 26.95% | 34.12% | 22.13% | 41.43% | 48.70% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
18 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $143.98 | $125.99 | $180.67 | $129.11 | $ 159.15 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment income (loss)c | (1.90 | ) | (1.81 | ) | (2.11 | ) | (2.38 | ) | (0.34 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.27 | 25.29 | (38.79 | ) | 60.61 | (29.70 | ) | |||||||||||||
Total from investment operations | 1.37 | 23.48 | (40.90 | ) | 58.23 | (30.04 | ) | |||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | (1.29 | ) | — | — | — | ||||||||||||||
Net realized gains | (3.60 | ) | (4.20 | ) | (13.78 | ) | (6.67 | ) | — | |||||||||||
Total distributions | (3.60 | ) | (5.49 | ) | (13.78 | ) | (6.67 | ) | — | |||||||||||
Net asset value, end of year | $141.75 | $143.98 | $125.99 | $180.67 | $129.11 | |||||||||||||||
Total returnd | 0.93% | 19.14% | (24.09)% | 45.76% | (18.88)% | |||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.80% | 1.79% | 1.71% | 1.75% | 1.82% | |||||||||||||||
Expenses net of waiver and payments by affiliatesf | 1.78% | 1.77% | 1.70% | 1.75% | g | 1.82% | g | |||||||||||||
Net investment income (loss) | (1.28)% | (1.33)% | (1.28)% | (1.42)% | (1.52)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $58,433 | $53,935 | $17,562 | $23,051 | $5,486 | |||||||||||||||
Portfolio turnover rate | 26.95% | 34.12% | 22.13% | 41.43% | 48.70% |
aFor the period March 4, 2014 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 19 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $151.03 | $131.37 | $185.75 | $131.09 | $ 104.56 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment income (loss)c | (0.17 | ) | (0.25 | ) | (0.32 | ) | (0.45 | ) | (0.49 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.39 | 26.41 | (40.28 | ) | 61.78 | 35.81 | ||||||||||||||
Total from investment operations | 3.22 | 26.16 | (40.60 | ) | 61.33 | 35.32 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | (2.30 | ) | — | — | — | ||||||||||||||
Net realized gains | (3.60 | ) | (4.20 | ) | (13.78 | ) | (6.67 | ) | (8.79 | ) | ||||||||||
Total distributions | (3.60 | ) | (6.50 | ) | (13.78 | ) | (6.67 | ) | (8.79 | ) | ||||||||||
Net asset value, end of year | $150.65 | $151.03 | $131.37 | $185.75 | $131.09 | |||||||||||||||
Total returnd | 2.11% | 20.50% | (23.24)% | 47.40% | 34.10% | |||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.65% | 0.63% | 0.60% | 0.60% | 0.63% | |||||||||||||||
Expenses net of waiver and payments by affiliatesf | 0.61% | 0.61% | 0.59% | 0.60% | g | 0.63% | g | |||||||||||||
Net investment income (loss) | (0.11)% | (0.17)% | (0.17)% | (0.27)% | (0.35)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $8,307 | $8,891 | $5,568 | $76,436 | $50,846 | |||||||||||||||
Portfolio turnover rate | 26.95% | 34.12% | 22.13% | 41.43% | 48.70% |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
20 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $150.20 | $130.67 | $185.12 | $130.86 | $106.86 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.45 | ) | (0.46 | ) | (0.55 | ) | (0.70 | ) | (0.69 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.39 | 26.27 | (40.12 | ) | 61.63 | 33.48 | ||||||||||||||
Total from investment operations | 2.94 | 25.81 | (40.67 | ) | 60.93 | 32.79 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | (2.08 | ) | — | — | — | ||||||||||||||
Net realized gains | (3.60 | ) | (4.20 | ) | (13.78 | ) | (6.67 | ) | (8.79 | ) | ||||||||||
Total distributions | (3.60 | ) | (6.28 | ) | (13.78 | ) | (6.67 | ) | (8.79 | ) | ||||||||||
Net asset value, end of year | $149.54 | $150.20 | $130.67 | $185.12 | $130.86 | |||||||||||||||
Total return | 1.94% | 20.32% | (23.36 | )% | 47.17% | 31.02% | ||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.80% | 0.79% | 0.75% | 0.75% | 0.80% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.78% | 0.77% | 0.74% | 0.75% | d | 0.80% | d | |||||||||||||
Net investment income (loss) | (0.28)% | (0.33)% | (0.32)% | (0.42)% | (0.52)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $180,219 | $159,894 | $93,263 | $167,035 | $91,012 | |||||||||||||||
Portfolio turnover rate | 26.95% | 34.12% | 22.13% | 41.43% | 48.70% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 21 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Biotechnology Discovery Fund
Country | Shares/ Warrants | Value | ||||||||||
Common Stocks and Other Equity Interests 96.4% | ||||||||||||
Biotechnology 78.7% | ||||||||||||
AbbVie Inc. | United States | 146,600 | $ | 14,154,230 | ||||||||
a Acceleron Pharma Inc. | United States | 166,700 | 5,819,497 | |||||||||
a Aimmune Therapeutics Inc. | United States | 201,900 | 6,266,976 | |||||||||
a Alexion Pharmaceuticals Inc. | United States | 868,900 | 102,208,707 | |||||||||
Amgen Inc. | United States | 253,900 | 44,300,472 | |||||||||
a Amicus Therapeutics Inc. | United States | 933,900 | 13,214,685 | |||||||||
a AnaptysBio Inc. | United States | 79,970 | 7,499,587 | |||||||||
a Aquinox Pharmaceuticals Inc. | Canada | 469,500 | 5,723,205 | |||||||||
a,b ARCA biopharma Inc., wts., 6/16/22 | United States | 1,338,619 | 5,435 | |||||||||
a,c Arcturus Therapeutics Ltd. | United States | 20,669 | 105,412 | |||||||||
a Argenx SE, ADR | Netherlands | 151,603 | 13,283,455 | |||||||||
a,c ARMO BioSciences Inc. | United States | 63,400 | 1,687,708 | |||||||||
a Array BioPharma Inc. | United States | 2,559,600 | 34,708,176 | |||||||||
a Ascendis Pharma AS, ADR | Denmark | 144,600 | 9,111,246 | |||||||||
a Audentes Therapeutics Inc. | United States | 146,600 | 5,476,976 | |||||||||
a,c Aurinia Pharmaceuticals Inc. | Canada | 644,300 | 3,382,575 | |||||||||
a Biogen Inc. | United States | 236,461 | 64,695,730 | |||||||||
a BioMarin Pharmaceutical Inc. | United States | 453,056 | 37,834,706 | |||||||||
a Bluebird Bio Inc. | United States | 109,100 | 18,563,365 | |||||||||
a,c Cara Therapeutics Inc. | United States | 159,600 | 1,975,848 | |||||||||
a Celgene Corp. | United States | 1,047,400 | 91,228,540 | |||||||||
a ChemoCentryx Inc. | United States | 604,679 | 6,609,142 | |||||||||
a Clovis Oncology Inc. | United States | 696,600 | 30,218,508 | |||||||||
a Concert Pharmaceuticals Inc. | United States | 207,400 | 3,785,050 | |||||||||
a,c CRISPR Therapeutics AG | Switzerland | 274,014 | 12,840,296 | |||||||||
a CTI BioPharma Corp. | United States | 1,339,000 | 5,195,320 | |||||||||
a CytomX Therapeutics Inc. | United States | 125,100 | 3,290,130 | |||||||||
a,c DelMar Pharmaceuticals Inc. | Canada | 388,770 | 364,122 | |||||||||
a,b DelMar Pharmaceuticals Inc., wts., 4/12/22 | Canada | 291,578 | 9,505 | |||||||||
a Dynavax Technologies Corp. | United States | 690,770 | 11,708,551 | |||||||||
a Enanta Pharmaceuticals Inc. | United States | 110,500 | 10,282,025 | |||||||||
a Epizyme Inc. | United States | 329,000 | 4,227,650 | |||||||||
a Exelixis Inc. | United States | 673,300 | 14,018,106 | |||||||||
a Fate Therapeutics Inc. | United States | 2,282,277 | 23,050,998 | |||||||||
a G1 Therapeutics Inc. | United States | 437,126 | 16,763,782 | |||||||||
Gilead Sciences Inc. | United States | 624,500 | 45,107,635 | |||||||||
a Global Blood Therapeutics Inc. | United States | 197,500 | 8,719,625 | |||||||||
a GlycoMimetics Inc. | United States | 825,200 | 13,937,628 | |||||||||
a Heron Therapeutics Inc. | United States | 1,448,177 | 43,879,763 | |||||||||
a Homology Medicines Inc. | United States | 138,400 | 2,766,616 | |||||||||
a ImmunoGen Inc. | United States | 660,600 | 7,259,994 | |||||||||
a Immunomedics Inc. | United States | 266,300 | 4,849,323 | |||||||||
a Incyte Corp. | United States | 323,300 | 20,025,202 | |||||||||
a,b,d Intarcia Therapeutics Inc., DD | United States | 80,195 | 1,862,062 | |||||||||
a Iovance Biotherapeutics Inc. | United States | 1,462,500 | 21,206,250 | |||||||||
a Karyopharm Therapeutics Inc. | United States | 387,854 | 5,073,130 | |||||||||
a Loxo Oncology Inc. | United States | 59,600 | 7,504,236 | |||||||||
a MacroGenics Inc. | United States | 180,200 | 4,155,412 | |||||||||
Merrimack Pharmaceuticals Inc. | United States | 140,218 | 1,189,049 | |||||||||
a Minerva Neurosciences Inc. | United States | 492,400 | 3,225,220 | |||||||||
a Molecular Templates Inc., wts., 2/12/20 | United States | 439,500 | — | |||||||||
a Neurocrine Biosciences Inc. | United States | 353,700 | 28,677,996 |
22 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Biotechnology Discovery Fund (continued)
Country | Shares/ Warrants | Value | ||||||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||||
Biotechnology (continued) | ||||||||||||
a,c Nightstar Therapeutics PLC, ADR | United States | 32,853 | $ | 470,126 | ||||||||
a,b Northwest Biotherapeutics Inc., wts., 2/20/19 | United States | 223,880 | 24 | |||||||||
a Novavax Inc. | United States | 2,282,500 | 3,560,700 | |||||||||
a Pfenex Inc. | United States | 532,384 | 2,960,055 | |||||||||
a Puma Biotechnology Inc. | United States | 329,300 | 20,992,875 | |||||||||
a,c Radius Health Inc. | United States | 140,100 | 4,231,020 | |||||||||
a Regeneron Pharmaceuticals Inc. | United States | 154,109 | 46,799,821 | |||||||||
a REGENXBIO Inc. | United States | 276,376 | 10,322,644 | |||||||||
a Rocket Pharmaceuticals Inc. | United States | 84,100 | 1,449,884 | |||||||||
a Sage Therapeutics Inc. | United States | 132,570 | 19,079,474 | |||||||||
a Sarepta Therapeutics Inc. | United States | 85,100 | 6,498,236 | |||||||||
a TG Therapeutics Inc. | United States | 504,000 | 7,232,400 | |||||||||
a uniQure B.V. | Netherlands | 47,000 | 1,372,400 | |||||||||
a Vertex Pharmaceuticals Inc. | United States | 430,800 | 65,981,328 | |||||||||
a Xencor Inc. | United States | 224,532 | 6,509,183 | |||||||||
a,c Zymeworks Inc. | Canada | 295,900 | 4,645,630 | |||||||||
|
| |||||||||||
|
1,045,154,657 |
| ||||||||||
|
| |||||||||||
Life Sciences Tools & Services 4.6% | ||||||||||||
a Illumina Inc. | United States | 224,700 | 54,136,971 | |||||||||
a MorphoSys AG, ADR | Germany | 275,700 | 7,217,826 | |||||||||
|
| |||||||||||
61,354,797 | ||||||||||||
|
| |||||||||||
Pharmaceuticals 13.1% | ||||||||||||
a Aclaris Therapeutics Inc. | United States | 758,614 | 13,465,399 | |||||||||
a Agile Therapeutics Inc. | United States | 1,390,171 | 3,934,184 | |||||||||
a Aratana Therapeutics Inc. | United States | 1,102,000 | 5,675,300 | |||||||||
a BioPharmX Corp. | United States | 1,991,575 | 447,507 | |||||||||
a,e BioPharmX Corp., 144A | United States | 1,945,737 | 437,207 | |||||||||
a,b BioPharmX Corp., wts., 3/29/21 | United States | 108,000 | 3,591 | |||||||||
a,b BioPharmX Corp., wts., 11/22/23 | United States | 1,679,900 | 140,503 | |||||||||
a Collegium Pharmaceutical Inc. | United States | 394,150 | 9,321,648 | |||||||||
a Corium International Inc. | United States | 409,900 | 4,049,812 | |||||||||
a Cymabay Therapeutics Inc. | United States | 678,300 | 7,888,629 | |||||||||
a Dermira Inc. | United States | 699,603 | 6,373,383 | |||||||||
a,c Flex Pharma Inc. | United States | 170,200 | 816,960 | |||||||||
a Foamix Pharmaceuticals Ltd. | Israel | 371,100 | 1,777,569 | |||||||||
a GW Pharmaceuticals PLC, ADR | United Kingdom | 48,967 | 6,508,204 | |||||||||
a Jazz Pharmaceuticals PLC | United States | 105,500 | 16,040,220 | |||||||||
a,c Marinus Pharmaceuticals Inc. | United States | 734,420 | 3,260,825 | |||||||||
a The Medicines Co. | United States | 291,300 | 8,765,217 | |||||||||
a Nabriva Therapeutics PLC | Ireland | 13,696 | 65,741 | |||||||||
a Nektar Therapeutics | United States | 279,700 | 23,399,702 | |||||||||
a Neos Therapeutics Inc. | United States | 614,800 | 5,102,840 | |||||||||
a Novan Inc. | United States | 120,969 | 350,810 | |||||||||
a Odonate Therapeutics Inc. | United States | 216,500 | 4,563,820 | |||||||||
a,b,d Odonate Therapeutics Inc., Private Placement | United States | 187,982 | 3,831,967 | |||||||||
a,c Reata Pharmaceuticals Inc. | United States | 91,000 | 2,406,040 | |||||||||
a Revance Therapeutics Inc. | United States | 606,200 | 16,943,290 | |||||||||
a,c TherapeuticsMD Inc. | United States | 2,847,040 | 15,658,720 |
franklintempleton.com | Annual Report | 23 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Biotechnology Discovery Fund (continued)
Country | Shares/ Warrants | Value | ||||||||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||||||
Pharmaceuticals (continued) | ||||||||||||||
a | Zogenix Inc. | United States | 342,215 | $ | 13,449,050 | |||||||||
|
| |||||||||||||
174,678,138 | ||||||||||||||
|
| |||||||||||||
Total Common Stocks and Other Equity Interests | ||||||||||||||
(Cost $796,777,220) | 1,281,187,592 | |||||||||||||
|
| |||||||||||||
Escrows and Litigation Trusts (Cost $2,788,760) 0.1% | ||||||||||||||
a,b | True North Therapeutics Inc., Escrow Account | United States | 759,880 | 1,411,906 | ||||||||||
|
| |||||||||||||
Total Investments before Short Term Investments | ||||||||||||||
(Cost $799,565,980) | 1,282,599,498 | |||||||||||||
|
| |||||||||||||
Short Term Investments 6.0% | ||||||||||||||
Money Market Funds (Cost $48,671,129) 3.7% | ||||||||||||||
f,g | Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 48,671,129 | 48,671,129 | ||||||||||
|
| |||||||||||||
h | Investments from Cash Collateral Received for Loaned Securities (Cost $31,355,415) 2.3% | |||||||||||||
Money Market Funds 2.3% | ||||||||||||||
f,g | Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 31,355,415 | 31,355,415 | ||||||||||
|
| |||||||||||||
Total Investments (Cost $879,592,524) 102.5% | 1,362,626,042 | |||||||||||||
Other Assets, less Liabilities (2.5)% | (33,783,818 | ) | ||||||||||||
|
| |||||||||||||
Net Assets 100.0% | $ | 1,328,842,224 | ||||||||||||
|
|
See Abbreviations on page 47.
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
cA portion or all of the security is on loan at April 30, 2018. See Note 1(c).
dSee Note 8 regarding restricted securities.
eSecurity 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, 2018, the aggregate value of these securities was $437,207, representing less than 0.1% of net assets.
fSee Note 3(f) regarding investments in affiliated management investment companies.
gThe rate shown is the annualized seven-day effective yield at period end.
hSee Note 1(c) regarding securities on loan.
24 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $25.11 | $25.02 | $31.46 | $39.79 | $33.03 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.39 | c | 0.20 | 0.29 | 0.23 | 0.19 | ||||||||||||||
Net realized and unrealized gains (losses) | 2.77 | 0.17 | (6.55 | ) | (8.27 | ) | 6.65 | |||||||||||||
Total from investment operations | 3.16 | 0.37 | (6.26 | ) | (8.04 | ) | 6.84 | |||||||||||||
Less distributions from net investment income | (0.31 | ) | (0.28 | ) | (0.18 | ) | (0.29 | ) | (0.08 | ) | ||||||||||
Net asset value, end of year | $27.96 | $25.11 | $25.02 | $31.46 | $39.79 | |||||||||||||||
Total returnd | 12.74% | 1.37% | (19.80)% | (20.07)% | 20.74% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.13% | 1.06% | 1.14% | 1.08% | 1.07% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.13% | e,f | 1.05% | f | 1.13% | 1.08% | e,f | 1.07% | e,f | |||||||||||
Net investment income | 1.56% | c | 0.79% | 1.22% | 0.67% | 0.53% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $344,695 | $398,703 | $461,596 | $572,518 | $624,250 | |||||||||||||||
Portfolio turnover rate | 29.98% | 29.74% | 35.77% | 30.05% | 21.03% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.91%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
fBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 25 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $24.28 | $24.25 | $30.46 | $38.39 | $32.02 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | 0.20 | c | 0.01 | 0.11 | (0.01 | ) | (0.06 | ) | ||||||||||||
Net realized and unrealized gains (losses) | 2.69 | 0.15 | (6.31 | ) | (7.91 | ) | 6.43 | |||||||||||||
Total from investment operations | 2.89 | 0.16 | (6.20 | ) | (7.92 | ) | 6.37 | |||||||||||||
Less distributions from net investment income | — | (0.13 | ) | (0.01 | ) | (0.01 | ) | �� | — | |||||||||||
Net asset value, end of year | $27.17 | $24.28 | $24.25 | $30.46 | $38.39 | |||||||||||||||
Total returnd | 11.90% | 0.63% | (20.37)% | (20.63)% | 19.89% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.88% | 1.81% | 1.87% | 1.78% | 1.76% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.88% | e,f | 1.80% | f | 1.86% | 1.78% | e,f | 1.76% | e,f | |||||||||||
Net investment income (loss) | 0.81% | c | 0.04% | 0.49% | (0.03)% | (0.16)% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $83,814 | $96,835 | $107,724 | $123,735 | $126,651 | |||||||||||||||
Portfolio turnover rate | 29.98% | 29.74% | 35.77% | 30.05% | 21.03% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.16%.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
fBenefit of expense reduction rounds to less than 0.01%.
26 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $26.87 | $26.73 | $33.62 | $42.58 | $38.28 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment incomec | 0.57 | d | 0.47 | 0.51 | 0.46 | 0.19 | ||||||||||||||
Net realized and unrealized gains (losses) | 2.95 | 0.04 | (7.06 | ) | (8.92 | ) | 4.31 | |||||||||||||
Total from investment operations | 3.52 | 0.51 | (6.55 | ) | (8.46 | ) | 4.50 | |||||||||||||
Less distributions from net investment income | (0.60 | ) | (0.37 | ) | (0.34 | ) | (0.50 | ) | (0.20 | ) | ||||||||||
Net asset value, end of year | $29.79 | $26.87 | $26.73 | $33.62 | $42.58 | |||||||||||||||
Total returne | 13.37% | 1.89% | (19.31)% | (19.61)% | 11.83% | |||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.64% | 0.83% | 0.60% | 0.55% | 0.55% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.57% | g | 0.54% | g | 0.55% | 0.54% | g | 0.53% | g | |||||||||||
Net investment income | 2.12%d | 1.30% | 1.80% | 1.21% | 1.07% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $15,866 | $218 | $15 | $439 | $939 | |||||||||||||||
Portfolio turnover rate | 29.98% | 29.74% | 35.77% | 30.05% | 21.03% |
aFor the period September 20, 2013 (effective date) to April 30, 2014.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.47%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 27 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $26.81 | $26.71 | $33.63 | $42.52 | $35.31 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.49 | c | 0.29 | 0.36 | 0.35 | 0.31 | ||||||||||||||
Net realized and unrealized gains (losses) | 2.95 | 0.17 | (7.00 | ) | (8.85 | ) | 7.10 | |||||||||||||
Total from investment operations | 3.44 | 0.46 | (6.64 | ) | (8.50 | ) | 7.41 | |||||||||||||
Less distributions from net investment income | (0.45 | ) | (0.36 | ) | (0.28 | ) | (0.39 | ) | (0.20 | ) | ||||||||||
Net asset value, end of year | $29.80 | $26.81 | $26.71 | $33.63 | $42.52 | |||||||||||||||
Total return | 13.04% | 1.64% | (19.60)% | (19.81)% | 21.07% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.88% | 0.81% | 0.87% | 0.78% | 0.77% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.88% | d,e | 0.80% | e | 0.86% | 0.78% | d,e | 0.77% | d,e | |||||||||||
Net investment income | 1.81% | c | 1.04% | 1.49% | 0.97% | 0.83% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $78,443 | $94,070 | $90,185 | $79,307 | $94,651 | |||||||||||||||
Portfolio turnover rate | 29.98% | 29.74% | 35.77% | 30.05% | 21.03% |
aThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.16 per share related to income received in the form of special dividends in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.16%.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
eBenefit of expense reduction rounds to less than 0.01%.
28 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Natural Resources Fund
Country
| Shares
| Value
| ||||||||||
Common Stocks 97.6% | ||||||||||||
Construction Materials 0.4% | ||||||||||||
a Cemex SAB de CV, CPO, ADR | Mexico | 367,000 | $ | 2,279,070 | ||||||||
|
| |||||||||||
Copper 3.8% | ||||||||||||
Antofagasta PLC | United Kingdom | 438,300 | 5,867,961 | |||||||||
First Quantum Minerals Ltd. | Zambia | 266,600 | 3,843,295 | |||||||||
Freeport-McMoRan Inc. | United States | 227,500 | 3,460,275 | |||||||||
a Imperial Metals Corp. | Canada | 364,500 | 568,067 | |||||||||
Lundin Mining Corp. | Canada | 329,900 | 2,185,109 | |||||||||
Sandfire Resources NL | Australia | 631,267 | 3,773,480 | |||||||||
|
| |||||||||||
|
19,698,187 |
| ||||||||||
|
| |||||||||||
Diversified Chemicals 0.8% | ||||||||||||
BASF SE | Germany | 22,800 | 2,377,165 | |||||||||
DowDuPont Inc. | United States | 29,500 | 1,865,580 | |||||||||
|
| |||||||||||
|
4,242,745 |
| ||||||||||
|
| |||||||||||
Diversified Metals & Mining 7.6% | ||||||||||||
BHP Billiton PLC, ADR | United Kingdom | 277,700 | 11,757,818 | |||||||||
Glencore PLC | Switzerland | 2,070,800 | 9,998,729 | |||||||||
Hudbay Minerals Inc. | Canada | 168,600 | 1,178,479 | |||||||||
a Nautilus Minerals Inc. | Canada | 3,895,831 | 683,053 | |||||||||
Nexa Resources SA | Peru | 149,000 | 2,604,520 | |||||||||
Rio Tinto PLC, ADR | United Kingdom | 89,800 | 4,934,510 | |||||||||
South32 Ltd. | Australia | 1,050,000 | 2,940,632 | |||||||||
Teck Resources Ltd., B | Canada | 223,000 | 5,603,990 | |||||||||
|
| |||||||||||
|
39,701,731 |
| ||||||||||
|
| |||||||||||
Gold 5.3% | ||||||||||||
Agnico Eagle Mines Ltd. | Canada | 77,600 | 3,267,146 | |||||||||
Alamos Gold Inc., A | Canada | 656,900 | 3,552,471 | |||||||||
a B2Gold Corp. | Canada | 1,615,900 | 4,646,358 | |||||||||
Barrick Gold Corp. | Canada | 255,400 | 3,440,238 | |||||||||
Goldcorp Inc. | Canada | 240,000 | 3,189,600 | |||||||||
a Guyana Goldfields Inc. | Canada | 758,600 | 2,943,838 | |||||||||
Newcrest Mining Ltd. | Australia | 142,400 | 2,267,404 | |||||||||
OceanaGold Corp. | Australia | 631,410 | 1,702,391 | |||||||||
Randgold Resources Ltd., ADR | United Kingdom | 5,400 | 437,940 | |||||||||
Tahoe Resources Inc. | Canada | 444,700 | 2,242,039 | |||||||||
|
| |||||||||||
|
27,689,425 |
| ||||||||||
|
| |||||||||||
Integrated Oil & Gas 14.9% | ||||||||||||
Chevron Corp. | United States | 115,800 | 14,487,738 | |||||||||
Exxon Mobil Corp. | United States | 231,000 | 17,960,250 | |||||||||
Occidental Petroleum Corp. | United States | 168,100 | 12,987,406 | |||||||||
a Petroleo Brasileiro SA, ADR | Brazil | 103,300 | 1,455,497 | |||||||||
Royal Dutch Shell PLC, A, ADR | United Kingdom | 197,521 | 13,806,718 | |||||||||
Suncor Energy Inc. | Canada | 309,500 | 11,841,697 | |||||||||
Total SA, B, ADR | France | 84,910 | 5,316,215 | |||||||||
|
| |||||||||||
|
77,855,521 |
| ||||||||||
|
| |||||||||||
Oil & Gas Drilling 3.4% | ||||||||||||
Ensco PLC, A | United States | 346,719 | 1,958,962 | |||||||||
Patterson-UTI Energy Inc. | United States | 386,000 | 8,268,120 | |||||||||
a Pioneer Energy Services Corp. | United States | 1,334,043 | 4,602,449 |
franklintempleton.com | Annual Report | 29 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Natural Resources Fund (continued)
Country
| Shares
| Value
| ||||||||||
Common Stocks (continued) | ||||||||||||
Oil & Gas Drilling (continued) | ||||||||||||
a Rowan Cos. PLC | United States | 213,600 | $ | 3,084,384 | ||||||||
|
| |||||||||||
|
17,913,915 |
| ||||||||||
|
| |||||||||||
Oil & Gas Equipment & Services 19.9% | ||||||||||||
Baker Hughes a GE Co., A | United States | 215,600 | 7,785,316 | |||||||||
a Dril-Quip Inc. | United States | 53,800 | 2,230,010 | |||||||||
Halliburton Co. | United States | 326,335 | 17,292,492 | |||||||||
a Hunting PLC | United Kingdom | 160,700 | 1,772,226 | |||||||||
a Liberty Oilfield Services Inc. | United States | 264,200 | 5,268,148 | |||||||||
a Mammoth Energy Services Inc. | United States | 58,608 | 1,903,588 | |||||||||
a Nine Energy Service Inc. | United States | 121,500 | 3,710,610 | |||||||||
Oceaneering International Inc. | United States | 182,400 | 3,874,176 | |||||||||
a Oil States International Inc. | United States | 195,200 | 7,017,440 | |||||||||
a Ranger Energy Services Inc. | United States | 158,300 | 1,305,975 | |||||||||
b RPC Inc. | United States | 311,500 | 5,610,115 | |||||||||
Schlumberger Ltd. | United States | 299,747 | 20,550,654 | |||||||||
a Superior Energy Services Inc. | United States | 1,020,900 | 10,954,257 | |||||||||
TechnipFMC PLC | United Kingdom | 393,600 | 12,973,056 | |||||||||
a Weatherford International PLC | United States | 659,800 | 1,946,410 | |||||||||
|
| |||||||||||
|
104,194,473 |
| ||||||||||
|
| |||||||||||
Oil & Gas Exploration & Production 29.2% | ||||||||||||
Anadarko Petroleum Corp. | United States | 212,400 | 14,298,768 | |||||||||
Cabot Oil & Gas Corp., A | United States | 463,700 | 11,087,067 | |||||||||
a Cairn Energy PLC | United Kingdom | 1,839,200 | 5,737,989 | |||||||||
a Callon Petroleum Co. | United States | 555,700 | 7,729,787 | |||||||||
Canadian Natural Resources Ltd. | Canada | 253,300 | 9,142,723 | |||||||||
a Concho Resources Inc. | United States | 76,500 | 12,026,565 | |||||||||
ConocoPhillips | United States | 151,300 | 9,910,150 | |||||||||
a Diamondback Energy Inc. | United States | 72,300 | 9,286,935 | |||||||||
EOG Resources Inc. | United States | 111,200 | 13,140,504 | |||||||||
EQT Corp. | United States | 204,200 | 10,248,798 | |||||||||
Hess Corp. | United States | 179,400 | 10,224,006 | |||||||||
a Jagged Peak Energy Inc. | United States | 478,400 | 6,855,472 | |||||||||
Noble Energy Inc. | United States | 429,900 | 14,543,517 | |||||||||
Pioneer Natural Resources Co. | United States | 50,400 | 10,158,120 | |||||||||
a Resolute Energy Corp. | United States | 203,300 | 6,788,187 | |||||||||
a SRC Energy Inc. | United States | 128,300 | 1,416,432 | |||||||||
|
| |||||||||||
|
152,595,020 |
| ||||||||||
|
| |||||||||||
Oil & Gas Refining & Marketing 3.6% | ||||||||||||
HollyFrontier Corp. | United States | 62,000 | 3,762,780 | |||||||||
Marathon Petroleum Corp. | United States | 63,600 | 4,764,276 | |||||||||
Phillips 66 | United States | 46,900 | 5,220,439 | |||||||||
Valero Energy Corp. | United States | 46,300 | 5,136,059 | |||||||||
|
| |||||||||||
|
18,883,554 |
| ||||||||||
|
| |||||||||||
Oil & Gas Storage & Transportation 7.0% | ||||||||||||
Enbridge Inc. | Canada | 314,547 | 9,521,338 | |||||||||
Kinder Morgan Inc. | United States | 647,700 | 10,246,614 | |||||||||
ONEOK Inc. | United States | 66,400 | 3,998,608 | |||||||||
Targa Resources Corp. | United States | 167,100 | 7,848,687 | |||||||||
TransCanada Corp. | Canada | 59,200 | 2,513,040 |
30 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Natural Resources Fund (continued)
Country
| Shares
| Value
| ||||||||||
Common Stocks (continued) | ||||||||||||
Oil & Gas Storage & Transportation (continued) | ||||||||||||
The Williams Cos. Inc. | United States | 100,800 | $ | 2,593,584 | ||||||||
|
| |||||||||||
36,721,871 | ||||||||||||
|
| |||||||||||
Paper Packaging 0.3% | ||||||||||||
Packaging Corp. of America | United States | 11,200 | 1,295,728 | |||||||||
|
| |||||||||||
Specialty Chemicals 1.1% | ||||||||||||
Albemarle Corp. | United States | 37,700 | 3,655,392 | |||||||||
Umicore SA | Belgium | 32,200 | 1,799,179 | |||||||||
|
| |||||||||||
5,454,571 | ||||||||||||
|
| |||||||||||
Trading Companies & Distributors 0.3% | ||||||||||||
a Univar Inc. | United States | 64,300 | 1,772,108 | |||||||||
|
| |||||||||||
Total Common Stocks (Cost $388,910,661) | 510,297,919 | |||||||||||
|
| |||||||||||
Convertible Preferred Stocks 0.4% | ||||||||||||
Oil & Gas Exploration & Production 0.4% | ||||||||||||
Sanchez Energy Corp., 4.875%, cvt. pfd., A | United States | 84,500 | 1,187,225 | |||||||||
Sanchez Energy Corp., 6.50%, cvt. pfd., B | United States | 56,000 | 968,800 | |||||||||
|
| |||||||||||
Total Convertible Preferred Stocks (Cost $6,412,173) | 2,156,025 | |||||||||||
|
| |||||||||||
Total Investments before Short Term Investments (Cost $395,322,834) | 512,453,944 | |||||||||||
|
| |||||||||||
Short Term Investments 3.3% | ||||||||||||
Money Market Funds (Cost $11,815,239) 2.3% | ||||||||||||
c,d Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 11,815,239 | 11,815,239 | |||||||||
|
| |||||||||||
e Investments from Cash Collateral Received for Loaned Securities (Cost $5,473,225) 1.0% | ||||||||||||
Money Market Funds 1.0% | ||||||||||||
c,d Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 5,473,225 | 5,473,225 | |||||||||
|
| |||||||||||
Total Investments (Cost $412,611,298) 101.3% | 529,742,408 | |||||||||||
Other Assets, less Liabilities (1.3)% | (6,924,796 | ) | ||||||||||
|
| |||||||||||
Net Assets 100.0% | $ | 522,817,612 | ||||||||||
|
|
See Abbreviations on page 47.
aNon-income producing.
bA portion or all of the security is on loan at April 30, 2018. See Note 1(c).
cSee Note 3(f) regarding investments in affiliated management investment companies.
dThe rate shown is the annualized seven-day effective yield at period end.
eSee Note 1(c) regarding securities on loan.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
Statements of Assets and Liabilities
April 30, 2018
Franklin
| Franklin Natural
| |||||||
| ||||||||
Assets: | ||||||||
+Investments in securities: | ||||||||
Cost - Unaffiliated issuers | $ | 799,565,980 | $ | 395,322,834 | ||||
Cost - Non-controlled affiliates (Note 3f and 9) | 80,026,544 | 17,288,464 | ||||||
|
| |||||||
Value - Unaffiliated issuers |
$ |
1,282,599,498 |
|
$ |
512,453,944 |
| ||
Value - Non-controlled affiliates (Note 3f and 9) | 80,026,544 | 17,288,464 | ||||||
Receivables: | ||||||||
Investment securities sold ** | 4,820 | 2,228,269 | ||||||
Capital shares sold | 1,205,397 | 542,028 | ||||||
Dividends and interest | 244,932 | 947,088 | ||||||
Other assets | 1,210 | 451 | ||||||
|
| |||||||
Total assets |
|
1,364,082,401 |
|
|
533,460,244 |
| ||
|
| |||||||
Liabilities: | ||||||||
Payables: | ||||||||
Investment securities purchased | 210,263 | 3,404,429 | ||||||
Capital shares redeemed | 2,119,627 | 991,689 | ||||||
Management fees | 624,999 | 205,556 | ||||||
Distribution fees | 275,379 | 136,125 | ||||||
Transfer agent fees | 568,337 | 372,213 | ||||||
Payable upon return of securities loaned | 31,355,415 | 5,473,225 | ||||||
Accrued expenses and other liabilities | 86,157 | 59,395 | ||||||
|
| |||||||
Total liabilities |
|
35,240,177 |
|
|
10,642,632 |
| ||
|
| |||||||
Net assets, at value |
$ |
1,328,842,224 |
|
$ |
522,817,612 |
| ||
|
| |||||||
Net assets consist of: | ||||||||
Paid-in capital | $ | 811,374,022 | $ | 561,112,914 | ||||
Undistributed net investment income (loss) | (8,318,907 | ) | 4,345,619 | |||||
Net unrealized appreciation (depreciation) | 483,033,518 | 117,125,800 | ||||||
Accumulated net realized gain (loss) | 42,753,591 | (159,766,721 | ) | |||||
|
| |||||||
Net assets, at value |
$ |
1,328,842,224 |
|
$ |
522,817,612 |
| ||
|
| |||||||
+Includes securities loaned | $ | 29,833,386 | $ | 5,328,259 | ||||
**Includes securities loaned | $ | 4,820 | $ | — |
32 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Assets and Liabilities (continued)
April 30, 2018
Franklin
| Franklin Natural
| |||||||
| ||||||||
Class A: | ||||||||
Net assets, at value | $ | 1,081,883,350 | $344,694,626 | |||||
|
| |||||||
Shares outstanding | 7,403,210 | 12,326,387 | ||||||
|
| |||||||
Net asset value per sharea | $146.14 | $27.96 | ||||||
|
| |||||||
Maximum offering price per share (net asset value per share ÷ 94.25%) | $155.06 | $29.67 | ||||||
|
| |||||||
Class C: | ||||||||
Net assets, at value | $ | 58,432,783 | $ 83,814,148 | |||||
|
| |||||||
Shares outstanding | 412,233 | 3,084,676 | ||||||
|
| |||||||
Net asset value and maximum offering price per sharea | $141.75 | $27.17 | ||||||
|
| |||||||
Class R6: | ||||||||
Net assets, at value | $ | 8,307,475 | $ 15,866,211 | |||||
|
| |||||||
Shares outstanding | 55,143 | 532,565 | ||||||
|
| |||||||
Net asset value and maximum offering price per share | $150.65 | $29.79 | ||||||
|
| |||||||
Advisor Class: | ||||||||
Net assets, at value | $ | 180,218,616 | $ 78,442,627 | |||||
|
| |||||||
Shares outstanding | 1,205,125 | 2,632,352 | ||||||
|
| |||||||
Net asset value and maximum offering price per share | $149.54 | $29.80 | ||||||
|
|
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 33 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations
for the year ended April 30, 2018
Franklin
| Franklin Natural
| |||||||
| ||||||||
Investment income: | ||||||||
Dividends: (net of foreign taxes)* | ||||||||
Unaffiliated issuers | $ | 4,451,465 | $ | 13,895,912 | ||||
Non-controlled affiliates (Note 3f and 9) | 261,113 | 49,486 | ||||||
Interest: | ||||||||
Unaffiliated issuers | — | 86,851 | ||||||
Income from securities loaned (net of fees and rebates) | 2,473,523 | 97,388 | ||||||
|
| |||||||
Total investment income | 7,186,101 | 14,129,637 | ||||||
|
| |||||||
Expenses: | ||||||||
Management fees (Note 3a) | 8,267,147 | 2,619,358 | ||||||
Distribution fees: (Note 3c) | ||||||||
Class A | 2,921,618 | 878,272 | ||||||
Class C | 585,639 | 853,551 | ||||||
Transfer agent fees: (Note 3e) | ||||||||
Class A | 2,227,982 | 1,151,738 | ||||||
Class C | 111,656 | 280,969 | ||||||
Class R6 | 3,804 | 1,318 | ||||||
Advisor Class | 346,598 | 287,669 | ||||||
Custodian fees (Note 4) | 13,960 | 15,813 | ||||||
Reports to shareholders | 161,584 | 109,794 | ||||||
Registration and filing fees | 116,765 | 84,528 | ||||||
Professional fees | 79,391 | 49,260 | ||||||
Trustees’ fees and expenses | 14,729 | 5,846 | ||||||
Other | 31,067 | 18,613 | ||||||
|
| |||||||
Total expenses | 14,881,940 | 6,356,729 | ||||||
Expense reductions (Note 4) | (590 | ) | (1,073 | ) | ||||
Expenses waived/paid by affiliates (Note 3f and 3g) | (294,807 | ) | (33,306 | ) | ||||
|
| |||||||
Net expenses | 14,586,543 | 6,322,350 | ||||||
|
| |||||||
Net investment income (loss) | (7,400,442 | ) | 7,807,287 | |||||
|
| |||||||
Realized and unrealized gains (losses): | ||||||||
Net realized gain (loss) from: | ||||||||
Investments: | ||||||||
Unaffiliated issuers | 64,627,903 | (12,677,172 | ) | |||||
Non-controlled affiliates (Note 3f and 9) | (10,264,307 | ) | — | |||||
Foreign currency transactions | (703 | ) | 37,163 | |||||
|
| |||||||
Net realized gain (loss) | 54,362,893 | (12,640,009 | ) | |||||
|
| |||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||
Investments: | ||||||||
Unaffiliated issuers | (24,252,374 | ) | 63,521,110 | |||||
Non-controlled affiliates (Note 3f and 9) | 1,655,827 | — | ||||||
Translation of other assets and liabilities denominated in foreign currencies | 326 | (7,087 | ) | |||||
|
| |||||||
Net change in unrealized appreciation (depreciation) | (22,596,221 | ) | 63,514,023 | |||||
|
| |||||||
Net realized and unrealized gain (loss) | 31,766,672 | 50,874,014 | ||||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | $ | 24,366,230 | $ | 58,681,301 | ||||
|
| |||||||
*Foreign taxes withheld on dividends | $ | — | $ | 445,415 |
34 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
Franklin Biotechnology | Franklin Natural | |||||||||||||||
Discovery Fund | Resources Fund | |||||||||||||||
|
| |||||||||||||||
Year Ended April 30, | Year Ended April 30, | |||||||||||||||
|
| |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
| ||||||||||||||||
Increase (decrease) in net assets: | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | $ | (7,400,442 | ) | $ | (7,464,858 | ) | $ | 7,807,287 | $ | 4,573,924 | ||||||
Net realized gain (loss) | 54,362,893 | 98,018,256 | (12,640,009 | ) | (16,276,712 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) | (22,596,221 | ) | 145,090,624 | 63,514,023 | 23,243,049 | |||||||||||
|
| |||||||||||||||
Net increase (decrease) in net assets resulting from operations | 24,366,230 | 235,644,022 | 58,681,301 | 11,540,261 | ||||||||||||
|
| |||||||||||||||
Distributions to shareholders from: | ||||||||||||||||
Net investment income: | ||||||||||||||||
Class A | — | (14,076,436 | ) | (4,171,579 | ) | (4,756,117 | ) | |||||||||
Class C | — | (408,909 | ) | — | (577,641 | ) | ||||||||||
Class R6 | — | (126,292 | ) | (26,407 | ) | (212 | ) | |||||||||
Advisor Class | — | (1,688,739 | ) | (1,426,444 | ) | (1,234,610 | ) | |||||||||
Net realized gains: | ||||||||||||||||
Class A | (27,114,653 | ) | (34,234,146 | ) | — | — | ||||||||||
Class C | (1,417,301 | ) | (1,330,584 | ) | — | — | ||||||||||
Class R6 | (199,407 | ) | (230,582 | ) | — | — | ||||||||||
Advisor Class | (4,208,617 | ) | (3,411,647 | ) | — | — | ||||||||||
|
| |||||||||||||||
Total distributions to shareholders | (32,939,978 | ) | (55,507,335 | ) | (5,624,430 | ) | (6,568,580 | ) | ||||||||
|
| |||||||||||||||
Capital share transactions: (Note 2) | ||||||||||||||||
Class A | (88,622,240 | ) | (55,488,311 | ) | (89,055,299 | ) | (66,989,230 | ) | ||||||||
Class C | 5,540,101 | 31,398,641 | (22,010,700 | ) | (11,600,701 | ) | ||||||||||
Class R6 | (555,474 | ) | 2,002,691 | 14,973,208 | 222,601 | |||||||||||
Advisor Class | 21,646,333 | 50,061,306 | (23,972,393 | ) | 3,702,378 | |||||||||||
|
| |||||||||||||||
Total capital share transactions | (61,991,280 | ) | 27,974,327 | (120,065,184 | ) | (74,664,952 | ) | |||||||||
|
| |||||||||||||||
Net increase (decrease) in net assets | (70,565,028 | ) | 208,111,014 | (67,008,313 | ) | (69,693,271 | ) | |||||||||
Net assets: | ||||||||||||||||
Beginning of year | 1,399,407,252 | 1,191,296,238 | 589,825,925 | 659,519,196 | ||||||||||||
|
| |||||||||||||||
End of year | $ | 1,328,842,224 | $ | 1,399,407,252 | $ | 522,817,612 | $ | 589,825,925 | ||||||||
|
| |||||||||||||||
Undistributed net investment income (loss) included in net assets: | ||||||||||||||||
End of year | $ | (8,318,907 | ) | $ | — | $ | 4,345,619 | $ | 1,804,541 | |||||||
|
| |||||||||||||||
Distributions in excess of net investment income included in net assets: | ||||||||||||||||
End of year | $ | — | $ | (6,168,715 | ) | $ | — | $ | — | |||||||
|
|
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds, two of which are included in this report (Funds) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Funds offer four classes of shares: Class A, Class C, Class R6, and Advisor Class. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Funds’ significant accounting policies.
a. Financial Instrument Valuation
The Funds’ investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Funds calculate the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Funds’ administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Funds’ valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Funds to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities 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 NAV.
The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Funds’ business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Funds’ portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC 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 Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against
36 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Funds. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Funds’ NAV is not calculated, which could result in differences between the value of the Funds’ portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes.
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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Board.
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 in the Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign
exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Lending
Certain or all Funds participate in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair 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 deposited into a joint cash account with other funds and is used to invest in a money market fund managed by Franklin Advisers, Inc., an affiliate of the Funds. The Fund may receive income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported separately in the Statements of Operations. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.
d. Income and Deferred Taxes
It is each Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which the Funds invest. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is determined to apply, certain or all Funds record an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
franklintempleton.com | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies (continued)
d. Income and Deferred Taxes (continued)
Each Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of April 30, 2018, each Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
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 for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Funds. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
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, excluding 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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, 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.
38 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest
At April 30, 2018, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Class A Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 1,057,237 | $ | 160,996,348 | 1,583,808 | $ | 40,230,459 | ||||||||||
Shares issued in reinvestment of distributions | 175,206 | 25,819,984 | 164,031 | 4,090,940 | ||||||||||||
Shares redeemed | (1,821,677 | ) | (275,438,572 | ) | (5,298,641 | ) | (133,376,698 | ) | ||||||||
Net increase (decrease) | (589,234 | ) | $ | (88,622,240 | ) | (3,550,802 | ) | $ | (89,055,299 | ) | ||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 2,141,244 | $ | 293,440,540 | 3,407,729 | $ | 87,917,703 | ||||||||||
Shares issued in reinvestment of distributions | 347,251 | 45,878,780 | 168,961 | 4,629,546 | ||||||||||||
Shares redeemed | (2,881,393 | ) | (394,807,631 | ) | (6,146,306 | ) | (159,536,479 | ) | ||||||||
Net increase (decrease) | (392,898 | ) | $ | (55,488,311 | ) | (2,569,616 | ) | $ | (66,989,230 | ) | ||||||
Class C Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 142,042 | $ | 21,098,664 | 388,443 | $ | 9,522,328 | ||||||||||
Shares issued in reinvestment of distributions | 9,827 | 1,408,701 | — | — | ||||||||||||
Shares redeemed | (114,253 | ) | (16,967,264 | ) | (1,292,254 | ) | (31,533,028 | ) | ||||||||
Net increase (decrease) | 37,616 | $ | 5,540,101 | (903,811 | ) | $ | (22,010,700 | ) | ||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 314,992 | $ | 42,287,943 | 801,399 | $ | 19,979,661 | ||||||||||
Shares issued in reinvestment of distributions | 13,374 | 1,732,743 | 21,022 | 558,336 | ||||||||||||
Shares redeemed | (93,143 | ) | (12,622,045 | ) | (1,275,577 | ) | (32,138,698 | ) | ||||||||
Net increase (decrease) | 235,223 | $ | 31,398,641 | (453,156 | ) | $ | (11,600,701 | ) | ||||||||
Class R6 Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 18,257 | $ | 2,841,320 | 544,711 | $ | 15,552,699 | ||||||||||
Shares issued in reinvestment of distributions | 1,314 | 199,406 | 995 | 26,408 | ||||||||||||
Shares redeemed | (23,294 | ) | (3,596,200 | ) | (21,257 | ) | (605,899 | ) | ||||||||
Net increase (decrease) | (3,723 | ) | $ | (555,474 | ) | 524,449 | $ | 14,973,208 | ||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 38,854 | $ | 5,153,854 | 7,779 | $ | 228,431 | ||||||||||
Shares issued in reinvestment of distributions | 2,637 | 356,874 | 7 | 211 | ||||||||||||
Shares redeemed | (25,011 | ) | (3,508,037 | ) | (222 | ) | (6,041 | ) | ||||||||
Net increase (decrease) | 16,480 | $ | 2,002,691 | 7,564 | $ | 222,601 |
franklintempleton.com | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest (continued)
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Advisor Class Shares: | ||||||||||||||||
Year ended April 30, 2018 | ||||||||||||||||
Shares sold | 444,625 | $ | 68,532,853 | 1,055,556 | $ | 28,419,344 | ||||||||||
Shares issued in reinvestment of distributions | 24,690 | 3,720,072 | 52,254 | 1,387,336 | ||||||||||||
Shares redeemed | (328,722 | ) | (50,606,592 | ) | (1,984,254 | ) | (53,779,073 | ) | ||||||||
Net increase (decrease) | 140,593 | $ | 21,646,333 | (876,444 | ) | $ | (23,972,393 | ) | ||||||||
Year ended April 30, 2017 | ||||||||||||||||
Shares sold | 662,833 | $ | 93,724,820 | 1,645,341 | $ | 45,812,950 | ||||||||||
Shares issued in reinvestment of distributions | 31,641 | 4,260,757 | 40,400 | 1,180,483 | ||||||||||||
Shares redeemed | (343,647 | ) | (47,924,271 | ) | (1,553,855 | ) | (43,291,055 | ) | ||||||||
Net increase (decrease) | 350,827 | $ | 50,061,306 | 131,886 | $ | 3,702,378 |
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
Franklin Biotechnology Discovery 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 | |
0.775% | Up to and including $100 million | |
0.650% | Over $100 million, up to and including $200 million | |
0.635% | Over $200 million, up to and including $250 million | |
0.585% | Over $250 million, up to and including $700 million | |
0.550% | Over $700 million, up to and including $1.2 billion | |
0.525% | Over $1.2 billion, up to and including $7.5 billion | |
0.515% | Over $7.5 billion, up to and including $10 billion | |
0.505% | Over $10 billion, up to and including $12.5 billion | |
0.495% | Over $12.5 billion, up to and including $15 billion | |
0.475% | in excess of $15 billion |
40 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Natural Resources 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% | In excess of $15 billion |
For the year ended April 30, 2018, each Fund’s gross effective investment management fee rate based on average daily net assets was as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |
| ||
0.583% | 0.498% |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on Funds’ average daily net assets, and is not an additional expense of the Funds.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and 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. In addition, under the Funds’ Class C 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 plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each Fund.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.35 | % | ||
Class C | 1.00 | % |
The Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.
franklintempleton.com | Annual Report | 41 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Funds. These charges are deducted from the proceeds of sales of fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds’ shares for the year:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | $373,812 | $67,584 | ||||||
CDSC retained | $ 18,329 | $11,740 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. Effective November 1, 2017, the fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. Prior to November 1, 2017, the fees were account based fees that varied based on fund or account type. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the year ended April 30, 2018, 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 Discovery Fund | Franklin Natural Resources Fund | |||||||
Transfer agent fees |
|
$952,294 |
|
|
$606,105 |
|
f. Investments in Affiliated Management Investment Companies
Certain or all Funds invest in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Funds are waived on assets invested in the affiliated management investment companies, as noted in the Statements of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the year ended April 30, 2018, investments in affiliated management investment companies were as follows:
Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Shares Held at End of Year | Value at End of Year | Dividend Income | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||
Franklin Biotechnology Discovery Fund | ||||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 85,673,142 | 639,250,636 | (644,897,234 | ) | 80,026,544 | $ | 80,026,544 | $ | 261,113 | $ | — | $ — | ||||||||||||||||||
Franklin Natural Resources Fund | ||||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 7,627,816 | 179,477,873 | (169,817,225 | ) | 17,288,464 | $ | 17,288,464 | $ | 49,486 | $ | — | $ — |
42 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
g. Waiver and Expense Reimbursements
For Franklin Biotechnology Discovery Fund, Investor Services has voluntarily agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.03% based on the average net assets of each class. Investor Services may discontinue this waiver in the future. For Franklin Natural Resources Fund, Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.03% until August 31, 2018.
h. Interfund Transactions
Franklin Biotechnology Discovery Fund engaged in purchases and sales of investments with funds or other accounts that have common investment managers (or affiliated investment managers), directors, trustees or officers. During the year ended April 30, 2018, these purchase and sale transactions aggregated $1,236,222 and $0, respectively.
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, 2018, 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. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At April 30, 2018, the capital loss carryforwards were as follows:
Franklin Natural Resources Fund | ||||
Capital loss carryforwards: | ||||
Short Term. | $ | 11,809,756 | ||
Long Term | 133,040,667 | |||
|
| |||
Total capital loss carryforwards. | $ | 144,850,423 | ||
|
|
On April 30, 2018, Franklin Natural Resources Fund had expired capital loss carryforwards of $12,737,677, which were reclassified to paid-in capital.
The tax character of distributions paid during the years ended April 30, 2018 and 2017, was as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||||||||||
|
| |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
| ||||||||||||||||
Distributions paid from: | ||||||||||||||||
Ordinary income | $ | 9,966,331 | $ | 16,300,376 | $ | 5,624,430 | $ | 6,568,580 | ||||||||
Long term capital gain | 22,973,647 | 39,206,959 | — | — | ||||||||||||
|
| |||||||||||||||
$32,939,978 | $ | 55,507,335 | $ | 5,624,430 | $ | 6,568,580 | ||||||||||
|
|
franklintempleton.com | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
5. Income Taxes (continued)
At April 30, 2018, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
| ||||||||
Cost of investments | $ | 893,349,664 | $ | 431,159,506 | ||||
|
| |||||||
Unrealized appreciation | $ | 553,584,494 | $ | 148,073,948 | ||||
Unrealized depreciation | (84,308,116 | ) | (49,491,046) | |||||
|
| |||||||
Net unrealized appreciation (depreciation) | $ | 469,276,378 | $ | 98,582,902 | ||||
|
| |||||||
Undistributed ordinary income | 28,039,837 | 7,977,538 | ||||||
Undistributed long term capital gains | 18,333,228 | — | ||||||
|
| |||||||
Distributable earnings | $ | 46,373,065 | $ | 7,977,538 | ||||
|
|
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of passive foreign investment company shares and wash sales.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2018, were as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Purchases | $ | 372,032,124 | $156,626,356 | |||||
Sales | $ | 489,837,416 | $276,632,476 |
At April 30, 2018, in connection with securities lending transactions, certain or all Funds loaned investments and received cash collateral as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Securities lending transactionsa: | ||||||||
Equity Investmentsb | $ | 31,355,415 | $5,473,225 | |||||
|
|
aThe agreements can be terminated at any time.
bThe gross amount of recognized liability for such transactions is included in payable upon return of securities loaned in the Statements of Assets and Liabilities.
7. Concentration of Risk
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
44 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
8. Restricted Securities
Certain or all Funds invest in securities that are restricted under the Securities Act of 1933 (1933 Act). 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, 2018, investments in restricted securities, excluding securities exempt from registration under the 1933 Act deemed to be liquid, were as follows:
Shares | Issuer | Acquisition Date | Cost | Value | ||||||||||
Franklin Biotechnology Discovery Fund |
| |||||||||||||
80,195 | Intarcia Therapeutics Inc., DD | 3/26/14 | $ | 2,597,516 | $ | 1,862,062 | ||||||||
187,982 | a Odonate Therapeutics Inc., Private Placement | 9/01/17 | 2,799,992 | 3,831,967 | ||||||||||
|
| |||||||||||||
Total Restricted Securities (Value is 0.4% of Net Assets) | $ | 5,397,508 | $ | 5,694,029 | ||||||||||
|
|
aThe Fund also invests in unrestricted securities of other investments in the issuer, valued at $4,563,820 as of April 30, 2018.
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. During the year ended April 30, 2018, investments in “affiliated companies” were as follows:
Name of Issuer | Number of Shares/ Warrants Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Shares/ Warrants Held at End of Year | Value at End of Year | Dividend Income | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||
Franklin Biotechnology Discovery Fund | ||||||||||||||||||||||||||||||||
Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
ARCA biopharma Inc. | 478,077 | — | (478,077 | ) | — | $ — | $ — | $ (2,674,699) | $1,655,827 | |||||||||||||||||||||||
ARCA biopharma Inc., wts., 6/16/22 | 1,338,619 | — | — | 1,338,619 | — | a | — | — | — | a | ||||||||||||||||||||||
Arcturus Therapeutics Ltd.b | 1,737,306 | — | (1,716,637 | )c | 20,669 | — | a | — | (7,989,125) | — | a | |||||||||||||||||||||
BioPharmX Corp. | 1,900,375 | 91,200 | — | 1,991,575 | — | a | — | — | — | a | ||||||||||||||||||||||
BioPharmX Corp., 144A | 1,945,737 | — | — | 1,945,737 | — | a | — | — | — | a | ||||||||||||||||||||||
BioPharmX Corp., wts., 3/29/21 | 108,000 | — | — | 108,000 | — | a | — | — | — | a | ||||||||||||||||||||||
BioPharmX Corp., wts., 11/22/23 | 1,259,925 | 419,975 | — | 1,679,900 | — | a | — | — | — | a | ||||||||||||||||||||||
Fate Therapeutics Inc. | 2,373,777 | — | (91,500 | ) | 2,282,277 | — | a | — | 399,517 | — | a | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Total Affiliated Securities (Value is 0.0% of Net Assets) |
| $ — | $ — | $(10,264,307) | $1,655,827 | |||||||||||||||||||||||||||
|
|
aAs of April 30, 2018, no longer an affiliate.
bEffective January 10, 2018, Alcobra Ltd. was merged into Arcturus Therapeutics Ltd.
cGross reduction was the result of a corporate action.
10. 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 $2 billion (Global Credit Facility) which matures on February 8, 2019. 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.
franklintempleton.com | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
10. Credit Facility (continued)
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 their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statements of Operations. During the year ended April 30, 2018, the Funds did not use the Global Credit Facility.
11. Fair Value Measurements
The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ financial instruments and are summarized in the following fair value hierarchy:
• | Level 1 – quoted prices in active markets for identical financial instruments |
• | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
• | Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments) |
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Funds have adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
A summary of inputs used as of April 30, 2018, in valuing the Funds’ assets carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Franklin Biotechnology Discovery Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Biotechnology. | $ | 1,043,277,631 | $ | — | c | $ | 1,877,026 | $ | 1,045,154,657 | |||||||
Pharmaceuticals | 170,702,077 | — | 3,976,061 | 174,678,138 | ||||||||||||
All Other Equity Investments | 61,354,797 | — | — | 61,354,797 | ||||||||||||
Escrows and Litigation Trusts | — | — | 1,411,906 | 1,411,906 | ||||||||||||
Short Term Investments | 80,026,544 | — | — | 80,026,544 | ||||||||||||
Total Investments in Securities | $ | 1,355,361,049 | $ | — | $ | 7,264,993 | $ | 1,362,626,042 | ||||||||
Franklin Natural Resources Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Oil & Gas Exploration & Production | $ | 152,595,020 | $ | 2,156,025 | $ | — | $ | 154,751,045 | ||||||||
All Other Equity Investments | 357,702,899 | — | — | 357,702,899 | ||||||||||||
Short Term Investments | 17,288,464 | — | — | 17,288,464 | ||||||||||||
Total Investments in Securities | $ | 527,586,383 | $ | 2,156,025 | $ | — | $ | 529,742,408 |
46 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
aFor detailed categories, see the accompanying Statement of Investments.
bIncludes common and convertible preferred stocks as well as other equity investments.
cIncludes securities determined to have no value at April 30, 2018.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the beginning and/or end of the year. At April 30, 2018, the reconciliation of assets is as follows:
Balance at Beginning of Year | Purchases | Sales | Transfer Into Level 3a | Transfer Out of Level 3b | Cost Basis Adjustmentsc | Net Realized Gain (Loss) | Net Unrealized Appreciation (Depreciation) | Balance at End of Year | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Year End | |||||||||||||||||||||||||||||||
Franklin Biotechnology Discovery Fund |
| |||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||||||
Equity Investments:d | ||||||||||||||||||||||||||||||||||||||||
Biotechnology | $ | 9,166,510 | $ | — | $ | (5,462,541 | ) | $ | — | $ | (8,041,464 | ) | $ | 2,799,999 | $ | 3,562,537 | $ | (148,015 | ) | $ | 1,877,026 | $ | (3,148,219 | ) | ||||||||||||||||
Pharmaceuticals | 7,765,403 | 2,799,992 | (3,580,618 | ) | — | — | (2,799,999 | ) | (2,591,988 | ) | 2,383,271 | 3,976,061 | 591,771 | |||||||||||||||||||||||||||
Escrows and Litigation Trusts | — | — | — | 1,308,937 | — | — | — | 102,969 | 1,411,906 | 102,969 | ||||||||||||||||||||||||||||||
Total Investments in Securities | $ | 16,931,913 | $ | 2,799,992 | $ | (9,043,159 | ) | $ | 1,308,937 | $ | (8,041,464 | ) | $ | — | $ | 970,549 | $ | 2,338,225 | $ | 7,264,993 | $ | (2,453,479 | ) | |||||||||||||||||
Receivables: | ||||||||||||||||||||||||||||||||||||||||
Investment Securities Sold | $ | 9,126,475 | $ | — | $ | — | $ | — | $ | (9,381,849 | ) | $ | — | $ | — | $ | 255,374 | $ | — | $ | — |
aThe investments were transferred into Level 3 as a result of the unavailability of other significant observable valuation inputs. May include amounts related to a corporate action.
bThe investments were transferred out of Level 3 as a result of the availability of other significant observable valuation inputs.
cMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.
dIncludes common and preferred stocks as well as other equity investments.
12. 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 Depositary Receipt | |||
CPO |
Certificate of Ordinary Participation (usually Mexico) |
franklintempleton.com | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Franklin Strategic Series and Shareholders of Franklin Biotechnology Discovery Fund and Franklin Natural Resources Fund
Opinions on the Financial Statements
We have audited the accompanying statements of assets and liabilities, including the statements of investments, of Franklin Biotechnology Discovery Fund and Franklin Natural Resources Fund (the “Funds”) as of April 30, 2018, the related statements of operations for the year ended April 30, 2018, the statements of changes in net assets for each of the two years in the period ended April 30, 2018, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Funds as of April 30, 2018, 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 ended April 30, 2018 and each of the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinions
These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of April 30, 2018 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2018
We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.
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FRANKLIN STRATEGIC SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), Franklin Biotechnology Discovery Fund hereby reports the maximum amount allowable but no less than the $22,973,647 as long term capital gain dividends for the fiscal year ended April 30, 2018.
Under Section 871(k)(2)(C) of the Code, Franklin Biotechnology Discovery Fund hereby reports the maximum amount allowable but no less than $9,966,331 as short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2018.
Under Section 854(b)(1)(A) of the Code, the Funds hereby report the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended April 30, 2018:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||
32.23% | 100.00% |
Under Section 854(b)(1)(B) of the Code, the Funds hereby report 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, 2018:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||
$3,212,704 | $13,076,619 |
Distributions, including qualified dividend income, paid during calendar year 2018 will be reported to shareholders on Form 1099-DIV by mid-February 2019. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
franklintempleton.com | Annual Report | 49 |
FRANKLIN STRATEGIC SERIES
Special Meeting of Shareholders
MEETING OF SHAREHOLDERS: OCTOBER 30, 2017 AND RECONVENED ON DECEMBER 15, 2017 AND DECEMBER 29, 2017
(UNAUDITED)
A Special Meeting of Shareholders of Franklin Strategic Series was held at the offices of Franklin Templeton Investments, One Franklin Parkway, San Mateo, California on October 30, 2017 and reconvened on December 15, 2017 and December 29, 2017. The purpose of the meeting was to elect Trustees of Franklin Strategic Series and to vote on the following proposals for each Fund: to approve the use of a “manager of managers” structure whereby the Fund’s investment manager would be able to hire and replace subadvisers without shareholder approval and to approve an amended fundamental investment restriction regarding investments in commodities. At the meeting, (i) the following persons were elected by the shareholders to serve as Trustees of Franklin Strategic Series: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, Gregory E. Johnson, Rupert H. Johnson, Jr., J. Michael Luttig, Larry D. Thompson, and John B. Wilson; and (ii) the proposals to use a “manager of managers” structure and to approve an amended fundamental investment restriction regarding investments in commodities were approved by shareholders of Franklin Biotechnology Discovery Fund. No other business was transacted at the meeting.
In connection with the meeting, management is aware that some shareholders received from the proxy solicitor numerous calls and mailings that may have been distracting. Management is taking steps to ensure that, in the future, for any new shareholder meeting solicitations that occur, such activity is not repeated. Management apologizes for any inconvenience that may have been caused as a result of such calls and mailings.
The results of the voting at the meeting are as follows:
Proposal 1. To elect a Board of Trustees:
Name | For | Withheld | ||||||
Harris J. Ashton | 598,070,781 | 20,352,982 | ||||||
Terrence J. Checki | 598,448,935 | 19,974,827 | ||||||
Mary C. Choksi | 598,960,351 | 19,463,411 | ||||||
Edith E. Holiday | 598,977,253 | 19,446,508 | ||||||
Gregory E. Johnson | 598,637,629 | 19,786,057 | ||||||
Rupert H. Johnson, Jr. | 598,128,852 | 20,294,908 | ||||||
J. Michael Luttig | 598,807,794 | 19,616,557 | ||||||
Larry D. Thompson | 598,633,435 | 19,785,269 | ||||||
John B. Wilson | 598,721,357 | 19,697,837 |
Total Trust Shares Outstanding*: 1,025,185,272
* As of the record date.
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FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
Proposal 2. | To approve the use of a “manager of managers” structure whereby the Fund’s investment manager would be able to hire and replace subadvisers without shareholder approval: |
Franklin Biotechnology Discovery Fund
Shares | ||||
For | 3,552,099 | |||
Against | 246,407 | |||
Abstain | 137,434 | |||
Broker Non-Votes | 1,355,044 | |||
Total Fund Shares Voted | 5,290,986 | |||
Total Fund Shares Outstanding* | 9,343,264 | |||
Franklin Natural Resources Fund | ||||
Shares | ||||
For | 7,986,111 | |||
Against | 574,269 | |||
Abstain | 324,142 | |||
Broker Non-Votes | 3,386,054 | |||
Total Fund Shares Voted | 12,270,575 | |||
Total Fund Shares Outstanding* | 21,488,313 |
Proposal 3. | To approve an amended fundamental investment restriction regarding investments in commodities: |
Franklin Biotechnology Discovery Fund
Shares | ||||
For | 3,554,351 | |||
Against | 198,469 | |||
Abstain | 183,123 | |||
Broker Non-Votes | 1,355,044 | |||
Total Fund Shares Voted | 5,290,986 | |||
Total Fund Shares Outstanding* | 9,343,264 | |||
Franklin Natural Resources Fund | ||||
Shares | ||||
For | 8,036,245 | |||
Against | 442,732 | |||
Abstain | 405,545 | |||
Broker Non-Votes | 3,386,054 | |||
Total Fund Shares Voted | 12,270,575 | |||
Total Fund Shares Outstanding* | 21,488,313 |
franklintempleton.com | Annual Report | 51 |
FRANKLIN STRATEGIC SERIES
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of US registered 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
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Harris J. Ashton (1932) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1991 | 137 | Bar-S Foods (meat packing company) (1981-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
| ||||||||
Terrence J. Checki (1945) | Trustee | Since December | 112 | Hess Corporation (exploration of oil | ||||
One Franklin Parkway San Mateo, CA 94403-1906 | 2017 | and gas) (2014-present). | ||||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Member of the Council on Foreign Relations (1996-present); Member of the National Committee on U.S.-China Relations (1999-present); member of the Board of Trustees of the Economic Club of New York (2013-present); member of the Board of Trustees of the Foreign Policy Association (2005-present) and member of various other boards of trustees and advisory boards; and formerly, Executive Vice President of the Federal Reserve Bank of New York and Head of its Emerging Markets and Internal Affairs Group and Member of Management Committee (1995-2014); and Visiting Fellow at the Council on Foreign Relations (2014).
| ||||||||
Mary C. Choksi (1950) | Trustee | Since 2014 | 137 | Avis Budget Group Inc. (car rental) | ||||
One Franklin Parkway San Mateo, CA 94403-1906 | (2007-present), Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (2017-present). | |||||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Founder and Senior Advisor, Strategic Investment Group (investment management group) (2015-2017); Founding Partner and Senior Managing Director, Strategic Investment Group (1987-2015); Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987).
| ||||||||
Edith E. Holiday (1952) | Trustee | Since 1998 | 137 | Hess Corporation (exploration of oil | ||||
One Franklin Parkway San Mateo, CA 94403-1906 | and gas) (1993-present), Canadian National Railway (railroad) (2001-present), White Mountains Insurance Group, Ltd. (holding company) (2004-present), Santander Consumer USA Holdings, Inc. (consumer finance) (2016-present), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). | |||||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison – United States Treasury Department (1988-1989).
| ||||||||
J. Michael Luttig (1954) | Trustee | Since 2009 | 137 | Boeing Capital Corporation (aircraft | ||||
One Franklin Parkway San Mateo, CA 94403-1906 | financing) (2006-2013). | |||||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).
|
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FRANKLIN STRATEGIC SERIES
Independent Board Members (continued)
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 137 | The Southern Company (energy company) (2014-present; previously 2010-2012), Graham Holdings Company (education and media organization) (2011-present) and Cbeyond, Inc. (business communications provider) (2010-2012). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; Counsel, Finch McCranie, LLP (law firm) (2015-present); Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of automobiles and commercial vehicles) (2017-present); John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; previously 2011-2012); and formerly, Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-2014); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
| ||||||||
John B. Wilson (1959) | Lead | Trustee since | 112 | None | ||||
One Franklin Parkway San Mateo, CA 94403-1906 | Independent Trustee | 2006 and Lead Independent Trustee since 2008 | ||||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing) (2002-present); Senior Advisor, McKinsey & Co. (consulting) (2017-present); serves on private and non-profit boards; and formerly, President, Staples International and Head of Global Transformation (office supplies) (2012-2016); Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (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 | ||||||||
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
**Gregory E. Johnson (1961) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2013 | 151 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).
| ||||||||
**Rupert H. Johnson, Jr. (1940) One Franklin Parkway San Mateo, CA 94403-1906 | Chairman of the Board and Trustee | Chairman of the Board since 2013 and Trustee since 1991 | 137 | None | ||||
Principal Occupation During at Least the 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 41 of the investment companies in Franklin Templeton Investments.
| ||||||||
Alison E. Baur (1964) | Vice President | Since 2012 | Not Applicable | Not Applicable | ||||
One Franklin Parkway San Mateo, CA 94403-1906 | ||||||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
|
franklintempleton.com | Annual Report | 53 |
FRANKLIN STRATEGIC SERIES
Interested Board Members and Officers (continued)
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 | Chief Financial Officer, Chief Accounting Officer and Treasurer | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments.
| ||||||||
Aliya S. Gordon (1973) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Matthew T. Hinkle (1971) One Franklin Parkway San Mateo, CA 94403-1906 | Chief Executive Officer – Finance and Administration | Since 2017 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton Investments (2009-2017).
| ||||||||
Edward B. Jamieson (1948) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive Officer – Investment Management | Since 2010 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and 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.
| ||||||||
Robert Lim (1948) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President – AML Compliance | Since 2016 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Christopher J. Molumphy (1962) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2000 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments.
|
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FRANKLIN STRATEGIC SERIES
Interested Board Members and Officers (continued)
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Kimberly H. Novotny (1972) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Robert C. Rosselot (1960) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Chief Compliance Officer | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).
| ||||||||
Karen L. Skidmore (1952) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President and Secretary | Since 2006 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Navid J. Tofigh (1972) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2015 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Craig S. Tyle (1960) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2005 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2011 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
|
franklintempleton.com | Annual Report | 55 |
FRANKLIN STRATEGIC SERIES
*We base the number of portfolios on each separate series of the US registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated 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/342-5236 to request the SAI.
56 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Board Approval of Investment Management Agreements
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Franklin Natural Resources Fund
(each a Fund)
At an in-person meeting held on April 17, 2018 (Meeting), the Board of Trustees (Board) of Franklin Strategic Series (Trust), including a majority of the trustees who are not “interested persons” as defined in the Investment Company Act of 1940 (Independent Trustees), reviewed and approved the continuance of the investment management agreement between Franklin Advisers, Inc. (Manager) and the Trust, on behalf of each Fund (each a Management Agreement) for an additional one-year period. The Independent Trustees received advice from and met separately with Independent Trustee counsel in considering whether to approve the continuation of each Management Agreement. Although the Management Agreements for the Funds were considered at the same Board meeting, the Board considered the information provided to it about the Funds together and with respect to each Fund separately as the Board deemed appropriate.
In considering the continuation of each Management Agreement, the Board reviewed and considered information provided by the Manager at the Meeting and throughout the year at meetings of the Board and its committees. The Board also reviewed and considered information provided in response to a detailed set of requests for information submitted to the Manager by Independent Trustee counsel on behalf of the Independent Trustees in connection with the annual contract renewal process. In addition, prior to the Meeting, the Independent Trustees held a telephonic contract renewal meeting at which the Independent Trustees conferred amongst themselves and Independent Trustee counsel about contract renewal matters. The Board reviewed and considered all of the factors it deemed relevant in approving the continuance of each Management Agreement, including, but not limited to: (i) the nature, extent and quality of the services provided by the Manager; (ii) the investment performance of each Fund; (iii) the costs of the services provided and profits realized by the Manager and its affiliates from the relationship with each Fund; (iv) the extent to which economies of scale are realized as each Fund grows; and (v) whether fee levels reflect these economies of scale for the benefit of Fund investors.
In approving the continuance of each Management Agreement, the Board, including a majority of the Independent Trustees,
determined that the terms of the Management Agreement are fair and reasonable and that the continuance of such Management Agreement is in the interests of the applicable Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s determination.
Nature, Extent and Quality of Services
The Board reviewed and considered information regarding the nature, extent and quality of investment management services provided by the Manager and its affiliates to the Funds and their shareholders. This information included, among other things, the qualifications, background and experience of the senior management and investment personnel of the Manager; the structure of investment personnel compensation; oversight of third-party service providers; investment performance reports and related financial information for each Fund; reports on expenses, shareholder services, marketing support payments made to financial intermediaries and third party servicing arrangements; legal and compliance matters; risk controls; pricing and other services provided by the Manager and its affiliates; and management fees charged by the Manager and its affiliates to U.S. funds and other accounts, including management’s explanation of differences among accounts where relevant. The Board also reviewed and considered an annual report on payments made by Franklin Templeton Investments (FTI) or the Funds to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a guidance update in 2016 from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees. The Board noted management’s continuing efforts and expenditures in establishing effective business continuity plans and developing strategies to address areas of heightened concern in the mutual fund industry, such as cybersecurity and liquidity risk management. The Board also recognized management’s commitment to facilitating Board oversight of particular areas, including derivatives and payments to intermediaries, by enhanced reporting.
The Board also reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the Franklin Templeton family of funds. The Board noted the financial position of Franklin Resources, Inc. (FRI), the Manager’s parent, and its commitment to the mutual fund business as evidenced by its continued introduction of new funds, reassessment of the fund offerings in response to the market environment and project initiatives and capital
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FRANKLIN STRATEGIC SERIES
SHAREHOLDER INFORMATION
investments relating to the services provided to the Funds by the FTI organization.
Following consideration of such information, the Board was satisfied with the nature, extent and quality of services provided by the Manager and its affiliates to the Funds and their shareholders.
Fund Performance
The Board reviewed and considered the performance results of each Fund over various time periods ended January 31, 2018. The Board considered the performance returns for each Fund in comparison to the performance returns of mutual funds deemed comparable to the Fund included in a universe (Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company data. The Board received a description of the methodology used by Broadridge to select the mutual funds included in a Performance Universe. The Board also reviewed and considered Fund performance reports provided and discussions that occurred with portfolio managers at Board meetings throughout the year. A summary of each Fund’s performance results is below.
Franklin Biotechnology Discovery Fund – The Performance Universe for this Fund included the Fund and all retail and institutional health/biotechnology funds. The Board noted that the Fund’s annualized total return for the one-, three- and five-year periods was below the median of its Performance Universe, but for the 10-year period was above the median of its Performance Universe. The Board concluded that the Fund’s performance was acceptable, noting its positive longer-term performance. In doing so, the Board noted management’s explanation that the Fund focuses on biotechnology, while the Performance Universe is comprised of mostly general healthcare funds. The Board further noted management’s explanation that the Fund underperformed its biotechnology-only peers due to individual stock selection in large cap stocks and in the areas of cancer and gene therapy. The Board also noted that the Fund’s annualized total return for the one- and five-year periods, while below the median, exceeded 19.2% and 17.9%, respectively. The Board further noted that the Fund opened to new investors on May 16, 2016.
Franklin Natural Resources Fund – The Performance Universe for this Fund included the Fund and all retail and institutional global natural resources funds. The Board noted that the Fund’s annualized total return for the one-, three- and five-year periods was below the median of its Performance Universe, but for the 10-year period was above the median of its Performance
Universe. The Board concluded that the Fund’s performance was acceptable, noting that the Fund’s 10-year performance fell within the second quintile of its Performance Universe. In doing so, the Board noted management’s explanation that the Fund’s relative performance was negatively impacted by its overweight positions in the weak-performing energy and oil field services sectors as compared to its peers. The Board further noted management’s explanation that management has sought to limit exposure to companies with significant levels of debt and to diversify Fund exposure by adding several non-energy positions while reducing several energy positions.
Comparative Fees and Expenses
The Board reviewed and considered information regarding each Fund’s actual total expense ratio and its various components, including, as applicable, management fees; transfer agent expenses; underlying fund expenses; Rule 12b-1 and non-Rule 12b-1 service fees; and other non-management fees. The Board also noted the quarterly and annual reports it receives on all marketing support payments made by FTI to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers (Management Rate), if any, of each Fund in comparison to the median expense ratio and median Management Rate, respectively, of other mutual funds deemed comparable to and with a similar expense structure as the Fund selected by Broadridge (Expense Group). Broadridge fee and 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 and Management Rates generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Broadridge to be an appropriate measure of comparative fees and expenses. The Broadridge Management Rate includes administrative charges, and the actual total expense ratio, for comparative consistency, was shown for Class A shares for funds with multiple classes of shares. The Board received a description of the methodology used by Broadridge to select the mutual funds included in an Expense Group.
The Expense Group for the Franklin Biotechnology Discovery Fund included the Fund and seven other health/biotechnology funds. The Expense Group for the Franklin Natural Resources Fund included the Fund and ten other global natural resources funds. The Board noted that the Management Rates and actual total expense ratios for these Funds were below the medians of
58 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
SHAREHOLDER INFORMATION
their respective Expense Groups. The Board concluded that the Management Rates charged to these Funds are reasonable.
Profitability
The Board reviewed and considered information regarding the profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board considered the Fund profitability analysis provided by the Manager that addresses the overall profitability of FTI’s U.S. fund business, as well as its profits in providing investment management and other services to each of the individual funds during the 12-month period ended September 30, 2017, being the most recent fiscal year-end for FRI. The Board noted that although management continually makes refinements to its methodologies used in calculating profitability in response to organizational and product-related changes, the overall methodology has remained consistent with that used in the Funds’ profitability report presentations from prior years. Additionally, PricewaterhouseCoopers LLP, auditor to Franklin Resources, Inc. and certain Franklin Templeton funds, has been engaged by the Manager to periodically review and assess the allocation methodologies to be used solely by the Funds’ Board with respect to the profitability analysis.
The Board noted management’s 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 noted management’s expenditures in improving shareholder services provided to the Funds, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from recent SEC and other regulatory requirements.
The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services, potential benefits resulting from personnel and systems enhancements necessitated by fund growth, as well as increased leverage with service providers and counterparties. Based upon its consideration of all these factors, the Board concluded 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, extent and quality of services provided to each Fund.
Economies of Scale
The Board reviewed and considered the extent to which the Manager may realize economies of scale, if any, as each Fund grows larger and whether the Fund’s management fee structure reflects any economies of scale for the benefit of shareholders. With respect to possible economies of scale, the Board noted the existence of management fee breakpoints, which operate generally to share any economies of scale with a Fund’s shareholders by reducing the Fund’s effective management fees as the Fund grows in size. The Board considered the Manager’s view that any analyses of potential economies of scale in managing a particular fund are inherently limited in light of the joint and common costs and investments the Manager incurs across the Franklin Templeton family of funds as a whole. The Board noted that each Fund had experienced a decrease in assets and would not be expected to demonstrate additional economies of scale in the near term.
Conclusion
Based on its review, consideration and evaluation of all factors it believed relevant, including the above-described factors and conclusions, the Board unanimously approved the continuation of each Management Agreement for an additional one-year period.
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, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the US 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 US 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.
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FRANKLIN STRATEGIC SERIES
SHAREHOLDER INFORMATION
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 each 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.
60 | Annual Report | franklintempleton.com |
Annual Report and Shareholder Letter Franklin Strategic Series
| ||
Investment Manager | ||
Franklin Advisers, Inc.
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Distributor | ||
Franklin Templeton Distributors, Inc. | ||
(800) DIAL BEN® / 342-5236 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 help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
© 2018 Franklin Templeton Investments. All rights reserved. | FSS2 A 06/18 |
Franklin Templeton Investments
Why choose Franklin Templeton Investments?
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
During the 12 months ended April 30, 2018, the global economy generally expanded amid improved commodity prices, generally upbeat economic data, passage of the US Tax Reform bill and encouraging corporate earnings. However, investor sentiment was dampened by Korean peninsula tensions, US and European political uncertainties, and a potentially quicker pace of central bank interest rate hikes due to strong economic growth and rising inflation.
Central bank policies were mixed, as the European Central Bank (ECB) and the Bank of Japan (BOJ) kept their benchmark interest rates unchanged, while the US Federal Reserve raised the target range for the federal funds rate in June and December 2017 and March 2018 amid a growing US economy. The BOJ continued its quantitative easing measures, but the ECB began to reduce its bond purchases in January 2018. In this environment, global government bonds, as measured by the Citigroup World Government Bond Index, recorded gains in US dollar and local currency terms.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a
well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Flexible Alpha Bond Fund’s annual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
Not FDIC Insured | May Lose Value | No Bank Guarantee |
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Franklin Flexible Alpha Bond Fund
This annual report for Franklin Flexible Alpha Bond Fund covers the fiscal year ended April 30, 2018.
Your Fund’s Goal and Main Investments
The Fund seeks to provide total return through a combination of current income and capital appreciation by investing at least 80% of its net assets in bonds and investments that provide exposure to bonds, including debt obligations of any credit quality, maturity or duration, all varieties of fixed income, variable rate and floating-rate debt securities and investments, money market instruments and derivatives. The Fund aims to provide attractive risk-adjusted total returns over a full market cycle. A full market cycle is a period of time that spans a full business and economic cycle, which may include periods of rising and declining interest rates.
What is duration?
|
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
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Performance Overview
For the 12 months under review, the Fund’s Class A shares delivered a +0.71% cumulative total return. In comparison, the LIBOR USD 3-Month Rate Index posted a +1.62% total return.1 The index tracks the interest rate at which banks offer to lend to one another in the wholesale money markets in London and is used to set the cost of various variable-rate loans. You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.
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.
Sector Exposure*
4/30/18
% of Total
| ||||
Collateralized Loan Obligations |
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19.3%
|
| |
Investment-Grade Corporate Securities |
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17.9%
|
| |
Residential Mortgage-Backed Securities | 17.0% | |||
International Bonds |
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8.9% |
| |
Covered Bonds |
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6.9% |
| |
Floating Rate Loans |
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5.5% |
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Commercial Mortgage-Backed Securities |
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4.7% |
| |
High Yield Corporate Securities |
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3.9% |
| |
Municipal Bonds |
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3.8% |
| |
Treasury Inflation-Protected Securities |
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2.8% |
| |
Other |
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2.0% |
| |
Asset-Backed Securities |
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0.1% |
| |
Agency Mortgage-Backed Securities |
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0.0% |
** | |
Interest-Rate Derivatives |
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-34.4% |
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Cash & Cash Equivalents |
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20.2% |
|
*Sector Exposure is intended to estimate the portfolio’s exposure to various sectors, including any hedged or increased exposure through certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. Interest-Rate Derivatives sector consists of Treasury, interest rate and other derivatives that are primarily used for duration management; a negative number indicates that the Fund is seeking to hedge interest rate risk.
**Rounds to less than 0.1%.
Economic and Market Overview
The US economy grew during the 12 months under review. The economy strengthened in 2017’s second and third quarters but moderated in the next two quarters. The slower growth in 2018’s first quarter reflected a slowdown in consumer spending, residential fixed investment, exports, and state and local government spending. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 4.4% in April 2017 to 3.9% at period-end.2 Annual inflation, as measured by the Consumer Price Index, increased from 2.2% in April 2017 to 2.5% at period-end.2
1. Source: Bloomberg LP.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
2. Source: Bureau of Labor Statistics.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI begins on page 16.
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FRANKLIN FLEXIBLE ALPHA BOND FUND
Dividend Distributions*
5/1/17–4/30/18
Dividend per Share (cents) | ||||||||||||||||||||
Month | Class A | Class C | Class R | Class R6 | Advisor Class | |||||||||||||||
May | 1.3706 | 0.8901 | 1.1328 | 1.4030 | 1.3903 | |||||||||||||||
June | 1.2890 | 0.9290 | 1.1133 | 1.3020 | 1.3024 | |||||||||||||||
July | 0.6152 | 0.4054 | — | 0.6660 | 0.6657 | |||||||||||||||
August | 1.4611 | 1.0107 | 0.6373 | 1.4940 | 1.4897 | |||||||||||||||
September | 0.9137 | 0.4742 | 0.6020 | 0.9467 | 0.9376 | |||||||||||||||
October | 1.0382 | 0.6053 | 0.5725 | 1.0740 | 1.0657 | |||||||||||||||
November | 1.1431 | 0.7413 | 0.9477 | 1.0602 | 1.1164 | |||||||||||||||
December** | 2.3465 | 1.8703 | 2.0437 | 2.3750 | 2.3687 | |||||||||||||||
January | 1.8877 | 1.3534 | 1.5393 | 1.9166 | 1.9110 | |||||||||||||||
February | 1.5681 | 0.9955 | 1.1711 | 1.8101 | 1.7699 | |||||||||||||||
March | 1.1076 | 0.7317 | 0.8125 | 1.5886 | 1.5230 | |||||||||||||||
April | 1.2587 | 1.8253 | 1.8108 | 1.9951 | 1.6833 | |||||||||||||||
Total | 15.9995 | 11.8322 | 12.3830 | 17.6313 | 17.2237 |
*The distribution amount is the sum of all net investment income distributions for the period shown. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.
**Includes an additional 0.71 cent per share distribution to meet excise tax requirements.
The US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June and December 2017 meetings and began reducing its balance sheet in October as part of its ongoing effort to normalize monetary policy. In February 2018, new Fed Chair Jerome Powell spoke before Congress and indicated the Fed saw signs of a continued strong labor market and economic growth. He reiterated the Fed’s intention to gradually raise interest rates in an effort to keep the economy from overheating and as inflation increases toward the Fed’s target. However, he noted there was no evidence of the economy overheating and he had yet to see a clear upward move in wages. At its March meeting, the Fed raised its target range for the federal funds rate 0.25% to 1.50%–1.75% and maintained its forecast of three rate increases in 2018. Additionally, the Fed upgraded its economic forecasts for 2018 and 2019, and its rate projections indicated the number of rate hikes would increase in 2019 and 2020.
The 10-year Treasury yield, which moves inversely to its price, shifted throughout the period. The yield rose in June 2017 amid renewed optimism for faster economic growth and was supported in July by hawkish comments from key central bankers around the world. Easing concerns about Hurricane Irma’s economic impact, the Fed’s balance sheet normalization beginning in October, the passage of the tax reform bill in December and indications of higher inflation, especially in the first two months of 2018, also pushed the yield higher.
However, some factors weighed on the Treasury yield at certain points during the period, including concerns about political uncertainties in the US, tensions between the US and North Korea, the Trump administration’s protectionist trade policies and escalating trade tensions between the US and China. In April, higher inflation expectations led the 10-year yield to reach 3.03%, the highest level since January 2014. Overall, the 10-year Treasury yield rose from 2.29% at the beginning of the period to 2.95% at period-end.
Currency Composition*
4/30/18
% of Total Net Assets | ||||
North America | 99.8% | |||
US Dollar | 99.6% | |||
Mexican Peso | 0.6% | |||
Canadian Dollar | -0.4% | |||
Asia | 0.8% | |||
Indian Rupee | 0.4% | |||
Indonesian Rupiah | 0.3% | |||
Malaysian Ringgit | 0.2% | |||
Philippine Peso | -0.1% | |||
Europe | -0.4% | |||
Swedish Krona | 0.4% | |||
Norwegian Krone | 0.3% | |||
Polish Zloty | 0.2% | |||
British Pound | -0.1% | |||
Euro | -1.2% | |||
Australia and New Zealand | -0.4% | |||
Australian Dollar | | -0.4% | |
*Currency Composition is intended to estimate the portfolio’s exposure to various currencies, including any hedged or increased exposure through certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.
Investment Strategy
The Fund seeks to generate returns from various sources, other than solely from interest rates, by allocating its portfolio across various risks (such as credit, currency and duration risks). In employing this strategy, the Fund has the flexibility to invest across all debt asset classes without regard to country, sector, quality, maturity or duration and without reference to a benchmark index.
4 | Annual Report | franklintempleton.com |
FRANKLIN FLEXIBLE ALPHA BOND FUND
The Fund may engage in active and frequent trading as part of its investment strategies and, at any given time, may have a substantial amount of its assets invested in any class of debt securities, including, but not limited to: US government and agency securities; foreign government and supranational debt securities; corporate bonds; corporate loans (and loan participations); collateralized debt and loan obligations; preferred securities; various types of mortgage-backed securities and other asset-backed securities; municipal securities; and derivatives and other instruments with similar economic characteristics, or that provide exposure, to such debt securities.
Manager’s Discussion
Over the 12-month period, the Fund posted a positive total return. The Fund’s spread-sector exposure was the primary contributor to performance, driven primarily by the Fund’s exposure to investment-grade corporate bonds, floating-rate corporate loans (including collateralized loan obligations), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) as well as the Fund’s exposure to municipal bonds and sovereign bonds. The Fund’s yield curve and duration positioning also contributed to positive alpha (excess return), driven primarily by duration exposure in the US. In contrast, the Fund’s foreign currency exposure detracted from returns, influenced primarily by short Canadian dollar, Australian dollar and euro exposures. Additionally, the Fund’s basis-trade positions (taking opposing long and short positions in two securities to profit from the convergence of their values) also detracted.
What is the yield curve? |
A yield curve is a line that plots the yield to maturity of bonds having equal credit quality against their maturity dates.
|
At period-end, we continued to invest in a broad set of global fixed income sectors, with a goal of achieving more consistent positive alpha with a risk-diversified portfolio. Additionally, we maintained the Fund’s risk profile at a conservative level. We remained overweighted in the investment-grade corporate bond sector as well as securitized sectors including RMBS and CMBS. We continued to find what we considered value in credit-hedged corporate positions as well. We sought to hedge all of the high-yield corporate beta (or risk) in the Fund, although we retained exposure to select corporate loans and collateralized loan obligations. We also retained positions in Treasury inflation-protected securities (TIPS) as well as covered bonds. Overall, portfolio duration remained relatively neutral toward US interest-rate and non-US duration positions.
The portfolio maintained an overweighting to the US dollar versus a basket of developed market and commodity related currencies for most of the period. During the first quarter of 2018, we took a negative stance toward the US dollar and other developed and emerging market currencies. Overall currency allocation did not represent a significant portion of the Fund’s risk allocation.
The Fund utilized derivatives, including credit default and currency swaps, currency forwards, Treasury futures, interest rate swaps, total return swaps and inflation index swaps, principally as a tool for efficient portfolio management and to manage overall portfolio risk. These derivative transactions may provide the same, or similar, net long or short exposure to select currencies, interest rates, countries, duration or credit risks in a less expensive way than by directly purchasing securities. In those markets where portfolio securities are readily available, the cost difference in normal market conditions may be small. Overall, the portfolio continued to meet its risk-adjusted return target and remained in the lower end of our targeted risk range. Much of the Fund’s derivatives positioning was to seek to hedge various risks in the portfolio and achieve the goal of a stable return profile.
What are swap agreements? |
Swap agreements, such as interest-rate, currency and credit default swaps, are contracts between the Fund and another party (the swap counterparty). In a basic swap transaction, the Fund agrees with the swap counterparty to exchange the returns (or differentials in rates of return) earned or realized on a particular “notional amount” of underlying instruments. The notional amount is the set amount selected by the parties as the basis on which to calculate the obligations that they have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead, they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments or at given interest rates.
|
What is a currency forward contract? |
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date. Currency forward contracts are privately traded in the interbank market, not on a centralized exchange.
|
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FRANKLIN FLEXIBLE ALPHA BOND FUND
What is a futures contract? |
A futures contract is an agreement between the Fund and a counterparty made through a US or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
|
Thank you for your participation in Franklin Flexible Alpha Bond Fund. We look forward to serving your future investment needs.
| ||
David Yuen, CFA, FRM | ||
| ||
Michael J. Materasso | ||
Portfolio Management Team |
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
CFA® is a trademark owned by CFA Institute.
6 | Annual Report | franklintempleton.com |
FRANKLIN FLEXIBLE ALPHA BOND FUND
Performance Summary as of April 30, 2018
The performance tables and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 4.25% and the minimum is 0%. Class A: 4.25% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class
| Cumulative Total Return2
| Average Annual Total Return3
| ||
A
| ||||
1-Year
| +0.71%4 | -3.59% | ||
Since Inception (8/3/15) | +2.59% | -0.64% | ||
Advisor
| ||||
1-Year | +1.14% | +1.14% | ||
Since Inception (8/3/15) | +2.97% | +1.07% |
Distribution | 30-Day Standardized Yield6 | |||||||||||
Share Class
| Rate5 | (with waiver) | (without waiver) | |||||||||
A
| 1.50 | % | 2.07 | % | 1.96 | % | ||||||
Advisor
| 1.99 | % | 2.21 | % | 2.09 | % |
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.
See page 9 for Performance Summary footnotes.
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FRANKLIN FLEXIBLE ALPHA BOND FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 9 for Performance Summary footnotes.
8 | Annual Report | franklintempleton.com |
FRANKLIN FLEXIBLE ALPHA BOND FUND
PERFORMANCE SUMMARY
Distributions (5/1/17–4/30/18)
Share Class
| Net Investment
| Long-Term
| Total
| |||||||||
A | $0.159995 | $0.009700 | $0.169695 | |||||||||
C | $0.118322 | $0.009700 | $0.128022 | |||||||||
R | $0.123830 | $0.009700 | $0.133530 | |||||||||
R6 | $0.176313 | $0.009700 | $0.186013 | |||||||||
Advisor | $0.172237 | $0.009700 | $0.181937 |
Total Annual Operating Expenses8
Share Class | With Waiver | Without Waiver | ||||||
A | 0.93% | 3.30 | % | |||||
Advisor | 0.89% | 3.26 | % |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Interest rate movements and mortgage prepayments will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. The risks associated with higher yielding, lower rated securities (commonly called junk bonds) include higher risk of default and loss of principal. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio, which may result in significant volatility and cause the Fund to participate in losses (as well as enable gains) in an amount that exceeds the Fund’s initial investment. The Fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as intended. Investments in foreign securities involve risks such as currency fluctuations, and political and economic uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has an expense reduction and a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the expense reduction and fee waiver; without these reductions, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. Total return information is based on net asset values calculated for shareholder transactions. Certain adjustments were made to the net assets of the Fund at 4/30/18 for financial reporting purposes, and as a result, the total returns based on those net asset values differ from the adjusted total returns reported in the Financial Highlights.
5. Distribution rate is based on an annualization of the sum of the respective class’s past 30 days’ daily distributions and the maximum offering price (NAV for Advisor Class) per share on 4/30/18.
6. The Fund’s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal the Fund’s actual income distribution rate, which reflects the Fund’s past dividends paid to shareholders.
7. Source: Bloomberg LP. The LIBOR USD 3-Month Rate Index tracks the interest rate at which banks offer to lend to one another in the wholesale money markets in London and is used to set the cost of various variable-rate loans.
8. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
See www.franklintempletondatasources.com for additional data provider information.
franklintempleton.com | Annual Report | 9 |
FRANKLIN FLEXIBLE ALPHA BOND FUND
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Net Annualized Ratio2 | ||||||||||||
A | $1,000 | $1,002.30 | $3.77 | $1,021.03 | $3.81 | 0.76% | ||||||||||||
C | $1,000 | $1,002.50 | $6.85 | $1,017.95 | $6.90 | 1.38% | ||||||||||||
R | $1,000 | $1,003.40 | $5.76 | $1,019.04 | $5.81 | 1.16% | ||||||||||||
R6 | $1,000 | $1,005.80 | $3.43 | $1,021.37 | $3.46 | 0.69% | ||||||||||||
Advisor | $1,000 | $1,006.50 | $3.63 | $1,021.17 | $3.66 | 0.73% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
10 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Franklin Flexible Alpha Bond Fund
Year Ended April 30, | ||||||||||||
2018 |
2017 |
2016a | ||||||||||
Class A | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the year) | ||||||||||||
Net asset value, beginning of year | $ 9.86 | $ 9.88 | $ 10.00 | |||||||||
Income from investment operationsb: | ||||||||||||
Net investment income | 0.166 | c | 0.180 | 0.099 | ||||||||
Net realized and unrealized gains (losses) | (0.066 | ) | 0.017 | (0.123 | ) | |||||||
Total from investment operations. | 0.100 | 0.197 | (0.024 | ) | ||||||||
Less distributions from: | ||||||||||||
Net investment income | (0.160 | ) | (0.217 | ) | (0.096 | ) | ||||||
Net realized gains | (0.010 | ) | — | — | ||||||||
Total distributions | (0.170 | ) | (0.217 | ) | (0.096 | ) | ||||||
Net asset value, end of year | $ 9.79 | $ 9.86 | $ 9.88 | |||||||||
Total returnd | 1.02% | 2.22% | (0.34)% | |||||||||
Ratios to average net assetse | ||||||||||||
Expenses before waiver and payments by affiliates | 0.97% | 3.17% | 3.47% | |||||||||
Expenses net of waiver and payments by affiliatesf | 0.79% | 0.67% | 0.84% | |||||||||
Net investment income. | 1.80% | 1.83% | 1.37% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of year (000’s) | $1,132 | $10,443 | $10,200 | |||||||||
Portfolio turnover rate | 48.04% | 90.37% | 40.12% | |||||||||
Portfolio turnover rate excluding mortgage dollar rollsg | 19.40% | 57.79% | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
eRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
fBenefit of expense reduction rounds to less than 0.01%.
gSee Note 1(f) regarding mortgage dollar rolls.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | | Annual Report | 11 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
Year Ended April 30, | ||||||||||||
2018 | 2017 | 2016a | ||||||||||
Class C | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the year) | ||||||||||||
Net asset value, beginning of year | $ 9.80 | $ 9.86 | $ 10.00 | |||||||||
Income from investment operationsb: | ||||||||||||
Net investment income | 0.120 | 0.130 | 0.072 | |||||||||
Net realized and unrealized gains (losses) | (0.062 | ) | (0.006 | ) | (0.131 | ) | ||||||
Total from investment operations | 0.058 | 0.124 | (0.059 | ) | ||||||||
Less distributions from: | ||||||||||||
Net investment income | (0.118 | ) | (0.184 | ) | (0.081 | ) | ||||||
Net realized gains | (0.010 | ) | — | — | ||||||||
Total distributions | (0.128 | ) | (0.184 | ) | (0.081 | ) | ||||||
Net asset value, end of year | $ 9.73 | $ 9.80 | $ 9.86 | |||||||||
Total returnc | 0.49% | 1.47% | (0.69)% | |||||||||
Ratios to average net assetsd | ||||||||||||
Expenses before waiver and payments by affiliates | 1.58% | 3.88% | 3.98% | |||||||||
Expenses net of waiver and payments by affiliatese | 1.40% | 1.38% | 1.34% | |||||||||
Net investment income | 1.19% | 1.12% | 0.87% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of year (000’s) | $279 | $245 | $204 | |||||||||
Portfolio turnover rate | 48.04% | 90.37% | 40.12% | |||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 19.40% | 57.79% | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
dRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(f) regarding mortgage dollar rolls.
12 | | Annual Report | | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
Year Ended April 30, | ||||||||||||
2018 | 2017 | 2016a | ||||||||||
Class R | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the year) | ||||||||||||
Net asset value, beginning of year | $ 9.86 | $ 9.86 | $ 10.00 | |||||||||
Income from investment operationsb: | ||||||||||||
Net investment income | 0.112 | 0.112 | 0.072 | |||||||||
Net realized and unrealized gains (losses) | (0.058 | ) | 0.095 | (0.127 | ) | |||||||
Total from investment operations | 0.054 | 0.207 | (0.055 | ) | ||||||||
Less distributions from: | ||||||||||||
Net investment income | (0.124 | ) | (0.207 | ) | (0.085 | ) | ||||||
Net realized gains | (0.010 | ) | — | — | ||||||||
Total distributions | (0.134 | ) | (0.207 | ) | (0.085 | ) | ||||||
Net asset value, end of year | $ 9.78 | $ 9.86 | $ 9.86 | |||||||||
Total returnc | 0.54% | 2.21% | (0.65)% | |||||||||
Ratios to average net assetsd | ||||||||||||
Expenses before waiver and payments by affiliates | 1.47% | 3.36% | 3.84% | |||||||||
Expenses net of waiver and payments by affiliatese | 1.29% | 0.86% | 1.22% | |||||||||
Net investment income | 1.30% | 1.64% | 0.99% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of year (000’s) | $51 | $60 | $10 | |||||||||
Portfolio turnover rate | 48.04% | 90.37% | 40.12% | |||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 19.40% | 57.79% | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(f) regarding mortgage dollar rolls.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | | Annual Report | 13 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
Year Ended April 30, | ||||||||||||
2018 | 2017 | 2016a | ||||||||||
Class R6 | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the year) | ||||||||||||
Net asset value, beginning of year | $ 9.86 | $ 9.88 | $ 10.00 | |||||||||
Income from investment operationsb: | ||||||||||||
Net investment income | 0.204 | 0.177 | 0.108 | |||||||||
Net realized and unrealized gains (losses) | (0.088 | ) | 0.022 | (0.124 | ) | |||||||
Total from investment operations | 0.116 | 0.199 | (0.016 | ) | ||||||||
Less distributions from: | ||||||||||||
Net investment income | (0.176 | ) | (0.219 | ) | (0.104 | ) | ||||||
Net realized gains | (0.010 | ) | — | — | ||||||||
Total distributions | (0.186 | ) | (0.219 | ) | (0.104 | ) | ||||||
Net asset value, end of year | $ 9.79 | $ 9.86 | $ 9.88 | |||||||||
Total returnc | 1.18% | 2.03% | (0.15)% | |||||||||
Ratios to average net assetsd | ||||||||||||
Expenses before waiver and payments by affiliates | 0.86% | 5.23% | 3.72% | |||||||||
Expenses net of waiver and payments by affiliatese | 0.71% | 0.71% | 0.71% | |||||||||
Net investment income | 1.88% | 1.79% | 1.50% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of year (000’s) | $210,808 | $10 | $10 | |||||||||
Portfolio turnover rate | 48.04% | 90.37% | 40.12% | |||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 19.40% | 57.79% | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(f) regarding mortgage dollar rolls.
14 | Annual Report | | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Flexible Alpha Bond Fund (continued)
Year Ended April 30,
| ||||||||||||
2018 | 2017 | 2016a | ||||||||||
Advisor Class | ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the year) | ||||||||||||
Net asset value, beginning of year | $ 9.85 | $ 9.88 | $ 10.00 | |||||||||
Income from investment operationsb: | ||||||||||||
Net investment income | 0.194 | 0.166 | 0.107 | |||||||||
Net realized and unrealized gains (losses) | (0.072) | 0.023 | (0.129) | |||||||||
Total from investment operations. | 0.122 | 0.189 | (0.022) | |||||||||
Less distributions from: | ||||||||||||
Net investment income | (0.172 | ) | (0.219 | ) | (0.098 | ) | ||||||
Net realized gains | (0.010 | ) | — | — | ||||||||
Total distributions | (0.182 | ) | (0.219 | ) | (0.098 | ) | ||||||
Net asset value, end of year | $ 9.79 | $ 9.85 | $ 9.88 | |||||||||
Total returnc | 1.14% | 2.13% | (0.31)% | |||||||||
Ratios to average net assetsd | ||||||||||||
Expenses before waiver and payments by affiliates | 0.93% | 3.22% | 3.34% | |||||||||
Expenses net of waiver and payments by affiliatese | 0.75% | 0.72% | 0.71% | |||||||||
Net investment income. | �� | 1.84% | 1.78% | 1.50% | ||||||||
Supplemental data | ||||||||||||
Net assets, end of year (000’s) | $425 | $232 | $344 | |||||||||
Portfolio turnover rate | 48.04% | 90.37% | 40.12% | |||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 19.40% | 57.79% | 30.05% |
aFor the period August 3, 2015 (commencement of operations) to April 30, 2016.
bThe 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’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cTotal return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year, except for non-recurring expenses, if any.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(f) regarding mortgage dollar rolls.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | | Annual Report | 15 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2018
Franklin Flexible Alpha Bond Fund
Country | Shares | Value | ||||||||||||||||
| ||||||||||||||||||
Management Investment Companies (Cost $4,549,803) 2.1% |
| |||||||||||||||||
Diversified Financials 2.1% |
| |||||||||||||||||
PowerShares Senior Loan Portfolio ETF | United States | 196,765 | $ | 4,547,239 | ||||||||||||||
|
| |||||||||||||||||
Principal | ||||||||||||||||||
Amount* | ||||||||||||||||||
Corporate Bonds 32.0% |
| |||||||||||||||||
Automobiles & Components 0.3% |
| |||||||||||||||||
Delphi Corp., senior bond, 4.15%, 3/15/24 | United States | 700,000 | 710,248 | |||||||||||||||
|
| |||||||||||||||||
Banks 12.1% |
| |||||||||||||||||
a | Banca Monte dei Paschi di Siena SpA, secured note, Reg S, 2.125%, 11/26/63 | Italy | 1,600,000 | EUR | 2,051,751 | |||||||||||||
a | Banca Popolare di Milano Scarl, | |||||||||||||||||
secured note, Reg S, 0.875%, 9/14/22 | Italy | 900,000 | EUR | 1,103,219 | ||||||||||||||
secured note, Reg S, 0.625%, 6/08/23 | Italy | 1,100,000 | EUR | 1,324,204 | ||||||||||||||
a | Banco BPM SpA, secured note, Reg S, 0.75%, 3/31/22 | Italy | 1,700,000 | EUR | 2,078,426 | |||||||||||||
a | Banco Comercial Portugues SA, secured note, Reg S, 0.75%, 5/31/22 | Portugal | 900,000 | EUR | 1,102,985 | |||||||||||||
Bank of America Corp., | ||||||||||||||||||
senior bond, 5.50%, 12/04/19 | United States | 75,000 | GBP | 110,013 | ||||||||||||||
senior note, 3.50%, 4/19/26 | United States | 1,100,000 | 1,062,277 | |||||||||||||||
senior note, 3.55% to 3/05/23, FRN thereafter, 3/05/24 | United States | 1,100,000 | 1,092,274 | |||||||||||||||
Bank of Nova Scotia, secured note, 1.875%, 4/26/21 | Canada | 100,000 | 96,475 | |||||||||||||||
Caixa Geral de Depositos SA, | ||||||||||||||||||
secured note, 3.00%, 1/15/19 | Portugal | 2,000,000 | EUR | 2,470,295 | ||||||||||||||
a secured note, Reg S, 1.00%, 1/27/22 | Portugal | 100,000 | EUR | 123,635 | ||||||||||||||
Citigroup Inc., senior note, 2.65%, 10/26/20 | United States | 1,050,000 | 1,036,090 | |||||||||||||||
senior note, 3.40%, 5/01/26 | United States | 1,100,000 | 1,041,622 | |||||||||||||||
HSBC Holdings PLC, | ||||||||||||||||||
senior note, 4.30%, 3/08/26 | United Kingdom | 1,100,000 | 1,116,335 | |||||||||||||||
senior note, 3.262% to 3/13/22, FRN thereafter, 3/13/23 | United Kingdom | 1,100,000 | 1,082,884 | |||||||||||||||
b | ICICI Bank Ltd./Dubai, senior note, 144A, 3.80%, 12/14/27 | India | 500,000 | 464,417 | ||||||||||||||
Industrial & Commercial Bank of China Ltd., senior note, 2.452%, 10/20/21 | China | 1,100,000 | 1,058,618 | |||||||||||||||
JPMorgan Chase & Co., | ||||||||||||||||||
senior bond, 3.30%, 4/01/26 | United States | 1,100,000 | 1,046,462 | |||||||||||||||
senior note, 2.40%, 6/07/21 | United States | 400,000 | 389,728 | |||||||||||||||
b | Kookmin Bank, secured note, 144A, 2.25%, 2/03/21 | South Korea | 600,000 | 580,641 | ||||||||||||||
PHH Corp., senior note, 7.375%, 9/01/19 | United States | 200,000 | 207,500 | |||||||||||||||
Royal Bank of Canada, secured note, 2.10%, 10/14/20 | Canada | 100,000 | 97,841 | |||||||||||||||
b | Standard Chartered PLC, senior note, 144A, 3.885% to 3/15/23, FRN thereafter, 3/15/24 | United Kingdom | 1,000,000 | 987,895 | ||||||||||||||
b | The Toronto-Dominion Bank, secured note, 144A, 2.25%, 3/15/21 | Canada | 200,000 | 195,279 | ||||||||||||||
a | Turkiye Vakiflar Bankasi TAO, secured note, Reg S, 2.375%, 5/04/21 | Turkey | 2,800,000 | EUR | 3,437,326 | |||||||||||||
Wells Fargo & Co., senior note, 3.00%, 4/22/26 | United States | 500,000 | 461,782 | |||||||||||||||
|
| |||||||||||||||||
25,819,974 | ||||||||||||||||||
|
| |||||||||||||||||
Capital Goods 0.2% |
| |||||||||||||||||
Aircastle Ltd., senior note, 4.125%, 5/01/24 | United States | 350,000 | 343,875 | |||||||||||||||
|
| |||||||||||||||||
Consumer Durables & Apparel 0.1% |
| |||||||||||||||||
KB Home, senior note, 8.00%, 3/15/20 | United States | 100,000 | 107,750 | |||||||||||||||
|
| |||||||||||||||||
Consumer Services 0.2% |
| |||||||||||||||||
b | Wynn Macau Ltd., senior note, 144A, 4.875%, 10/01/24 | Macau | 525,000 | 515,813 | ||||||||||||||
|
|
16 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||||||
| ||||||||||||||||||||||
Corporate Bonds (continued) |
| |||||||||||||||||||||
Diversified Financials 2.4% |
| |||||||||||||||||||||
Capital One Financial Corp., | ||||||||||||||||||||||
senior note, 3.05%, 3/09/22 | United States | 1,000,000 | $ | 978,697 | ||||||||||||||||||
senior note, 3.20%, 2/05/25 | United States | 1,100,000 | 1,039,374 | |||||||||||||||||||
c | Deutsche Bank AG, senior note, FRN, 3.195%, (3-month USD LIBOR + 1.31%), 8/20/20 | Germany | 100,000 | 100,886 | ||||||||||||||||||
b | Dexia Credit Local SA, senior note, 144A, 2.375%, 9/20/22 | France | 250,000 | 241,915 | ||||||||||||||||||
The Goldman Sachs Group Inc., | ||||||||||||||||||||||
senior note, 3.75%, 5/22/25 | United States | 600,000 | 586,574 | |||||||||||||||||||
c senior note, FRN, 3.325%, (3-month USD LIBOR + 1.20%), 9/15/20 | United States | 500,000 | 509,417 | |||||||||||||||||||
Morgan Stanley, senior note, 3.70%, 10/23/24 | United States | 1,100,000 | 1,084,489 | |||||||||||||||||||
Navient Corp., senior bond, 8.00%, 3/25/20 | United States | 400,000 | 427,000 | |||||||||||||||||||
Springleaf Finance Corp., senior note, 6.00%, 6/01/20 | United States | 60,000 | 62,550 | |||||||||||||||||||
|
| |||||||||||||||||||||
5,030,902 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Energy 3.1% |
| |||||||||||||||||||||
Anadarko Petroleum Corp., senior bond, 3.45%, 7/15/24 | United States | 650,000 | 626,222 | |||||||||||||||||||
CNOOC Finance 2015 USA LLC, senior note, 3.50%, 5/05/25 | China | 1,200,000 | 1,151,364 | |||||||||||||||||||
b | CNPC General Capital Ltd., senior note, 144A, 3.40%, 4/16/23 | China | 1,100,000 | 1,078,638 | ||||||||||||||||||
Energy Transfer Equity LP, senior note, first lien, 7.50%, 10/15/20 | United States | 750,000 | 805,313 | |||||||||||||||||||
Energy Transfer Partners LP, senior bond, 6.50%, 2/01/42 | United States | 50,000 | 52,971 | |||||||||||||||||||
Enterprise Products Operating LLC, senior note, 3.35%, 3/15/23 | United States | 600,000 | 594,144 | |||||||||||||||||||
Kinder Morgan Energy Partners LP, senior bond, 6.50%, 9/01/39 | United States | 50,000 | 55,802 | |||||||||||||||||||
Oceaneering International Inc., senior note, 4.65%, 11/15/24 | United States | 50,000 | 47,978 | |||||||||||||||||||
Sabine Pass Liquefaction LLC, senior secured note, first lien, 5.625%, 4/15/23 | United States | 1,050,000 | 1,119,840 | |||||||||||||||||||
b | Sinopec Group Overseas Development 2015 Ltd., senior note, 144A, 2.50%, 4/28/20 | China | 1,000,000 | 983,780 | ||||||||||||||||||
|
| |||||||||||||||||||||
6,516,052 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Food & Staples Retailing 0.5% |
| |||||||||||||||||||||
Safeway Inc., senior bond, 5.00%, 8/15/19 | United States | 1,000,000 | 1,010,000 | |||||||||||||||||||
|
| |||||||||||||||||||||
Food, Beverage & Tobacco 1.2% |
| |||||||||||||||||||||
Anheuser-Busch Inbev Finance Inc., senior bond, 3.65%, 2/01/26 | Belgium | 700,000 | 684,562 | |||||||||||||||||||
Bunge Ltd. Finance Corp., senior note, 3.25%, 8/15/26 | United States | 50,000 | 45,896 | |||||||||||||||||||
b | Imperial Brands Finance PLC, senior note, 144A, 4.25%, 7/21/25 | United Kingdom | 1,000,000 | 1,001,550 | ||||||||||||||||||
Kraft Heinz Foods Co., senior note, 3.50%, 7/15/22 | United States | 750,000 | 744,514 | |||||||||||||||||||
Reynolds American Inc., senior note, 4.45%, 6/12/25 | United Kingdom | 100,000 | 101,357 | |||||||||||||||||||
|
| |||||||||||||||||||||
2,577,879 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Health Care Equipment & Services 1.1% |
| |||||||||||||||||||||
Anthem Inc., senior note, 2.95%, 12/01/22. | United States | 500,000 | 485,004 | |||||||||||||||||||
c | Becton Dickinson and Co., senior note, FRN, 2.944%, (3-month USD LIBOR + 0.875%), 12/29/20. | United States | 600,000 | 601,552 | ||||||||||||||||||
CVS Health Corp., senior note, 3.70%, 3/09/23 | United States | 800,000 | 797,803 | |||||||||||||||||||
HCA Inc., senior secured bond, first lien, 5.875%, 3/15/22 | United States | 350,000 | 369,687 | |||||||||||||||||||
Tenet Healthcare Corp., senior note, 5.50%, 3/01/19. | United States | 90,000 | 91,688 | |||||||||||||||||||
b | Universal Health Services Inc., senior secured note, first lien, 144A, 3.75%, 8/01/19 | United States | 50,000 | 50,313 | ||||||||||||||||||
|
| |||||||||||||||||||||
2,396,047 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Household & Personal Products 0.0%† |
| |||||||||||||||||||||
Avon Products Inc., senior note, 6.50%, 3/01/19 | United Kingdom | 50,000 | 51,250 | |||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 17 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||||||
| ||||||||||||||||||||||
Corporate Bonds (continued) |
| |||||||||||||||||||||
Insurance 0.9% |
| |||||||||||||||||||||
b | Athene Global Funding, secured note, 144A, 3.00%, 7/01/22 | United States | 1,850,000 | $ | 1,787,865 | |||||||||||||||||
b | Jackson National Life Global Funding, | |||||||||||||||||||||
secured note, 144A, 2.25%, 4/29/21 | United States | 50,000 | 48,670 | |||||||||||||||||||
secured note, 144A, 2.10%, 10/25/21 | United States | 25,000 | 24,020 | |||||||||||||||||||
|
| |||||||||||||||||||||
1,860,555 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Materials 0.8% |
| |||||||||||||||||||||
Freeport-McMoRan Inc., senior note, 4.00%, 11/14/21 | United States | 315,000 | 315,000 | |||||||||||||||||||
b | Glencore Funding LLC, senior note, 144A, 3.00%, 10/27/22 | Switzerland | 300,000 | 287,160 | ||||||||||||||||||
LYB International Finance BV, senior note, 4.00%, 7/15/23 | United States | 800,000 | 806,632 | |||||||||||||||||||
b | Sealed Air Corp., senior bond, 144A, 5.25%, 4/01/23 | United States | 350,000 | 360,500 | ||||||||||||||||||
|
| |||||||||||||||||||||
1,769,292 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Media 0.3% |
| |||||||||||||||||||||
Time Warner Inc., senior bond, 3.40%, 6/15/22 | United States | 700,000 | 695,704 | |||||||||||||||||||
|
| |||||||||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 1.1% |
| |||||||||||||||||||||
Allergan Funding SCS, senior bond, 3.80%, 3/15/25 | United States | 700,000 | 671,980 | |||||||||||||||||||
Amgen Inc., | ||||||||||||||||||||||
senior note, 2.60%, 8/19/26 | United States | 200,000 | 180,480 | |||||||||||||||||||
senior note, 3.20%, 11/02/27 | United States | 550,000 | 514,600 | |||||||||||||||||||
Baxalta Inc., | ||||||||||||||||||||||
senior note, 2.875%, 6/23/20 | United States | 600,000 | 594,078 | |||||||||||||||||||
senior note, 3.60%, 6/23/22 | United States | 100,000 | 98,967 | |||||||||||||||||||
Celgene Corp., | ||||||||||||||||||||||
senior bond, 3.875%, 8/15/25 | United States | 200,000 | 196,185 | |||||||||||||||||||
senior bond, 3.45%, 11/15/27 | United States | 200,000 | 187,385 | |||||||||||||||||||
|
| |||||||||||||||||||||
2,443,675 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Real Estate 1.0% |
| |||||||||||||||||||||
American Homes 4 Rent LP, senior bond, 4.25%, 2/15/28 | United States | 400,000 | 384,881 | |||||||||||||||||||
American Tower Corp., senior bond, 3.50%, 1/31/23 | United States | 1,100,000 | 1,085,907 | |||||||||||||||||||
Crown Castle International Corp., senior note, 3.15%, 7/15/23 | United States | 500,000 | 481,826 | |||||||||||||||||||
Prologis LP, senior note, 4.25%, 8/15/23 | United States | 200,000 | 206,137 | |||||||||||||||||||
|
| |||||||||||||||||||||
2,158,751 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Retailing 0.3% |
| |||||||||||||||||||||
b | Amazon.com Inc., senior note, 144A, 2.40%, 2/22/23 | United States | 300,000 | 287,456 | ||||||||||||||||||
b | PetSmart Inc., senior note, 144A, 7.125%, 3/15/23 | United States | 550,000 | 323,125 | ||||||||||||||||||
|
| |||||||||||||||||||||
610,581 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Semiconductors & Semiconductor Equipment 0.1% |
| |||||||||||||||||||||
Maxim Integrated Products Inc., senior note, 3.45%, 6/15/27 | United States | 300,000 | 288,031 | |||||||||||||||||||
|
| |||||||||||||||||||||
Software & Services 0.8% |
| |||||||||||||||||||||
Alibaba Group Holding Ltd., senior note, 2.80%, 6/06/23 | China | 400,000 | 384,406 | |||||||||||||||||||
Fiserv Inc., senior bond, 3.85%, 6/01/25 | United States | 400,000 | 399,485 | |||||||||||||||||||
b | Tencent Holdings Ltd., senior note, 144A, 2.985%, 1/19/23 | China | 1,000,000 | 967,910 | ||||||||||||||||||
|
| |||||||||||||||||||||
1,751,801 | ||||||||||||||||||||||
|
| |||||||||||||||||||||
Technology Hardware & Equipment 0.1% |
| |||||||||||||||||||||
b | Sanmina Corp., senior note, first lien, 144A, 4.375%, 6/01/19 | United States | 100,000 | 101,250 | ||||||||||||||||||
Tech Data Corp., senior bond, 4.95%, 2/15/27 | United States | 50,000 | 48,893 | |||||||||||||||||||
|
| |||||||||||||||||||||
150,143 | ||||||||||||||||||||||
|
|
18 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) |
| |||||||||||||||||
Telecommunication Services 1.2% |
| |||||||||||||||||
b | Sprint Spectrum Co. LLC, first lien, senior secured note, 144A, 5.152%, 9/20/29 . | United States | 1,100,000 | $ | 1,116,500 | |||||||||||||
Telefonica Emisiones S.A.U., senior note, 4.103%, 3/08/27 | Spain | 700,000 | 692,261 | |||||||||||||||
Verizon Communications Inc., senior note, 2.45%, 11/01/22 | United States | 750,000 | 717,987 | |||||||||||||||
|
| |||||||||||||||||
2,526,748 | ||||||||||||||||||
|
| |||||||||||||||||
Transportation 1.2% |
| |||||||||||||||||
b | Air Canada 2017-1AA PTT, secured bond, 144A, 3.30%, 7/15/31 | Canada | 100,000 | 95,039 | ||||||||||||||
b | American Airlines Group Inc., senior note, 144A, 5.50%, 10/01/19 | United States | 530,000 | 541,925 | ||||||||||||||
American Airlines Pass Through Trust, first lien, 2016-2, AA, 3.20%, 6/15/28 | United States | 521,400 | 498,099 | |||||||||||||||
FedEx Corp., senior bond, 3.20%, 2/01/25 | United States | 750,000 | 724,370 | |||||||||||||||
Transurban Finance Co. Pty. Ltd., senior secured bond, 144A, 3.375%, 3/22/27 | Australia | 400,000 | 371,610 | |||||||||||||||
United Airlines 2018-1 Pass Through Trust, first lien, AA, 3.50%, 9/01/31 | United States | 250,000 | 243,831 | |||||||||||||||
|
| |||||||||||||||||
2,474,874 | ||||||||||||||||||
|
| |||||||||||||||||
Utilities 3.0% |
| |||||||||||||||||
Calpine Corp., senior note, 5.375%, 1/15/23 | United States | 35,000 | 33,688 | |||||||||||||||
b | Colbun SA, senior note, 144A, 3.95%, 10/11/27 | Chile | 200,000 | 190,570 | ||||||||||||||
Dominion Energy Inc., | ||||||||||||||||||
senior bond, 3.90%, 10/01/25 | United States | 50,000 | 49,496 | |||||||||||||||
senior bond, 2.85%, 8/15/26 | United States | 1,100,000 | 1,004,575 | |||||||||||||||
b,d | EDF SA, junior sub. bond, 144A, 5.625% to 1/22/24, FRN thereafter, Perpetual | France | 1,200,000 | 1,203,990 | ||||||||||||||
b | Israel Electric Corp. Ltd., secured bond, 144A, 4.25%, 8/14/28 | Israel | 200,000 | 191,760 | ||||||||||||||
The Southern Co., senior bond, 3.25%, 7/01/26 | United States | 1,050,000 | 987,312 | |||||||||||||||
b | State Grid Overseas Investments 2016 Ltd., senior note, 144A, 3.50%, 5/04/27 | China | 1,100,000 | 1,047,073 | ||||||||||||||
b | Three Gorges Finance I Cayman Islands Ltd., senior note, 144A, 3.70%, 6/10/25 | China | 1,600,000 | 1,571,400 | ||||||||||||||
|
| |||||||||||||||||
6,279,864 | ||||||||||||||||||
|
| |||||||||||||||||
Total Corporate Bonds (Cost $69,545,133) | 68,089,809 | |||||||||||||||||
|
| |||||||||||||||||
Foreign Government and Agency Securities 2.1% | ||||||||||||||||||
b | The Export-Import Bank of China, | |||||||||||||||||
senior note, 144A, 2.50%, 7/31/19 | China | 200,000 | 198,709 | |||||||||||||||
senior note, 144A, 3.625%, 7/31/24 | China | 900,000 | 886,145 | |||||||||||||||
b | The Export-Import Bank of India, senior note, 144A, 3.875%, 2/01/28 | India | 1,000,000 | 952,655 | ||||||||||||||
The Export-Import Bank of Korea, senior note, 2.875%, 1/21/25 | South Korea | 1,100,000 | 1,032,735 | |||||||||||||||
Government of Indonesia, senior bond, FR70, 8.375%, 3/15/24 | Indonesia | 263,000,000 | IDR | 20,429 | ||||||||||||||
Government of Malaysia, senior bond, 3.955%, 9/15/25 | Malaysia | 1,700,000 | MYR | 427,872 | ||||||||||||||
b,e | Harvest Operations Corp., senior note, 144A, 4.20%, 6/01/23 | South Korea | 300,000 | 303,129 | ||||||||||||||
The Korea Development Bank, senior note, 3.375%, 3/12/23 | South Korea | 600,000 | 590,403 | |||||||||||||||
|
| |||||||||||||||||
Total Foreign Government and Agency Securities (Cost $4,503,989) | 4,412,077 | |||||||||||||||||
|
| |||||||||||||||||
U.S. Government and Agency Securities 1.9% | ||||||||||||||||||
f | U.S. Treasury Note, | |||||||||||||||||
Index Linked, 0.25%, 1/15/25. | United States | 1,408,453 | 1,365,692 | |||||||||||||||
Index Linked, 0.125%, 7/15/26 | United States | 2,908,077 | 2,774,747 | |||||||||||||||
|
| |||||||||||||||||
Total U.S. Government and Agency Securities (Cost $4,190,116) | 4,140,439 | |||||||||||||||||
|
|
franklintempleton.com | Annual Report | 19 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities 41.0% | ||||||||||||||||||
Banks 0.1% | ||||||||||||||||||
g | Impac Secured Assets Corp., 2004-4, M1, FRN, 2.662%, (1-month USD LIBOR + 0.765%), 2/25/35 | United States | 37,905 | $ | 38,007 | |||||||||||||
|
| |||||||||||||||||
Diversified Financials 40.5% | ||||||||||||||||||
b,g | AMMC CLO 21 Ltd., 2017-21A, C, 144A, FRN, 3.878%, (3-month USD LIBOR + 2.10%), 11/02/30 | United States | 400,000 | 400,456 | ||||||||||||||
b,e,h | Antares CLO Ltd., 2018-1A, B, 144A, FRN, (3-month USD LIBOR + 1.65%), 4/20/31 | United States | 600,000 | 600,000 | ||||||||||||||
b,g | Atrium X, 10A, CR, 144A, FRN, 4.298%, (3-month USD LIBOR + 1.95%), 7/16/25 | United States | 60,000 | 60,085 | ||||||||||||||
b,g | Atrium XIII, | |||||||||||||||||
2013A, B, 144A, FRN, 3.862%, (3-month USD LIBOR + 1.50%), 11/21/30 | United States | 2,000,000 | 2,006,640 | |||||||||||||||
2013A, C, 144A, FRN, 4.162%, (3-month USD LIBOR + 1.80%), 11/21/30 | United States | 600,000 | 599,988 | |||||||||||||||
b | BAMLL Commercial Mortgage Securities Trust, | |||||||||||||||||
2012-PARK, A, 144A, 2.959%, 12/10/30 | United States | 100,000 | 98,455 | |||||||||||||||
2015-200P, A, 144A, 3.218%, 4/14/33 | United States | 600,000 | 586,426 | |||||||||||||||
Banc of America Commercial Mortgage Trust, 2015-UBS7, A4, 3.705%, 9/15/48 . | United States | 100,000 | 100,423 | |||||||||||||||
b,g | Bellemeade Re 2018-1 Ltd., 2018-1A, M1B, 144A, FRN, 3.477%, (1-month USD LIBOR + 1.60%), 4/25/28 | Bermuda | 500,000 | 500,000 | ||||||||||||||
b,g | Birchwood Park CLO Ltd., 2014-1A, AR, 144A, FRN, 3.528%, (3-month USD LIBOR + 1.18%), 7/15/26 | United States | 500,000 | 500,530 | ||||||||||||||
b,g | BlueMountain Fuji U.S. CLO I Ltd., 2017-1A, C, 144A, FRN, 4.709%, (3-month USD LIBOR + 2.35%), 7/20/29 | United States | 60,000 | 60,364 | ||||||||||||||
b,g | BlueMountain Fuji U.S. CLO II Ltd., 2017-2A, A1A, 144A, FRN, 3.559%, (3-month USD LIBOR + 1.20%), 10/20/30 | United States | 250,000 | 251,500 | ||||||||||||||
b,g | BlueMountain Fuji U.S. CLO III Ltd., 2017-3A, C, 144A, FRN, 3.427%, (3-month USD LIBOR + 1.70%), 1/15/30 | United States | 1,000,000 | 995,140 | ||||||||||||||
g | Capital One Multi-Asset Execution Trust, 2004-B3, B3, FRN, 2.627%, (1-month USD LIBOR + 0.73%), 1/18/22 | United States | 150,000 | 150,592 | ||||||||||||||
b,g | Carlyle Global Market Strategies CLO Ltd., 2014-3A, A1AR, 144A, FRN, 3.516%, (3-month USD LIBOR + 1.15%), 7/27/26 | United States | 150,000 | 150,138 | ||||||||||||||
b,g | Carlyle U.S. CLO Ltd., | |||||||||||||||||
2017-2A, B, 144A, FRN, 4.759%, (3-month USD LIBOR + 2.40%), 7/20/31 | United States | 60,000 | 60,407 | |||||||||||||||
2017-4A, B, 144A, FRN, 4.198%, (3-month USD LIBOR + 1.85%), 1/15/30 | United States | 600,000 | 599,610 | |||||||||||||||
2017-4A, C, 144A, FRN, 5.148%, (3-month USD LIBOR + 2.80%), 1/15/30 | United States | 400,000 | 400,028 | |||||||||||||||
b,g | Cent CLO Ltd., 2013-17A, A1, 144A, FRN, 3.067%, (3-month USD LIBOR + 1.30%), 1/30/25 | United States | 18,086 | 18,112 | ||||||||||||||
b,i | CGRBS Commercial Mortgage Trust, 2013-VN05, C, 144A, FRN, 3.703%, 3/13/35 | United States | 450,000 | 442,279 | ||||||||||||||
b,i | COMM 2014-277P Mortgage Trust, 2014-277P, A, 144A, FRN, 3.732%, 8/10/49 | United States | 900,000 | 905,187 | ||||||||||||||
COMM Mortgage Trust, | ||||||||||||||||||
i,j 2014-UBS4, XA, IO, FRN, 1.364%, 8/10/47 | United States | 334,786 | 16,363 | |||||||||||||||
b 2015-3BP, A, 144A, 3.178%, 2/10/35 | United States | 600,000 | 585,295 | |||||||||||||||
i | Conseco Finance Securitizations Corp., 2002-2, M1, FRN, 7.424%, 3/01/33 | United States | 73,202 | 80,272 | ||||||||||||||
b | Core Industrial Trust, 2015-CALW, A, 144A, 3.04%, 2/10/34 | United States | 30,000 | 29,796 | ||||||||||||||
b,g | Dryden 34 Senior Loan Fund, 2014-34A, AR, 144A, FRN, 3.508%, (3-month USD LIBOR + 1.16%), 10/15/26 | United States | 516,706 | 516,706 | ||||||||||||||
b,g | Dryden 49 Senior Loan Fund, 2017-49A, C, 144A, FRN, 4.705%, (3-month USD LIBOR + 2.35%), 7/18/30 | United States | 60,000 | 60,323 |
20 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||||
b,g | Dryden 53 CLO Ltd., | |||||||||||||||||
2017-53A, B, 144A, FRN, 3.748%, (3-month USD LIBOR + 1.40%), 1/15/31. | United States | 1,000,000 | $ | 992,070 | ||||||||||||||
2017-53A, C, 144A, FRN, 4.048%, (3-month USD LIBOR + 1.70%), 1/15/31 | United States | 1,000,000 | 996,610 | |||||||||||||||
b,e,h | Dryden 64 CLO Ltd., | |||||||||||||||||
2018-64A, A, 144A, FRN, (3-month USD LIBOR + 0.97%), 4/18/31 | United States | 3,000,000 | 3,000,000 | |||||||||||||||
2018-64A, C, 144A, FRN, (3-month USD LIBOR + 1.75%), 4/18/31 | United States | 750,000 | 750,000 | |||||||||||||||
b,g | Eaton Vance CDO Ltd., 2014-1A, AR, 144A, FRN, 3.548%, (3-month USD LIBOR + 1.20%), 7/15/26 | United States | 24,000 | 23,963 | ||||||||||||||
b,i | Eleven Madison Trust Mortgage Trust, 2015-11MD, A, 144A, FRN, 3.673%, 9/10/35 | United States | 505,000 | 503,961 | ||||||||||||||
g | FHLMC Structured Agency Credit Risk Debt Notes, | |||||||||||||||||
2014-DN1, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 2/25/24 | United States | 499,036 | 513,572 | |||||||||||||||
2014-DN3, M3, FRN, 5.897%, (1-month USD LIBOR + 4.00%), 8/25/24 | United States | 219,618 | 240,767 | |||||||||||||||
2014-DN4, M3, FRN, 6.447%, (1-month USD LIBOR + 4.55%), 10/25/24 | United States | 207,780 | 231,781 | |||||||||||||||
2014-HQ2, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 9/25/24 | United States | 521,468 | 538,268 | |||||||||||||||
2014-HQ2, M3, FRN, 5.647%, (1-month USD LIBOR + 3.75%), 9/25/24 | United States | 1,500,000 | 1,729,093 | |||||||||||||||
2014-HQ3, M3, FRN, 6.647%, (1-month USD LIBOR + 4.75%), 10/25/24 | United States | 304,627 | 339,907 | |||||||||||||||
2015-DN1, M3, FRN, 6.047%, (1-month USD LIBOR + 4.15%), 1/25/25 | United States | 776,915 | 837,746 | |||||||||||||||
2015-DNA1, M2, FRN, 3.747%, (1-month USD LIBOR + 1.85%), 10/25/27 | United States | 250,000 | 255,145 | |||||||||||||||
2015-DNA1, M3, FRN, 5.197%, (1-month USD LIBOR + 3.30%), 10/25/27 | United States | 600,000 | 668,885 | |||||||||||||||
2015-DNA2, M2, FRN, 4.497%, (1-month USD LIBOR + 2.60%), 12/25/27 | United States | 171,350 | 175,189 | |||||||||||||||
2015-DNA2, M3, FRN, 5.797%, (1-month USD LIBOR + 3.90%), 12/25/27 | United States | 850,000 | 944,952 | |||||||||||||||
2015-DNA3, M2, FRN, 4.747%, (1-month USD LIBOR + 2.85%), 4/25/28 | United States | 531,083 | 551,032 | |||||||||||||||
2015-DNA3, M3, FRN, 6.597%, (1-month USD LIBOR + 4.70%), 4/25/28 | United States | 1,500,000 | 1,801,762 | |||||||||||||||
2015-HQ1, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 3/25/25 | United States | 283,885 | 285,838 | |||||||||||||||
2015-HQ1, M3, FRN, 5.697%, (1-month USD LIBOR + 3.80%), 3/25/25 | United States | 550,000 | 592,398 | |||||||||||||||
2015-HQ2, M3, FRN, 5.147%, (1-month USD LIBOR + 3.25%), 5/25/25 | United States | 1,500,000 | 1,700,876 | |||||||||||||||
2015-HQA2, M2, FRN, 4.697%, (1-month USD LIBOR + 2.80%), 5/25/28 | United States | 353,020 | 363,184 | |||||||||||||||
2016-DNA1, M3, FRN, 7.422%, (1-month USD LIBOR + 5.55%), 7/25/28 | United States | 550,000 | 665,258 | |||||||||||||||
2016-DNA2, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 10/25/28 | United States | 477,429 | 483,558 | |||||||||||||||
2016-DNA3, M2, FRN, 3.897%, (1-month USD LIBOR + 2.00%), 12/25/28 | United States | 396,000 | 402,837 | |||||||||||||||
2016-HQA2, M2, FRN, 4.147%, (1-month USD LIBOR + 2.25%), 11/25/28 | United States | 579,232 | 593,186 | |||||||||||||||
2016-HQA3, M1, FRN, 2.697%, (1-month USD LIBOR + 0.80%), 3/25/29 | United States | 270,126 | 270,664 | |||||||||||||||
2016-HQA3, M2, FRN, 3.247%, (1-month USD LIBOR + 1.35%), 3/25/29 | United States | 350,000 | 355,086 | |||||||||||||||
2016-HQA4, M2, FRN, 3.197%, (1-month USD LIBOR + 1.30%), 4/25/29 | United States | 700,000 | 710,888 | |||||||||||||||
g | FNMA Connecticut Avenue Securities, | |||||||||||||||||
2013-C01, M1, FRN, 3.897%, (1-month USD LIBOR + 2.00%), 10/25/23 | United States | 14,330 | 14,412 | |||||||||||||||
2013-C01, M2, FRN, 7.147%, (1-month USD LIBOR + 5.25%), 10/25/23 | United States | 1,500,000 | 1,739,941 | |||||||||||||||
2014-C02, 1M2, FRN, 4.497%, (1-month USD LIBOR + 2.60%), 5/25/24 | United States | 1,820,000 | 1,935,868 | |||||||||||||||
2014-C02, 2M2, FRN, 4.497%, (1-month USD LIBOR + 2.60%), 5/25/24 | United States | 1,440,933 | 1,522,142 | |||||||||||||||
2014-C03, 1M2, FRN, 4.897%, (1-month USD LIBOR + 3.00%), 7/25/24 | United States | 1,397,462 | 1,495,137 | |||||||||||||||
2014-C03, 2M2, FRN, 4.797%, (1-month USD LIBOR + 2.90%), 7/25/24 | United States | 1,439,268 | 1,534,049 | |||||||||||||||
2014-C04, 1M1, FRN, 6.797%, (1-month USD LIBOR + 4.90%), 11/25/24 | United States | 774,862 | 888,439 | |||||||||||||||
2014-C04, 2M2, FRN, 6.897%, (1-month USD LIBOR + 5.00%), 11/25/24 | United States | 563,066 | 632,571 | |||||||||||||||
2015-C01, 1M2, FRN, 6.197%, (1-month USD LIBOR + 4.30%), 2/25/25 | United States | 35,866 | 39,669 | |||||||||||||||
2015-C01, 2M2, FRN, 6.447%, (1-month USD LIBOR + 4.55%), 2/25/25 | United States | 152,023 | 165,310 | |||||||||||||||
2015-C02, 1M2, FRN, 5.897%, (1-month USD LIBOR + 4.00%), 5/25/25 | United States | 516,052 | 566,910 | |||||||||||||||
2015-C02, 2M2, FRN, 5.897%, (1-month USD LIBOR + 4.00%), 5/25/25 | United States | 166,399 | 179,624 | |||||||||||||||
2015-C03, 1M2, FRN, 6.897%, (1-month USD LIBOR + 5.00%), 7/25/25 | United States | 1,011,697 | 1,154,997 | |||||||||||||||
2015-C03, 2M2, FRN, 6.897%, (1-month USD LIBOR + 5.00%), 7/25/25 | United States | 836,785 | 933,150 | |||||||||||||||
2017-C01, 1B1, FRN, 7.647%, (1-month USD LIBOR + 5.75%), 7/25/29 | United States | 33,000 | 38,840 |
franklintempleton.com | Annual Report | 21 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||||
b | FREMF Mortgage Trust, 2018-K72, B, 144A, 3.992%, 12/25/50 | United States | 450,000 | $ | 436,438 | |||||||||||||
b | Galaxy XXVII CLO Ltd., | |||||||||||||||||
g 2018-27A, A, 144A, FRN, 3.383%, (3-month USD LIBOR + 1.02%), 5/16/31 | United States | 2,500,000 | 2,501,403 | |||||||||||||||
2018-27A, C, 144A, 4.163%, 5/16/31 | United States | 1,450,000 | 1,451,631 | |||||||||||||||
g 2018-27A, C, 144A, FRN, 5.113%, (3-month USD LIBOR + 2.75%), 5/16/31 | United States | 300,000 | 295,193 | |||||||||||||||
b,g | Gilbert Park CLO Ltd., | |||||||||||||||||
2017-1A, B, 144A, FRN, 3.948%, (3-month USD LIBOR + 1.60%), 10/15/30 | United States | 3,000,000 | 3,015,000 | |||||||||||||||
2017-1A, D, 144A, FRN, 5.298%, (3-month USD LIBOR + 2.95%), 10/15/30 | United States | 400,000 | 402,404 | |||||||||||||||
GS Mortgage Securities Trust, | ||||||||||||||||||
2016-GS3, A4, 2.85%, 10/10/49 | United States | 600,000 | 565,010 | |||||||||||||||
2017-GS5, A4, 3.674%, 3/10/50 | United States | 600,000 | 599,690 | |||||||||||||||
b,g | Invitation Homes Trust, | |||||||||||||||||
2017-SFR2, A, 144A, FRN, 2.746%, (1-month USD LIBOR + 0.85%), 12/17/36 | United States | 1,134,792 | 1,138,707 | |||||||||||||||
2015-SFR1, A, 144A, FRN, 3.346%, (1-month USD LIBOR + 1.45%), 3/17/32 | United States | 688,249 | 690,662 | |||||||||||||||
2015-SFR2, A, 144A, FRN, 3.246%, (1-month USD LIBOR + 1.35%), 6/17/32 | United States | 483,030 | 484,415 | |||||||||||||||
2015-SFR3, A, 144A, FRN, 3.196%, (1-month USD LIBOR + 1.30%), 8/17/32 | United States | 658,046 | 660,040 | |||||||||||||||
2015-SFR3, D, 144A, FRN, 4.646%, (1-month USD LIBOR + 2.75%), 8/17/32 | United States | 100,000 | 100,458 | |||||||||||||||
b,i | J.P. Morgan Chase Commercial Mortgage Securities, 2016-Nine, A, 144A, FRN, 2.949%, 10/06/38 | United States | 600,000 | 563,804 | ||||||||||||||
JPMBB Commercial Mortgage Securities Trust, | ||||||||||||||||||
i 2015-C30, AS, FRN, 4.226%, 7/15/48 | United States | 450,000 | 460,419 | |||||||||||||||
2016-C1, A5, 3.576%, 3/15/49 | United States | 1,500,000 | 1,492,555 | |||||||||||||||
JPMCC Commercial Mortgage Securities Trust, 2017-JP6, A5, 3.49%, 7/15/50 | United States | 600,000 | 590,530 | |||||||||||||||
i,j | JPMDB Commercial Mortgage Securities Trust, 2017-C5, XA, IO, FRN, 1.175%, 3/15/50 | United States | 198,961 | 13,161 | ||||||||||||||
b,g | LCM 26 Ltd., 26A, C, 144A, FRN, 3.726%, (3-month USD LIBOR + 1.80%), 1/20/31 | United States | 400,000 | 397,460 | ||||||||||||||
b,g | Long Point Park CLO Ltd., | |||||||||||||||||
2017-1A, A2, 144A, FRN, 3.061%, (3-month USD LIBOR + 1.375%), 1/17/30 | United States | 1,000,000 | 998,930 | |||||||||||||||
2017-1A, B, 144A, FRN, 3.386%, (3-month USD LIBOR + 1.70%), 1/17/30 | United States | 1,000,000 | 1,000,920 | |||||||||||||||
b,i | Mill City Mortgage Loan Trust, 2018-1, A1, 144A, FRN, 3.25%, 5/25/62 | United States | 540,000 | 541,350 | ||||||||||||||
b | Morgan Stanley Capital I Trust, 2014-150E, A, 144A, 3.912%, 9/09/32 | United States | 450,000 | 454,904 | ||||||||||||||
b,g | Neuberger Berman CLO Ltd., 2017-26A, B, 144A, FRN, 3.855%, (3-month USD LIBOR + 1.50%), 10/18/30 | United States | 539,475 | 541,164 | ||||||||||||||
b,g | Octagon Investment Partners 18-R Ltd., 2018-18A, C, 144A, FRN, 5.055%, (3-month USD LIBOR + 2.70%), 4/16/31 | United States | 350,000 | 350,007 | ||||||||||||||
b,g | Octagon Investment Partners 33 Ltd., | |||||||||||||||||
2017-1A, A2, 144A, FRN, 3.859%, (3-month USD LIBOR + 1.50%), 1/20/31 | United States | 2,000,000 | 2,007,720 | |||||||||||||||
2017-1A, B, 144A, FRN, 4.209%, (3-month USD LIBOR + 1.85%), 1/20/31 | United States | 500,000 | 498,170 | |||||||||||||||
2017-1A, C, 144A, FRN, 5.109%, (3-month USD LIBOR + 2.75%), 1/20/31 | United States | 250,000 | 249,300 |
22 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||||
b,g | Octagon Investment Partners XX Ltd., 2014-1A, AR, 144A, FRN, 2.941%, (3-month USD LIBOR + 1.13%), 8/12/26 | United States | 500,000 | $ | 500,550 | |||||||||||||
b,g | Octagon Investment Partners XXIII Ltd., | |||||||||||||||||
2015-1A, BR, 144A, FRN, 3.461%, (3-month USD LIBOR + 1.20%), 7/15/27 | United States | 1,200,000 | 1,200,120 | |||||||||||||||
2015-1A, CR, 144A, FRN, 4.111%, (3-month USD LIBOR + 1.85%), 7/15/27 | United States | 2,000,000 | 2,000,220 | |||||||||||||||
2015-1A, DR, 144A, FRN, 4.811%, (3-month USD LIBOR + 2.55%), 7/15/27 | United States | 300,000 | 300,039 | |||||||||||||||
b,g | Radnor RE Ltd., 2018-1, M1, 144A, FRN, 3.297%, (1-month USD LIBOR + 1.40%), 3/25/28 | United States | 630,000 | 631,553 | ||||||||||||||
b,g | TCI-Flatiron CLO Ltd., | |||||||||||||||||
2017-1A, B, 144A, FRN, 3.187%, (3-month USD LIBOR + 1.56%), 11/17/30 | United States | 2,000,000 | 2,000,100 | |||||||||||||||
2017-1A, C, 144A, FRN, 3.477%, (3-month USD LIBOR + 1.85%), 11/17/30 | United States | 1,200,000 | 1,205,316 | |||||||||||||||
2017-1A, D, 144A, FRN, 4.377%, (3-month USD LIBOR + 2.75%), 11/17/30 | United States | 250,000 | 250,850 | |||||||||||||||
i | Thornburg Mortgage Securities Trust, 2005-1, A3, FRN, 3.366%, 4/25/45 | United States | 28,962 | 29,178 | ||||||||||||||
b | Towd Point Mortgage Trust, | |||||||||||||||||
i 2015-2, 2A1, 144A, FRN, 3.75%, 11/25/57 | United States | 490,803 | 495,253 | |||||||||||||||
i 2016-3, A1, 144A, FRN, 2.25%, 4/25/56 | United States | 61,358 | 60,378 | |||||||||||||||
i 2016-5, A1, 144A, FRN, 2.50%, 10/25/56 | United States | 523,027 | 514,327 | |||||||||||||||
i 2017-1, A1, 144A, FRN, 2.75%, 10/25/56 | United States | 538,526 | 532,022 | |||||||||||||||
i 2017-4, A1, 144A, FRN, 2.75%, 6/25/57 | United States | 301,310 | 296,805 | |||||||||||||||
g 2017-5, A1, 144A, FRN, 2.497%, (1-month USD LIBOR + 0.60%), 2/25/57 | United States | 190,929 | 192,231 | |||||||||||||||
b,g | Voya CLO Ltd., | |||||||||||||||||
2014-1A, BR2, 144A, FRN, 4.255%, (3-month USD LIBOR + 1.90%), 4/18/31 | United States | 2,750,000 | 2,750,000 | |||||||||||||||
2013-2A, A1R, 144A, FRN, 3.314%, (3-month USD LIBOR + 0.97%), 4/25/31 | United States | 2,000,000 | 1,992,540 | |||||||||||||||
2013-2A, BR, 144A, FRN, 4.194%, (3-month USD LIBOR + 1.85%), 4/25/31 | United States | 2,000,000 | 1,999,820 | |||||||||||||||
Wells Fargo Commercial Mortgage Trust, 2016-NXS6, A4, 2.918%, 11/15/49 | United States | 1,500,000 | 1,418,434 | |||||||||||||||
b,g | West CLO Ltd., 2014-1A, A2R, 144A, FRN, 3.705%, (3-month USD LIBOR + 1.35%), 7/18/26 | United States | 170,000 | 170,119 | ||||||||||||||
|
| |||||||||||||||||
86,175,950 | ||||||||||||||||||
|
| |||||||||||||||||
Real Estate 0.4% | ||||||||||||||||||
b | American Homes 4 Rent, 2014-SFR3, A, 144A, 3.678%, 12/17/36 | United States | 761,542 | 767,091 | ||||||||||||||
b,g | Colony American Homes, 2015-1A, A, 144A, FRN, 3.097%, (1-month USD LIBOR + 1.20%), 7/17/32 | United States | 103,647 | 103,728 | ||||||||||||||
b | Colony MFM Trust, 2014-1, A, 144A, 2.543%, 4/20/50 | United States | 16,537 | 16,425 | ||||||||||||||
|
| |||||||||||||||||
887,244 | ||||||||||||||||||
|
| |||||||||||||||||
Total Asset-Backed Securities and Commercial Mortgage- | 87,101,201 | |||||||||||||||||
|
| |||||||||||||||||
Mortgage-Backed Securities (Cost $274,476) 0.1% | ||||||||||||||||||
Federal National Mortgage Association (FNMA) Fixed Rate 0.1% | ||||||||||||||||||
FNMA, 3.50%, 7/01/56 | United States | 266,826 | 264,347 | |||||||||||||||
|
|
franklintempleton.com | Annual Report | 23 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Municipal Bonds 0.4% | ||||||||||||||||||
Cincinnati GO, Various Purpose, Improvement and Refunding, Series A, 5.00%, 12/01/25 | United States | 100,000 | $ | 115,637 | ||||||||||||||
Citizens Property Insurance Corp. Revenue, Coastal Account, senior secured, | ||||||||||||||||||
Series A-1, 5.00%, 6/01/22 | United States | 125,000 | 136,715 | |||||||||||||||
Colorado State Board of Governors University Enterprise System Revenue, | ||||||||||||||||||
Green Bonds, Series E-2, 5.00%, 3/01/25 | United States | 100,000 | 115,741 | |||||||||||||||
Orlando Health Obligated Group, 3.777%, 10/01/28 | United States | 105,000 | 103,803 | |||||||||||||||
Providence St. Joseph Health Obligated Group, 2.746%, 10/01/26 | United States | 15,000 | 13,954 | |||||||||||||||
San Jose RDA Successor Agency Tax Allocation, Senior, Refunding, Series A-T, 3.226%, 8/01/27 | United States | 190,000 | 184,754 | |||||||||||||||
Teays Valley Local School District GO, Pickaway Fairfield and Franklin Counties, | ||||||||||||||||||
Refunding, 4.00%, 12/01/26 | United States | 100,000 | 106,531 | |||||||||||||||
Texas State GO, Transportation Commission-Highway Improvement, Series A, 5.00%, 4/01/21 | United States | 5,000 | 5,418 | |||||||||||||||
|
| |||||||||||||||||
Total Municipal Bonds (Cost $786,937) | 782,553 | |||||||||||||||||
|
| |||||||||||||||||
Number of Contracts | Notional Amount* | |||||||||||||||||
Options Purchased 0.1% | ||||||||||||||||||
Puts - Over-the-Counter | ||||||||||||||||||
Credit Default Swaptions 0.0%† | ||||||||||||||||||
Buy protection on CDX.NA.HY.30, Premium Rate 5.00%, Strike Price $104, | ||||||||||||||||||
Counterparty SMB, Expires 6/20/18 | 1 | 1,500,000 | 3,953 | |||||||||||||||
Buy protection on CDX.NA.IG.30, Premium Rate 1.00%, Strike Price $65, | ||||||||||||||||||
Counterparty SMB, Expires 7/18/18 | 1 | 4,750,000 | 10,934 | |||||||||||||||
|
| |||||||||||||||||
14,887 | ||||||||||||||||||
|
| |||||||||||||||||
Interest Rate Swaptions 0.1% | ||||||||||||||||||
Receive float 3 month USD LIBOR, Pay fixed 2.92%, Counterparty HSBK, | ||||||||||||||||||
Expires 9/28/18 | 1 | 3,700,000 | 67,318 | |||||||||||||||
Receive float 3 month USD LIBOR, Pay fixed 3.06%, Counterparty SMB, Expires 10/18/18 | 1 | 6,500,000 | 86,125 | |||||||||||||||
|
| |||||||||||||||||
153,443 | ||||||||||||||||||
|
| |||||||||||||||||
Management Investment Companies 0.0%† | ||||||||||||||||||
iShares iBoxx High Yield Corporate Bond ETF, July Strike Price $85, | ||||||||||||||||||
Counterparty BNDP, Expires 7/20/18 | 230 | 23,000 | 28,980 | |||||||||||||||
|
| |||||||||||||||||
Total Options Purchased (Cost $165,254) | 197,310 | |||||||||||||||||
|
| |||||||||||||||||
Total Investments before Short Term Investments | 169,534,975 | |||||||||||||||||
|
| |||||||||||||||||
Country | Principal Amount* | |||||||||||||||||
Short Term Investments 21.4% | ||||||||||||||||||
Corporate Bonds 0.3% | ||||||||||||||||||
Consumer Durables & Apparel 0.1% | ||||||||||||||||||
b | Lennar Corp., senior note, 144A, 8.375%, 5/15/18 | United States | 250,000 | 250,625 | ||||||||||||||
|
|
24 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Country | Principal Amount* | Value | ||||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Diversified Financials 0.2% | ||||||||||||||||||
Navient Corp., senior note, 5.50%, 1/15/19 | United States | 300,000 | $ | 304,950 | ||||||||||||||
|
| |||||||||||||||||
Total Corporate Bonds (Cost $553,449) | 555,575 | |||||||||||||||||
|
| |||||||||||||||||
Total Investments before Money Market Funds | 170,090,550 | |||||||||||||||||
|
| |||||||||||||||||
Shares | ||||||||||||||||||
Money Market Funds (Cost $44,846,991) 21.1% | ||||||||||||||||||
k,l | Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 44,846,991 | 44,846,991 | ||||||||||||||
|
| |||||||||||||||||
Total Investments (Cost $216,773,073) 101.1% | 214,937,541 | |||||||||||||||||
Options Written (0.0)%† | (18,706 | ) | ||||||||||||||||
TBA Sale Commitments (0.1)% | (297,680 | ) | ||||||||||||||||
Other Assets, less Liabilities (1.0)% | (1,925,723 | ) | ||||||||||||||||
|
| |||||||||||||||||
Net Assets 100.0% | $ | 212,695,432 | ||||||||||||||||
|
| |||||||||||||||||
Principal Amount* | ||||||||||||||||||
TBA Sale Commitments (Proceeds $299,907) (0.1)% | ||||||||||||||||||
Federal National Mortgage Association (FNMA) Fixed Rate (0.1)% | ||||||||||||||||||
m | FNMA 30 Year, 3.50%, 5/01/48. | United States | 300,000 | $ | (297,680 | ) | ||||||||||||
|
| |||||||||||||||||
Number of Contracts | Notional Amount* | |||||||||||||||||
n | Options Written (0.0)%† | |||||||||||||||||
Puts - Over-the-Counter | ||||||||||||||||||
Credit Default Swaptions (0.0)%† | ||||||||||||||||||
Buy protection on CDX.NA.HY.30, Premium Rate 5.00%, Strike Price $100, | ||||||||||||||||||
Counterparty SMB, Expires 6/20/18 | 1 | 1,500,000 | (1,548 | ) | ||||||||||||||
Buy protection on CDX.NA.IG.30, Premium Rate 1.00%, Strike Price $90, | ||||||||||||||||||
Counterparty SMB, Expires 7/18/18 | 1 | 4,750,000 | (3,358 | ) | ||||||||||||||
|
| |||||||||||||||||
(4,906 | ) | |||||||||||||||||
|
| |||||||||||||||||
Management Investment Companies (0.0)%† | ||||||||||||||||||
iShares iBoxx High Yield Corporate Bond ETF, July Strike Price $83, | ||||||||||||||||||
Counterparty BNDP, Expires 7/20/18 | 230 | 23,000 | (13,800 | ) | ||||||||||||||
|
| |||||||||||||||||
Total Options Written (Premiums received $23,486) | $ | (18,706 | ) | |||||||||||||||
|
|
franklintempleton.com | Annual Report | 25 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
†Rounds to less than 0.1% of net assets.
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.
aSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At April 30, 2018, the aggregate value of these securities was $11,221,546, representing 5.3% of net assets.
bSecurity 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, 2018, the aggregate value of these securities was $72,662,963, representing 34.2% of net assets.
cThe coupon rate shown represents the rate at period end.
dPerpetual security with no stated maturity date.
eSecurity purchased on a when-issued basis. See Note 1(c).
fPrincipal amount of security is adjusted for inflation. See Note 1(h).
gThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end.
hThe coupon rate will be determined at time of issue.
iAdjustable rate security with an interest rate that is not based on a published reference index and spread. The rate is based on the structure of the agreement and current market conditions. The coupon rate shown represents the rate at period end.
jInvestment in an interest-only security entitles holders to receive only the interest payment on the underlying instruments. The principal amount shown is the notional amount of the underlying instruments.
kSee Note 3(f) regarding investments in affiliated management investment companies.
lThe rate shown is the annualized seven-day effective yield at period end.
mSecurity sold on a to-be-announced (TBA) basis resulting in a short position. As such, the Fund is not subject to fees and expenses associated with short sale transactions.
nSee Note 1(d) regarding written options.
At April 30, 2018, the Fund had the following futures contracts outstanding. See Note 1(d).
Futures Contracts
Description | Type | Number of Contracts | Notional Amount* | Expiration Date | Value/ Unrealized Appreciation (Depreciation) | |||||||||||||||
| ||||||||||||||||||||
Interest Rate Contracts | ||||||||||||||||||||
Australian 10 Yr. Bond | Long | 38 | $ | 3,658,810 | 6/15/18 | $ (10,846) | ||||||||||||||
Canadian 10 Yr. Bond | Long | 49 | 5,019,130 | 6/20/18 | (14,971 | ) | ||||||||||||||
Euro-Bund | Short | 7 | 1,342,139 | 6/07/18 | (7,204 | ) | ||||||||||||||
U.S. Treasury 2 Yr. Note | Short | 178 | 37,744,344 | 6/29/18 | 76,133 | |||||||||||||||
U.S. Treasury 5 Yr. Note | Short | 56 | 6,356,437 | 6/29/18 | 39,232 | |||||||||||||||
U.S. Treasury 10 Yr. Note | Short | 66 | 7,895,250 | 6/20/18 | �� | 40,544 | ||||||||||||||
|
| |||||||||||||||||||
Total Futures Contracts | $ 122,888 | |||||||||||||||||||
|
|
*As of period end. |
26 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
At April 30, 2018, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
Forward Exchange Contracts
Currency | Counterpartya | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
OTC Forward Exchange Contracts | ||||||||||||||||||||||||||||||||
South Korean Won | RBS | Buy | 1,052,300,000 | 979,396 | 5/09/18 | $ | 3,424 | $ | — | |||||||||||||||||||||||
South Korean Won | RBS | Sell | 408,500,000 | 383,029 | 5/09/18 | 1,501 | — | |||||||||||||||||||||||||
South Korean Won | RBS | Sell | 643,800,000 | 599,721 | 5/09/18 | — | (1,571 | ) | ||||||||||||||||||||||||
Mexican Peso | RBS | Buy | 27,358,000 | 1,450,019 | 5/11/18 | 10,479 | — | |||||||||||||||||||||||||
Mexican Peso | RBS | Sell | 4,000,000 | 214,397 | 5/11/18 | 858 | — | |||||||||||||||||||||||||
Indonesian Rupiah | JPHQ | Buy | 8,236,500,000 | 597,372 | 5/21/18 | — | (7,043 | ) | ||||||||||||||||||||||||
Philippine Peso | JPHQ | Sell | 11,300,000 | 215,948 | 5/23/18 | — | (2,503 | ) | ||||||||||||||||||||||||
Singapore Dollar | RBS | Buy | 147,000 | 111,685 | 5/23/18 | — | (764 | ) | ||||||||||||||||||||||||
Singapore Dollar | RBS | Sell | 147,000 | 110,722 | 5/23/18 | — | (199 | ) | ||||||||||||||||||||||||
Polish Zloty | RBS | Buy | 1,600,000 | 471,834 | 5/29/18 | — | (15,736 | ) | ||||||||||||||||||||||||
Swedish Krona | UBSW | Buy | 8,235,000 | 1,018,897 | 6/04/18 | — | (74,436 | ) | ||||||||||||||||||||||||
Canadian Dollar | UBSW | Buy | 115,000 | 90,614 | 6/05/18 | — | (929 | ) | ||||||||||||||||||||||||
Canadian Dollar | UBSW | Sell | 360,000 | 276,591 | 6/05/18 | — | (4,160 | ) | ||||||||||||||||||||||||
Canadian Dollar | UBSW | Sell | 662,000 | 522,181 | 6/05/18 | 5,910 | — | |||||||||||||||||||||||||
Australian Dollar | UBSW | Sell | 1,058,000 | 831,139 | 6/18/18 | 34,506 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 2,777,000 | 3,443,813 | 6/28/18 | 73,960 | — | |||||||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 5,180,000 | 671,493 | 7/13/18 | — | (23,336 | ) | ||||||||||||||||||||||||
British Pound | UBSW | Sell | 82,000 | 117,235 | 7/17/18 | 3,899 | — | |||||||||||||||||||||||||
Indian Rupee | RBS | Buy | 60,250,000 | 917,885 | 7/24/18 | — | (20,852 | ) | ||||||||||||||||||||||||
Canadian Dollar | RBS | Sell | 91,000 | 71,322 | 7/25/18 | 268 | — | |||||||||||||||||||||||||
Canadian Dollar | UBSW | Sell | 26,000 | 26,679 | AUD | 7/27/18 | — | (209 | ) | |||||||||||||||||||||||
Japanese Yen | JPHQ | Buy | 35,719,260 | 324,259 | 12/17/18 | 8,447 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 35,719,260 | 324,187 | 12/17/18 | — | (8,519 | ) | ||||||||||||||||||||||||
British Pound | JPHQ | Sell | 86,300 | 115,081 | 8/15/19 | — | (6,582 | ) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Forward Exchange Contracts |
| $ | 143,252 | $ | (166,839 | ) | ||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (23,587 | ) | ||||||||||||||||||||||||||||
|
|
*In U.S. dollars unless otherwise indicated.
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.
At April 30, 2018, the Fund had the following credit default swap contracts outstanding. See Note 1(d).
Credit Default Swap Contracts
Description | Periodic Payment Rate Received (Paid) | Payment Frequency | Counter- party | Maturity Date | Notional Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||||
Centrally Cleared Swap Contracts |
| |||||||||||||||||||||||||||||||||||
Contracts to Buy Protectionc |
| |||||||||||||||||||||||||||||||||||
Single Name | ||||||||||||||||||||||||||||||||||||
Navient Corp. | (5.00 | )% | Quarterly | 3/20/19 | 300,000 | $ | (13,966 | ) | $ | (10,982) | $ | (2,984 | ) | |||||||||||||||||||||||
Traded Index |
| |||||||||||||||||||||||||||||||||||
ITRX.EUR.28 | (1.00 | )% | Quarterly | 12/20/22 | 7,050,000 EUR | (222,550 | ) | (186,397 | ) | (36,153 | ) |
franklintempleton.com | Annual Report | 27 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Credit Default Swap Contracts (continued)
Description | Periodic Payment Rate Received (Paid) | Payment Frequency | Counter- party | Maturity Date | Notional Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Centrally Cleared Swap Contracts (continued) |
| |||||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d |
| |||||||||||||||||||||||||||||||||||
Single Name | ||||||||||||||||||||||||||||||||||||
Government of Indonesia | 1.00 | % | Quarterly | 6/20/23 | 1,260,000 | $ | (956 | ) | $ | 2,052 | $ | (3,008) | BBB- | |||||||||||||||||||||||
Traded Index |
| |||||||||||||||||||||||||||||||||||
CDX.NA.HY.30 | 5.00 | % | Quarterly | 6/20/23 | 1,430,000 | 106,956 | 85,936 | 21,020 | | Non- Investment Grade | | |||||||||||||||||||||||||
CDX.NA.IG.29 | 1.00 | % | Quarterly | 12/20/22 | 8,530,000 | 182,671 | 161,702 | 20,969 | | Invest- ment | | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
Total Centrally Cleared Swap Contracts |
| $ | 52,155 | $ | 52,311 | $ | (156) | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
OTC Swap Contracts |
| |||||||||||||||||||||||||||||||||||
Contracts to Buy Protectionc |
| |||||||||||||||||||||||||||||||||||
Single Name |
| |||||||||||||||||||||||||||||||||||
The AES Corp. | (5.00 | )% | Quarterly | JPHQ | 6/20/22 | 35,000 | $ | (6,008) | $ | (3,913) | $ | (2,095) | ||||||||||||||||||||||||
Ally Financial Inc. | (5.00 | )% | Quarterly | CITI | 12/20/22 | 150,000 | (25,883 | ) | (25,411 | ) | (472 | ) | ||||||||||||||||||||||||
Ally Financial Inc. | (5.00 | )% | Quarterly | JPHQ | 12/20/22 | 250,000 | (43,139 | ) | (42,674 | ) | (465 | ) | ||||||||||||||||||||||||
American Airlines Group Inc. | (5.00 | )% | Quarterly | BZWS | 12/20/19 | 400,000 | (29,814 | ) | (27,359 | ) | (2,455 | ) | ||||||||||||||||||||||||
American Airlines Group Inc. | (5.00 | )% | Quarterly | CITI | 12/20/19 | 130,000 | (9,690 | ) | (8,780 | ) | (910 | ) | ||||||||||||||||||||||||
Avon Products Inc. | (5.00 | )% | Quarterly | JPHQ | 3/20/19 | 50,000 | (2,048 | ) | (1,580 | ) | (468 | ) | ||||||||||||||||||||||||
Boyd Gaming Corp. | (5.00 | )% | Quarterly | BZWS | 6/20/22 | 525,000 | (88,267 | ) | (82,007 | ) | (6,260 | ) | ||||||||||||||||||||||||
CalAtlantic Group Inc. | (5.00 | )% | Quarterly | BZWS | 6/20/18 | 250,000 | (3,143 | ) | (1,396 | ) | (1,747 | ) | ||||||||||||||||||||||||
Dish DBS Corp. | (5.00 | )% | Quarterly | BZWS | 12/20/20 | 175,000 | (9,999 | ) | (13,435 | ) | 3,436 | |||||||||||||||||||||||||
Dish DBS Corp. | (5.00 | )% | Quarterly | JPHQ | 6/20/21 | 470,000 | (24,082 | ) | (21,621 | ) | (2,461 | ) | ||||||||||||||||||||||||
Energy Transfer Equity LP | (5.00 | )% | Quarterly | MSCO | 12/20/20 | 750,000 | (87,344 | ) | (83,403 | ) | (3,941 | ) | ||||||||||||||||||||||||
KB Home | (5.00 | )% | Quarterly | JPHQ | 3/20/20 | 100,000 | (9,026 | ) | (6,727 | ) | (2,299 | ) | ||||||||||||||||||||||||
Nabors Industries Inc. | (1.00 | )% | Quarterly | JPHQ | 6/20/20 | 5,000 | (27 | ) | 97 | (124 | ) | |||||||||||||||||||||||||
Navient Corp. | (5.00 | )% | Quarterly | JPHQ | 3/20/20 | 400,000 | (33,791 | ) | (27,471 | ) | (6,320 | ) | ||||||||||||||||||||||||
PHH Corp. | (5.00 | )% | Quarterly | BZWS | 9/20/19 | 200,000 | (13,533 | ) | (1,248 | ) | (12,285 | ) | ||||||||||||||||||||||||
Safeway Inc. | (5.00 | )% | Quarterly | BZWS | 6/20/19 | 1,000,000 | (50,561 | ) | (40,269 | ) | (10,292 | ) | ||||||||||||||||||||||||
Sanmina Corp. | (5.00 | )% | Quarterly | BZWS | 6/20/19 | 100,000 | (6,153 | ) | (4,904 | ) | (1,249 | ) | ||||||||||||||||||||||||
Springleaf Finance Corp. | (5.00 | )% | Quarterly | GSCO | 6/20/20 | 60,000 | (5,772 | ) | (1,551 | ) | (4,221 | ) | ||||||||||||||||||||||||
Tenet Healthcare Corp. | (5.00 | )% | Quarterly | BZWS | 3/20/19 | 90,000 | (4,083 | ) | (1,808 | ) | (2,275 | ) | ||||||||||||||||||||||||
Universal Health | ||||||||||||||||||||||||||||||||||||
Services Inc. | (5.00 | )% | Quarterly | BZWS | 9/20/19 | 50,000 | (3,598 | ) | (2,887 | ) | (711 | ) | ||||||||||||||||||||||||
Contracts to Sell Protectionc,d | ||||||||||||||||||||||||||||||||||||
Single Name | ||||||||||||||||||||||||||||||||||||
American Tower Corp. | 1.00 | % | Quarterly | GSCO | 3/20/21 | 100,000 | (349 | ) | (1,082 | ) | 733 | BBB- | ||||||||||||||||||||||||
Capital One Financial Corp. | 1.00 | % | Quarterly | JPHQ | 12/20/22 | 150,000 | 3,045 | 2,416 | 629 | BBB | ||||||||||||||||||||||||||
Dish DBS Corp. | 5.00 | % | Quarterly | BZWS | 12/20/22 | 175,000 | (2,114 | ) | 8,383 | (10,497 | ) | B | ||||||||||||||||||||||||
Dish DBS Corp. | 5.00 | % | Quarterly | JPHQ | 6/20/23 | 470,000 | (17,807 | ) | (6,394 | ) | (11,413 | ) | B | |||||||||||||||||||||||
Enterprise Products Operating LLC | 1.00 | % | Quarterly | GSCO | 3/20/23 | 50,000 | 879 | (614 | ) | 1,493 | BBB+ |
28 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Credit Default Swap Contracts (continued)
Description | Periodic Payment Rate Received (Paid) | Payment Frequency | Counter- party | Maturity Date | Notional Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
OTC Swap Contracts (continued) |
| |||||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d (continued) |
| |||||||||||||||||||||||||||||||||||
Single Name (continued) |
| |||||||||||||||||||||||||||||||||||
General Electric Co. | 1.00 | % | Quarterly | CITI | 12/20/22 | 775,000 | $ | 9,145 | $ | 7,291 | $ | 1,854 | A | |||||||||||||||||||||||
Goldman Sachs Group Inc. | 1.00 | % | Quarterly | BZWS | 12/20/22 | 250,000 | 4,880 | 4,379 | 501 | BBB+ | ||||||||||||||||||||||||||
Goldman Sachs Group Inc. | 1.00 | % | Quarterly | JPHQ | 12/20/22 | 150,000 | 2,928 | 2,599 | 329 | BBB+ | ||||||||||||||||||||||||||
Government of China | 1.00 | % | Quarterly | CITI | 6/20/23 | 2,050,000 | 43,677 | 38,492 | 5,185 | A+ | ||||||||||||||||||||||||||
Government of Colombia | 1.00 | % | Quarterly | CITI | 6/20/23 | 850,000 | (1,786 | ) | (2,286 | ) | 500 | BBB- | ||||||||||||||||||||||||
Government of Malaysia | 1.00 | % | Quarterly | CITI | 6/20/23 | 525,000 | 7,513 | 8,098 | (585 | ) | NR | |||||||||||||||||||||||||
Government of Mexico | 1.00 | % | Quarterly | JPHQ | 6/20/23 | 1,270,000 | (6,677 | ) | (9,528 | ) | 2,851 | BBB+ | ||||||||||||||||||||||||
Morgan Stanley | 1.00 | % | Quarterly | BZWS | 12/20/22 | 250,000 | 4,989 | 4,909 | 80 | BBB+ | ||||||||||||||||||||||||||
Nabors Industries Inc. | 1.00 | % | Quarterly | JPHQ | 6/20/22 | 5,000 | (276 | ) | (541 | ) | 265 | BB | ||||||||||||||||||||||||
Sprint Communications Inc. | 5.00 | % | Quarterly | JPHQ | 9/20/20 | 12,000 | 1,159 | — | 1,159 | B | ||||||||||||||||||||||||||
Traded Index | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Boulder Index, Mezzanine Tranche 5-15% | 1.24 | % | Quarterly | CITI | 12/20/19 | 1,600,000 | 13,606 | — | 13,606 | Non- | ||||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Cambridge Index, Equity Tranche 0-3% | 0.00 | % | Quarterly | CITI | 12/20/19 | 500,000 | (91,231 | ) | (67,166 | ) | (24,065 | ) | Non- | |||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Hong Kong Index, Mezzanine Tranche 3-5% | 1.00 | % | Quarterly | CITI | 12/20/18 | 30,000 | 124 | (411 | ) | 535 | Non- | |||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Index, Mezzanine Tranche 6-10% | 0.63 | % | Quarterly | CITI | 12/20/18 | 1,000,000 | 1,900 | — | 1,900 | Non- | ||||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Lisbon Index, Equity Tranche 0-3% | 0.00 | % | Quarterly | CITI | 6/20/19 | 10,000 | (832 | ) | (1,348 | ) | 516 | Non- | ||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade |
franklintempleton.com | Annual Report | 29 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Credit Default Swap Contracts (continued)
Description | Periodic Payment Rate Received (Paid) | Payment Frequency | Counter- party | Maturity Date | Notional Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||
OTC Swap Contracts (continued) |
| |||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d (continued) |
| |||||||||||||||||||||||||||||||||
Traded Index (continued) |
| |||||||||||||||||||||||||||||||||
eCitibank Bespoke Lisbon Index, Mezzanine Tranche 3-7% | 0.79 | % | Quarterly | CITI | 6/20/19 | 1,100,000 | $ | (3,990 | ) | $ | — | $ | (3,990 | ) | Non- Investment Grade | |||||||||||||||||||
eCitibank Bespoke Verona Index, Equity Tranche 0-3% | 0.00 | % | Quarterly | CITI | 12/20/19 | 15,000 | (2,548 | ) | (2,473 | ) | (75 | ) | Non- Investment Grade | |||||||||||||||||||||
eCitibank Bespoke Verona Index, Mezzanine Tranche 7-15% | 0.40 | % | Quarterly | CITI | 12/20/19 | 280,000 | 615 | — | 615 | Non- Investment Grade | ||||||||||||||||||||||||
MCDX.NA.30 | 1.00 | % | Quarterly | CITI | 6/20/23 | 7,100,000 | 170,186 | 170,820 | (634 | ) | Investment Grade | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Total OTC Swap Contracts | $ | (318,925 | ) | $ | (242,803 | ) | $ | (76,122 | ) | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Total Credit Default Swap Contracts | $ | (266,770 | ) | $ | (190,492 | ) | $ | (76,278 | ) | |||||||||||||||||||||||||
|
|
aIn U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts.
bBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external vendors.
cPerformance triggers for settlement of contract include default, bankruptcy or restructuring for single name swaps, and failure to pay or bankruptcy of the underlying securities for traded index swaps.
dThe Fund enters contracts to sell protection to create a long credit position. eRepresents a custom index comprised of a basket of underlying issuers.
At April 30, 2018, the Fund had the following cross-currency swap contracts outstanding. See Note 1(d).
Cross-Currency Swap Contracts
Description | Payment Frequency | Counter- party | Maturity Date | Notional Amount | Value/ Unrealized Appreciation (Depreciation) | |||||||||||||||||
| ||||||||||||||||||||||
OTC Swap Contracts | ||||||||||||||||||||||
Receive Floating 3-month USD LIBOR + 0.727% | Quarterly | 1,185,000 | USD | |||||||||||||||||||
Pay Fixed 0.10% | Annual | HSBK | 1/15/19 | 1,000,000 | EUR | $ | (22,130) |
30 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
Cross-Currency Swap Contracts (continued)
Description | Payment Frequency | Counter- party | Maturity Date | Notional Amount | Value/ Unrealized Appreciation (Depreciation) | |||||||||||||||||||
| ||||||||||||||||||||||||
OTC Swap Contracts (continued) | ||||||||||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.894% | Quarterly | 2,460,000 | USD | |||||||||||||||||||||
Pay Fixed 1.50% | Annual | CITI | 5/04/21 | 2,000,000 | EUR | $ | 54,399 | |||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.850% | Quarterly | 617,500 | USD | |||||||||||||||||||||
Pay Fixed 1.50% | Annual | CITI | 5/04/21 | 500,000 | EUR | 15,039 | ||||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.302% | Quarterly | 496,000 | USD | |||||||||||||||||||||
Pay Fixed 1.00% | Annual | JPHQ | 5/04/21 | 400,000 | EUR | 15,634 | ||||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.122% | Quarterly | 111,500 | USD | |||||||||||||||||||||
Pay Fixed 0.75% | Annual | HSBK | 4/01/22 | 100,000 | EUR | (8,446 | ) | |||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.045% | Quarterly | 1,552,200 | USD | |||||||||||||||||||||
Pay Fixed 0.75% | Annual | HSBK | 5/31/22 | 1,300,000 | EUR | (10,559 | ) | |||||||||||||||||
Receive Floating 3-month USD LIBOR + 0.848% | Quarterly | 3,472,000 | USD | |||||||||||||||||||||
Pay Fixed 0.75% | Annual | DBAB | 9/14/22 | 2,800,000 | EUR | 102,345 | ||||||||||||||||||
Receive Floating 3-month USD LIBOR + 0.821% | Quarterly | 466,000 | USD | |||||||||||||||||||||
Pay Fixed 0.625% | Annual | BNDP | 6/08/23 | 400,000 | EUR | (13,031 | ) | |||||||||||||||||
Receive Floating 3-month USD LIBOR + 0.782% | Quarterly | 957,600 | USD | |||||||||||||||||||||
Pay Fixed 0.625% | Annual | HSBK | 6/08/23 | 800,000 | EUR | (1,095 | ) | |||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.395% | Quarterly | 358,500 | USD | |||||||||||||||||||||
Pay Fixed 1.50% | Annual | HSBK | 11/26/25 | 300,000 | EUR | (402 | ) | |||||||||||||||||
Receive Floating 3-month USD LIBOR + 1.415% | Quarterly | 598,500 | USD | |||||||||||||||||||||
Pay Fixed 1.50% | Annual | HSBK | 11/26/25 | 500,000 | EUR | 447 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Cross Currency Swap Contracts | $ | 132,201 | ||||||||||||||||||||||
|
|
At April 30, 2018, the Fund had the following interest rate swap contracts outstanding. See Note 1(d).
Interest Rate Swap Contracts
Description | Payment Frequency | Maturity Date | Notional Amount | Value | Unamortized Upfront | Unrealized Appreciation (Depreciation) | ||||||||||||||||
| ||||||||||||||||||||||
Centrally Cleared Swap Contracts | ||||||||||||||||||||||
Receive Floating 3-month USD LIBOR | Quarterly | |||||||||||||||||||||
Pay Fixed 2.788% | Semi-Annual | 3/26/23 | $ | 7,900,000 | $ | 38,856 | $ | — | $ | 38,856 | ||||||||||||
Receive Floating 3-month USD LIBOR | Quarterly | |||||||||||||||||||||
Pay Fixed 2.79% | Semi-Annual | 3/28/23 | 7,900,000 | 38,421 | — | 38,421 | ||||||||||||||||
Receive Floating 3-month USD LIBOR | Quarterly | |||||||||||||||||||||
Pay Fixed 2.713% | Semi-Annual | 3/29/23 | 4,700,000 | 40,029 | — | 40,029 | ||||||||||||||||
Receive Floating 3-month USD LIBOR | Quarterly | |||||||||||||||||||||
Pay Fixed 2.806% | Semi-Annual | 4/17/23 | 5,800,000 | 26,684 | — | 26,684 | ||||||||||||||||
Receive Floating 3-month USD LIBOR | Quarterly | |||||||||||||||||||||
Pay Fixed 2.00% | Semi-Annual | 6/20/25 | 11,100,000 | 674,506 | 643,214 | 31,292 | ||||||||||||||||
Receive Floating 3-month USD LIBOR | Quarterly | |||||||||||||||||||||
Pay Fixed 2.883% | Semi-Annual | 3/26/28 | 2,500,000 | 18,977 | — | 18,977 | ||||||||||||||||
|
| |||||||||||||||||||||
Total Interest Rate Swap Contracts | $ | 837,473 | $ | 643,214 | $ | 194,259 | ||||||||||||||||
|
|
franklintempleton.com | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Flexible Alpha Bond Fund (continued)
At April 30, 2018, the Fund had the following inflation index swap contracts outstanding. See Note 1(d).
Inflation Index Swap Contracts
Description | Payment Frequency | Maturity Date | Notional Amount | Value/ Unrealized Appreciaton (Depreciation) | ||||||||||||
Centrally Cleared Swap Contracts | ||||||||||||||||
Receive variable change in USA-CPI-U | At maturity | |||||||||||||||
Pay Fixed 2.079% | At maturity | 9/18/24 | $ | 1,770,000 | $ | 39,408 | ||||||||||
|
|
At April 30, 2018, the Fund had the following total return swap contracts outstanding. See Note 1(d).
Total Return Swap Contracts
Underlying Instruments | Financing Rate | Payment Frequency | Counterparty | Maturity Date | Notional Value | Value/ Unrealized Appreciation (Depreciation) | ||||||||||||||||
OTC Swap Contracts | ||||||||||||||||||||||
Longa | ||||||||||||||||||||||
Markit iBoxx USD Liquid Leveraged Loan Index | 3-month USD LIBOR | Quarterly | CITI | 9/20/18 | $ | 900,000 | $ | 8,411 | ||||||||||||||
Markit iBoxx USD Liquid Leveraged Loan Index | 3-month USD LIBOR | Quarterly | GSCO | 12/20/18 | 5,160,000 | (448 | ) | |||||||||||||||
Markit iBoxx USD Liquid Leveraged Loan Index | 3-month USD LIBOR | Quarterly | GSCO | 3/20/19 | 4,000,000 | (12,229 | ) | |||||||||||||||
Markit iBoxx USD Liquid Leveraged Loan Index | 3-month USD LIBOR | Quarterly | JPHQ | 3/20/19 | 1,050,000 | (2,286 | ) | |||||||||||||||
|
| |||||||||||||||||||||
Total Total Return Swap Contracts | $ | (6,552 | ) | |||||||||||||||||||
|
|
aThe Fund receives the total return on the underlying instrument and pays a variable financing rate.
See Note 8 regarding other derivative information.
See Abbreviations on page 51.
32 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Assets and Liabilities
April 30, 2018
Franklin Flexible Alpha Bond Fund
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 171,926,082 | ||
Cost - Non-controlled affiliates (Note 3f) | 44,846,991 | |||
|
| |||
Value - Unaffiliated issuers | $ | 170,090,550 | ||
Value - Non-controlled affiliates (Note 3f) | 44,846,991 | |||
Restricted cash for OTC derivative contracts (Note 1e) | 290,000 | |||
Foreign currency, at value (cost $1,462,913) | 1,457,457 | |||
Receivables: | ||||
Investment securities sold | 300,285 | |||
Interest. | 820,592 | |||
Deposits with brokers for: | ||||
Futures contracts | 321,643 | |||
Centrally cleared swap contracts | 2,319,837 | |||
Variation margin on futures contracts | 14,776 | |||
OTC swap contracts (upfront payments $253,668) | 247,484 | |||
Unrealized appreciation on OTC forward exchange contracts | 143,252 | |||
Unrealized appreciation on OTC swap contracts | 232,462 | |||
Other assets | 7,553 | |||
|
| |||
Total assets | 221,092,882 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 6,391,783 | |||
Capital shares redeemed | 31,171 | |||
Management fees | 79,982 | |||
Distribution fees | 185 | |||
Transfer agent fees | 3,278 | |||
Distributions to shareholders | 410,428 | |||
Variation margin on centrally cleared swap contracts | 18,085 | |||
Deposits from brokers for: | ||||
OTC derivative contracts | 290,000 | |||
OTC swap contracts (upfront receipts $619,652) | 490,287 | |||
Options written, at value (premiums received $23,486) | 18,706 | |||
TBA sale commitments, at value (proceeds $299,907) | 297,680 | |||
Unrealized depreciation on OTC forward exchange contracts | 166,839 | |||
Unrealized depreciation on OTC swap contracts | 182,935 | |||
Accrued expenses and other liabilities | 16,091 | |||
|
| |||
Total liabilities | 8,397,450 | |||
|
| |||
Net assets, at value | $ | 212,695,432 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 213,596,737 | ||
Undistributed net investment income | 58,013 | |||
Net unrealized appreciation (depreciation) | (1,480,780 | ) | ||
Accumulated net realized gain (loss) | 521,462 | |||
|
| |||
Net assets, at value | $ | 212,695,432 | ||
|
|
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 33 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued)
April 30, 2018
Franklin Flexible Alpha Bond Fund
Class A: | ||||
Net assets, at value | $ | 1,132,309 | ||
|
| |||
Shares outstanding | 115,650 | |||
|
| |||
Net asset value per sharea | $9.79 | |||
|
| |||
Maximum offering price per share (net asset value per share ÷ 95.75%) | $10.22 | |||
|
| |||
Class C: | ||||
Net assets, at value | $ | 279,076 | ||
|
| |||
Shares outstanding | 28,683 | |||
|
| |||
Net asset value and maximum offering price per sharea | $9.73 | |||
|
| |||
Class R: | ||||
Net assets, at value | $ | 50,571 | ||
|
| |||
Shares outstanding | 5,170 | |||
|
| |||
Net asset value and maximum offering price per share | $9.78 | |||
|
| |||
Class R6: | ||||
Net assets, at value | $ | 210,808,298 | ||
|
| |||
Shares outstanding | 21,534,094 | |||
|
| |||
Net asset value and maximum offering price per share | $9.79 | |||
|
| |||
Advisor Class: | ||||
Net assets, at value | $ | 425,178 | ||
|
| |||
Shares outstanding | 43,437 | |||
|
| |||
Net asset value and maximum offering price per share | $9.79 | |||
|
|
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
34 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statement of Operations
for the year ended April 30, 2018
Franklin Flexible Alpha Bond Fund
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | 105,401 | ||
Non-controlled affiliates (Note 3f) | 204,362 | |||
Interest: | ||||
Unaffiliated issuers | 1,962,489 | |||
|
| |||
Total investment income | 2,272,252 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 478,922 | |||
Distribution fees: (Note 3c) | ||||
Class A | 2,662 | |||
Class C | 1,506 | |||
Class R | 308 | |||
Transfer agent fees: (Note 3e) | ||||
Class A | 6,031 | |||
Class C | 197 | |||
Class R | 48 | |||
Class R6 | 13,515 | |||
Advisor Class. | 264 | |||
Custodian fees (Note 4) | 3,368 | |||
Reports to shareholders | 14,968 | |||
Registration and filing fees | 80,693 | |||
Professional fees | 103,080 | |||
Trustees’ fees and expenses | 361 | |||
Other | 55,543 | |||
|
| |||
Total expenses. | 761,466 | |||
Expense reductions (Note 4) | (53 | ) | ||
Expenses waived/paid by affiliates (Note 3f and 3g) | (131,853 | ) | ||
|
| |||
Net expenses. | 629,560 | |||
|
| |||
Net investment income | 1,642,692 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments: | ||||
Unaffiliated issuers | (166,398 | ) | ||
Written options | 16,218 | |||
Foreign currency transactions | (15,373 | ) | ||
Forward exchange contracts | (34,073 | ) | ||
Futures contracts | 1,158,402 | |||
TBA sale commitments | 18,346 | |||
Swap contracts | 56,053 | |||
|
| |||
Net realized gain (loss) | 1,033,175 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments: | ||||
Unaffiliated issuers | (1,973,683 | ) | ||
Translation of other assets and liabilities | (7,053 | ) | ||
Forward exchange contracts | (27,025 | ) | ||
Written options | 3,823 | |||
Futures contracts | 129,169 |
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statement of Operations (continued)
for the year ended April 30, 2018
Franklin Flexible Alpha Bond Fund
TBA sale commitments | 2,227 | |||
Swap contracts | 314,149 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (1,558,393 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (525,218 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 1,117,474 | ||
|
|
36 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
Franklin Flexible Alpha Bond Fund
Year Ended April 30, | ||||||||
2018 | 2017 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 1,642,692 | $ | 198,634 | ||||
Net realized gain (loss) | 1,033,175 | (6,779 | ) | |||||
Net change in unrealized appreciation (depreciation) | (1,558,393 | ) | 25,805 | |||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | 1,117,474 | 217,660 | ||||||
|
| |||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class A | (102,670 | ) | (228,517 | ) | ||||
Class C | (2,927 | ) | (3,853 | ) | ||||
Class R | (695 | ) | (1,041 | ) | ||||
Class R6 | (1,603,614 | ) | (220 | ) | ||||
Advisor Class | (5,822 | ) | (6,710 | ) | ||||
Net realized gains: | ||||||||
Class A | (930 | ) | — | |||||
Class C | (232 | ) | — | |||||
Class R | (50 | ) | — | |||||
Class R6 | (107,984 | ) | — | |||||
Advisor Class | (417 | ) | — | |||||
|
| |||||||
Total distributions to shareholders | (1,825,341 | ) | (240,341 | ) | ||||
|
| |||||||
Capital share transactions: (Note 2) | ||||||||
Class A | (9,288,308 | ) | 263,641 | |||||
Class C | 35,861 | 42,152 | ||||||
Class R | (9,156 | ) | 50,835 | |||||
Class R6 | 211,478,984 | — | ||||||
Advisor Class | 195,749 | (111,111 | ) | |||||
|
| |||||||
Total capital share transactions | 202,413,130 | 245,517 | ||||||
|
| |||||||
Net increase (decrease) in net assets | 201,705,263 | 222,836 | ||||||
Net assets: | ||||||||
Beginning of year | 10,990,169 | 10,767,333 | ||||||
|
| |||||||
End of year | $ | 212,695,432 | $ | 10,990,169 | ||||
|
| |||||||
Undistributed net investment income included in net assets: | ||||||||
End of year | $ | 58,013 | $ | — | ||||
|
| |||||||
Distributions in excess of net investment income included in net assets: | ||||||||
End of year | $ | — | $ | (33,482 | ) | |||
|
|
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
Franklin Flexible Alpha Bond Fund
1. Organization and Significant Accounting Policies
Franklin Strategic Series (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eight separate funds and and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Flexible Alpha Bond Fund (Fund) is included in this report. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6, and Advisor Class. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities, exchange traded funds, and derivative financial instruments listed on an 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 (OTC) securities 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.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Investments in open-end mutual funds are valued at the closing NAV.
Certain derivative financial instruments are centrally cleared or trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these
38 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Board.
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 in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a When-Issued Basis
The Fund purchases securities on a when-issued 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 invested in derivative financial instruments in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of
franklintempleton.com | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
1. Organization and Significant Accounting Policies (continued)
d. Derivative Financial Instruments (continued)
collateral is required by either the Fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty the next business day, or within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to interest rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset at a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily 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 at a specific exchange rate on a future date.
The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (OTC credit default swaps) or may be executed in a multilateral trade facility platform, such as a registered exchange (centrally cleared credit default swaps). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index,
a basket of issuers or indices, or a tranche of a credit index or basket of issuers or indices. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Statement of Operations.
The Fund entered into OTC cross currency swap contracts primarily to manage and/or gain exposure to interest rate risk and certain foreign currencies. A cross currency swap is an agreement between the Fund and a counterparty to exchange cash flows (determined using either a fixed or floating rate) based on the notional amounts of two different currencies. The notional amounts are typically determined based on the spot exchange rates at the opening of the contract. Cross currency swaps may require the exchange of notional amounts at the opening and/or closing of the contract. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Statement of Assets and Liabilities and represent compensating factors between stated terms of the cross currency swap contract and prevailing market conditions (interest rate spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Statement of Operations.
40 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
The Fund entered into inflation index swap contracts primarily to manage and/or gain exposure to inflation risk. An inflation index swap is an agreement between the Fund and a counterparty to exchange cash flows whereby one party makes payments based on the percentage change in an index that serves as a measure of inflation and the other party makes a regular payment based on a compounded fixed rate, applied to a notional amount. These agreements may be privately negotiated in the over-the-counter market (OTC inflation index swap) or may be executed on a registered exchange (centrally cleared inflation index swap). For centrally cleared inflation index swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized. Typically, an inflation index swap has payment obligations netted and exchanged upon maturity.
The Fund entered into interest rate swap contracts primarily to manage interest rate risk. An interest rate swap is an agreement between the Fund and a counterparty to exchange cash flows based on the difference between two interest rates, applied to a notional amount. These agreements may be privately negotiated in the over-the-counter market (OTC interest rate swaps) or may be executed on a registered exchange (centrally cleared interest rate swaps). For centrally cleared interest rate swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized.
The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to interest rate risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.
The Fund purchased or wrote exchange traded and/or OTC option contracts primarily to manage and/or gain exposure to interest rate, foreign exchange rate and credit risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Certain option contracts are marked-to-market daily and the daily change in fair value is accounted for as variation margin payable or receivable in the Statement of Assets and Liabilities. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.
See Note 8 regarding other derivative information.
e. Restricted Cash
At April 30, 2018, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.
f. Mortgage Dollar Rolls
The Fund enters into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution where the Fund sells (or buys) mortgage-backed securities for delivery on a specified date and simultaneously contracts to repurchase (or sell) substantially similar (same type, coupon, and maturity) securities at a future date and at a predetermined price. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. Transactions in mortgage dollar rolls are accounted for as purchases and sales and may result in an increase to the Fund’s portfolio turnover rate. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.
franklintempleton.com | Annual Report | 41 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
1. Organization and Significant Accounting Policies (continued)
g. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of April 30, 2018, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
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. Paydown gains and losses are recorded as an adjustment to interest income. Dividend income is recorded on the ex-dividend date. Dividends from net investment income are normally declared daily; these dividends may be reinvested or paid monthly to shareholders. Distributions from realized capital gains and other distributions, if any, are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These
differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
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.
Net investment income, excluding class specific expenses, is allocated daily to each class of shares based upon the relative value of the settled shares of each class. Realized and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions by class are generally due to differences in class specific expenses.
Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income in the Statement of Operations.
i. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
j. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the 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.
42 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
2. Shares of Beneficial Interest
At April 30, 2018, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Year Ended April 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Class A Shares: | ||||||||||||||||
Shares sold | 71,706 | $ | 705,410 | 33,507 | $ | 331,682 | ||||||||||
Shares issued in reinvestment of distributions | 2,584 | 25,433 | 1,227 | 12,100 | ||||||||||||
Shares redeemed | (1,017,579 | ) | (10,019,151 | ) | (8,135 | ) | (80,141 | ) | ||||||||
Net increase (decrease) |
|
(943,289 |
) | $ | (9,288,308 | ) | 26,599 | $ | 263,641 | |||||||
Class C Shares: | ||||||||||||||||
Shares sold | 28,772 | $ | 281,596 | 20,061 | $ | 197,723 | ||||||||||
Shares issued in reinvestment of distributions | 318 | 3,106 | 393 | 3,853 | ||||||||||||
Shares redeemed | (25,418 | ) | (248,841 | ) | (16,105 | ) | (159,424 | ) | ||||||||
Net increase (decrease) |
|
3,672 |
| $ | 35,861 | 4,349 | $ | 42,152 | ||||||||
Class R Shares: | ||||||||||||||||
Shares sold | — | $ | — | 5,015 | $ | 50,000 | ||||||||||
Shares issued in reinvestment of distributions | 71 | 695 | 85 | 835 | ||||||||||||
Shares redeemed | (1,001 | ) | (9,851 | ) | — | — | ||||||||||
Net increase (decrease) |
|
(930 |
) | $ | (9,156 | ) | 5,100 | $ | 50,835 | |||||||
Class R6 Shares: | ||||||||||||||||
Shares sold | 21,649,534 | $ | 212,625,650 | — | $ | — | ||||||||||
Shares issued in reinvestment of distributions | 9,792 | 96,166 | — | — | ||||||||||||
Shares redeemed | (126,232 | ) | (1,242,832 | ) | — | — | ||||||||||
Net increase (decrease) |
|
21,533,094 |
| $ | 211,478,984 | — | $ | — | ||||||||
Advisor Class Shares: | ||||||||||||||||
Shares sold | 19,425 | $ | 191,301 | 4,318 | $ | 42,500 | ||||||||||
Shares issued in reinvestment of distributions | 635 | 6,240 | 662 | 6,531 | ||||||||||||
Shares redeemed | (181 | ) | (1,792 | ) | (16,269 | ) | (160,142 | ) | ||||||||
Net increase (decrease) |
|
19,879 |
| $ | 195,749 | (11,289 | ) | $ | (111,111 | ) |
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 Institutional, LLC (FT Institutional) | 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 |
franklintempleton.com | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
3. Transactions with Affiliates (continued)
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
Annualized Fee Rate | Net Assets | |
0.550% | Up to and including $1 billion | |
0.500% | Over $1 billion, up to and including $5 billion | |
0.450% | Over $5 billion, up to and including $10 billion | |
0.445% | Over $10 billion, up to and including $15 billion | |
0.440% | Over $15 billion, up to and including $20 billion | |
0.435% | In excess of $20 billion |
For the year ended April 30, 2018, the gross effective investment management fee rate was 0.550% of the Fund’s average daily net assets.
Under a subadvisory agreement, FT Instituitional, an affiliate of Advisers, provides subadvisory services to the Fund. The subadvisory fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and 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 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 plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.25 | % | ||
Class C | 0.65 | % | ||
Class R | 0.50 | % |
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the year:
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | $ | 511 | ||
CDSC retained | $ | 115 |
44 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. Effective November 1, 2017, the fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. Prior to November 1, 2017, the fees were account based fees that varied based on fund or account type. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the year ended April 30, 2018, the Fund paid transfer agent fees of $20,055, of which $17,483 was retained by Investor Services.
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the year ended April 30, 2018, the Fund held investments in affiliated management investment companies as follows:
Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Shares Held at End of Year | Value at End of Year | Dividend Income | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 1,305,181 | 221,213,978 | (177,672,168 | ) | 44,846,991 | $44,846,991 | $204,362 | $ — | $ — |
g. Waiver and Expense Reimbursements
Advisers has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, and acquired fund fees and expenses) for each class of the Fund do not exceed 0.85% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until August 31, 2018. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end. Prior to September 1, 2017, expenses for Class R6 were limited to 0.71%.
Investor Services has voluntarily agreed in advance to waive or limit its fees so that the new transfer agent fee arrangement effective November 1, 2017 will not increase the fees retained by more than 0.02% based on the average net assets of each class. Investor Services may discontinue this waiver in the future.
h. Other Affiliated Transactions
At April 30, 2018, the shares of the Fund were owned by the following entities/investment companies:
Shares | Percentage of Outstanding Sharesa | |||||||
Franklin Resources, Inc | 10,397,554 | 47.9 | % | |||||
Franklin Total Return Fund | 10,172,940 | 46.8 | % | |||||
20,570,494 | 94.7 | % |
aInvestment activities of significant shareholders could have a material impact on the Fund.
franklintempleton.com | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
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, 2018, the custodian fees were reduced as noted in the Statement of Operations.
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains, if any.
During the year ended April 30, 2018, the Fund utilized $155,949 of capital loss carryforwards.
The tax character of distributions paid during the years ended April 30, 2018 and 2017, was as follows:
2018 | 2017 | |||||||
Distributions paid from: | ||||||||
Ordinary income | $ | 1,715,728 | $ | 240,341 | ||||
Long term capital gain | 109,613 | — | ||||||
$ | 1,825,341 | $ | 240,341 |
At April 30, 2018, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
Cost of investments | $ | 217,185,472 | ||
Unrealized appreciation | $ | 1,194,563 | ||
Unrealized depreciation | (2,896,688 | ) | ||
Net unrealized appreciation (depreciation) | $ | (1,702,125 | ) | |
Undistributed ordinary income | 726,163 | |||
Undistributed long term capital gains | 554,940 | |||
Distributable earnings | $ | 1,281,103 |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of paydown losses, bond discounts and premiums, swaps and financial futures transactions.
The Fund utilized a tax accounting practice to treat a portion of the proceeds from capital shares redeemed as a distribution from realized capital gains.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2018, aggregated $196,316,330 and $33,613,653, respectively.
7. Credit Risk
At April 30, 2018, the Fund had 12.1% of its portfolio invested in high yield securities or other securities rated below investment grade and unrated securities, if any. 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.
46 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
8. Other Derivative Information
At April 30, 2018, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value | ||||||||
Interest rate contracts | Investments in securities, at value | $ 182,423a | Options written, at value | $ 13,800 | ||||||||
Variation margin on futures | 155,909b | Variation margin on futures | 33,021 | b | ||||||||
contracts | contracts | |||||||||||
Variation margin on centrally | 194,259b | |||||||||||
cleared swap contracts | ||||||||||||
Unrealized appreciation on OTC | 196,275 | Unrealized depreciation on OTC | 70,626 | |||||||||
swap contracts | swap contracts | |||||||||||
Foreign exchange contracts | Unrealized appreciation on OTC | 143,252 | Unrealized depreciation on OTC | 166,839 | ||||||||
forward exchange contracts | forward exchange contracts | |||||||||||
Credit contracts | Investments in securities, at value | 14,887a | Options written, at value | 4,906 | ||||||||
Variation margin on centrally | 41,989b | Variation margin on centrally | 42,145 | b | ||||||||
cleared swap contracts | cleared swap contracts | |||||||||||
OTC swap contracts (premium | 247,484 | OTC swap contracts (premium | 490,287 | |||||||||
paid) | received) | |||||||||||
Unrealized appreciation on OTC | 36,187 | Unrealized depreciation on OTC | 112,309 | |||||||||
swap contracts | swap contracts | |||||||||||
Inflation contracts |
Variation margin on centrally | 39,408b | ||||||||||
cleared swap contracts | ||||||||||||
Totals | $1,252,073 | $933,933 |
aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
bThis amount reflects the cumulative appreciation (depreciation) of futures contracts and centrally cleared swap contracts as reported in the Statement of Investments. Only the variation margin receivable/payable at year end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
franklintempleton.com | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
8. Other Derivative Information (continued)
For the year ended April 30, 2018, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
Derivative Contracts Not Accounted for as Hedging Instruments
| Statement of Operations Location
| Net Realized
| Statement of Operations Location
| Net Change
| ||||||||
Net realized gain (loss) from: | Net change in unrealized | |||||||||||
appreciation (depreciation) on: | ||||||||||||
Interest rate contracts | Investments | $ (9,284)a | Investments | $ 52,074a | ||||||||
Written options | 9,927 | Written options | 423 | |||||||||
Futures contracts | 1,158,402 | Futures contracts | 129,169 | |||||||||
Swap contracts | 2,289 | Swap contracts | 322,529 | |||||||||
Foreign exchange contracts | Investments | (488)a | Investments | 74a | ||||||||
Forward exchange contracts | (34,073) | Forward exchange contracts | (27,025) | |||||||||
Credit contracts | Investments | (14,475)a | Investments | (10,308)a | ||||||||
Written options | 6,291 | Written options | 3,400 | |||||||||
Swap contracts | 30,067 | Swap contracts | (47,788) | |||||||||
Inflation contracts | Swap contracts | 23,697 | Swap contracts | 39,408 | ||||||||
Totals | $1,172,353 | $461,956 |
aPurchased option contracts are included in net realized gain (loss) from investments and net change in unrealized appreciation (depreciation) on investments in the Statement of Operations.
For the year ended April 30, 2018, the average month end notional amount of futures contracts, options and swap contracts, and the average month end contract value for forward exchange contracts, were as follows:
Futures contracts | $ | 35,715,604 | ||
Options | 8,335,749 | |||
Swap contracts | 29,179,948 | |||
Forward exchange contracts | 6,495,491 |
At April 30, 2018, the Fund’s OTC derivative assets and liabilities are as follows:
Gross Amounts of Assets and Liabilities Presented | ||||||||
Assetsa
| Liabilitiesa
| |||||||
Derivatives | ||||||||
Forward exchange contracts | $143,252 | $166,839 | ||||||
Options purchased | 197,310 | — | ||||||
Options written | — | 18,706 | ||||||
Swap contracts | 479,946 | 673,222 | ||||||
Total | $820,508 | $858,767 |
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
48 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
At April 30, 2018, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||||||||||
Statement of Assets and Liabilities | ||||||||||||||||||||
Gross Amounts of Assets Presented in
| Financial
| Financial
| Cash
| Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BNDP | $ 28,980 | $ (26,831 | ) | $ — | $ — | $ 2,149 | ||||||||||||||
BZWS | 21,688 | (21,688 | ) | — | — | — | ||||||||||||||
CITI | 428,273 | (143,512 | ) | — | (284,761 | ) | — | |||||||||||||
DBAB | 102,345 | — | — | — | 102,345 | |||||||||||||||
GSCO | 2,226 | (2,226 | ) | — | — | — | ||||||||||||||
HSBK | 67,765 | (42,632 | ) | — | — | 25,133 | ||||||||||||||
JPHQ | 34,426 | (34,426 | ) | — | — | — | ||||||||||||||
MSCO | — | — | — | — | — | |||||||||||||||
RBS | 16,530 | (16,530 | ) | — | — | — | ||||||||||||||
UBSW |
| 118,275
|
| (103,070 | ) | — | — | 15,205 | ||||||||||||
Total | $820,508 | $(390,915 | ) | $ — | $(284,761 | ) | $144,832 |
aIn some instances, the collateral amount disclosed in the table above was adjusted due to the requirement to limit collateral amount to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amount disclosed herein.
At April 30, 2018, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||||||||||
Statement of Assets and Liabilities | ||||||||||||||||||||
Gross Amounts of | Financial Instruments Available for Offset | Financial Instruments Collateral Pledged | Cash Collateral Pledged | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BNDP | $ 26,831 | $ (26,831 | ) | $ — | $ — | $ — | ||||||||||||||
BZWS | 223,084 | (21,688 | ) | — | — | 201,396 | ||||||||||||||
CITI | 143,512 | (143,512 | ) | — | — | — | ||||||||||||||
DBAB | — | — | — | — | — | |||||||||||||||
GSCO | 20,145 | (2,226 | ) | — | — | 17,919 | ||||||||||||||
HSBK | 42,632 | (42,632 | ) | — | — | — | ||||||||||||||
JPHQ | 173,027 | (34,426 | ) | — | — | 138,601 | ||||||||||||||
MSCO | 87,344 | — | — | — | 87,344 | |||||||||||||||
RBS | 39,122 | (16,530 | ) | — | — | 22,592 | ||||||||||||||
UBSW |
| 103,070
|
| (103,070 | ) | — | — | — | ||||||||||||
Total | $858,767 | $(390,915 | ) | $ — | $ — | $467,852 |
See Note 1(d) regarding derivative financial instruments.
See Abbreviations on page 51.
franklintempleton.com | Annual Report | 49 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
9. 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 $2 billion (Global Credit Facility) which matures on February 8, 2019. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statement of Operations. During the year ended April 30, 2018, the Fund did not use the Global Credit Facility.
10. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
• | Level 1 – quoted prices in active markets for identical financial instruments |
• | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
• | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
50 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
A summary of inputs used as of April 30, 2018, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Management Investment Companies | $ | 4,547,239 | $ | — | $ | — | $ | 4,547,239 | ||||||||
Corporate Bonds | — | 68,089,809 | — | 68,089,809 | ||||||||||||
Foreign Government and Agency Securities | — | 4,412,077 | — | 4,412,077 | ||||||||||||
U.S. Government and Agency Securities | — | 4,140,439 | — | 4,140,439 | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 87,101,201 | — | 87,101,201 | ||||||||||||
Mortgage-Backed Securities | — | 264,347 | — | 264,347 | ||||||||||||
Municipal Bonds | — | 782,553 | — | 782,553 | ||||||||||||
Options Purchased | 28,980 | 168,330 | — | 197,310 | ||||||||||||
Short Term Investments |
| 44,846,991
|
| 555,575 | — | 45,402,566 | ||||||||||
Total Investments in Securities | $ | 49,423,210 | $ | 165,514,331 | $ | — | $ | 214,937,541 | ||||||||
Other Financial Instruments: | ||||||||||||||||
Futures Contracts | $ | 155,909 | $ | — | $ | — | $ | 155,909 | ||||||||
Forward Exchange Contracts | — | 143,252 | — | 143,252 | ||||||||||||
Swap Contracts |
| —
|
| 508,118 | — | 508,118 | ||||||||||
Total Other Financial Instruments | $ | 155,909 | $ | 651,370 | $ | — | $ | 807,279 | ||||||||
Liabilities: | ||||||||||||||||
Other Financial Instruments: | ||||||||||||||||
Options Written | $ | 13,800 | $ | 4,906 | $ | — | $ | 18,706 | ||||||||
TBA Sales Commitments | — | 297,680 | — | 297,680 | ||||||||||||
Futures Contracts | 33,021 | — | — | 33,021 | ||||||||||||
Forward Exchange Contracts | — | 166,839 | — | 166,839 | ||||||||||||
Swap Contracts |
| —
|
| 225,080 | — | 225,080 | ||||||||||
Total Other Financial Instruments | $ | 46,821 | $ | 694,505 | $ | — | $ | 741,326 |
aFor detailed categories, see the accompanying Statement of Investments.
11. 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.
Abbreviations
Counterparty/Exchange | Currency | Selected Portfolio | ||||||||
BNDP | BNP Paribas | AUD | Australian Dollar | CDO | Collateralized Debt Obligation | |||||
BZWS | Barclays Bank PLC | EUR | Euro | CLO | Collateralized Loan Obligation | |||||
CITI | Citigroup, Inc. | GBP | British Pound | CPI | Consumer Price Index | |||||
DBAB | Deutsche Bank AG | IDR | Indonesian Rupiah | ETF | Exchange Traded Fund | |||||
GSCO | Goldman Sachs Group, Inc. | MYR | Malaysian Ringgit | FHLMC | Federal Home Loan Mortgage Corp | |||||
HSBK | HSBC Bank PLC | USD | United States Dollar | FRN | Floating Rate Note | |||||
JPHQ | JP Morgan Chase & Co. | GO | General Obligation | |||||||
MSCO | Morgan Stanley | IO | Interest Only | |||||||
RBS | Royal Bank of Scotland PLC | LIBOR | London InterBank Offered Rate | |||||||
SMB | Citigroup Global Markets | MFM | Multi-Family Mortgage | |||||||
UBSW | UBS AG | RDA | Redevelopment Agency/Authority | |||||||
SFR | Single Family Revenue |
franklintempleton.com | Annual Report | 51 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Flexible Alpha Bond Fund (continued)
Index | ||
CDX.NA.HY.Series number | CDX North America High Yield Index | |
CDX.NA.IG.Series number | CDX North America Investment Grade Index | |
ITRX.EUR.Series number | iTraxx Europe Index | |
MCDX.NA.Series number | MCDX North America Index |
52 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Franklin Strategic Series and Shareholders of Franklin Flexible Alpha Bond Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Franklin Flexible Alpha Bond Fund (the “Fund”) as of April 30, 2018, the related statement of operations for the year ended April 30, 2018, the statement of changes in net assets for each of the two years in the period ended April 30, 2018, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of April 30, 2018, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended April 30, 2018 and the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of April 30, 2018 by correspondence with the custodian, transfer agent, and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2018
We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.
franklintempleton.com | Annual Report | 53 |
FRANKLIN STRATEGIC SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $203,121 as a long term capital gain dividend for the fiscal year ended April 30, 2018.
Under Section 871(k)(1)(C) of the Code, the Fund hereby reports the maximum amount allowable but no less than $1,366,850 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended April 30, 2018.
54 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Special Meeting of Shareholders
MEETING OF SHAREHOLDERS: OCTOBER 30, 2017 AND RECONVENED ON DECEMBER 15, 2017 AND DECEMBER 29, 2017
(UNAUDITED)
A Special Meeting of Shareholders of Franklin Strategic Series was held at the offices of Franklin Templeton Investments, One Franklin Parkway, San Mateo, California on October 30, 2017 and reconvened on December 15, 2017 and December 29, 2017. The purpose of the meeting was to elect Trustees of Franklin Strategic Series and to vote to approve an amended fundamental investment restriction regarding investments in commodities for the Fund. At the meeting, (i) the following persons were elected by the shareholders to serve as Trustees of Franklin Strategic Series: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, Gregory E. Johnson, Rupert H. Johnson, Jr., J. Michael Luttig, Larry D. Thompson, and John B. Wilson; and (ii) the proposal to approve an amended fundamental investment restriction regarding investments in commodities was approved by shareholders of the Fund. No other business was transacted at the meeting.
In connection with the meeting, management is aware that some shareholders received from the proxy solicitor numerous calls and mailings that may have been distracting. Management is taking steps to ensure that, in the future, for any new shareholder meeting solicitations that occur, such activity is not repeated. Management apologizes for any inconvenience that may have been caused as a result of such calls and mailings.
The results of the voting at the meeting are as follows:
Proposal 1. To elect a Board of Trustees:
Name
| For
| Withheld
| ||||||
Harris J. Ashton | 598,070,781 | 20,352,982 | ||||||
Terrence J. Checki | 598,448,935 | 19,974,827 | ||||||
Mary C. Choksi | 598,960,351 | 19,463,411 | ||||||
Edith E. Holiday | 598,977,253 | 19,446,508 | ||||||
Gregory E. Johnson | 598,637,629 | 19,786,057 | ||||||
Rupert H. Johnson, Jr. | 598,128,852 | 20,294,908 | ||||||
J. Michael Luttig | 598,807,794 | 19,616,557 | ||||||
Larry D. Thompson | 598,633,435 | 19,785,269 | ||||||
John B. Wilson | 598,721,357 | 19,697,837 | ||||||
Total Trust Shares Outstanding*: 1,025,185,272 |
* As of the record date.
franklintempleton.com | Annual Report | 55 |
FRANKLIN STRATEGIC SERIES
SPECIAL MEETING OF SHAREHOLDERS
Proposal 2. To approve an amended fundamental investment restriction regarding investments in commodities:
Shares
| ||||
For | 1,051,390 | |||
Against | 0 | |||
Abstain | 0 | |||
Broker Non-Votes | 42,366 | |||
Total Fund Shares Voted | 1,093,756 | |||
Total Fund Shares Outstanding* | 1,120,847 |
56 | Annual Report | franklintempleton.com |
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during at least the past five years and number of US registered 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
Name,Year of Birth and Address
| Position
| Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
| ||||||||
Harris J. Ashton (1932) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1991 | 137 | Bar-S Foods (meat packing company) (1981-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
| ||||||||
| ||||||||
Terrence J. Checki (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since December 2017 | 112 | Hess Corporation (exploration of oil and gas) (2014-present). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Member of the Council on Foreign Relations (1996-present); Member of the National Committee on U.S.-China Relations (1999-present); member of the Board of Trustees of the Economic Club of New York (2013-present); member of the Board of Trustees of the Foreign Policy Association (2005-present) and member of various other boards of trustees and advisory boards; and formerly, Executive Vice President of the Federal Reserve Bank of New York and Head of its Emerging Markets and Internal Affairs Group and Member of Management Committee (1995-2014); and Visiting Fellow at the Council on Foreign Relations (2014).
| ||||||||
| ||||||||
Mary C. Choksi (1950) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2014 | 137 | Avis Budget Group Inc. (car rental) (2007-present), Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (2017-present). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Founder and Senior Advisor, Strategic Investment Group (investment management group) (2015-2017); Founding Partner and Senior Managing Director, Strategic Investment Group (1987-2015); Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987).
| ||||||||
| ||||||||
Edith E. Holiday (1952) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1998 | 137 | Hess Corporation (exploration of oil and gas) (1993-present), Canadian National Railway (railroad) (2001-present), White Mountains Insurance Group, Ltd. (holding company) (2004-present), Santander Consumer USA Holdings, Inc. (consumer finance) (2016-present), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison – United States Treasury Department (1988-1989).
| ||||||||
| ||||||||
J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2009 | 137 | Boeing Capital Corporation (aircraft financing) (2006-2013). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).
| ||||||||
|
franklintempleton.com | Annual Report | 57 |
Independent Board Members (continued)
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
| ||||||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 137 | The Southern Company (energy company) (2014-present; previously 2010-2012), Graham Holdings Company (education and media organization) (2011-present) and Cbeyond, Inc. (business communications provider) (2010-2012). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; Counsel, Finch McCranie, LLP (law firm) (2015-present); Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of automobiles and commercial vehicles) (2017-present); John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; previously 2011-2012); and formerly, Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-2014); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
| ||||||||
| ||||||||
John B. Wilson (1959) One Franklin Parkway | Lead Independent Trustee | Trustee since 2006 and Lead Independent Trustee since 2008 | 112 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing) (2002-present); Senior Advisor, McKinsey & Co. (consulting) (2017-present); serves on private and non-profit boards; and formerly, President, Staples International and Head of Global Transformation (office supplies) (2012-2016); Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (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
| ||||||||
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
| ||||||||
**Gregory E. Johnson (1961) One Franklin Parkway | Trustee | Since 2013 | 151 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).
| ||||||||
| ||||||||
**Rupert H. Johnson, Jr. (1940) One Franklin Parkway | Chairman of the Board and Trustee | Chairman of the Board since 2013 and Trustee since 1991 | 137 | None | ||||
Principal Occupation During at Least the 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 41 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Alison E. Baur (1964) One Franklin Parkway | Vice President | Since 2012 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. |
58 | Annual Report | franklintempleton.com |
Interested Board Members and Officers (continued)
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
| ||||||||
Gaston Gardey (1967) One Franklin Parkway | Chief Financial Officer, Chief Accounting Officer and Treasurer | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Aliya S. Gordon (1973) One Franklin Parkway | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Steven J. Gray (1955) One Franklin Parkway | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Matthew T. Hinkle (1971) One Franklin Parkway | Chief Executive Officer – Finance and Administration | Since 2017 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton Investments (2009-2017).
| ||||||||
| ||||||||
Edward B. Jamieson (1948) One Franklin Parkway | President and Chief Executive Officer – Investment Management | Since 2010 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and 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.
| ||||||||
| ||||||||
Robert Lim (1948) One Franklin Parkway | Vice President – AML Compliance | Since 2016 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Christopher J. Molumphy (1962) One Franklin Parkway | Vice President | Since 2000 | �� | Not Applicable | Not Applicable | |||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments.
| ||||||||
|
franklintempleton.com | Annual Report | 59 |
Interested Board Members and Officers (continued)
Name, Year of Birth and Address
| Position
| Length of Time Served
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
| ||||||||
Kimberly H. Novotny (1972) 300 S.E. 2nd Street | Vice President | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Robert C. Rosselot (1960) 300 S.E. 2nd Street | Chief Compliance Officer | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).
| ||||||||
| ||||||||
Karen L. Skidmore (1952) One Franklin Parkway | Vice President and Secretary | Since 2006 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Navid J. Tofigh (1972) One Franklin Parkway | Vice President | Since 2015 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Craig S. Tyle (1960) One Franklin Parkway | Vice President | Since 2005 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2011 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
|
60 | Annual Report | franklintempleton.com |
*We base the number of portfolios on each separate series of the US registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated 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/342-5236 to request the SAI.
franklintempleton.com | Annual Report | 61 |
FRANKLIN STRATEGIC SERIES
FRANKLIN FLEXIBLE ALPHA BOND FUND
Board Approval of Investment Management Agreements
FRANKLIN STRATEGIC SERIES
Franklin Flexible Alpha Bond Fund
(Fund)
At an in-person meeting held on April 17, 2018 (Meeting), the Board of Trustees (Board) of Franklin Strategic Series (Trust), including a majority of the trustees who are not “interested persons” as defined in the Investment Company Act of 1940 (Independent Trustees), reviewed and approved the continuance of the investment management agreement between Franklin Advisers, Inc. (FAI) and the Trust, on behalf of the Fund and the investment sub-advisory agreement between FAI and Franklin Templeton Institutional, LLC (Sub-Adviser), an affiliate of FAI, on behalf of the Fund (each a Management Agreement) for an additional one-year period. The Independent Trustees received advice from and met separately with Independent Trustee counsel in considering whether to approve the continuation of each Management Agreement. FAI and the Sub-Adviser are each referred to herein as a Manager.
In considering the continuation of each Management Agreement, the Board reviewed and considered information provided by each Manager at the Meeting and throughout the year at meetings of the Board and its committees. The Board also reviewed and considered information provided in response to a detailed set of requests for information submitted to each Manager by Independent Trustee counsel on behalf of the Independent Trustees in connection with the annual contract renewal process. In addition, prior to the Meeting, the Independent Trustees held a telephonic contract renewal meeting at which the Independent Trustees conferred amongst themselves and Independent Trustee counsel about contract renewal matters. The Board reviewed and considered all of the factors it deemed relevant in approving the continuance of each Management Agreement, including, but not limited to: (i) the nature, extent and quality of the services provided by each Manager; (ii) the investment performance of the Fund; (iii) the costs of the services provided and profits realized by each Manager and its affiliates from the relationship with the Fund; (iv) the extent to which economies of scale are realized as the Fund grows; and (v) whether fee levels reflect these economies of scale for the benefit of Fund investors.
In approving the continuance of each Management Agreement, the Board, including a majority of the Independent Trustees, determined that the terms of the Management Agreement are fair and reasonable and that the continuance of such
Management Agreement is in the interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s determination.
Nature, Extent and Quality of Services
The Board reviewed and considered information regarding the nature, extent and quality of investment management services provided by each Manager and its affiliates to the Fund and its shareholders. This information included, among other things, the qualifications, background and experience of the senior management and investment personnel of each Manager; the structure of investment personnel compensation; oversight of third-party service providers; investment performance reports and related financial information for the Fund; reports on expenses, shareholder services, marketing support payments made to financial intermediaries and third party servicing arrangements; legal and compliance matters; risk controls; pricing and other services provided by each Manager and its affiliates; and management fees charged by each Manager and its affiliates to U.S. funds and other accounts, including management’s explanation of differences among accounts where relevant. The Board also reviewed and considered an annual report on payments made by Franklin Templeton Investments (FTI) or the Fund to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a guidance update in 2016 from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees. The Board noted management’s continuing efforts and expenditures in establishing effective business continuity plans and developing strategies to address areas of heightened concern in the mutual fund industry, such as cybersecurity and liquidity risk management. The Board also recognized management’s commitment to facilitating Board oversight of particular areas, including derivatives and payments to intermediaries, by enhanced reporting.
The Board also reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the Franklin Templeton family of funds. The Board noted the financial position of Franklin Resources, Inc. (FRI), the Managers’ parent, and its commitment to the mutual fund business as evidenced by its continued introduction of new funds, reassessment of the fund offerings in response to the market environment and project initiatives and capital investments relating to the services provided to the Fund by the FTI organization.
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FRANKLIN STRATEGIC SERIES
FRANKLIN FLEXIBLE ALPHA BOND FUND
SHAREHOLDER INFORMATION
Following consideration of such information, the Board was satisfied with the nature, extent and quality of services provided by each Manager and its affiliates to the Fund and its shareholders.
Fund Performance
The Board reviewed and considered the performance results of the Fund over various time periods ended January 31, 2018. The Board considered the performance returns for the Fund in comparison to the performance returns of mutual funds deemed comparable to the Fund included in a universe (Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company data. The Board received a description of the methodology used by Broadridge to select the mutual funds included in a Performance Universe. The Board also reviewed and considered Fund performance reports provided and discussions that occurred with portfolio managers at Board meetings throughout the year. A summary of the Fund’s performance results is below.
The Performance Universe for the Fund included the Fund and all retail and institutional alternative credit focus funds. The Fund commenced operations on August 3, 2015, and thus has been in operation for less than three years. The Board noted that the Fund’s annualized income return and annualized total return for the one-year period were below the medians of its Performance Universe. The Board concluded that the Fund’s performance was acceptable given its short period of operation.
Comparative Fees and Expenses
The Board reviewed and considered information regarding the Fund’s actual total expense ratio and its various components, including, as applicable, management fees; transfer agent expenses; underlying fund expenses; Rule 12b-1 and non-Rule 12b-1 service fees; and other non-management fees. The Board also noted the quarterly and annual reports it receives on all marketing support payments made by FTI to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers (Management Rate), if any, of the Fund in comparison to the median expense ratio and median Management Rate, respectively, of other mutual funds deemed comparable to and with a similar expense structure as the Fund selected by Broadridge (Expense Group). Broadridge fee and 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 and Management Rates generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Broadridge to be an appropriate measure of comparative fees and expenses. The Broadridge Management Rate includes administrative charges, and the actual total expense ratio, for comparative consistency, was shown for Class A shares for funds with multiple classes of shares. The Board received a description of the methodology used by Broadridge to select the mutual funds included in an Expense Group.
The Expense Group for the Fund included the Fund and 14 other alternative credit focus funds. The Board noted that the Management Rate and actual total expense ratio for the Fund were below the medians of its Expense Group. The Board concluded that the Management Rate charged to the Fund is reasonable. In doing so, the Board noted that the Fund’s actual total expense ratio reflected a fee waiver from management and that the Sub-Adviser was paid by FAI out of the management fee FAI received from the Fund.
Profitability
The Board reviewed and considered information regarding the profits realized by each Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board considered the Fund profitability analysis that addresses the overall profitability of FTI’s U.S. fund business, as well as its profits in providing investment management and other services to each of the individual funds during the 12-month period ended September 30, 2017, being the most recent fiscal year-end for FRI. The Board noted that although management continually makes refinements to its methodologies used in calculating profitability in response to organizational and product related changes, the overall methodology has remained consistent with that used in the Fund’s profitability report presentations from prior years. Additionally, Pricewaterhouse-Coopers LLP, auditor to Franklin Resources, Inc. and certain Franklin Templeton funds, has been engaged to periodically review and assess the allocation methodologies to be used solely by the Fund’s Board with respect to the profitability analysis.
The Board noted management’s belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by each 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
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FRANKLIN STRATEGIC SERIES
FRANKLIN FLEXIBLE ALPHA BOND FUND
SHAREHOLDER INFORMATION
and efficiencies initiated by management. The Board also noted management’s expenditures in improving shareholder services provided to the Fund, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from recent SEC and other regulatory requirements.
The Board also considered the extent to which each Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services, potential benefits resulting from personnel and systems enhancements necessitated by fund growth, as well as increased leverage with service providers and counterparties. Based upon its consideration of all these factors, the Board concluded that the level of profits realized by each Manager and its affiliates from providing services to the Fund was not excessive in view of the nature, extent and quality of services provided to the Fund.
Economies of Scale
The Board reviewed and considered the extent to which each Manager may realize economies of scale, if any, as the Fund grows larger and whether the Fund’s management fee structure reflects any economies of scale for the benefit of shareholders. With respect to possible economies of scale, the Board noted the existence of management fee breakpoints, which operate generally to share any economies of scale with a Fund’s shareholders by reducing the Fund’s effective management fees as the Fund grows in size. The Board considered each Manager’s view that any analyses of potential economies of scale in managing a particular fund are inherently limited in light of the joint and common costs and investments each Manager incurs across the Franklin Templeton family of funds as a whole. The Board also noted that the Fund commenced operations on August 3, 2015 and recognized that there would not likely be any economies of scale until the Fund’s assets grow.
Conclusion
Based on its review, consideration and evaluation of all factors it believed relevant, including the above-described factors and conclusions, the Board unanimously approved the continuation of each Management Agreement for an additional one-year period.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the US 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, on behalf of the Fund, files a complete statement of investments with the US 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.
64 | Annual Report | franklintempleton.com |
Annual Report and Shareholder Letter | ||
Franklin Flexible Alpha Bond Fund | ||
Investment Manager | ||
Franklin Advisers, Inc. | ||
Subadvisor | ||
Franklin Templeton Institutional, LLC | ||
Distributor | ||
Franklin Templeton Distributors, Inc. | ||
(800) DIAL BEN® / 342-5236 | ||
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 help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
© 2018 Franklin Templeton Investments. All rights reserved. | 953 A 06/18 |
Franklin Templeton Investments
Why choose Franklin Templeton Investments?
Successful investing begins with ambition. And achievement only comes when you reach for it. That’s why we continually strive to deliver better outcomes for investors. No matter what your goals are, our deep, global investment expertise allows us to offer solutions that can help.
During our more than 70 years of experience, we’ve managed through all kinds of markets—up, down and those in between. We’re always preparing for what may come next. It’s because of this, combined with our strength as one of the world’s largest asset managers that we’ve earned the trust of millions of investors around the world.
Dear Shareholder:
During the 12 months ended April 30, 2018, mostly upbeat economic data, better corporate earnings and generally supportive monetary policies, combined with the passage of the US Tax Reform bill, aided markets. However, investor sentiment was dampened by worries about rising US inflation and trade tensions between the US and China, and a sell-off in technology firms occurred amid concerns about consumer data privacy.
The US Federal Reserve began reducing its balance sheet in October 2017 and raised its target for the federal funds rate in June and December 2017 and March 2018. It maintained its forecast of three rate increases in 2018. The Fed left its target unchanged at its May 2018 meeting and expressed confidence that inflation was moving closer to its goal. The 10-year US Treasury yield began the period at 2.29% and ended the period at 2.95%. Within this environment, US stocks, as measured by the Standard & Poor’s® 500 Index, generated a double-digit positive total return. Investment-grade bonds, as measured by the Bloomberg Barclays US Aggregate Bond Index, had a slightly negative total return.
We are committed to our long-term perspective and disciplined investment approach as we conduct a rigorous, fundamental analysis of securities with a regular emphasis on investment risk management.
We believe active, professional investment management serves investors well. We also recognize the important role of financial advisors in today’s markets and encourage investors
to continue to seek their advice. Amid changing markets and economic conditions, we are confident investors with a well-diversified portfolio and a patient, long-term outlook should be well positioned for the years ahead.
In addition, Franklin Strategic Income Fund’s annual report includes more detail about prevailing conditions and a discussion about investment decisions during the period. Please remember all securities markets fluctuate, as do mutual fund share prices.
We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your future investment needs.
Sincerely,
Edward B. Jamieson
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2018, unless otherwise indicated. The information is not a complete analysis of every aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.
Not FDIC Insured | May Lose Value | No Bank Guarantee |
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Franklin Strategic Income Fund
This annual report for Franklin Strategic Income Fund covers the fiscal year ended April 30, 2018.
Your Fund’s Goal and Main Investments
The 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 US and foreign debt securities, including those in emerging markets.
The Fund may invest in all varieties of fixed, variable and floating rate income securities, including bonds, US and foreign government and agency securities, corporate loans (and loan participations), mortgage-backed securities and other asset-backed securities and convertible securities.
Performance Overview
The Fund’s Class A shares delivered a +0.64% cumulative total return for the 12 months under review. In comparison, the Bloomberg Barclays US Aggregate Bond Index, which represents the US investment-grade fixed rate taxable bond market, had a -0.32% total return.1 The Lipper Multi-Sector Income Funds Classification Average, which consists of funds chosen by Lipper that seek current income by allocating assets among different fixed income securities sectors, with a significant portion rated below investment grade, produced a +2.31% total return.2 You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
The US economy grew during the 12 months under review. The economy strengthened in 2017’s second and third quarters but moderated in the next two quarters. The slower growth in 2018’s first quarter reflected a slowdown in consumer spending, residential fixed investment, exports, and state and local government spending. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 4.4% in April 2017 to 3.9% at period-end.3 Annual inflation, as measured by the Consumer Price Index, increased from 2.2% in April 2017 to 2.5% at period-end.3
The US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its June and December 2017 meetings and began reducing its balance sheet in October as part of its ongoing effort to normalize monetary policy. In February 2018, new Fed Chair Jerome Powell spoke before Congress and indicated the Fed saw signs of a continued strong labor market and economic growth. He reiterated the Fed’s intention to gradually raise interest rates in an effort to keep the economy from overheating and as inflation increases toward the Fed’s target. However, he noted there was no evidence of the economy overheating and he had yet to see a clear upward move in wages. At its March meeting, the Fed raised its target range for the federal funds rate 0.25% to 1.50%–1.75% and maintained its forecast of three rate increases in 2018. Additionally, the Fed upgraded its economic forecasts for 2018 and 2019, and its rate projections indicated the number of rate hikes would increase in 2019 and 2020.
The 10-year Treasury yield, which moves inversely to its price, shifted throughout the period. The yield rose in June 2017 amid renewed optimism for faster economic growth and was supported in July by hawkish comments from key central bankers around the world. Easing concerns about Hurricane Irma’s economic impact, the Fed’s balance sheet normalization beginning in October, the passage of the tax reform bill in
1. Source: Morningstar.
2. Source: Lipper, a Thomson Reuters Company. For the 12-month period ended 4/30/18, this category consisted of 324 funds. Lipper calculations do not include sales charges or expense subsidization by a fund’s manager. Fund performance relative to the average may have differed if these or other factors had been considered.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
3. Source: Bureau of Labor Statistics.
See www.franklintempletondatasources.com for additional data provider information.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Consolidated Statement of Investments (SOI). The Consolidated SOI begins on page 16.
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FRANKLIN STRATEGIC INCOME FUND
December and indications of higher inflation, especially in the first two months of 2018, also pushed the yield higher. However, some factors weighed on the Treasury yield at certain points during the period, including concerns about political uncertainties in the US, tensions between the US and North Korea, the Trump administration’s protectionist trade policies and escalating trade tensions between the US and China. In April, higher inflation expectations led the 10-year yield to reach 3.03%, the highest level since January 2014. Overall, the 10-year Treasury yield rose from 2.29% at the beginning of the period to 2.95% at period-end.
Portfolio Composition*
Based on Consolidated Net Assets
4/30/18 | 4/30/17 | |||||||
High Yield Corporate Bonds | 32.0% | 28.8% | ||||||
Investment-Grade Corporate Bonds | 16.2% | 17.0% | ||||||
Floating-Rate Loans | 15.6% | 16.6% | ||||||
Mortgage-Backed Securities | 14.7% | 12.8% | ||||||
International Government & Agency Bonds | 8.8% | 8.5% | ||||||
Collateral Loan Obligations | 5.5% | 4.1% | ||||||
Asset-Backed Securities | 2.4% | 2.3% | ||||||
Commercial Mortgage-Backed Securities | 2.4% | 2.0% | ||||||
US Treasury Securities | 2.0% | 3.5% | ||||||
Treasury Inflation-Protected Securities | 2.0% | 3.0% | ||||||
Municipal Bonds | 1.2% | 2.1% | ||||||
Other | 0.7% | 2.5% | ||||||
Short-Term Investments & Other Net Assets | -3.5% | -3.2% |
*Percentages reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. The composition may not match the SOI.
Investment Strategy
We use an active asset allocation strategy to try to achieve the Fund’s investment goals. We employ a top-down analysis of macroeconomic trends combined with a bottom-up fundamental analysis of market sectors, industries and issuers to try to take advantage of varying sector reactions to economic events. We regularly enter into various currency-related transactions involving derivative instruments, including currency and cross currency forwards, currency swaps, currency and currency index futures contracts and currency options. We may also enter into interest-rate and credit-related transactions involving derivative instruments, including interest-rate, fixed income total return and credit default swaps and interest rate and/or bond futures contracts.
What is a currency forward contract?
|
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency in exchange for another currency at a specific exchange rate on a future date. Currency forward contracts are privately traded in the interbank market, not on a centralized exchange.
|
What are swap agreements?
|
Swap agreements, such as interest-rate, currency and credit default swaps, are contracts between the Fund and another party (the swap counterparty). In a basic swap transaction, the Fund agrees with the swap counterparty to exchange the returns (or differentials in rates of return) earned or realized on a particular “notional amount” of underlying instruments. The notional amount is the set amount selected by the parties as the basis on which to calculate the obligations that they have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead, they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments or at given interest rates.
|
What is a futures contract?
|
A futures contract is an agreement between the Fund and a counterparty made through a US or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
|
What is an option?
|
An option is a contract to buy or sell a specific financial product known as the option’s underlying instrument at a specific price. The buyer of an option has the right, but not the obligation, to buy or sell the underlying instrument at or until a specified expiration date. Conversely, the seller (“writer”) of an option who opens a transaction is obligated to buy or sell the underlying instrument should the option holder exercise that right.
|
Manager’s Discussion
For global fixed income markets, the first half of the 12 months under review were generally characterized by low levels of volatility and an increase in risk appetite amid low interest rates. The Fed raised its rates three times during the period in June and December of 2017 and most recently in March 2018, citing a strengthening economic outlook and strong labor market conditions. However, toward the end of the second half of the period, volatility increased as the Trump administration’s protectionist policy and escalating trade tensions between the US and China (as well as Canada, Mexico and Europe)
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FRANKLIN STRATEGIC INCOME FUND
dampened investor sentiment. Outside the US, many major economies kept their interest rates unchanged.
In this environment, all global fixed income sectors outpaced US Treasuries on a duration-matched basis. Senior secured floating rate loans, high yield bonds and emerging market debt securities were the strongest performers, as were investment-grade bonds.
What is duration?
|
Duration is a measure of a bond’s price sensitivity to interest-rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest-rate changes than a portfolio with a higher duration.
|
Dividend Distributions*
5/1/17–4/30/18
Dividend per Share (cents) | ||||||||||||||||||||
Month | Class A | Class C | Class R | Class R6 | Advisor Class | |||||||||||||||
May | 2.10 | 1.77 | 1.89 | 2.42 | 2.30 | |||||||||||||||
June | 2.09 | 1.76 | 1.88 | 2.42 | 2.30 | |||||||||||||||
July | 2.09 | 1.76 | 1.88 | 2.42 | 2.29 | |||||||||||||||
August | 2.09 | 1.75 | 1.88 | 2.43 | 2.30 | |||||||||||||||
September | 2.09 | 1.76 | 1.89 | 2.42 | 2.30 | |||||||||||||||
October | 2.08 | 1.74 | 1.87 | 2.59 | 2.29 | |||||||||||||||
November | 2.09 | 1.74 | 1.87 | 2.43 | 2.30 | |||||||||||||||
December | 2.97 | 2.61 | 2.74 | 3.32 | 3.20 | |||||||||||||||
January | 2.98 | 2.66 | 2.78 | 3.28 | 3.18 | |||||||||||||||
February | 2.98 | 2.68 | 2.79 | 3.25 | 3.17 | |||||||||||||||
March | 2.97 | 2.66 | 2.79 | 3.25 | 3.16 | |||||||||||||||
April | 2.97 | 2.66 | 2.78 | 3.25 | 3.16 | |||||||||||||||
Total | 29.50 | 25.55 | 27.04 | 33.48 | 31.95 |
*The distribution amount is the sum of all net investment income distributions for the period shown. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.
During the period, the Fund’s exposure to high yield bonds provided a significant boost to performance. Additionally, our non-US duration exposure also added to results. Senior secured floating-rate loans, investment-grade corporate credit and emerging market sovereign debt securities also benefited returns. In contrast, the Fund’s more defensive positioning on
the US yield curve hurt performance. Our exposure to foreign currencies also detracted.
What is the yield curve?
|
A yield curve is a line that plots the yield to maturity of bonds having equal credit quality against their maturity dates.
|
Corporate credit fundamentals remained generally supportive and technical conditions continued to be strong as the low interest-rate backdrop provided strong demand for corporate credit. We remained allocated across spread sectors, both corporate and securitized. Over the period, we increased our exposure to high yield corporate credit and non-agency residential mortgage-backed securities. We also added to collateralized loan obligations.
We reduced allocation to other emerging market and investment-grade corporate credit. We continued to find what we considered opportunities in global bond markets outside the US, but pared our exposure over the period.
Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs.
Christopher J. Molumphy, CFA | ||
Roger A. Bayston, CFA | ||
Patricia O’Connor, CFA | ||
Portfolio Management Team |
CFA® is a trademark owned by CFA Institute.
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FRANKLIN STRATEGIC INCOME FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2018, 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.
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FRANKLIN STRATEGIC INCOME FUND
Performance Summary as of April 30, 2018
The performance tables and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses. Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities.
Performance as of 4/30/181
Cumulative total return excludes sales charges. Average annual total return includes maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 4.25% and the minimum is 0%. Class A: 4.25% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class
| Cumulative Total Return2
| Average Annual Total Return3
| ||
A
| ||||
1-Year
| +0.64% | -3.66% | ||
5-Year
| +8.68% | +0.80% | ||
10-Year
| +56.46% | +4.12% | ||
Advisor
| ||||
1-Year
| +0.79% | +0.79% | ||
5-Year
| +10.02% | +1.93% | ||
10-Year
| +60.36% | +4.84% |
Distribution | 30-Day Standardized Yield5 | |||||||||||||||
Share Class
| Rate4 | (with waiver) | (without waiver) | |||||||||||||
A
| 2.94% | 4.15% | 4.10% | |||||||||||||
Advisor
| 3.32% | 4.60% | 4.54% |
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.
See page 9 for Performance Summary footnotes.
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FRANKLIN STRATEGIC INCOME FUND
PERFORMANCE SUMMARY
Total Return Index Comparison for a Hypothetical $10,000 Investment1
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.
See page 9 for Performance Summary footnotes.
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FRANKLIN STRATEGIC INCOME FUND
PERFORMANCE SUMMARY
Distributions (5/1/17–4/30/18)
Share Class
| Net Investment Income
| |||
A
| $0.2950 | |||
C
| $0.2555 | |||
R
| $0.2704 | |||
R6
| $0.3348 | |||
Advisor
| $0.3195 |
Total Annual Operating Expenses8
Share Class
| With Waiver
| Without Waiver
| ||||||
A
| 0.89% | 0.95% | ||||||
Advisor
| 0.64% | 0.70% |
Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus.
All investments involve risks, including possible loss of principal. 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. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yields reflect the higher credit risks associated with certain lower rated securities held in the portfolio. Floating rate loans and high yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy. The risks of foreign securities include currency fluctuations and political uncertainty. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Investing in derivative securities and the use of foreign currency techniques involve special risks as such may not achieve the anticipated benefits and/or may result in losses to the Fund. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 8/31/18. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not been annualized.
4. Distribution rate is based on the sum of the respective class’s dividend distributions over the past 12 months and the maximum offering price (NAV for Advisor Class) per share on 4/30/18.
5. The Fund’s 30-day standardized yield is calculated over a trailing 30-day period using the yield to maturity on bonds and/or the dividends accrued on stocks. It may not equal the Fund’s actual income distribution rate, which reflects the Fund’s past dividends paid to shareholders.
6. Source: Morningstar. The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index representing the US 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.
7. Source: Lipper, a Thomson Reuters Company. 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 Incomes 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 US and foreign governments, with a significant portion rated below investment grade. For the 12-month period ended 4/30/18, there were 324 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.
8. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Consolidated Financial Highlights sections in this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. See www.franklintempletondatasources.com for additional data provider information.
franklintempleton.com | Annual Report | 9 |
FRANKLIN STRATEGIC INCOME FUND
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads) on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
Actual (actual return after expenses) | Hypothetical (5% annual return before expenses) | |||||||||||||||||
Share Class | Beginning Account Value 11/1/17 | Ending Account Value 4/30/18 | Expenses Paid During Period 11/1/17–4/30/181,2 | Ending Account Value 4/30/18 | Expenses Paid During 11/1/17–4/30/181,2 | Net Annualized Ratio2 | ||||||||||||
A | $1,000 | $987.70 | $4.14 | $1,020.63 | $4.21 | 0.84% | ||||||||||||
C | $1,000 | $985.70 | $6.11 | $1,018.65 | $6.21 | 1.24% | ||||||||||||
R | $1,000 | $986.50 | $5.37 | $1,019.39 | $5.46 | 1.09% | ||||||||||||
R6 | $1,000 | $989.60 | $2.27 | $1,022.51 | $2.31 | 0.46% | ||||||||||||
Advisor | $1,000 | $987.90 | $2.91 | $1,021.87 | $2.96 | 0.59% |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 181/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
10 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Consolidated Financial Highlights
Franklin Strategic Income Fund
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.84 | $ 9.32 | $10.04 | $10.57 | $10.86 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.39 | 0.39 | 0.42 | 0.42 | 0.44 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.32 | ) | 0.30 | (0.74 | ) | (0.30 | ) | (0.18 | ) | |||||||||||
Total from investment operations | 0.07 | 0.69 | (0.32 | ) | 0.12 | 0.26 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.30 | ) | (0.17 | ) | (0.40 | ) | (0.55 | ) | (0.45 | ) | ||||||||||
Net realized gains | — | — | — | (0.10 | ) | (0.10 | ) | |||||||||||||
Total distributions | (0.30 | ) | (0.17 | ) | (0.40 | ) | (0.65 | ) | (0.55 | ) | ||||||||||
Net asset value, end of year | $ 9.61 | $ 9.84 | $ 9.32 | $10.04 | $10.57 | |||||||||||||||
Total returnc | 0.64% | 7.50% | (3.14)% | 1.16% | 2.52% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.90% | 0.88% | 0.88% | 0.86% | 0.86% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 0.85% | 0.82% | 0.84% | 0.85% | 0.86% | e | ||||||||||||||
Net investment income | 3.93% | 4.08% | 4.44% | 4.03% | 4.16% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $3,291,002 | $3,833,786 | $4,500,752 | $5,242,844 | $5,182,490 | |||||||||||||||
Portfolio turnover rate | 115.94% | 140.83% | 88.04% | 72.51% | 54.11% | |||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 47.40% | 87.33% | 48.33% | 49.36% | 54.11% |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
fSee Note 1(h) regarding mortgage dollar rolls.
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | | Annual Report | 11 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.84 | $ 9.31 | $10.04 | $10.57 | $10.85 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.35 | 0.35 | 0.38 | 0.38 | 0.40 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.33 | ) | 0.31 | (0.75 | ) | (0.30 | ) | (0.17 | ) | |||||||||||
Total from investment operations | 0.02 | 0.66 | (0.37 | ) | 0.08 | 0.23 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.26 | ) | (0.13 | ) | (0.36 | ) | (0.51 | ) | (0.41 | ) | ||||||||||
Net realized gains | — | — | — | (0.10 | ) | (0.10 | ) | |||||||||||||
Total distributions | (0.26 | ) | (0.13 | ) | (0.36 | ) | (0.61 | ) | (0.51 | ) | ||||||||||
Net asset value, end of year | $ 9.60 | $ 9.84 | $ 9.31 | $10.04 | $10.57 | |||||||||||||||
Total returnc | 0.14% | 7.19% | (3.64)% | 0.76% | 2.20% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.30% | 1.28% | 1.28% | 1.26% | 1.26% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.25% | 1.22% | 1.24% | 1.25% | 1.26% | e | ||||||||||||||
Net investment income | 3.53% | 3.68% | 4.04% | 3.63% | 3.76% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $1,078,890 | $1,385,981 | $1,645,852 | $2,070,739 | $2,109,049 | |||||||||||||||
Portfolio turnover rate | 115.94% | 140.83% | 88.04% | 72.51% | 54.11% | |||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 47.40% | 87.33% | 48.33% | 49.36% | 54.11% |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
fSee Note 1(h) regarding mortgage dollar rolls.
12 | Annual Report | | The accompanying notes are an integral part of these consolidated financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.81 | $ 9.28 | $10.01 | $10.54 | $10.82 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.36 | 0.37 | 0.39 | 0.39 | 0.41 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.33 | ) | 0.31 | (0.74 | ) | (0.29 | ) | (0.17 | ) | |||||||||||
Total from investment operations | 0.03 | 0.68 | (0.35 | ) | 0.10 | 0.24 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.27 | ) | (0.15 | ) | (0.38 | ) | (0.53 | ) | (0.42 | ) | ||||||||||
Net realized gains | — | — | — | (0.10 | ) | (0.10 | ) | |||||||||||||
Total distributions | (0.27 | ) | (0.15 | ) | (0.38 | ) | (0.63 | ) | (0.52 | ) | ||||||||||
Net asset value, end of year | $ 9.57 | $ 9.81 | $ 9.28 | $10.01 | $10.54 | |||||||||||||||
Total return | 0.29% | 7.38% | (3.50)% | 0.91% | 2.36% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.15% | 1.13% | 1.13% | 1.11% | 1.11% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 1.10% | 1.07% | 1.09% | 1.10% | 1.11% | d | ||||||||||||||
Net investment income | 3.68% | 3.83% | 4.19% | 3.78% | 3.91% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $105,692 | $146,552 | $181,671 | $223,758 | $227,359 | |||||||||||||||
Portfolio turnover rate | 115.94% | 140.83% | 88.04% | 72.51% | 54.11% | |||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollse | 47.40% | 87.33% | 48.33% | 49.36% | 54.11% |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
eSee Note 1(h) regarding mortgage dollar rolls.
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | | Annual Report | 13 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014a | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.86 | $ 9.33 | $10.05 | $10.58 | $10.87 | |||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment incomec | 0.43 | 0.43 | 0.46 | 0.46 | 0.49 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.34 | ) | 0.31 | (0.74 | ) | (0.30 | ) | (0.19 | ) | |||||||||||
Total from investment operations | 0.09 | 0.74 | (0.28 | ) | 0.16 | 0.30 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.33 | ) | (0.21 | ) | (0.44 | ) | (0.59 | ) | (0.49 | ) | ||||||||||
Net realized gains | — | — | — | (0.10 | ) | (0.10 | ) | |||||||||||||
Total distributions | (0.33 | ) | (0.21 | ) | (0.44 | ) | (0.69 | ) | (0.59 | ) | ||||||||||
Net asset value, end of year | $ 9.62 | $ 9.86 | $ 9.33 | $10.05 | $10.58 | |||||||||||||||
Total return | 0.95% | 8.03% | (2.76)% | 1.54% | 2.90% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.50% | 0.48% | 0.49% | 0.48% | 0.48% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 0.45% | 0.42% | 0.45% | 0.47% | 0.48% | e | ||||||||||||||
Net investment income | 4.33% | 4.48% | 4.83% | 4.41% | 4.54% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $433,068 | $369,106 | $286,503 | $253,929 | $247,007 | |||||||||||||||
Portfolio turnover rate | 115.94% | 140.83% | 88.04% | 72.51% | 54.11% | |||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 47.40% | 87.33% | 48.33% | 49.36% | 54.11% |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dBenefit of expense reduction rounds to less than 0.01%.
eBenefit of waiver and payments by affiliates rounds to less than 0.01%.
fSee Note 1(h) regarding mortgage dollar rolls.
14 | Annual Report | | The accompanying notes are an integral part of these consolidated financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
Franklin Strategic Income Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.85 | $ 9.33 | $10.05 | $10.58 | $10.86 | |||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.41 | 0.42 | 0.44 | 0.44 | 0.47 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.32 | ) | 0.30 | (0.74 | ) | (0.29 | ) | (0.17 | ) | |||||||||||
Total from investment operations | 0.09 | 0.72 | (0.30 | ) | 0.15 | 0.30 | ||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.32 | ) | (0.20 | ) | (0.42 | ) | (0.58 | ) | (0.48 | ) | ||||||||||
Net realized gains | — | — | — | (0.10 | ) | (0.10 | ) | |||||||||||||
Total distributions | (0.32 | ) | (0.20 | ) | (0.42 | ) | (0.68 | ) | (0.58 | ) | ||||||||||
Net asset value, end of year | $ 9.62 | $ 9.85 | $ 9.33 | $10.05 | $10.58 | |||||||||||||||
Total return | 0.79% | 7.76% | (2.89)% | 1.41% | 2.87% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.65% | 0.63% | 0.63% | 0.61% | 0.61% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.60% | 0.57% | 0.59% | 0.60% | 0.61% | d | ||||||||||||||
Net investment income | 4.18% | 4.33% | 4.69% | 4.28% | 4.41% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $933,747 | $1,070,103 | $904,899 | $1,130,796 | $1,010,755 | |||||||||||||||
Portfolio turnover rate | 115.94% | 140.83% | 88.04% | 72.51% | 54.11% | |||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollse | 47.40% | 87.33% | 48.33% | 49.36% | 54.11% |
aThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cBenefit of expense reduction rounds to less than 0.01%.
dBenefit of waiver and payments by affiliates rounds to less than 0.01%.
eSee Note 1(h) regarding mortgage dollar rolls.
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | | Annual Report | 15 |
FRANKLIN STRATEGIC SERIES
Consolidated Statement of Investments, April 30, 2018
Franklin Strategic Income Fund
Country | Shares/ Units/ Warrants | Value | ||||||||||||||||
| ||||||||||||||||||
Common Stocks and Other Equity Interests 0.5% | ||||||||||||||||||
Consumer Services 0.0%† | ||||||||||||||||||
a,aa,ab | Turtle Bay Resort | United States | 5,579,940 | $ | 1,009,115 | |||||||||||||
|
| |||||||||||||||||
Energy 0.5% | ||||||||||||||||||
a | Breitburn Energy Partners LP | United States | 831,762 | 9,565,263 | ||||||||||||||
a | Chaparral Energy Inc. | United States | 94,305 | 1,603,185 | ||||||||||||||
a | Chaparral Energy Inc., A | United States | 283,517 | 5,315,944 | ||||||||||||||
a,b | Chaparral Energy Inc., A, 144A | United States | 3,418 | 64,088 | ||||||||||||||
a | Energy XXI Gulf Coast Inc., wts., 12/30/21 | United States | 47,227 | 1,653 | ||||||||||||||
a | Halcon Resources Corp. | United States | 955,276 | 5,129,832 | ||||||||||||||
a | Halcon Resources Corp., wts., 9/09/20 | United States | 75,770 | 47,356 | ||||||||||||||
a | Linn Energy Inc. | United States | 104,517 | 4,097,066 | ||||||||||||||
a | Midstates Petroleum Co. Inc. | United States | 6,993 | 97,832 | ||||||||||||||
a,ab | Midstates Petroleum Co. Inc., wts., 4/21/20 | United States | 49,552 | 1,083 | ||||||||||||||
|
| |||||||||||||||||
25,923,302 | ||||||||||||||||||
|
| |||||||||||||||||
Materials 0.0%† | ||||||||||||||||||
a | Verso Corp., A | United States | 38,905 | 702,624 | ||||||||||||||
a | Verso Corp., wts., 7/25/23 | United States | 4,095 | 6,347 | ||||||||||||||
|
| |||||||||||||||||
708,971 | ||||||||||||||||||
|
| |||||||||||||||||
Retailing 0.0%† | ||||||||||||||||||
a,ab,c | K2016470219 South Africa Ltd., A | South Africa | 125,940,079 | 101,061 | ||||||||||||||
a,ab,c | K2016470219 South Africa Ltd., B | South Africa | 12,532,821 | 10,057 | ||||||||||||||
|
| |||||||||||||||||
111,118 | ||||||||||||||||||
|
| |||||||||||||||||
Transportation 0.0%† | ||||||||||||||||||
a,ab | CEVA Holdings LLC | United States | 1,570 | 588,739 | ||||||||||||||
|
| |||||||||||||||||
Total Common Stocks and Other Equity Interests | 28,341,245 | |||||||||||||||||
|
| |||||||||||||||||
Management Investment Companies 7.8% | ||||||||||||||||||
Diversified Financials 7.8% | ||||||||||||||||||
d | Franklin Lower Tier Floating Rate Fund | United States | 25,361,119 | 250,567,853 | ||||||||||||||
d | Franklin Middle Tier Floating Rate Fund | United States | 21,833,687 | 206,546,684 | ||||||||||||||
|
| |||||||||||||||||
Total Management Investment Companies | 457,114,537 | |||||||||||||||||
|
| |||||||||||||||||
Convertible Preferred Stocks 0.0%† | ||||||||||||||||||
Transportation 0.0%† | ||||||||||||||||||
a,ab | CEVA Holdings LLC, cvt. pfd., A-1 | United States | 62 | 32,550 | ||||||||||||||
a,ab | CEVA Holdings LLC, cvt. pfd., A-2 | United States | 3,399 | 1,274,460 | ||||||||||||||
|
| |||||||||||||||||
Total Convertible Preferred Stocks | 1,307,010 | |||||||||||||||||
|
| |||||||||||||||||
Principal Amount* | ||||||||||||||||||
|
| |||||||||||||||||
Convertible Bonds (Cost $8,996,239) 0.1% | ||||||||||||||||||
Energy 0.1% | ||||||||||||||||||
CHC Group LLC/CHC Finance Ltd., cvt., secured note, zero cpn., 10/01/20 | Cayman Islands | 4,862,832 | 5,373,429 | |||||||||||||||
|
|
16 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Corporate Bonds 48.8% | ||||||||||||||||||
Automobiles & Components 0.5% | ||||||||||||||||||
Fiat Chrysler Automobiles NV, senior note, 5.25%, 4/15/23 | United Kingdom | 10,000,000 | $ | 10,408,050 | ||||||||||||||
The Goodyear Tire & Rubber Co., senior bond, 5.00%, 5/31/26 | United States | 16,000,000 | 15,300,000 | |||||||||||||||
senior note, 5.125%, 11/15/23 | United States | 2,900,000 | 2,892,750 | |||||||||||||||
|
| |||||||||||||||||
28,600,800 | ||||||||||||||||||
|
| |||||||||||||||||
Banks 4.0% | ||||||||||||||||||
Bank of America Corp., senior bond, 3.248%, 10/21/27 | United States | 5,000,000 | 4,656,671 | |||||||||||||||
senior note, 3.50%, 4/19/26 | United States | 46,000,000 | 44,422,503 | |||||||||||||||
CIT Group Inc., senior bond, 5.00%, 8/15/22 | United States | 14,817,000 | 15,187,425 | |||||||||||||||
senior note, 5.375%, 5/15/20 | United States | 447,000 | 462,645 | |||||||||||||||
Citigroup Inc., senior note, 3.30%, 4/27/25 | United States | 2,500,000 | 2,397,806 | |||||||||||||||
senior note, 3.40%, 5/01/26 | United States | 23,300,000 | 22,063,439 | |||||||||||||||
senior note, 3.20%, 10/21/26 | United States | 20,000,000 | 18,642,340 | |||||||||||||||
sub. bond, 5.50%, 9/13/25 | United States | 10,000,000 | 10,679,732 | |||||||||||||||
sub. note, 4.05%, 7/30/22 | United States | 5,000,000 | 5,060,432 | |||||||||||||||
b | ICICI Bank Ltd./Dubai, senior note, 144A, 3.80%, 12/14/27 | India | 15,800,000 | 14,675,593 | ||||||||||||||
JPMorgan Chase & Co., e junior sub. bond, R, 6.00% to 8/01/23, FRN thereafter, Perpetual | United States | 10,000,000 | 10,196,800 | |||||||||||||||
e junior sub. bond, X, 6.10% to 10/01/24, FRN thereafter, Perpetual | United States | 5,000,000 | 5,187,500 | |||||||||||||||
senior bond, 3.30%, 4/01/26 | United States | 10,000,000 | 9,513,289 | |||||||||||||||
senior bond, 3.20%, 6/15/26 | United States | 7,000,000 | 6,627,199 | |||||||||||||||
senior bond, 2.95%, 10/01/26 | United States | 5,000,000 | 4,627,861 | |||||||||||||||
sub. note, 3.375%, 5/01/23 | United States | 10,000,000 | 9,802,641 | |||||||||||||||
sub. note, 3.875%, 9/10/24 | United States | 10,000,000 | 9,868,690 | |||||||||||||||
Royal Bank of Scotland Group PLC, sub. note, 5.125%, 5/28/24 | United Kingdom | 7,600,000 | 7,734,710 | |||||||||||||||
Wells Fargo & Co., e junior sub. bond, S, 5.90% to 6/15/24, FRN thereafter, Perpetual | United States | 21,000,000 | 21,393,750 | |||||||||||||||
senior note, 3.00%, 4/22/26 | United States | 11,000,000 | 10,159,206 | |||||||||||||||
|
| |||||||||||||||||
233,360,232 | ||||||||||||||||||
|
| |||||||||||||||||
Capital Goods 1.4% | ||||||||||||||||||
Aircastle Ltd., senior note, 4.125%, 5/01/24 | United States | 25,500,000 | 25,053,750 | |||||||||||||||
b | Beacon Roofing Supply Inc., senior note, 144A, 4.875%, 11/01/25 | United States | 15,000,000 | 14,250,000 | ||||||||||||||
CNH Industrial NV, senior bond, 3.85%, 11/15/27 | United Kingdom | 6,600,000 | 6,318,675 | |||||||||||||||
General Electric Co., senior bond, 4.50%, 3/11/44 | United States | 2,000,000 | 1,930,039 | |||||||||||||||
Legrand France SA, senior bond, 8.50%, 2/15/25 | France | 200,000 | 251,078 | |||||||||||||||
b | Terex Corp., senior note, 144A, 5.625%, 2/01/25 | United States | 14,600,000 | 14,545,250 | ||||||||||||||
b | Vertiv Group Corp., senior note, 144A, 9.25%, 10/15/24 | United States | 16,900,000 | 17,153,500 | ||||||||||||||
|
| |||||||||||||||||
79,502,292 | ||||||||||||||||||
|
| |||||||||||||||||
Commercial & Professional Services 0.9% | ||||||||||||||||||
b | IHS Markit Ltd., senior note, 144A, 4.00%, 3/01/26 | United States | 11,700,000 | 11,202,750 | ||||||||||||||
United Rentals North America Inc., senior bond, 5.875%, 9/15/26 | United States | 20,500,000 | 21,448,125 | |||||||||||||||
b | West Corp., senior note, 144A, 8.50%, 10/15/25 | United States | 20,300,000 | 19,691,000 | ||||||||||||||
|
| |||||||||||||||||
52,341,875 | ||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 17 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Consumer Durables & Apparel 1.1% | ||||||||||||||||||
b | Hanesbrands Inc., senior bond, 144A, 4.875%, 5/15/26 | United States | 25,100,000 | $ | 24,347,000 | |||||||||||||
KB Home, senior bond, 7.50%, 9/15/22 | United States | 5,000,000 | 5,487,500 | |||||||||||||||
senior note, 7.00%, 12/15/21 | United States | 10,000,000 | 10,662,500 | |||||||||||||||
PulteGroup Inc., senior bond, 5.00%, 1/15/27 | United States | 24,600,000 | 24,052,650 | |||||||||||||||
|
| |||||||||||||||||
64,549,650 | ||||||||||||||||||
|
| |||||||||||||||||
Consumer Services 2.1% | ||||||||||||||||||
b | 1011778 BC ULC/New Red Finance Inc., secured note, second lien, 144A, 5.00%, 10/15/25 | Canada | 11,500,000 | 11,122,685 | ||||||||||||||
senior secured note, first lien, 144A, 4.25%, 5/15/24 | Canada | 9,000,000 | 8,583,750 | |||||||||||||||
b | Golden Nugget Inc., senior note, 144A, 6.75%, 10/15/24 | United States | 5,100,000 | 5,189,250 | ||||||||||||||
b | International Game Technology PLC, senior secured bond, 144A, 6.50%, 2/15/25 | United States | 13,200,000 | 14,157,000 | ||||||||||||||
senior secured note, 144A, 6.25%, 2/15/22 | United States | 15,000,000 | 15,763,800 | |||||||||||||||
b | KFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of America LLC, | |||||||||||||||||
senior note, 144A, 5.00%, 6/01/24 | United States | 8,900,000 | 8,888,875 | |||||||||||||||
senior note, 144A, 5.25%, 6/01/26 | United States | 9,100,000 | 9,168,250 | |||||||||||||||
Marriott International Inc., senior bond, 3.75%, 10/01/25 | United States | 30,000,000 | 29,443,683 | |||||||||||||||
b | Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp., senior bond, 144A, 5.50%, 3/01/25 | United States | 13,700,000 | 13,671,230 | ||||||||||||||
b | Wynn Macau Ltd., senior note, 144A, 4.875%, 10/01/24 | Macau | 5,200,000 | 5,109,000 | ||||||||||||||
|
| |||||||||||||||||
121,097,523 | ||||||||||||||||||
|
| |||||||||||||||||
Diversified Financials 2.6% | ||||||||||||||||||
Capital One Financial Corp., senior note, 3.20%, 2/05/25 | United States | 20,000,000 | 18,897,717 | |||||||||||||||
The Goldman Sachs Group Inc., senior note, 3.50%, 1/23/25 | United States | 33,800,000 | 32,665,624 | |||||||||||||||
senior note, 3.75%, 2/25/26 | United States | 15,000,000 | 14,545,756 | |||||||||||||||
b | Lincoln Finance Ltd., senior secured note, 144A, 6.875%, 4/15/21 | Netherlands | 8,400,000 | EUR | 10,504,852 | |||||||||||||
Morgan Stanley, senior bond, 3.591% to 7/22/27, FRN thereafter, 7/22/28 | United States | 10,000,000 | 9,507,470 | |||||||||||||||
senior note, 3.875%, 1/27/26 | United States | 43,100,000 | 42,480,502 | |||||||||||||||
Navient Corp., senior note, 5.875%, 3/25/21 | United States | 5,000,000 | 5,137,500 | |||||||||||||||
senior note, 6.625%, 7/26/21 | United States | 8,000,000 | 8,330,000 | |||||||||||||||
senior note, 6.125%, 3/25/24 | United States | 10,000,000 | 10,062,500 | |||||||||||||||
|
| |||||||||||||||||
152,131,921 | ||||||||||||||||||
|
| |||||||||||||||||
Energy 4.8% | ||||||||||||||||||
Anadarko Petroleum Corp., senior bond, 7.95%, 6/15/39 | United States | 1,200,000 | 1,626,925 | |||||||||||||||
b | BG Energy Capital PLC, senior bond, 144A, 5.125%, 10/15/41 | United Kingdom | 600,000 | 668,666 | ||||||||||||||
b | California Resources Corp., secured note, second lien, 144A, 8.00%, 12/15/22 | United States | 7,852,000 | 6,772,350 | ||||||||||||||
Cheniere Corpus Christi Holdings LLC, senior secured note, first lien, 7.00%, 6/30/24 | United States | 8,800,000 | 9,647,000 | |||||||||||||||
senior secured note, first lien, 5.875%, 3/31/25 | United States | 8,200,000 | 8,484,622 |
18 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Energy (continued) | ||||||||||||||||||
b | Cheniere Energy Partners LP, senior secured note, first lien, 144A, 5.25%, 10/01/25 | United States | 11,900,000 | $ | 11,662,000 | |||||||||||||
CNOOC Finance 2015 USA LLC, senior note, 3.50%, 5/05/25 | China | 12,800,000 | 12,281,216 | |||||||||||||||
CONSOL Energy Inc., senior note, 5.875%, 4/15/22 | United States | 20,000,000 | 20,150,000 | |||||||||||||||
Energy Transfer Equity LP, senior note, first lien, 7.50%, 10/15/20 | United States | 11,000,000 | 11,811,250 | |||||||||||||||
Energy Transfer Partners LP, senior note, 5.20%, 2/01/22 | United States | 10,000,000 | 10,397,432 | |||||||||||||||
Energy Transfer Partners LP/Regency Energy Finance Corp., senior note, 5.875%, 3/01/22 | United States | 1,300,000 | 1,379,614 | |||||||||||||||
senior note, 5.00%, 10/01/22 | United States | 10,000,000 | 10,333,228 | |||||||||||||||
b,f | EnQuest PLC, senior note, 144A, PIK, 7.00%, 4/15/22 | United Kingdom | 12,855,122 | 11,682,428 | ||||||||||||||
Enterprise Products Operating LLC, senior bond, 6.125%, 10/15/39 | United States | 200,000 | 239,484 | |||||||||||||||
b,g | Gaz Capital SA (OJSC Gazprom), loan participation, senior note, 144A, 3.85%, 2/06/20 | Russia | 20,000,000 | 19,946,700 | ||||||||||||||
Kinder Morgan Inc., senior bond, 4.30%, 6/01/25 | United States | 17,000,000 | 16,973,962 | |||||||||||||||
senior note, 3.15%, 1/15/23 | United States | 9,000,000 | 8,705,128 | |||||||||||||||
Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, 7.25%, 2/15/21 | United States | 20,000,000 | 20,150,000 | |||||||||||||||
Oceaneering International Inc., senior note, 4.65%, 11/15/24 | United States | 2,100,000 | 2,015,086 | |||||||||||||||
Sabine Pass Liquefaction LLC, senior secured note, first lien, 5.625%, 2/01/21 | United States | 20,000,000 | 21,002,016 | |||||||||||||||
senior secured note, first lien, 5.625%, 4/15/23 | United States | 6,200,000 | 6,612,386 | |||||||||||||||
senior secured note, first lien, 5.625%, 3/01/25 | United States | 5,000,000 | 5,329,937 | |||||||||||||||
Sanchez Energy Corp., senior note, 6.125%, 1/15/23 | United States | 6,000,000 | 4,363,200 | |||||||||||||||
b | Sinopec Group Overseas Development 2016 Ltd., senior note, 144A, 2.75%, 9/29/26 | China | 12,800,000 | 11,490,496 | ||||||||||||||
b | Sunoco LP/Sunoco Finance Corp., senior note, 144A, 4.875%, 1/15/23 | United States | 5,900,000 | 5,823,123 | ||||||||||||||
b,f | W&T Offshore Inc., secured note, second lien, 144A, PIK, 9.00%, 5/15/20 | United States | 5,321,977 | 5,321,977 | ||||||||||||||
senior secured note, third lien, 144A, PIK, 10.00%, 6/15/21 | United States | 4,745,765 | 4,248,317 | |||||||||||||||
Weatherford International Ltd., senior note, 7.75%, 6/15/21 | United States | 9,000,000 | 8,898,750 | |||||||||||||||
senior note, 8.25%, 6/15/23 | United States | 10,500,000 | 9,896,250 | |||||||||||||||
b | Woodside Finance Ltd., senior bond, 144A, 3.70%, 3/15/28 | Australia | 7,100,000 | 6,815,858 | ||||||||||||||
senior note, 144A, 3.70%, 9/15/26 | Australia | 5,400,000 | 5,221,114 | |||||||||||||||
|
| |||||||||||||||||
279,950,515 | ||||||||||||||||||
|
| |||||||||||||||||
Food & Staples Retailing 0.9% | ||||||||||||||||||
b | Aramark Services Inc., senior bond, 144A, 5.00%, 2/01/28 | United States | 7,600,000 | 7,413,116 | ||||||||||||||
Kroger Co., senior bond, 2.65%, 10/15/26 | United States | 15,300,000 | 13,553,024 | |||||||||||||||
Walgreens Boots Alliance Inc., senior note, 3.80%, 11/18/24 | United States | 30,000,000 | 29,598,397 | |||||||||||||||
|
| |||||||||||||||||
50,564,537 | ||||||||||||||||||
|
| |||||||||||||||||
Food, Beverage & Tobacco 1.5% | ||||||||||||||||||
Bunge Ltd. Finance Corp., senior note, 3.25%, 8/15/26 | United States | 2,000,000 | 1,835,825 | |||||||||||||||
Coca-Cola Femsa SAB de CV, senior bond, 5.25%, 11/26/43 | Mexico | 1,800,000 | 2,030,117 | |||||||||||||||
b | Imperial Brands Finance PLC, senior note, 144A, 3.50%, 2/11/23 | United Kingdom | 20,400,000 | 20,024,732 | ||||||||||||||
Kraft Heinz Foods Co., senior bond, 3.00%, 6/01/26 | United States | 25,400,000 | 23,075,950 |
franklintempleton.com | Annual Report | 19 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Food, Beverage & Tobacco (continued) | ||||||||||||||||||
b | Lamb Weston Holdings Inc., senior note, 144A, 4.625%, 11/01/24 | United States | 6,500,000 | $ | 6,475,625 | |||||||||||||
senior note, 144A, 4.875%, 11/01/26 | United States | 16,500,000 | 16,396,875 | |||||||||||||||
b | Post Holdings Inc., senior bond, 144A, 5.625%, 1/15/28 | United States | 10,000,000 | 9,587,500 | ||||||||||||||
senior note, 144A, 5.50%, 3/01/25 | United States | 8,000,000 | 7,880,000 | |||||||||||||||
Reynolds American Inc., senior note, 4.45%, 6/12/25 | United Kingdom | 1,900,000 | 1,925,775 | |||||||||||||||
|
| |||||||||||||||||
89,232,399 | ||||||||||||||||||
|
| |||||||||||||||||
Health Care Equipment & Services 2.5% | ||||||||||||||||||
b | Avantor Inc., senior secured note, first lien, 144A, 6.00%, 10/01/24 | United States | 18,000,000 | 18,135,000 | ||||||||||||||
Centene Corp., senior note, 4.75%, 5/15/22 | United States | 12,000,000 | 12,180,000 | |||||||||||||||
CHS/Community Health Systems Inc., senior note, 7.125%, 7/15/20 | United States | 2,000,000 | 1,600,000 | |||||||||||||||
senior note, 6.875%, 2/01/22 | United States | 8,300,000 | 4,533,875 | |||||||||||||||
senior secured note, first lien, 6.25%, 3/31/23 | United States | 3,900,000 | 3,566,062 | |||||||||||||||
CVS Health Corp., senior bond, 4.30%, 3/25/28 | United States | 9,600,000 | 9,480,628 | |||||||||||||||
DaVita Inc., senior bond, 5.125%, 7/15/24 | United States | 10,000,000 | 9,706,250 | |||||||||||||||
senior bond, 5.00%, 5/01/25 | United States | 9,300,000 | 8,836,860 | |||||||||||||||
HCA Inc., senior bond, 5.875%, 5/01/23 | United States | 15,000,000 | 15,675,000 | |||||||||||||||
senior bond, 5.875%, 2/15/26 | United States | 3,000,000 | 3,045,000 | |||||||||||||||
senior secured bond, first lien, 5.875%, 3/15/22 | United States | 5,000,000 | 5,281,250 | |||||||||||||||
senior secured bond, first lien, 5.25%, 4/15/25 | United States | 10,000,000 | 10,150,000 | |||||||||||||||
senior secured bond, first lien, 5.50%, 6/15/47 | United States | 12,000,000 | 11,370,000 | |||||||||||||||
b | MPH Acquisition Holdings LLC, senior note, 144A, 7.125%, 6/01/24 | United States | 11,100,000 | 11,326,551 | ||||||||||||||
b,f | Polaris Intermediate Corp., senior note, 144A, PIK, 8.50%, 12/01/22 | United States | 2,900,000 | 2,950,750 | ||||||||||||||
Stryker Corp., senior bond, 3.50%, 3/15/26 | United States | 4,800,000 | 4,725,269 | |||||||||||||||
Tenet Healthcare Corp., senior note, 5.50%, 3/01/19 | United States | 7,000,000 | 7,131,250 | |||||||||||||||
senior note, 8.125%, 4/01/22 | United States | 5,000,000 | 5,225,000 | |||||||||||||||
senior note, 6.75%, 6/15/23 | United States | 2,700,000 | 2,664,563 | |||||||||||||||
|
| |||||||||||||||||
147,583,308 | ||||||||||||||||||
|
| |||||||||||||||||
Insurance 0.6% | ||||||||||||||||||
b | Nippon Life Insurance Co., sub. bond, 144A, 5.10% to 10/16/24, FRN thereafter, 10/16/44 | Japan | 35,000,000 | 36,410,850 | ||||||||||||||
|
| |||||||||||||||||
Materials 6.6% | ||||||||||||||||||
ArcelorMittal, senior note, 5.75%, 3/01/21 | France | 17,600,000 | 18,549,344 | |||||||||||||||
senior note, 6.125%, 6/01/25 | France | 2,700,000 | 2,929,500 | |||||||||||||||
f | ARD Finance SA, secured note, PIK, 7.125%, 9/15/23 | Luxembourg | 1,300,000 | 1,337,375 | ||||||||||||||
b | Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., senior note, 144A, 6.00%, 6/30/21 | Luxembourg | 5,100,000 | 5,208,375 | ||||||||||||||
senior note, 144A, 6.00%, 2/15/25 | Luxembourg | 11,500,000 | 11,701,250 |
20 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Materials (continued) | ||||||||||||||||||
b | BWAY Holding Co., senior note, 144A, 7.25%, 4/15/25 | United States | 21,200,000 | $ | 21,829,640 | |||||||||||||
b | Cemex Finance LLC, senior secured note, first lien, 144A, 6.00%, 4/01/24 | Mexico | 5,800,000 | 5,953,149 | ||||||||||||||
b | Cemex SAB de CV, senior secured bond, first lien, 144A, 5.70%, 1/11/25 | Mexico | 15,000,000 | 15,197,250 | ||||||||||||||
senior secured bond, first lien, 144A, 6.125%, 5/05/25 | Mexico | 4,000,000 | 4,146,460 | |||||||||||||||
The Chemours Co., senior note, 6.625%, 5/15/23 | United States | 21,000,000 | 22,115,625 | |||||||||||||||
b | Crown Americas LLC/Crown Americas Capital Corp., senior note, 144A, 4.75%, 2/01/26 | United States | 7,100,000 | 6,869,250 | ||||||||||||||
b | First Quantum Minerals Ltd., senior note, 144A, 7.00%, 2/15/21 | Zambia | 8,000,000 | 8,060,000 | ||||||||||||||
senior note, 144A, 7.25%, 4/01/23 | �� | Zambia | 7,200,000 | 7,198,560 | ||||||||||||||
b | FMG Resources (August 2006) Pty. Ltd., senior note, 144A, 5.125%, 3/15/23 | Australia | 3,600,000 | 3,591,000 | ||||||||||||||
senior note, 144A, 5.125%, 5/15/24 | Australia | 7,700,000 | 7,649,141 | |||||||||||||||
Freeport-McMoRan Inc., senior note, 4.55%, 11/14/24 | United States | 26,000,000 | 25,220,000 | |||||||||||||||
b | Glencore Finance Canada Ltd., senior bond, 144A, 4.95%, 11/15/21 | Switzerland | 13,300,000 | 13,787,404 | ||||||||||||||
b | Glencore Funding LLC, senior note, 144A, 4.125%, 5/30/23 | Switzerland | 5,000,000 | 4,987,154 | ||||||||||||||
senior note, 144A, 4.625%, 4/29/24 | Switzerland | 2,500,000 | 2,527,728 | |||||||||||||||
b | INVISTA Finance LLC, senior secured note, 144A, 4.25%, 10/15/19 | United States | 30,000,000 | 30,187,500 | ||||||||||||||
LYB International Finance BV, senior note, 4.00%, 7/15/23 | United States | 20,400,000 | 20,569,116 | |||||||||||||||
b | New Gold Inc., senior note, 144A, 6.375%, 5/15/25 | Canada | 6,900,000 | 7,046,625 | ||||||||||||||
b | Northwest Acquisitions ULC/Dominion Finco Inc., secured note, second lien, 144A, 7.125%, 11/01/22 | Canada | 3,800,000 | 3,879,040 | ||||||||||||||
b | Novelis Corp., senior bond, 144A, 5.875%, 9/30/26 | United States | 19,400,000 | 19,303,000 | ||||||||||||||
b | Owens-Brockway Glass Container Inc., senior note, 144A, 5.00%, 1/15/22 | United States | 7,800,000 | 7,946,250 | ||||||||||||||
senior note, 144A, 5.875%, 8/15/23 | United States | 12,500,000 | 12,828,125 | |||||||||||||||
Reynolds Group Issuer Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Luxembourg SA, | ||||||||||||||||||
b senior note, 144A, 7.00%, 7/15/24 | United States | 5,600,000 | 5,841,500 | |||||||||||||||
senior secured note, first lien, 5.75%, 10/15/20 | United States | 6,396,111 | 6,450,158 | |||||||||||||||
b senior secured note, first lien, 144A, 5.125%, 7/15/23 | United States | 5,900,000 | 5,933,217 | |||||||||||||||
b,h senior secured note, first lien, 144A, FRN, 5.848%, (3-month | ||||||||||||||||||
USD LIBOR + 3.50%), 7/15/21 | United States | 6,500,000 | 6,605,625 | |||||||||||||||
b | Sealed Air Corp., senior bond, 144A, 5.125%, 12/01/24 | United States | 11,300,000 | 11,526,000 | ||||||||||||||
senior bond, 144A, 5.50%, 9/15/25 | United States | 2,600,000 | 2,694,250 | |||||||||||||||
senior note, 144A, 4.875%, 12/01/22 | United States | 11,300,000 | 11,511,875 | |||||||||||||||
b | Sociedad Quimica y Minera de Chile SA, senior note, 144A, 3.625%, 4/03/23 | Chile | 1,500,000 | 1,485,398 | ||||||||||||||
Steel Dynamics Inc., senior bond, 5.50%, 10/01/24 | United States | 9,700,000 | 9,991,000 | |||||||||||||||
senior note, 5.125%, 10/01/21 | United States | 9,200,000 | 9,395,500 | |||||||||||||||
b | SunCoke Energy Partners LP/SunCoke Energy Partners Finance Corp., senior note, 144A, 7.50%, 6/15/25 | United States | 19,500,000 | 20,133,750 | ||||||||||||||
|
| |||||||||||||||||
382,186,134 | ||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 21 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Media 5.3% | ||||||||||||||||||
b | Altice Financing SA, secured bond, 144A, 7.50%, 5/15/26 | Luxembourg | 3,000,000 | $ | 2,955,000 | |||||||||||||
b | Altice U.S. Finance I Corp., senior secured bond, 144A, 5.50%, 5/15/26 | United States | 22,000,000 | 21,381,250 | ||||||||||||||
AMC Networks Inc., senior note, 5.00%, 4/01/24 | United States | 18,000,000 | 17,640,000 | |||||||||||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior bond, 5.25%, 9/30/22. | United States | 8,500,000 | 8,662,137 | |||||||||||||||
b senior bond, 144A, 5.375%, 5/01/25 | United States | 13,000,000 | 12,813,125 | |||||||||||||||
Clear Channel Worldwide Holdings Inc., senior note, 6.50%, 11/15/22 | United States | 3,000,000 | 3,075,000 | |||||||||||||||
senior note, 6.50%, 11/15/22 | United States | 5,000,000 | 5,143,750 | |||||||||||||||
senior sub. note, 7.625%, 3/15/20 | United States | 900,000 | 904,500 | |||||||||||||||
senior sub. note, 7.625%, 3/15/20 | United States | 6,400,000 | 6,440,000 | |||||||||||||||
CSC Holdings LLC, senior note, 6.75%, 11/15/21 | United States | 22,000,000 | 23,210,000 | |||||||||||||||
DISH DBS Corp., senior bond, 5.875%, 7/15/22 | United States | 7,000,000 | 6,448,750 | |||||||||||||||
senior bond, 5.00%, 3/15/23 | United States | 10,000,000 | 8,662,500 | |||||||||||||||
senior note, 5.875%, 11/15/24 | United States | 8,000,000 | 6,870,000 | |||||||||||||||
i | iHeartCommunications Inc., senior secured bond, first lien, 9.00%, 3/01/21 | United States | 8,000,000 | 6,460,000 | ||||||||||||||
senior secured note, first lien, 9.00%, 9/15/22 | United States | 3,100,000 | 2,472,250 | |||||||||||||||
b | Nexstar Broadcasting Inc., senior note, 144A, 5.625%, 8/01/24 | United States | 21,300,000 | 21,033,750 | ||||||||||||||
b | Sirius XM Radio Inc., senior bond, 144A, 6.00%, 7/15/24 | United States | 14,600,000 | 15,036,365 | ||||||||||||||
senior bond, 144A, 5.375%, 4/15/25 | United States | 10,000,000 | 9,975,000 | |||||||||||||||
Tegna Inc., senior bond, 6.375%, 10/15/23 | United States | 12,000,000 | 12,435,000 | |||||||||||||||
b senior bond, 144A, 5.50%, 9/15/24 | United States | 2,800,000 | 2,859,500 | |||||||||||||||
senior note, 5.125%, 7/15/20 | United States | 9,800,000 | 9,861,250 | |||||||||||||||
Time Warner Inc., senior bond, 2.95%, 7/15/26 | United States | 25,400,000 | 23,357,566 | |||||||||||||||
b | Unitymedia Hessen GmbH & Co. KG/Unitymedia NRW GmbH, senior secured note, first lien, 144A, 5.625%, 4/15/23 | Germany | 1,330,000 | EUR | 1,656,120 | |||||||||||||
b | Unitymedia KabelBW GmbH, senior bond, 144A, 6.125%, 1/15/25 | Germany | 18,000,000 | 18,967,500 | ||||||||||||||
b | Univision Communications Inc., senior secured note, first lien, 144A, 5.125%, 2/15/25 | United States | 25,000,000 | 23,148,750 | ||||||||||||||
b | Virgin Media Finance PLC, senior bond, 144A, 6.375%, 10/15/24 | United Kingdom | 9,600,000 | GBP | 13,915,285 | |||||||||||||
b | Virgin Media Secured Finance PLC, senior secured bond, first lien, 144A, 5.50%, 1/15/25 | United Kingdom | 14,000,000 | 13,790,000 | ||||||||||||||
b | Ziggo Secured Finance BV, senior secured bond, 144A, 4.25%, 1/15/27 | Netherlands | 8,600,000 | EUR | 10,626,370 | |||||||||||||
|
| |||||||||||||||||
309,800,718 | ||||||||||||||||||
|
| |||||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 1.8% | ||||||||||||||||||
Allergan Funding SCS, senior bond, 3.80%, 3/15/25 | United States | 25,000,000 | 23,999,299 | |||||||||||||||
Baxalta Inc., senior note, 4.00%, 6/23/25 | United States | 25,000,000 | 24,480,845 | |||||||||||||||
Celgene Corp., senior bond, 3.45%, 11/15/27 | United States | 7,900,000 | 7,401,692 | |||||||||||||||
b,f | Eagle Holdings Co. II LLC, senior note, 144A, PIK, 7.625%, 5/15/22 | United States | 3,300,000 | 3,349,500 | ||||||||||||||
b | Endo DAC/Endo Finance LLC/Endo Finco Inc., senior bond, 144A, 6.00%, 2/01/25 | United States | 11,900,000 | 8,419,250 | ||||||||||||||
senior note, 144A, 6.00%, 7/15/23 | United States | 5,000,000 | 3,662,500 |
22 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences (continued) | ||||||||||||||||
b | Jaguar Holding Co. II/Pharmaceutical Product Development LLC, senior note, 144A, 6.375%, 8/01/23 | United States | 12,900,000 | $ | 13,093,500 | |||||||||||
b | Valeant Pharmaceuticals International, senior note, 144A, 6.375%, 10/15/20 | United States | 9,000,000 | 9,168,750 | ||||||||||||
b | Valeant Pharmaceuticals International Inc., senior bond, 144A, 6.125%, 4/15/25 | United States | 3,100,000 | 2,807,732 | ||||||||||||
senior note, 144A, 5.50%, 3/01/23 | United States | 8,000,000 | 7,275,000 | |||||||||||||
senior note, first lien, 144A, 7.00%, 3/15/24 | United States | 2,100,000 | 2,222,741 | |||||||||||||
|
| |||||||||||||||
105,880,809 | ||||||||||||||||
|
| |||||||||||||||
Real Estate 1.3% | ||||||||||||||||
American Homes 4 Rent LP, senior bond, 4.25%, 2/15/28 | United States | 8,000,000 | 7,697,627 | |||||||||||||
American Tower Corp., senior bond, 3.375%, 10/15/26 | United States | 28,900,000 | 26,843,535 | |||||||||||||
Equinix Inc., senior bond, 5.375%, 4/01/23 | United States | 25,000,000 | 25,812,500 | |||||||||||||
MPT Operating Partnership LP/MPT Finance Corp., senior bond, 5.25%, 8/01/26 | United States | 4,200,000 | 4,105,500 | |||||||||||||
senior bond, 5.00%, 10/15/27 | United States | 10,700,000 | 10,165,000 | |||||||||||||
|
| |||||||||||||||
74,624,162 | ||||||||||||||||
|
| |||||||||||||||
Retailing 1.0% | ||||||||||||||||
b | Amazon.com Inc., senior note, 144A, 2.80%, 8/22/24 | United States | 8,900,000 | 8,559,483 | ||||||||||||
Home Depot Inc., senior note, 2.125%, 9/15/26 | United States | 15,000,000 | 13,381,779 | |||||||||||||
JD.com Inc., senior note, 3.125%, 4/29/21 | China | 2,000,000 | 1,952,980 | |||||||||||||
c,f | K2016470219 South Africa Ltd., senior secured note, 144A, PIK, 3.00%, 12/31/22 | South Africa | 9,545,517 | 47,251 | ||||||||||||
ab,c,f | K2016470260 South Africa Ltd., senior secured note, 144A, PIK, 25.00%, 12/31/22 | South Africa | 1,665,603 | 230,474 | ||||||||||||
Netflix Inc., senior bond, 5.875%, 2/15/25 | United States | 10,000,000 | 10,297,000 | |||||||||||||
senior bond, 4.375%, 11/15/26 | United States | 11,800,000 | 11,062,500 | |||||||||||||
b | PetSmart Inc., senior note, 144A, 7.125%, 3/15/23 | United States | 20,000,000 | 11,750,000 | ||||||||||||
|
| |||||||||||||||
57,281,467 | ||||||||||||||||
|
| |||||||||||||||
Semiconductors & Semiconductor Equipment 0.3% | ||||||||||||||||
Maxim Integrated Products Inc., senior note, 3.375%, 3/15/23 | United States | 1,800,000 | 1,773,162 | |||||||||||||
Qorvo Inc., senior bond, 7.00%, 12/01/25 | United States | 4,300,000 | 4,687,000 | |||||||||||||
senior note, 6.75%, 12/01/23 | United States | 10,000,000 | 10,662,500 | |||||||||||||
Xilinx Inc., senior note, 2.125%, 3/15/19 | United States | 1,900,000 | 1,892,993 | |||||||||||||
|
| |||||||||||||||
19,015,655 | ||||||||||||||||
|
| |||||||||||||||
Software & Services 1.5% | ||||||||||||||||
b | BMC Software Finance Inc., senior note, 144A, 8.125%, 7/15/21 | United States | 19,800,000 | 19,849,500 | ||||||||||||
b | First Data Corp., secured note, second lien, 144A, 5.75%, 1/15/24 | United States | 22,400,000 | 22,794,688 | ||||||||||||
senior note, 144A, 7.00%, 12/01/23 | United States | 7,500,000 | 7,866,600 | |||||||||||||
Fiserv Inc., senior bond, 3.85%, 6/01/25 | United States | 8,400,000 | 8,389,192 | |||||||||||||
Infor (U.S.) Inc., senior note, 6.50%, 5/15/22 | United States | 20,000,000 | 20,400,000 | |||||||||||||
b | Symantec Corp., senior note, 144A, 5.00%, 4/15/25 | United States | 9,500,000 | 9,562,394 | ||||||||||||
|
| |||||||||||||||
88,862,374 | ||||||||||||||||
|
|
franklintempleton.com | Annual Report | 23 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||
Technology Hardware & Equipment 0.6% | ||||||||||||||||
b | CommScope Technologies LLC, senior bond, 144A, 6.00%, 6/15/25 | United States | 16,600,000 | $ | 17,181,000 | |||||||||||
b | Dell International LLC/EMC Corp., senior note, 144A, 5.875%, 6/15/21 | United States | 2,500,000 | 2,577,984 | ||||||||||||
senior note, 144A, 7.125%, 6/15/24 | United States | 12,600,000 | 13,430,968 | |||||||||||||
Juniper Networks Inc., senior bond, 5.95%, 3/15/41 | United States | 1,200,000 | 1,245,724 | |||||||||||||
Tech Data Corp., senior bond, 4.95%, 2/15/27 | United States | 1,900,000 | 1,857,933 | |||||||||||||
|
| |||||||||||||||
36,293,609 | ||||||||||||||||
|
| |||||||||||||||
Telecommunication Services 2.5% | ||||||||||||||||
CenturyLink Inc., senior bond, 6.75%, 12/01/23 | United States | 3,500,000 | 3,491,250 | |||||||||||||
senior bond, 5.625%, 4/01/25 | United States | 2,700,000 | 2,486,700 | |||||||||||||
b | Digicel Group Ltd., senior note, 144A, 8.25%, 9/30/20 | Bermuda | 10,000,000 | 8,948,600 | ||||||||||||
senior note, 144A, 7.125%, 4/01/22 | Bermuda | 3,000,000 | 2,457,960 | |||||||||||||
b | Digicel Ltd., senior note, 144A, 6.00%, 4/15/21 | Bermuda | 10,000,000 | 9,532,250 | ||||||||||||
Hughes Satellite Systems Corp., senior bond, 6.625%, 8/01/26 | United States | 17,200,000 | 17,114,000 | |||||||||||||
Intelsat Jackson Holdings SA, senior bond, 7.25%, 10/15/20 | Luxembourg | 15,000,000 | 14,718,750 | |||||||||||||
senior note, 7.50%, 4/01/21 | Luxembourg | 2,500,000 | 2,378,125 | |||||||||||||
Sprint Communications Inc., senior note, 6.00%, 11/15/22 | United States | 10,000,000 | 10,237,500 | |||||||||||||
b senior note, 144A, 9.00%, 11/15/18 | United States | 816,000 | 839,970 | |||||||||||||
b senior note, 144A, 7.00%, 3/01/20 | United States | 5,000,000 | 5,288,500 | |||||||||||||
b | Sprint Spectrum Co. LLC, first lien, senior secured note, 144A, 5.152%, 9/20/29 | United States | 15,300,000 | 15,529,500 | ||||||||||||
T-Mobile USA Inc., senior bond, 6.50%, 1/15/24 | United States | 5,000,000 | 5,250,000 | |||||||||||||
senior bond, 6.375%, 3/01/25 | United States | 14,700,000 | 15,471,750 | |||||||||||||
senior note, 6.00%, 4/15/24 | United States | 4,200,000 | 4,408,740 | |||||||||||||
senior note, 5.125%, 4/15/25 | United States | 6,000,000 | 6,060,000 | |||||||||||||
Verizon Communications Inc., senior note, 5.15%, 9/15/23 | United States | 22,000,000 | 23,676,995 | |||||||||||||
|
| |||||||||||||||
147,890,590 | ||||||||||||||||
|
| |||||||||||||||
Transportation 1.1% | ||||||||||||||||
b | DAE Funding LLC, senior note, 144A, 4.50%, 8/01/22 | United Arab Emirates | 6,000,000 | 5,820,000 | ||||||||||||
senior note, 144A, 5.00%, 8/01/24 | United Arab Emirates | 14,000,000 | 13,509,650 | |||||||||||||
b | Park Aerospace Holdings Ltd., senior note, 144A, 5.25%, 8/15/22 | Ireland | 5,000,000 | 4,974,000 | ||||||||||||
senior note, 144A, 5.50%, 2/15/24 | Ireland | 17,400,000 | 17,013,720 | |||||||||||||
b | Transurban Finance Co. Pty. Ltd., senior secured bond, 144A, 3.375%, 3/22/27 | Australia | 11,400,000 | 10,590,885 | ||||||||||||
United Airlines Pass Through Trust, second lien, 2016-1, A, 3.45%, 1/07/30 | United States | 13,435,947 | 13,092,569 | |||||||||||||
|
| |||||||||||||||
65,000,824 | ||||||||||||||||
|
| |||||||||||||||
Utilities 3.9% | ||||||||||||||||
Calpine Corp., senior bond, 5.75%, 1/15/25 | United States | 9,000,000 | 8,257,500 | |||||||||||||
senior note, 5.375%, 1/15/23 | United States | 10,000,000 | 9,625,000 | |||||||||||||
b senior secured bond, first lien, 144A, 5.875%, 1/15/24 | United States | 2,000,000 | 2,020,000 |
24 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||
Utilities (continued) | ||||||||||||||||
b | Colbun SA, senior note, 144A, 3.95%, 10/11/27 | Chile | 6,200,000 | $ | 5,907,670 | |||||||||||
Dominion Energy Inc., senior bond, 2.85%, 8/15/26 | United States | 11,400,000 | 10,411,050 | |||||||||||||
b,e | EDF SA, junior sub. bond, 144A, 5.625% to 1/22/24, FRN thereafter, Perpetual | France | 5,000,000 | 5,016,625 | ||||||||||||
junior sub. note, 144A, 5.25% to 1/29/23, FRN thereafter, Perpetual | France | 25,000,000 | 24,982,500 | |||||||||||||
Exelon Corp., senior bond, 3.95%, 6/15/25 | United States | 18,500,000 | 18,377,245 | |||||||||||||
b | InterGen NV, secured bond, 144A, 7.00%, 6/30/23 | Netherlands | 25,000,000 | 24,941,250 | ||||||||||||
b | Israel Electric Corp. Ltd., secured bond, 144A, 4.25%, 8/14/28 | Israel | 9,200,000 | 8,820,960 | ||||||||||||
The Southern Co., senior bond, 3.25%, 7/01/26 | United States | 32,300,000 | 30,371,593 | |||||||||||||
b | State Grid Overseas Investments 2016 Ltd., senior note, 144A, 3.50%, 5/04/27 | China | 12,800,000 | 12,184,128 | ||||||||||||
b | Talen Energy Supply LLC, senior note, 144A, 9.50%, 7/15/22 | United States | 15,900,000 | 15,154,926 | ||||||||||||
senior note, 144A, 10.50%, 1/15/26 | United States | 8,100,000 | 7,016,625 | |||||||||||||
b | Three Gorges Finance I Cayman Islands Ltd., senior note, 144A, 3.15%, 6/02/26 | China | 12,800,000 | 11,936,000 | ||||||||||||
b | Vistra Energy Corp., senior note, 144A, 8.00%, 1/15/25 | United States | 28,300,000 | 30,811,625 | ||||||||||||
|
| |||||||||||||||
225,834,697 | ||||||||||||||||
|
| |||||||||||||||
Total Corporate Bonds (Cost $2,917,132,169) | 2,847,996,941 | |||||||||||||||
|
| |||||||||||||||
h,j | Senior Floating Rate Interests 8.4% | |||||||||||||||
Automobiles & Components 0.2% | ||||||||||||||||
Allison Transmission Inc., New Term Loans, 3.65%, (1-month USD LIBOR + 1.75%), 9/23/22 | United States | 2,319,107 | 2,340,716 | |||||||||||||
TI Group Automotive Systems LLC, Initial US Term Loan, 4.401%, (1-month USD LIBOR + 2.50%), 6/30/22 | United States | 9,315,471 | 9,398,351 | |||||||||||||
|
| |||||||||||||||
11,739,067 | ||||||||||||||||
|
| |||||||||||||||
Capital Goods 0.1% | ||||||||||||||||
Doncasters U.S. Finance LLC, Second Lien Term Loan, 10.552%, (3-month USD LIBOR + 8.25%), 10/09/20 | United States | 736,591 | 726,002 | |||||||||||||
Harsco Corp., Term B-1 Loan, 4.938%, (1-month USD LIBOR + 3.00%), 12/10/24 | United States | 4,291,516 | 4,354,550 | |||||||||||||
Leidos Innovations Corp., Term Loan B, 3.688%, (1-month USD LIBOR + 1.75%), 8/16/23 | United States | 1,572,019 | 1,586,265 | |||||||||||||
|
| |||||||||||||||
6,666,817 | ||||||||||||||||
|
| |||||||||||||||
Commercial & Professional Services 0.1% | ||||||||||||||||
KAR Auction Services Inc., Tranche B-5 Term Loans, 4.813%, (3-month USD LIBOR + 2.50%), 3/09/23 | United States | 7,340,579 | 7,380,342 | |||||||||||||
Ventia Pty. Ltd., Term B Loans (USD), 5.802%, (3-month USD LIBOR + 3.50%), 5/21/22 | Australia | 834,851 | 847,374 | |||||||||||||
|
| |||||||||||||||
8,227,716 | ||||||||||||||||
|
|
franklintempleton.com | Annual Report | 25 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
h,j | Senior Floating Rate Interests (continued) | |||||||||||||||
Consumer Services 0.2% | ||||||||||||||||
Aristocrat Technologies Inc., Term B-2 Loans, 4.359%, (3-month USD LIBOR + 2.00%), 10/20/21 | United States | 1,676,538 | $ | 1,687,719 | ||||||||||||
Avis Budget Car Rental LLC, Tranche B Term Loans, 4.31%, (3-month USD LIBOR + 2.00%), 2/13/25 | United States | 6,391,827 | 6,447,755 | |||||||||||||
Eldorado Resorts Inc., | ||||||||||||||||
Initial Term Loan, 4.188%, (1-month USD LIBOR + 2.25%), 4/17/24 | United States | 1,463,164 | 1,471,852 | |||||||||||||
Initial Term Loan, 4.125% - 4.188%, (2-month USD LIBOR + 2.25%), 4/17/24 | United States | 2,045,313 | 2,057,458 | |||||||||||||
Greektown Holdings LLC, Initial Term Loan, 4.901%, (1-month USD LIBOR + 3.00%), 4/25/24 | United States | 3,018,079 | 3,026,095 | |||||||||||||
|
| |||||||||||||||
14,690,879 | ||||||||||||||||
|
| |||||||||||||||
Diversified Financials 0.1% | ||||||||||||||||
First Eagle Holdings Inc., Initial Term Loans, 5.302%, (3-month USD LIBOR + 3.00%), 12/01/22 | United States | 5,215,999 | 5,266,532 | |||||||||||||
|
| |||||||||||||||
Energy 1.8% | ||||||||||||||||
Bowie Resource Holdings LLC, | ||||||||||||||||
First Lien Initial Term Loan, 7.651%, (1-month USD LIBOR + 5.75%), 8/14/20 | United States | 24,426,968 | 24,075,830 | |||||||||||||
Second Lien Initial Term Loan, 12.651%, (1-month USD LIBOR + 10.75%), 2/16/21 | United States | 16,760,827 | 16,058,968 | |||||||||||||
Fieldwood Energy LLC, Closing Date Loans, 7.151%, (1-month USD LIBOR + 5.25%), 4/11/22 | United States | 49,391,396 | 49,730,962 | |||||||||||||
Foresight Energy LLC, Term Loans, 8.109%, (3-month USD LIBOR + 5.75%), 3/28/22 | United States | 10,218,614 | 10,021,905 | |||||||||||||
OSG Bulk Ships Inc., Initial Term Loan, 6.04%, (3-month USD LIBOR + 4.25%), 8/05/19 | United States | 7,897,976 | 7,690,654 | |||||||||||||
|
| |||||||||||||||
107,578,319 | ||||||||||||||||
|
| |||||||||||||||
Food & Staples Retailing 0.3% | ||||||||||||||||
Aramark Corp., U.S. Term B-1 Loan, 3.901%, (1-month USD LIBOR + 2.00%), 3/11/25 | United States | 3,910,569 | 3,941,118 | |||||||||||||
Smart & Final Stores LLC, First Lien Term Loan, 5.401%, (1-month USD LIBOR + 3.50%), 11/15/22 | United States | 11,875,171 | 11,667,356 | |||||||||||||
|
| |||||||||||||||
15,608,474 | ||||||||||||||||
|
| |||||||||||||||
Food, Beverage & Tobacco 0.6% | ||||||||||||||||
CSM Bakery Supplies LLC, Second Lien Term Loan, 10.06%, (3-month USD LIBOR + 7.75%), 7/03/21 | United States | 10,000,000 | 9,612,500 | |||||||||||||
JBS USA LUX SA, New Initial Term Loans, 4.678%, (3-month USD LIBOR + 2.50%), 10/30/22 | United States | 23,612,382 | 23,621,237 | |||||||||||||
|
| |||||||||||||||
33,233,737 | ||||||||||||||||
|
| |||||||||||||||
Health Care Equipment & Services 0.0%† | ||||||||||||||||
U.S. Renal Care Inc., Initial Term Loan, 6.552%, (3-month USD LIBOR + 4.25%), 12/31/22 | United States | 988,587 | 985,497 | |||||||||||||
|
|
26 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
h,j | Senior Floating Rate Interests (continued) | |||||||||||||||||
Household & Personal Products 0.1% | ||||||||||||||||||
Spectrum Brands Inc., | ||||||||||||||||||
USD Term Loans, 3.791%, (3-month USD LIBOR + 2.00%), 6/23/22 | United States | 1,258,669 | $ | 1,260,917 | ||||||||||||||
USD Term Loans, 3.994% - 4.056%, (2-month USD LIBOR + 2.00%), 6/23/22 | United States | 2,896,715 | 2,901,889 | |||||||||||||||
|
| |||||||||||||||||
4,162,806 | ||||||||||||||||||
|
| |||||||||||||||||
Materials 0.8% | ||||||||||||||||||
Ashland LLC, Term B Loan, 3.897% - 3.901%, (1-month USD LIBOR + 2.00%), 5/17/24 | United States | 4,113,535 | 4,152,613 | |||||||||||||||
Axalta Coating Systems U.S. Holdings Inc., Term B-3 Dollar Loan, 4.052%, (3-month USD LIBOR + 1.75%), 6/01/24 | United States | 4,849,161 | 4,874,231 | |||||||||||||||
Chemours Co., Tranche B-2 US$ Term Loan, 3.66%, (1-month USD LIBOR + 1.75%), 4/03/25 | United States | 11,559,145 | 11,584,436 | |||||||||||||||
Crown Americas LLC, Term B Loans, 4.312%, (3-month USD LIBOR + 2.00%), 4/03/25 | United States | 988,346 | 998,616 | |||||||||||||||
Oxbow Carbon LLC, | ||||||||||||||||||
Second Lien Term Loan, 9.401%, (1-month USD LIBOR + 7.50%), 1/04/24 | United States | 2,161,171 | 2,204,395 | |||||||||||||||
Tranche A Term Loan, 4.401%, (1-month USD LIBOR + 2.50%), 1/04/22 | United States | 13,284,375 | 13,300,981 | |||||||||||||||
Tranche B Term Loan, 5.651%, (1-month USD LIBOR + 3.75%), 1/04/23 | United States | 7,732,125 | 7,838,442 | |||||||||||||||
|
| |||||||||||||||||
44,953,714 | ||||||||||||||||||
|
| |||||||||||||||||
Media 0.6% | ||||||||||||||||||
Altice U.S. Finance I Corp., March 2017 Refinancing Term Loan Commitments, 4.151%, (1-month USD LIBOR + 2.25%), 7/28/25 | United States | 1,971,214 | 1,971,214 | |||||||||||||||
AMC Entertainment Holdings Inc., 2016 Incremental Term Loans, 4.147%, (1-month USD LIBOR + 2.25%), 12/15/23 | United States | 4,551,582 | 4,567,704 | |||||||||||||||
Initial Term Loans, 4.147%, (1-month USD LIBOR + 2.25%), 12/15/22 | United States | 5,957,159 | 5,992,533 | |||||||||||||||
Charter Communications Operating LLC, Term A-2 Loan, 3.41%, (1-month USD LIBOR + 1.50%), 3/31/23 | United States | 9,197,834 | 9,219,394 | |||||||||||||||
CSC Holdings LLC, March 2017 Incremental Term Loans, 4.147%, (1-month USD LIBOR + 2.25%), 7/17/25 | United States | 12,829,016 | 12,843,448 | |||||||||||||||
Lions Gate Capital Holdings LLC, Term A Loan, 3.648%, (1-month USD LIBOR + 1.75%), 3/22/23 | Canada | 2,541,660 | 2,551,191 | |||||||||||||||
|
| |||||||||||||||||
37,145,484 | ||||||||||||||||||
|
| |||||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 0.9% | ||||||||||||||||||
Endo Luxembourg Finance Co. I S.A.R.L. and Endo LLC, Initial Term Loans, 6.188%, (1-month USD LIBOR + 4.25%), 4/29/24 | United States | 19,861,116 | 19,794,918 | |||||||||||||||
Grifols Worldwide Operations USA Inc., Tranche B Term Loan, 4.00%, (1-week USD LIBOR + 2.25%), 1/31/25 | United States | 12,922,125 | 13,005,990 | |||||||||||||||
Syneos Health Inc., | ||||||||||||||||||
Initial Term B Loans, 4.151%, (1-month USD LIBOR + 2.25%), 8/01/24 | United States | 5,841,726 | 5,866,373 | |||||||||||||||
k,l Replacement Term B Loans, TBD, 8/01/24 | United States | 4,739,174 | 4,762,130 |
franklintempleton.com | Annual Report | 27 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
h,j | Senior Floating Rate Interests (continued) | |||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences (continued) | ||||||||||||||||
Valeant Pharmaceuticals International Inc., Series F-4 Tranche B Term Loans, 5.394%, (1-month USD LIBOR + 3.50%), 4/01/22 | United States | 6,552,855 | $ | 6,633,652 | ||||||||||||
|
| |||||||||||||||
50,063,063 | ||||||||||||||||
|
| |||||||||||||||
Retailing 1.2% | ||||||||||||||||
Ascena Retail Group Inc., Tranche B Term Loan, 6.438%, (1-month USD LIBOR + 4.50%), 8/21/22 | United States | 35,164,991 | 30,827,987 | |||||||||||||
General Nutrition Centers Inc., Tranche B-2 Term Loans, 10.66%, (1-month USD LIBOR + 8.75%), 3/04/21 | United States | 6,248,439 | 6,007,612 | |||||||||||||
Jo-Ann Stores Inc., Initial Loans, 7.509%, (6-month USD LIBOR + 5.00%), 10/23/23 | United States | 12,435,674 | 12,392,920 | |||||||||||||
PetSmart Inc., Tranche B-2 Loans, 4.89%, (1-month USD LIBOR + 3.00%), 3/11/22 | United States | 25,752,871 | 20,237,456 | |||||||||||||
|
| |||||||||||||||
69,465,975 | ||||||||||||||||
|
| |||||||||||||||
Semiconductors & Semiconductor Equipment 0.3% | ||||||||||||||||
MKS Instruments Inc., Tranche B-4 Term Loan, 3.651%, (1-month USD LIBOR + 1.75%), 4/29/23 | United States | 2,722,324 | 2,742,320 | |||||||||||||
ON Semiconductor Corp., 2017 Replacement Term B-2 Loans, 3.901%, (1-month USD LIBOR + 2.00%), 3/31/23 | United States | 12,130,482 | 12,219,944 | |||||||||||||
|
| |||||||||||||||
14,962,264 | ||||||||||||||||
|
| |||||||||||||||
Software & Services 0.1% | ||||||||||||||||
Rackspace Hosting Inc., Term B Loans, 4.787%, (3-month USD LIBOR + 3.00%), 11/03/23 | United States | 3,827,528 | 3,823,011 | |||||||||||||
Wex Inc., Term B-2 Loan, 4.151%, (1-month USD LIBOR + 2.25%), 7/01/23 | United States | 1,872,405 | 1,887,033 | |||||||||||||
|
| |||||||||||||||
5,710,044 | ||||||||||||||||
|
| |||||||||||||||
Technology Hardware & Equipment 0.2% | ||||||||||||||||
Ciena Corp., Refinancing Term Loan, 4.397%, (1-month USD LIBOR + 2.50%), 1/28/22 | United States | 1,840,148 | 1,851,649 | |||||||||||||
CommScope Inc., Tranche 5 Term Loans, 3.901%, (1-month USD LIBOR + 2.00%), 12/29/22 | United States | 814,871 | 820,728 | |||||||||||||
Western Digital Corp., U.S. Term B-3 Loan, 3.90%, (1-month USD LIBOR + 2.00%), 4/29/23 | United States | 8,109,791 | 8,171,336 | |||||||||||||
|
| |||||||||||||||
10,843,713 | ||||||||||||||||
|
| |||||||||||||||
Telecommunication Services 0.1% | ||||||||||||||||
Consolidated Communications Inc., Initial Term Loan, 4.91%, (1-month USD LIBOR + 3.00%), 10/05/23 | United States | 2,375,063 | 2,356,756 | |||||||||||||
Global Tel*Link Corp., Term Loan, 6.302%, (3-month USD LIBOR + 4.00%), 5/23/20 | United States | 2,782,165 | 2,802,164 | |||||||||||||
|
| |||||||||||||||
5,158,920 | ||||||||||||||||
|
| |||||||||||||||
Transportation 0.5% | ||||||||||||||||
Air Canada, Term Loan, 3.984%, (3-month USD LIBOR + 2.00%), 10/06/23 | Canada | 547,806 | 551,800 | |||||||||||||
Hertz Corp., Tranche B-1 Term Loan, 4.651%, (1-month USD LIBOR + 2.75%), 6/30/23 | United States | 9,092,000 | 9,121,831 | |||||||||||||
International Seaways Operating Corp., Initial Term Loans, 7.41%, (1-month USD LIBOR + 5.50%), 6/22/22 | United States | 8,340,625 | 8,288,496 |
28 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
h,j | Senior Floating Rate Interests (continued) | |||||||||||||||||
Transportation (continued) | ||||||||||||||||||
Navios Maritime Midstream Partners LP, Initial Term Loan, 6.71%, (3-month USD LIBOR + 4.50%), 6/18/20 | Marshall Islands | 13,162,538 | $ | 13,104,952 | ||||||||||||||
|
| |||||||||||||||||
31,067,079 | ||||||||||||||||||
|
| |||||||||||||||||
Utilities 0.2% | ||||||||||||||||||
EFS Cogen Holdings I LLC (Linden), Term B Advance, 5.56%, (3-month USD LIBOR + 3.25%), 6/28/23 | United States | 6,332,368 | 6,371,946 | |||||||||||||||
NRG Energy Inc., Term loan B, 4.052%, (3-month USD LIBOR + 1.75%), 6/30/23 | United States | 8,478,975 | 8,510,347 | |||||||||||||||
|
| |||||||||||||||||
14,882,293 | ||||||||||||||||||
|
| |||||||||||||||||
Total Senior Floating Rate Interests | 492,412,393 | |||||||||||||||||
|
| |||||||||||||||||
Foreign Government and Agency Securities 6.7% | ||||||||||||||||||
b | The Export-Import Bank of India, senior note, 144A, 3.875%, 2/01/28 | India | 16,000,000 | 15,242,480 | ||||||||||||||
Government of Hungary, 5.375%, 2/21/23 | Hungary | 16,250,000 | 17,417,969 | |||||||||||||||
Government of Indonesia, | ||||||||||||||||||
senior bond, FR34, 12.80%, 6/15/21 | Indonesia | 169,210,000,000 | IDR | 14,341,952 | ||||||||||||||
senior bond, FR36, 11.50%, 9/15/19 | Indonesia | 35,400,000,000 | IDR | 2,727,676 | ||||||||||||||
senior bond, FR39, 11.75%, 8/15/23 | Indonesia | 29,150,000,000 | IDR | 2,571,173 | ||||||||||||||
senior bond, FR44, 10.00%, 9/15/24 | Indonesia | 8,340,000,000 | IDR | 699,151 | ||||||||||||||
senior bond, FR56, 8.375%, 9/15/26 | Indonesia | 532,400,000,000 | IDR | 41,420,986 | ||||||||||||||
senior bond, FR70, 8.375%, 3/15/24 | Indonesia | 140,000,000,000 | IDR | 10,874,962 | ||||||||||||||
Government of Malaysia, senior bond, 4.378%, 11/29/19 | Malaysia | 103,000,000 | MYR | 26,580,645 | ||||||||||||||
Government of Mexico, | ||||||||||||||||||
senior bond, M, 6.50%, 6/10/21 | Mexico | 4,690,000 | m | MXN | 24,503,635 | |||||||||||||
senior note, M 10, 8.50%, 12/13/18 | Mexico | 16,200,000 | m | MXN | 87,142,787 | |||||||||||||
b | Government of Serbia, | |||||||||||||||||
senior note, 144A, 4.875%, 2/25/20 | Serbia | 29,400,000 | 29,968,449 | |||||||||||||||
senior note, 144A, 7.25%, 9/28/21 | Serbia | 15,000,000 | 16,591,275 | |||||||||||||||
b | Government of Ukraine, | |||||||||||||||||
144A, 7.75%, 9/01/22 | Ukraine | 2,200,000 | 2,249,115 | |||||||||||||||
144A, 7.75%, 9/01/23 | Ukraine | 4,355,000 | 4,400,401 | |||||||||||||||
144A, 7.75%, 9/01/24 | Ukraine | 4,355,000 | 4,348,642 | |||||||||||||||
144A, 7.75%, 9/01/25 | Ukraine | 4,355,000 | 4,323,100 | |||||||||||||||
144A, 7.75%, 9/01/26 | Ukraine | 4,355,000 | 4,298,494 | |||||||||||||||
144A, 7.75%, 9/01/27 | Ukraine | 4,354,000 | 4,273,016 | |||||||||||||||
a,n 144A, VRI, GDP Linked Security, 5/31/40 | Ukraine | 20,490,000 | 13,894,474 | |||||||||||||||
Nota Do Tesouro Nacional, 10.00%, 1/01/21 | Brazil | 97,200 | o | BRL | 29,096,995 | |||||||||||||
10.00%, 1/01/23 | Brazil | 34,402 | o | BRL | 10,209,709 | |||||||||||||
p Index Linked, 6.00%, 5/15/23 | Brazil | 19,500 | o | BRL | 18,309,700 | |||||||||||||
senior note, 10.00%, 1/01/19 | Brazil | 25,000 | o | BRL | 7,302,470 | |||||||||||||
|
| |||||||||||||||||
Total Foreign Government and Agency | 392,789,256 | |||||||||||||||||
|
|
franklintempleton.com | Annual Report | 29 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
U.S. Government and Agency Securities 3.9% | ||||||||||||||||
U.S. Treasury Bond, 7.125%, 2/15/23 | United States | 3,000,000 | $ | 3,584,004 | ||||||||||||
6.25%, 8/15/23 | United States | 4,000,000 | 4,675,859 | |||||||||||||
6.875%, 8/15/25 | United States | 1,000,000 | 1,261,758 | |||||||||||||
6.50%, 11/15/26 | United States | 34,000,000 | 43,174,687 | |||||||||||||
5.25%, 2/15/29 | United States | 1,750,000 | 2,119,722 | |||||||||||||
3.00%, 11/15/45 | United States | 50,000,000 | 48,980,469 | |||||||||||||
q Index Linked, 0.625%, 1/15/24 | United States | 24,486,647 | 24,422,355 | |||||||||||||
U.S. Treasury Note, 2.375%, 8/15/24 | United States | 5,000,000 | 4,854,199 | |||||||||||||
q Index Linked, 0.125%, 7/15/24 | United States | 94,927,935 | 91,986,198 | |||||||||||||
|
| |||||||||||||||
Total U.S. Government and Agency Securities | 225,059,251 | |||||||||||||||
|
| |||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed | ||||||||||||||||
Banks 1.0% | ||||||||||||||||
r | Bear Stearns ARM Trust, 2004-4, A6, FRN, 3.644%, 6/25/34 | United States | 9,382,646 | 9,645,166 | ||||||||||||
s | Citibank Credit Card Issuance Trust, 2013-A2, A2, FRN, 2.177%, (1-month USD LIBOR + 0.28%), 5/26/20 | United States | 7,230,000 | 7,231,489 | ||||||||||||
2013-A4, A4, FRN, 2.317%, (1-month USD LIBOR + 0.42%), 7/24/20 | United States | 7,666,000 | 7,673,257 | |||||||||||||
Citigroup Commercial Mortgage Trust, 2006-C5, AJ, 5.482%, 10/15/49 | United States | 8,274,360 | 7,847,077 | |||||||||||||
r | Commercial Mortgage Trust, 2006-GG7, AJ, FRN, 5.945%, 7/10/38 | United States | 10,783,000 | 9,940,537 | ||||||||||||
CSAIL Commercial Mortgage Trust, 2015-C1, A4, 3.505%, 4/15/50 | United States | 10,050,000 | 10,003,705 | |||||||||||||
r | CWABS Asset-Backed Certificates Trust, 2005-11, AF4, FRN, 4.489%, 3/25/34 | United States | 2,800,000 | 2,835,388 | ||||||||||||
s | Merrill Lynch Mortgage Investors Trust, 2005-A6, 2A3, FRN, 2.277%, (1-month USD LIBOR + 0.38%), 8/25/35 | United States | 1,750,513 | 1,738,388 | ||||||||||||
|
| |||||||||||||||
56,915,007 | ||||||||||||||||
|
| |||||||||||||||
Diversified Financials 14.5% | ||||||||||||||||
b,s | AMMC CLO XI Ltd., 2012-11A, BR2, 144A, FRN, 3.959%, (3-month USD LIBOR + 1.60%), 4/30/31 | United States | 3,000,000 | 3,000,000 | ||||||||||||
2012-11A, CR2, 144A, FRN, 4.259%, (3-month USD LIBOR + 1.90%), 4/30/31 | United States | 1,000,000 | 1,000,000 | |||||||||||||
2012-11A, DR2, 144A, FRN, 5.209%, (3-month USD LIBOR + 2.85%), 4/30/31 | United States | 1,450,000 | 1,450,000 | |||||||||||||
b,t,u | Antares CLO Ltd., 2018-1A, B, 144A, FRN, (3-month USD LIBOR + 1.65%), 4/20/31 | United States | 17,500,000 | 17,500,000 | ||||||||||||
b,s | Ares XLIII CLO Ltd., 2017-43A, A, 144A, FRN, 3.568%, (3-month USD LIBOR + 1.22%), 10/15/29 | United States | 3,870,000 | 3,887,067 | ||||||||||||
b,s | Atrium VIII, 8A, BR, 144A, FRN, 4.262%, (3-month USD LIBOR + 1.90%), 10/23/24 | United States | 4,520,000 | 4,536,362 | ||||||||||||
8A, CR, 144A, FRN, 4.862%, (3-month USD LIBOR + 2.50%), 10/23/24 | United States | 6,080,000 | 6,113,987 |
30 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||
b,s | Atrium XI, 11A, CR, 144A, FRN, 4.512%, (3-month USD LIBOR + 2.15%), 10/23/25 | United States | 15,440,000 | $ | 15,482,769 | |||||||||||
Banc of America Commercial Mortgage Trust, 2015-UBS7, A3, 3.441%, 9/15/48 | United States | 10,920,000 | 10,799,653 | |||||||||||||
2015-UBS7, A4, 3.705%, 9/15/48 | United States | 12,450,000 | 12,502,666 | |||||||||||||
r 2015-UBS7, B, FRN, 4.511%, 9/15/48 | United States | 6,740,000 | 6,792,913 | |||||||||||||
b,r | BCAP LLC Trust, 2009-RR1, 2A2, 144A, FRN, 3.715%, 5/26/35 | United States | 8,864,866 | 8,646,019 | ||||||||||||
b,s | Birchwood Park CLO Ltd., 2014-1A, AR, 144A, FRN, 3.528%, (3-month USD LIBOR + 1.18%), 7/15/26 | United States | 4,400,000 | 4,404,664 | ||||||||||||
b,s | BlueMountain CLO Ltd., 2012-2A, BR, 144A, FRN, 3.785%, (3-month USD LIBOR + 1.90%), 11/20/28 | United States | 6,710,000 | 6,733,082 | ||||||||||||
2012-2A, CR, 144A, FRN, 4.485%, (3-month USD LIBOR + 2.60%), 11/20/28 | United States | 2,730,000 | 2,745,998 | |||||||||||||
b,s | BlueMountain Fuji U.S. CLO II Ltd., 2017-2A, A1A, 144A, FRN, 3.559%, (3-month USD LIBOR + 1.20%), 10/20/30 | United States | 4,200,000 | 4,225,200 | ||||||||||||
b,s | BlueMountain Fuji U.S. CLO III Ltd., 2017-3A, A2, 144A, FRN, 2.877%, (3-month USD LIBOR + 1.15%), 1/15/30 | United States | 4,600,000 | 4,613,156 | ||||||||||||
b,s | Burnham Park CLO Ltd., 2016-1A, A, 144A, FRN, 3.789%, (3-month USD LIBOR + 1.43%), 10/20/29 | United States | 4,590,000 | 4,616,714 | ||||||||||||
2016-1A, B, 144A, FRN, 4.159%, (3-month USD LIBOR + 1.80%), 10/20/29 | United States | 6,000,000 | 6,017,400 | |||||||||||||
2016-1A, C, 144A, FRN, 4.759%, (3-month USD LIBOR + 2.40%), 10/20/29 | United States | 6,000,000 | 6,021,600 | |||||||||||||
s | Capital One Multi-Asset Execution Trust, 2014-A3, A3, FRN, 2.277%, (1-month USD LIBOR + 0.38%), 1/18/22 | United States | 4,265,000 | 4,274,885 | ||||||||||||
2016-A1, A1, FRN, 2.347%, (1-month USD LIBOR + 0.45%), 2/15/22 | United States | 32,250,000 | 32,359,731 | |||||||||||||
2016-A2, A2, FRN, 2.527%, (1-month USD LIBOR + 0.63%), 2/15/24 | United States | 44,033,000 | 44,584,328 | |||||||||||||
b,s | Carlyle Global Market Strategies CLO Ltd., 2012-4A, BR, 144A, FRN, 4.259%, (3-month USD LIBOR + 1.90%), 1/20/29 | United States | 6,540,000 | 6,585,322 | ||||||||||||
2012-4A, C1R, 144A, FRN, 4.959%, (3-month USD LIBOR + 2.60%), 1/20/29 | United States | 6,330,000 | 6,376,779 | |||||||||||||
b,s | Carlyle U.S. CLO Ltd., 2017-2A, A1B, 144A, FRN, 3.579%, (3-month USD LIBOR + 1.22%), 7/20/31 | United States | 8,500,000 | 8,525,585 | ||||||||||||
b,s | Catamaran CLO Ltd., 2014-2A, BR, 144A, FRN, 5.305%, (3-month USD LIBOR + 2.95%), 10/18/26 | United States | 11,770,000 | 11,873,929 | ||||||||||||
b,s | Cent CLO Ltd., 2013-17A, B, 144A, FRN, 4.767%, (3-month USD LIBOR + 3.00%), 1/30/25 | United States | 7,450,980 | 7,478,772 | ||||||||||||
2013-20A, AR, 144A, FRN, 3.46%, (3-month USD LIBOR + 1.10%), 1/25/26 | United States | 1,927,042 | 1,929,508 | |||||||||||||
b,s | Cent CLO LP, 2014-22A, A2AR, 144A, FRN, 3.743%, (3-month USD LIBOR + 1.95%), 11/07/26 | United States | 5,224,000 | 5,230,269 | ||||||||||||
2014-22A, BR, 144A, FRN, 4.743%, (3-month USD LIBOR + 2.95%), 11/07/26 | United States | 4,416,410 | 4,427,451 |
franklintempleton.com | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||
b,r | CGRBS Commercial Mortgage Trust, 2013-VN05, C, 144A, FRN, 3.703%, 3/13/35 | United States | 7,700,000 | $ | 7,567,891 | |||||||||||
s | Chase Issuance Trust, 2013-A6, A6, FRN, 2.317%, (1-month USD LIBOR + 0.42%), 7/15/20 | United States | 12,040,000 | 12,048,789 | ||||||||||||
b,s | Cole Park CLO Ltd., 2015-1A, B, 144A, FRN, 4.609%, (3-month USD LIBOR + 2.25%), 10/20/28 | United States | 3,530,000 | 3,540,131 | ||||||||||||
r | COMM Mortgage Trust, 2014-CR19, B, FRN, 4.703%, 8/10/47 | United States | 7,700,000 | 7,915,261 | ||||||||||||
b | Core Industrial Trust, 2015-CALW, A, 144A, 3.04%, 2/10/34 | United States | 15,065,000 | 14,962,721 | ||||||||||||
s | Discover Card Execution Note Trust, 2016-A2, A2, FRN, 2.437%, (1-month USD LIBOR + 0.54%), 9/15/21 | United States | 32,250,000 | 32,376,043 | ||||||||||||
b,s | Dryden 33 Senior Loan Fund, 2014-33A, BR, 144A, FRN, 4.198%, (3-month USD LIBOR + 1.85%), 10/15/28 | United States | 7,030,000 | 7,056,011 | ||||||||||||
2014-33A, CR, 144A, FRN, 4.848%, (3-month USD LIBOR + 2.50%), 10/15/28 | United States | 3,530,000 | 3,545,850 | |||||||||||||
b,s | Dryden 34 Senior Loan Fund, 2014-34A, AR, 144A, FRN, 3.508%, (3-month USD LIBOR + 1.16%), 10/15/26 | United States | 5,491,095 | 5,491,095 | ||||||||||||
b,t,u | Dryden 64 CLO Ltd., 2018-64A, A, 144A, FRN, (3-month USD LIBOR + 0.97%), 4/18/31 | United States | 5,070,000 | 5,070,000 | ||||||||||||
2018-64A, D, 144A, FRN, (3-month USD LIBOR + 2.65%), 4/18/31 | United States | 2,200,000 | 2,200,000 | |||||||||||||
b,s | Eaton Vance CDO Ltd., 2014-1A, AR, 144A, FRN, 3.548%, (3-month USD LIBOR + 1.20%), 7/15/26 | United States | 17,022,000 | 16,995,446 | ||||||||||||
b,r | Eleven Madison Trust Mortgage Trust, 2015-11MD, A, 144A, FRN, 3.673%, 9/10/35 | United States | 14,920,000 | 14,889,304 | ||||||||||||
s | FHLMC Structured Agency Credit Risk Debt Notes, 2014-DN1, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 2/25/24 | United States | 9,980,729 | 10,271,438 | ||||||||||||
2014-DN3, M3, FRN, 5.897%, (1-month USD LIBOR + 4.00%), 8/25/24 | United States | 1,363,649 | 1,494,967 | |||||||||||||
2014-DN4, M3, FRN, 6.447%, (1-month USD LIBOR + 4.55%), 10/25/24 | United States | 15,047,430 | 16,785,589 | |||||||||||||
2014-HQ1, M3, FRN, 5.997%, (1-month USD LIBOR + 4.10%), 8/25/24 | United States | 3,660,000 | 4,072,354 | |||||||||||||
2014-HQ2, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 9/25/24 | United States | 12,689,047 | 13,097,863 | |||||||||||||
2014-HQ3, M3, FRN, 6.647%, (1-month USD LIBOR + 4.75%), 10/25/24 | United States | 8,624,747 | 9,623,622 | |||||||||||||
2015-DNA3, M3, FRN, 6.597%, (1-month USD LIBOR + 4.70%), 4/25/28 | United States | 18,411,581 | 22,115,520 | |||||||||||||
2015-HQ1, M2, FRN, 4.097%, (1-month USD LIBOR + 2.20%), 3/25/25 | United States | 2,185,555 | 2,200,595 | |||||||||||||
2015-HQ1, M3, FRN, 5.697%, (1-month USD LIBOR + 3.80%), 3/25/25 | United States | 9,580,000 | 10,318,490 |
32 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||
| ||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||
b,s | Flagship CLO VIII Ltd., 2014-8A, AR, 144A, FRN, 3.598%, (3-month USD LIBOR + 1.25%), 1/16/26 | United States | 6,880,000 | $ | 6,891,490 | |||||||||||
s | FNMA Connecticut Avenue Securities, 2014-C02, 1M2, FRN, 4.497%, (1-month USD LIBOR + 2.60%), 5/25/24 | United States | 14,572,000 | 15,499,709 | ||||||||||||
2014-C03, 1M2, FRN, 4.897%, (1-month USD LIBOR + 3.00%), 7/25/24 | United States | 32,692,995 | 34,978,071 | |||||||||||||
2015-C01, 1M2, FRN, 6.197%, (1-month USD LIBOR + 4.30%), 2/25/25 | United States | 8,005,302 | 8,854,063 | |||||||||||||
2015-C01, 2M2, FRN, 6.447%, (1-month USD LIBOR + 4.55%), 2/25/25 | United States | 15,214,144 | 16,543,912 | |||||||||||||
2015-C02, 1M2, FRN, 5.897%, (1-month USD LIBOR + 4.00%), 5/25/25 | United States | 9,730,464 | 10,689,420 | |||||||||||||
2015-C02, 2M2, FRN, 5.897%, (1-month USD LIBOR + 4.00%), 5/25/25 | United States | 16,502,078 | 17,813,571 | |||||||||||||
2015-C03, 1M2, FRN, 6.897%, (1-month USD LIBOR + 5.00%), 7/25/25 | United States | 15,683,709 | 17,905,206 | |||||||||||||
2015-C03, 2M2, FRN, 6.897%, (1-month USD LIBOR + 5.00%), 7/25/25 | United States | 20,523,689 | 22,887,213 | |||||||||||||
2017-C01, 1M2, FRN, 5.447%, (1-month USD LIBOR + 3.55%), 7/25/29 | United States | 20,720,000 | 22,675,065 | |||||||||||||
b,s | Galaxy CLO Ltd., 2014-17A, AR, 144A, FRN, 3.748%, (3-month USD LIBOR + 1.40%), 7/15/26 | United States | 9,540,000 | 9,559,939 | ||||||||||||
2014-17A, BR, 144A, FRN, 4.148%, (3-month USD LIBOR + 1.80%), 7/15/26 | United States | 6,190,000 | 6,203,185 | |||||||||||||
2014-17A, C1R, 144A, FRN, 4.748%, (3-month USD LIBOR + 2.40%), 7/15/26 | United States | 3,070,000 | 3,078,350 | |||||||||||||
b,s | Galaxy XXVII CLO Ltd., 2018-27A, C, 144A, FRN, 5.113%, (3-month USD LIBOR + 2.75%), 5/16/31 | United States | 5,750,000 | 5,657,868 | ||||||||||||
b | G-Force LLC, 2005-RRA, C, 144A, 5.20%, 8/22/36 | United States | 3,128,098 | 3,097,094 | ||||||||||||
GS Mortgage Securities Trust, r 2016-GS3, B, FRN, 3.395%, 10/10/49 | United States | 8,037,000 | 7,734,781 | |||||||||||||
2017-GS6, B, 3.869%, 5/10/50 | United States | 7,700,000 | 7,600,997 | |||||||||||||
s | Impac Secured Assets Trust, 2007-2, FRN, 2.147%, (1-month USD LIBOR + 0.25%), 4/25/37 | United States | 1,934,917 | 1,905,714 | ||||||||||||
b,s | Invitation Homes Trust, 2015-SFR1, A, 144A, FRN, 3.346%, (1-month USD LIBOR + 1.45%), 3/17/32 | United States | 8,768,108 | 8,798,850 | ||||||||||||
b,r | J.P. Morgan Chase Commercial Mortgage Securities, 2016-Nine, B, 144A, FRN, 2.949%, 10/06/38 | United States | 9,600,000 | 8,852,521 | ||||||||||||
JPMCC Commercial Mortgage Securities Trust, 2017-JP6, B, 3.946%, 7/15/50 | United States | 9,250,000 | 9,172,656 | |||||||||||||
b,s | LCM XVI LP, 2016A, BR, 144A, FRN, 3.848%, (3-month USD LIBOR + 1.50%), 7/15/26 | United States | 6,900,000 | 6,906,969 | ||||||||||||
b,s | LCM XVII LP, 2017A, BR, 144A, FRN, 4.198%, (3-month USD LIBOR + 1.85%), 10/15/26 | United States | 4,590,000 | 4,597,941 | ||||||||||||
2017A, CR, 144A, FRN, 4.848%, (3-month USD LIBOR + 2.50%), 10/15/26 | United States | 4,240,000 | 4,249,243 |
franklintempleton.com | Annual Report | 33 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed | ||||||||||||||||||
Diversified Financials (continued) | ||||||||||||||||||
b,t,u | LCM XVIII LP, 2018A, DR, 144A, FRN, (3-month USD LIBOR + 2.80%), 4/20/31 | United States | 6,860,000 | $ | 6,860,000 | |||||||||||||
b,s | LCM XXIV Ltd., 24A, A, 144A, FRN, 3.669%, (3-month USD LIBOR + 1.31%), 3/20/30 | United States | 4,300,000 | 4,369,058 | ||||||||||||||
b,s | Madison Park Funding XXIII Ltd., 2017-23A, B, 144A, FRN, 4.066%, (3-month USD LIBOR + 1.70%), 7/27/30 | United States | 2,400,000 | 2,426,232 | ||||||||||||||
2017-23A, C, 144A, FRN, 4.716%, (3-month USD LIBOR + 2.35%), 7/27/30 | United States | 5,000,000 | 5,028,350 | |||||||||||||||
b,s | Magnetite XVIII Ltd., 2016-18A, B, 144A, FRN, 3.589%, (3-month USD LIBOR + 1.75%), 11/15/28 | United States | 2,090,000 | 2,095,016 | ||||||||||||||
s | MortgageIT Trust, 2004-1, A2, FRN, 2.797%, (1-month USD LIBOR + 0.90%), 11/25/34 | United States | 2,494,901 | 2,459,100 | ||||||||||||||
2005-5, A1, FRN, 2.157%, (1-month USD LIBOR + 0.26%), 12/25/35 | United States | 2,187,578 | 2,179,262 | |||||||||||||||
b,s | NZCG Funding Ltd., 2015-1A, A2R, 144A, FRN, 3.494%, | |||||||||||||||||
(3-month USD LIBOR + 1.55%), 2/26/31 | United States | 15,500,000 | 15,503,565 | |||||||||||||||
b,s | Octagon Investment Partners 30 Ltd., 144A, FRN, 3.679%, (3-month USD LIBOR + 1.32%), 3/17/30 | United States | 4,300,000 | 4,328,036 | ||||||||||||||
b,s | Octagon Investment Partners XX Ltd., 2014-1A, AR, 144A, FRN, 2.941%, (3-month USD LIBOR + 1.13%), 8/12/26 | United States | 6,800,000 | 6,807,480 | ||||||||||||||
b,s | Octagon Investment Partners XXIII Ltd., 2015-1A, BR, 144A, FRN, 3.461%, (3-month USD LIBOR + 1.20%), 7/15/27 | United States | 4,590,000 | 4,590,459 | ||||||||||||||
2015-1A, DR, 144A, FRN, 4.811%, (3-month USD LIBOR + 2.55%), 7/15/27 | United States | 6,400,000 | 6,400,832 | |||||||||||||||
s | Opteum Mortgage Acceptance Corp. Trust, 2005-4, 1APT, FRN, 2.207%, (1-month USD LIBOR + 0.31%), 11/25/35 | United States | 3,147,143 | 3,127,323 | ||||||||||||||
s | Structured Asset Securities Corp., 2005-2XS, 2A2, FRN, 3.387%, (1-month USD LIBOR + 1.50%), 2/25/35 | United States | 2,362,198 | 2,332,716 | ||||||||||||||
r | Thornburg Mortgage Securities Trust, 2005-1, A3, FRN, 3.366%, 4/25/45 | United States | 3,632,627 | 3,659,686 | ||||||||||||||
b,s | Voya CLO Ltd., 2014-1A, CR2, 144A, FRN, 5.155%, (3-month USD LIBOR + 2.80%), 4/18/31 | United States | 8,000,000 | 8,000,000 | ||||||||||||||
2013-2A, BR, 144A, FRN, 4.194%, (3-month USD LIBOR + 1.85%), 4/25/31 | United States | 5,770,000 | 5,769,481 | |||||||||||||||
2015-2A, B, 144A, FRN, 4.342%, (3-month USD LIBOR + 1.98%), 7/23/27 | United States | 9,290,000 | 9,322,608 | |||||||||||||||
Wells Fargo Mortgage Backed Securities Trust, r2004-W, A9, FRN, 3.707%, 11/25/34 | United States | 1,378,781 | 1,416,018 | |||||||||||||||
2007-3, 3A1, 5.50%, 4/25/22 | United States | 281,803 | 287,586 | |||||||||||||||
|
| |||||||||||||||||
847,491,425 | ||||||||||||||||||
|
| |||||||||||||||||
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities | 904,406,432 | |||||||||||||||||
|
|
34 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Mortgage-Backed Securities 9.2% | ||||||||||||||||||
v | Federal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%† | |||||||||||||||||
FHLMC, 3.687%, (US 1 Year CMT T-Note +/- MBS Margin), 1/01/33 | United States | 22,450 | $ | 23,225 | ||||||||||||||
|
| |||||||||||||||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 5.0% | ||||||||||||||||||
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 | United States | 70,701 | 71,268 | |||||||||||||||
FHLMC Gold 15 Year, 5.00%, 4/01/19 - 7/01/22 | United States | 155,564 | 159,591 | |||||||||||||||
FHLMC Gold 15 Year, 5.50%, 10/01/18 - 2/01/19 | United States | 1,164 | 1,167 | |||||||||||||||
FHLMC Gold 30 Year, 3.50%, 12/01/47 | United States | 14,947,034 | 14,850,040 | |||||||||||||||
w | FHLMC Gold 30 Year, 3.50%, 5/01/48 | United States | 106,500,000 | 105,709,571 | ||||||||||||||
FHLMC Gold 30 Year, 4.00%, 5/01/48 | United States | 72,880,000 | 74,348,016 | |||||||||||||||
w | FHLMC Gold 30 Year, 4.00%, 5/01/48 | United States | 90,000,000 | 91,652,340 | ||||||||||||||
FHLMC Gold 30 Year, 4.50%, 10/01/40 | United States | 167,274 | 176,067 | |||||||||||||||
FHLMC Gold 30 Year, 5.00%, 5/01/27 - 2/01/38 | United States | 1,364,786 | 1,452,850 | |||||||||||||||
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/36 | United States | 991,693 | 1,085,720 | |||||||||||||||
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/37 | United States | 291,205 | 322,751 | |||||||||||||||
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 6/01/36 | United States | 186,371 | 210,039 | |||||||||||||||
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 | United States | 28,870 | 30,037 | |||||||||||||||
FHLMC Gold 30 Year, 7.50%, 1/01/26 - 1/01/31 | United States | 6,435 | 7,268 | |||||||||||||||
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 | United States | 193 | 197 | |||||||||||||||
FHLMC Gold 30 Year, 9.00%, 12/01/24 | United States | 94 | 102 | |||||||||||||||
|
| |||||||||||||||||
290,077,024 | ||||||||||||||||||
|
| |||||||||||||||||
v | Federal National Mortgage Association (FNMA) Adjustable Rate 0.0%† | |||||||||||||||||
FNMA, 3.418% - 4.08%, (US 1 Year CMT T-Note +/- MBS Margin), 4/01/20 - 12/01/34 | United States | 175,845 | 185,193 | |||||||||||||||
|
| |||||||||||||||||
Federal National Mortgage Association (FNMA) Fixed Rate 3.7% | ||||||||||||||||||
FNMA 15 Year, 2.50%, 7/01/27 | United States | 334,028 | 327,605 | |||||||||||||||
FNMA 15 Year, 3.00%, 4/01/33 | United States | 20,830,932 | 20,679,626 | |||||||||||||||
w | FNMA 15 Year, 3.00%, 5/01/33 | United States | 17,000,000 | 16,857,226 | ||||||||||||||
FNMA 15 Year, 4.50%, 3/01/20 | United States | 25,422 | 25,617 | |||||||||||||||
FNMA 15 Year, 5.00%, 6/01/18 | United States | 1,939 | 1,970 | |||||||||||||||
FNMA 15 Year, 5.50%, 3/01/21 - 4/01/22 | United States | 58,683 | 59,831 | |||||||||||||||
FNMA 30 Year, 3.50%, 11/01/47 | United States | 38,420,506 | 38,181,714 | |||||||||||||||
w | FNMA 30 Year, 3.50%, 5/01/48 | United States | 53,000,000 | 52,590,078 | ||||||||||||||
w | FNMA 30 Year, 4.00%, 5/01/48 | United States | 52,300,000 | 53,243,854 | ||||||||||||||
FNMA 30 Year, 4.50%, 3/01/28 - 2/01/41 | United States | 542,083 | 569,772 | |||||||||||||||
w | FNMA 30 Year, 4.50%, 5/01/48 | United States | 25,000,000 | 26,027,344 | ||||||||||||||
FNMA 30 Year, 5.00%, 9/01/23 - 10/01/35 | United States | 1,468,302 | 1,570,580 | |||||||||||||||
FNMA 30 Year, 5.50%, 9/01/33 - 12/01/35 | United States | 1,313,620 | 1,437,357 | |||||||||||||||
FNMA 30 Year, 6.00%, 6/01/34 - 5/01/38 | United States | 2,590,213 | 2,882,890 | |||||||||||||||
FNMA 30 Year, 6.50%, 3/01/28 - 10/01/37 | United States | 390,976 | 435,869 | |||||||||||||||
FNMA 30 Year, 7.50%, 10/01/29 | United States | 6,381 | 7,296 | |||||||||||||||
FNMA 30 Year, 8.00%, 1/01/25 - 5/01/26 | United States | 3,439 | 3,840 | |||||||||||||||
|
| |||||||||||||||||
214,902,469 | ||||||||||||||||||
|
| |||||||||||||||||
Government National Mortgage Association (GNMA) Fixed Rate 0.5% | ||||||||||||||||||
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 | United States | 175,208 | 187,749 | |||||||||||||||
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 | United States | 444,464 | 486,472 | |||||||||||||||
GNMA I SF 30 Year, 6.00%, 8/15/36 | United States | 23,700 | 26,447 |
franklintempleton.com | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Mortgage-Backed Securities (continued) | ||||||||||||||||||
Government National Mortgage Association (GNMA) Fixed Rate (continued) | ||||||||||||||||||
GNMA I SF 30 Year, 6.50%, 2/15/29 - 3/15/32 | United States | 41,661 | $ | 46,608 | ||||||||||||||
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 | United States | 18,218 | 19,293 | |||||||||||||||
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 | United States | 858 | 890 | |||||||||||||||
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 | United States | 4,067 | 4,373 | |||||||||||||||
GNMA I SF 30 Year, 8.50%, 8/15/24 | United States | 66 | 71 | |||||||||||||||
GNMA I SF 30 Year, 9.00%, 1/15/25 | United States | 240 | 241 | |||||||||||||||
GNMA I SF 30 Year, 9.50%, 6/15/25 | United States | 451 | 452 | |||||||||||||||
GNMA II SF 30 Year, 3.50%, 9/20/47 | United States | 10,475,371 | 10,496,569 | |||||||||||||||
w | GNMA II SF 30 Year, 3.50%, 5/01/48 | United States | 20,000,000 | 20,014,063 | ||||||||||||||
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 | United States | 242,251 | 261,432 | |||||||||||||||
GNMA II SF 30 Year, 5.50%, 6/20/34 | United States | 123,275 | 135,236 | |||||||||||||||
GNMA II SF 30 Year, 6.00%, 11/20/34 | United States | 115,426 | 129,759 | |||||||||||||||
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 | United States | 64,431 | 71,970 | |||||||||||||||
GNMA II SF 30 Year, 7.50%, 4/20/32 | United States | 17,540 | 19,329 | |||||||||||||||
|
| |||||||||||||||||
31,900,954 | ||||||||||||||||||
|
| |||||||||||||||||
Total Mortgage-Backed Securities (Cost $541,516,708) | 537,088,865 | |||||||||||||||||
|
| |||||||||||||||||
Municipal Bonds 1.2% | ||||||||||||||||||
California State GO, Various Purpose, Refunding, 5.00%, 9/01/29 | United States | 17,200,000 | 20,245,260 | |||||||||||||||
New Jersey EDA Revenue, School Facilities Construction, Refunding, Series NN, 5.00%, 3/01/30 | United States | 5,200,000 | 5,472,740 | |||||||||||||||
New York City HDC Capital Fund Grant Program Revenue, New York City Housing Authority Program, Series B1, 5.00%, 7/01/33 | United States | 3,500,000 | 3,769,885 | |||||||||||||||
Orlando Health Obligated Group, 3.777%, 10/01/28 | United States | 3,870,000 | 3,825,877 | |||||||||||||||
Port Authority of New York and New Jersey Revenue, Consolidated, One Hundred Ninety-First Series, 4.823%, 6/01/45 | United States | 14,165,000 | 15,004,276 | |||||||||||||||
i | Puerto Rico Electric Power Authority Power Revenue, | |||||||||||||||||
Series A, 6.75%, 7/01/36 | United States | 30,900,000 | 12,591,750 | |||||||||||||||
Series XX, 5.25%, 7/01/40 | United States | 15,000,000 | 6,112,500 | |||||||||||||||
San Jose RDA Successor Agency Tax Allocation, Senior, Refunding, Series A-T, 3.25%, 8/01/29 | United States | 5,675,000 | 5,419,739 | |||||||||||||||
|
| |||||||||||||||||
Total Municipal Bonds (Cost $89,921,898) | 72,442,027 | |||||||||||||||||
|
| |||||||||||||||||
Shares | ||||||||||||||||||
Escrows and Litigation Trusts 0.0%† | ||||||||||||||||||
a,ab | Midstates Petroleum Co. Inc./Midstates Petroleum Co. LLC, Escrow Account | United States | 15,000,000 | — | ||||||||||||||
a,ab | NewPage Corp., Litigation Trust | United States | 14,000,000 | — | ||||||||||||||
a | Penn Virginia Corp., Escrow Account | United States | 15,000,000 | 37,500 | ||||||||||||||
a | Vistra Energy Corp., Escrow Account | United States | 30,000,000 | 243,750 | ||||||||||||||
|
| |||||||||||||||||
Total Escrows and Litigation Trusts (Cost $952,711) | 281,250 | |||||||||||||||||
|
| |||||||||||||||||
Total Investments before Short Term Investments (Cost $6,136,300,326) | 5,964,612,636 | |||||||||||||||||
|
|
36 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country | | Principal Amount | * | Value | ||||||||||||||
| ||||||||||||||||||
Short Term Investments 3.5% | ||||||||||||||||||
U.S. Government and Agency Securities (Cost $3,799,592) 0.1% | ||||||||||||||||||
x,y | U.S. Treasury Bill, 5/03/18 | United States | 3,800,000 | $ | 3,799,671 | |||||||||||||
|
| |||||||||||||||||
Total Investments before Money Market Funds (Cost $6,140,099,918) | 5,968,412,307 | |||||||||||||||||
|
| |||||||||||||||||
Shares | ||||||||||||||||||
Money Market Funds (Cost $200,193,361) 3.4% | ||||||||||||||||||
d,z | Institutional Fiduciary Trust Money Market Portfolio, 1.30% | United States | 200,193,361 | 200,193,361 | ||||||||||||||
|
| |||||||||||||||||
Total Investments (Cost $6,340,293,279) 105.6% | 6,168,605,668 | |||||||||||||||||
Other Assets, less Liabilities (5.6)% | (326,207,379 | ) | ||||||||||||||||
|
| |||||||||||||||||
Net Assets 100.0% | $ | 5,842,398,289 | ||||||||||||||||
|
|
franklintempleton.com | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
aaThe security is owned by FT Holdings Corporation II, a wholly-owned subsidiary of the Fund. See Note 1(g).
abFair valued using significant unobservable inputs. See Note 12 regarding fair value measurements.
bSecurity 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, 2018, the aggregate value of these securities was $1,768,721,461, representing 30.3% of net assets.
cSee Note 8 regarding restricted securities.
dSee Note 3(f) regarding investments in affiliated management investment companies.
ePerpetual security with no stated maturity date.
fIncome may be received in additional securities and/or cash.
gSee Note 1(f) regarding loan participation notes.
hThe coupon rate shown represents the rate at period end.
iSee Note 7 regarding defaulted securities.
jSee Note 1(i) regarding senior floating rate interests.
kSecurity purchased on a delayed delivery basis. See Note 1(c).
lA portion or all of the security represents an unsettled loan commitment. The coupon rate is to-be determined (TBD) at the time of settlement and will be based upon a reference index/floor plus a spread.
mPrincipal amount is stated in 100 Mexican Peso Units.
nThe principal represents the notional amount. See Note 1(d) regarding value recovery instruments.
oPrincipal amount is stated in 1,000 Brazilian Real Units.
pRedemption price at maturity and coupon payment is adjusted for inflation. See Note 1(k).
qPrincipal amount of security is adjusted for inflation. See Note 1(k).
rAdjustable rate security with an interest rate that is not based on a published reference index and spread. The rate is based on the structure of the agreement and current market conditions. The coupon rate shown represents the rate at period end.
sThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end.
tSecurity purchased on a when-issued basis. See Note 1(c).
uThe coupon rate will be determined at time of issue.
vAdjustable Rate Mortgage-Backed Security (ARM); the rate shown is the effective rate at period end. ARM rates are not based on a published reference rate and spread, but instead pass-through weighted average interest income inclusive of any caps or floors, if applicable, from the underlying mortgage loans in which the majority of mortgages pay interest based on the index shown at their designated reset dates plus a spread, less the applicable servicing and guaranty fee (MBS margin).
wSecurity purchased on a to-be-announced (TBA) basis. See Note 1(c).
xThe security was issued on a discount basis with no stated coupon rate.
yA portion or all of the security has been segregated as collateral for open futures contracts. At April 30, 2018, the value of this security and/or cash pledged amounted to $2,964,742, representing 0.1% of net assets.
zThe rate shown is the annualized seven-day effective yield at period end.
38 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
At April 30, 2018, the Fund had the following futures contracts outstanding. See Note 1(d).
Futures Contracts
Description | Type | | Number of Contracts | | | Notional Amount | * | | Expiration Date | | | Value/ Unrealized Appreciation (Depreciation | ) | |||||||
| ||||||||||||||||||||
Interest Rate Contracts | ||||||||||||||||||||
Long Gilt | Long | 496 | $ | 83,490,474 | 6/27/18 | $ 886,928 | ||||||||||||||
U.S. Treasury 10 Yr. Note Ultra | Long | 196 | 25,066,563 | 6/20/18 | (25,019 | ) | ||||||||||||||
U.S. Treasury 30 Yr. Bond | Long | 214 | 30,782,562 | 6/20/18 | 173,297 | |||||||||||||||
|
| |||||||||||||||||||
Total Futures Contracts | $1,035,206 | |||||||||||||||||||
|
|
*As of period end.
At April 30, 2018, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
Forward Exchange Contracts
Currency |
| Counterparty | a | Type |
| Quantity |
| | Contract Amount | * | | Settlement Date |
| | Unrealized Appreciation |
| | Unrealized Depreciation |
| |||||||||||||
| ||||||||||||||||||||||||||||||||
OTC Forward Exchange Contracts | ||||||||||||||||||||||||||||||||
Argentine Peso | JPHQ | Buy | 135,000,000 | 6,461,185 | 5/29/18 | $ — | $ | (30,623 | ) | |||||||||||||||||||||||
Mexican Peso | JPHQ | Sell | 345,000,000 | 18,255,900 | 7/19/18 | 37,934 | — | |||||||||||||||||||||||||
Mexican Peso | JPHQ | Sell | 395,000,000 | 20,704,379 | 7/19/18 | — | (153,872 | ) | ||||||||||||||||||||||||
Polish Zloty | DBAB | Buy | 63,000,000 | 18,560,528 | 7/19/18 | — | (580,195 | ) | ||||||||||||||||||||||||
Canadian Dollar | JPHQ | Sell | 50,000,000 | 40,154,515 | 7/31/18 | 1,109,217 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 2,886,000,000 | 44,352,236 | 7/31/18 | — | (1,419,011 | ) | ||||||||||||||||||||||||
British Pound | JPHQ | Sell | 8,300,000 | 10,951,850 | 8/15/18 | — | (536,226 | ) | ||||||||||||||||||||||||
Euro | JPHQ | Sell | 13,600,000 | 16,857,200 | 8/15/18 | 289,027 | — | |||||||||||||||||||||||||
Swedish Krona | JPHQ | Buy | 152,000,000 | 18,729,592 | 8/15/18 | — | (1,192,793 | ) | ||||||||||||||||||||||||
Polish Zloty | JPHQ | Buy | 60,000,000 | 17,849,174 | 8/16/18 | — | (713,583 | ) | ||||||||||||||||||||||||
Australian Dollar | JPHQ | Sell | 41,450,000 | 32,704,050 | 8/20/18 | 1,478,618 | — | |||||||||||||||||||||||||
Euro | JPHQ | Sell | 47,400,000 | 59,501,220 | 8/20/18 | 1,731,722 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 2,200,000,000 | 33,500,838 | 8/20/18 | — | (848,907 | ) | ||||||||||||||||||||||||
British Pound | JPHQ | Sell | 4,800,000 | 6,839,683 | 9/19/18 | 184,504 | — | |||||||||||||||||||||||||
Norwegian Krone | JPHQ | Buy | 136,000,000 | 17,510,654 | 9/19/18 | — | (445,091 | ) | ||||||||||||||||||||||||
Swedish Krona | JPHQ | Buy | 128,000,000 | 15,577,461 | 9/19/18 | — | (765,206 | ) | ||||||||||||||||||||||||
United States Dollar | DBAB | Buy | 41,480,412 | 33,200,000 | EUR | 9/19/18 | 913,946 | — | ||||||||||||||||||||||||
Australian Dollar | DBAB | Sell | 43,000,000 | 33,400,250 | 10/09/18 | 992,228 | — | |||||||||||||||||||||||||
Canadian Dollar | JPHQ | Sell | 35,300,000 | 28,090,558 | 10/09/18 | 486,049 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 212,000,000 | 3,204,837 | 10/09/18 | — | (76,564 | ) | ||||||||||||||||||||||||
South Korean Won | JPHQ | Buy | 17,000,000,000 | 15,961,992 | 10/10/18 | 10,014 | — | |||||||||||||||||||||||||
South Korean Won | JPHQ | Sell | 17,000,000,000 | 16,061,222 | 10/10/18 | 89,215 | — | |||||||||||||||||||||||||
Argentine Peso | JPHQ | Buy | 135,000,000 | 6,052,455 | 10/31/18 | — | (249,192 | ) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Forward Exchange Contracts |
| $7,322,474 | $ | (7,011,263 | ) | |||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ 311,211 | ||||||||||||||||||||||||||||||
|
|
|
*In U.S. dollars unless otherwise indicated.
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.
franklintempleton.com | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
At April 30, 2018, the Fund had the following credit default swap contracts outstanding. See Note 1(d).
Credit Default Swap Contracts
Description | Periodic Payment Rate Received (Paid) | Payment Frequency | Counter- party | Maturity Date | Notional Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Centrally Cleared Swap Contracts |
| |||||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d |
| |||||||||||||||||||||||||||||||||||
Traded Index |
| |||||||||||||||||||||||||||||||||||
CDX.EM.29 | 1.00 | % | Quarterly | 6/20/23 | $ | 18,300,000 | $ | (333,706 | ) | $ | (361,767 | ) | $ | 28,061 | Non- | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
OTC Swap Contracts |
| |||||||||||||||||||||||||||||||||||
Contracts to Buy Protectiond |
| |||||||||||||||||||||||||||||||||||
Single Name | ||||||||||||||||||||||||||||||||||||
Ally Financial Inc. | (5.00 | )% | Quarterly | CITI | 12/20/22 | 7,350,000 | (1,268,283 | ) | (1,245,138 | ) | (23,145 | ) | ||||||||||||||||||||||||
Ally Financial Inc. | (5.00 | )% | Quarterly | JPHQ | 12/20/22 | 12,450,000 | (2,148,317 | ) | (2,123,867 | ) | (24,450 | ) | ||||||||||||||||||||||||
Contracts to Sell Protectionc,d |
| |||||||||||||||||||||||||||||||||||
Single Name |
| |||||||||||||||||||||||||||||||||||
Government of Argentina | 5.00 | % | Quarterly | MSCO | 6/20/23 | 48,600,000 | 4,759,163 | 4,989,256 | (230,093 | ) | B+ | |||||||||||||||||||||||||
Government of Colombia | 1.00 | % | Quarterly | CITI | 6/20/23 | 36,100,000 | (75,849 | ) | (97,068 | ) | 21,219 | BBB- | ||||||||||||||||||||||||
Government of Mexico | 1.00 | % | Quarterly | JPHQ | 6/20/23 | 16,000,000 | (84,122 | ) | (120,036 | ) | 35,914 | BBB+ | ||||||||||||||||||||||||
Traded Index |
| |||||||||||||||||||||||||||||||||||
eCitibank Bespoke | ||||||||||||||||||||||||||||||||||||
Cambridge Index, Equity | ||||||||||||||||||||||||||||||||||||
Tranche 0-3% | 0.00 | % | Quarterly | CITI | 12/20/19 | 27,300,000 | (4,981,222 | ) | (3,667,249 | ) | (1,313,973 | ) | Non- | |||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Index, | ||||||||||||||||||||||||||||||||||||
Mezzanine Tranche 5-8% | 0.50 | % | Quarterly | CITI | 6/20/18 | 30,000,000 | 1,270 | — | 1,270 | Non- | ||||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Lisbon | ||||||||||||||||||||||||||||||||||||
Index, Equity Tranche 0-3% | 0.00 | % | Quarterly | CITI | 6/20/19 | 5,440,000 | (452,576 | ) | (733,519 | ) | 280,943 | Non- | ||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Verona | ||||||||||||||||||||||||||||||||||||
Index, Equity Tranche 0-3% | 0.00 | % | Quarterly | CITI | 12/20/19 | 10,900,000 | (1,851,572 | ) | (1,797,336 | ) | (54,236 | ) | Non- | |||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
eCitibank Bespoke Verona | ||||||||||||||||||||||||||||||||||||
Index, Mezzanine Tranche 7-15% | 0.40 | % | Quarterly | CITI | 12/20/19 | 31,000,000 | 68,083 | — | 68,083 | Non- | ||||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||||||||||||||
Grade |
40 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Credit Default Swap Contracts (continued)
Description | | Periodic Payment Rate Received (Paid | ) | | Payment Frequency | | | Counter- party | | | Maturity Date | | | Notional Amount | a | Value | | Unamortized Upfront Payments (Receipts | ) | | Unrealized Appreciation (Depreciation | ) | Rating | b | ||||||||||||
| ||||||||||||||||||||||||||||||||||||
OTC Swap Contracts (continued) |
| |||||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d (continued) |
| |||||||||||||||||||||||||||||||||||
Traded Index (continued) |
| |||||||||||||||||||||||||||||||||||
MCDX.NA.30 | 1.00 | % | Quarterly | CITI | 6/20/23 | $ | 23,060,000 | $ | 552,746 | $ | 554,805 | $ | (2,059) | Investment | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Grade | ||||||||||||||||||||||||||||||||||||
Total OTC Swap Contracts |
| $ | (5,480,679 | ) | $ | (4,240,152) | $ | (1,240,527) | ||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Total Credit Default Swap Contracts |
| $ | (5,814,385 | ) | $ | (4,601,919) | $ | (1,212,466) | ||||||||||||||||||||||||||||
|
|
aFor contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts.
bBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external vendors.
cThe Fund enters contracts to sell protection to create a long credit position.
dPerformance triggers for settlement of contract include default, bankruptcy or restructuring for single name swaps and failure to pay or bankruptcy of the underlying securities for traded index swaps.
eRepresents a custom index comprised of a basket of underlying issuers.
See Note 9 regarding other derivative information.
See Abbreviations on page 62.
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | | Annual Report | 41 |
FRANKLIN STRATEGIC SERIES
Consolidated Financial Statements
Consolidated Statement of Assets and Liabilities
April 30, 2018
Franklin Strategic Income Fund
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 5,669,141,189 | ||
Cost - Controlled affiliates (Note 3f and 10) | 470,958,729 | |||
Cost - Non-controlled affiliates (Note 3f and 10) | 200,193,361 | |||
|
| |||
Value - Unaffiliated issuers | $ | 5,511,297,770 | ||
Value - Controlled affiliates (Note 3f and 10) | 457,114,537 | |||
Value - Non-controlled affiliates (Note 3f and 10) | 200,193,361 | |||
Cash | 27,022,680 | |||
Restricted cash for OTC derivative contracts (Note 1e) | 4,880,000 | |||
Foreign currency, at value (cost $5,487,505) | 5,486,349 | |||
Receivables: | ||||
Investment securities sold | 770,219 | |||
Capital shares sold | 2,825,670 | |||
Dividends and interest | 54,951,969 | |||
Deposits with brokers for: | ||||
OTC derivative contracts | 10,550,000 | |||
TBA transactions | 2,820,000 | |||
Centrally cleared swap contracts | 3,009,303 | |||
Variation margin on futures contracts. | 405,154 | |||
OTC swap contracts (upfront payments $5,676,677) | 5,544,061 | |||
Unrealized appreciation on OTC forward exchange contracts | 7,322,474 | |||
Unrealized appreciation on OTC swap contracts | 407,429 | |||
FT Subsidiary deferred tax benefit (Note 1g) | 1,390,539 | |||
Other assets | 7,840 | |||
|
| |||
Total assets | 6,295,999,355 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 405,270,692 | |||
Capital shares redeemed | 10,081,450 | |||
Management fees | 1,930,895 | |||
Distribution fees | 1,310,721 | |||
Transfer agent fees | 1,845,629 | |||
Distributions to shareholders | 1,193,514 | |||
Variation margin on centrally cleared swap contracts | 14,099 | |||
Deposits from brokers for: | ||||
OTC derivative contracts | 4,880,000 | |||
OTC swap contracts (upfront receipts $12,440,981) | 9,784,213 | |||
Unrealized depreciation on OTC forward exchange contracts | 7,011,263 | |||
Unrealized depreciation on OTC swap contracts | 1,647,956 | |||
Deferred tax | 319,728 | |||
FT Subsidiary income taxes (Note 1g) | 7,860,901 | |||
Accrued expenses and other liabilities | 450,005 | |||
|
| |||
Total liabilities | 453,601,066 | |||
|
| |||
Net assets, at value | $ | 5,842,398,289 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 6,448,608,302 | ||
Distributions in excess of net investment income | (39,100,421 | ) | ||
Net unrealized appreciation (depreciation) | (169,930,906 | ) | ||
Accumulated net realized gain (loss) | (397,178,686 | ) | ||
|
| |||
Net assets, at value | $ | 5,842,398,289 | ||
|
|
42 | Annual Report | | The accompanying notes are an integral part of these consolidated financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Assets and Liabilities (continued)
April 30, 2018
Franklin Strategic Income Fund
Class A: | ||||
Net assets, at value | $3,291,002,285 | |||
|
| |||
Shares outstanding | 342,600,688 | |||
|
| |||
Net asset value per sharea | $9.61 | |||
|
| |||
Maximum offering price per share (net asset value per share ÷ 95.75%) | $10.04 | |||
|
| |||
Class C: | ||||
Net assets, at value | $1,078,889,977 | |||
|
| |||
Shares outstanding | 112,338,689 | |||
|
| |||
Net asset value and maximum offering price per sharea | $9.60 | |||
|
| |||
Class R: | ||||
Net assets, at value | $105,691,875 | |||
|
| |||
Shares outstanding | 11,045,019 | |||
|
| |||
Net asset value and maximum offering price per share | $9.57 | |||
|
| |||
Class R6: | ||||
Net assets, at value | $433,067,607 | |||
|
| |||
Shares outstanding | 45,019,681 | |||
|
| |||
Net asset value and maximum offering price per share | $9.62 | |||
|
| |||
Advisor Class: | ||||
Net assets, at value | $933,746,545 | |||
|
| |||
Shares outstanding | 97,108,609 | |||
|
| |||
Net asset value and maximum offering price per share | $9.62 | |||
|
|
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Operations
for the year ended April 30, 2018
Franklin Strategic Income Fund
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | 548,837 | ||
Controlled affiliates (Note 3f and 10) | 39,286,366 | |||
Non-controlled affiliates (Note 3f and 10) | 917,362 | |||
Interest: (net of foreign taxes)~ | ||||
Unaffiliated issuers | 264,105,106 | |||
Other income (net of taxes of $420,611) (Note 1g) | 122,227 | |||
|
| |||
Total investment income | 304,979,898 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 28,976,892 | |||
Distribution fees: (Note 3c) | ||||
Class A | 8,989,786 | |||
Class C | 8,001,944 | |||
Class R | 623,214 | |||
Transfer agent fees: (Note 3e) | ||||
Class A | 6,047,723 | |||
Class C | 2,074,412 | |||
Class R | 209,886 | |||
Class R6 | 62,292 | |||
Advisor Class | 1,728,563 | |||
Custodian fees (Note 4) | 314,373 | |||
Reports to shareholders | 546,799 | |||
Registration and filing fees | 191,141 | |||
Professional fees | 333,062 | |||
Trustees’ fees and expenses | 70,164 | |||
Other | 517,614 | |||
|
| |||
Total expenses | 58,687,865 | |||
Expense reductions (Note 4) | (125,632 | ) | ||
Expenses waived/paid by affiliates (Note 3f and 3g) | (3,128,133 | ) | ||
|
| |||
Net expenses | 55,434,100 | |||
|
| |||
Net investment income | 249,545,798 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments:# | ||||
Unaffiliated issuers | (103,500,450 | ) | ||
Non-controlled affiliates (Note 3f and 10) | (1,170,097 | ) | ||
Foreign currency transactions | (18,343 | ) | ||
Forward exchange contracts | (34,920,481 | ) | ||
Futures contracts | (992,424 | ) | ||
Swap contracts | 3,847,817 | |||
Capital gain distributions from management investment companies: | ||||
Controlled affiliates (Note 3f) | 7,017,422 | |||
Capital gain distribution received in FT Subsidiary (net of taxes of $7,440,290) (Note 1g) | 16,523,235 | |||
|
| |||
Net realized gain (loss) | (113,213,321 | ) | ||
|
|
44 | Annual Report | | The accompanying notes are an integral part of these consolidated financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Operations (continued)
for the year ended April 30, 2018
Franklin Strategic Income Fund
Net change in unrealized appreciation (depreciation) on: | ||||
Investments: | ||||
Unaffiliated issuers | (61,550,163 | ) | ||
Controlled affiliates (Note 3f and 10) | (30,092,162 | ) | ||
Non-controlled affiliates (Note 3f and 10) | 420,888 | |||
Translation of other assets and liabilities denominated in foreign currencies | (229,516 | ) | ||
Forward exchange contracts. | (227,693 | ) | ||
Futures contracts | (1,974,659 | ) | ||
Swap contracts | (814,289 | ) | ||
Change in FT Subsidiary deferred tax benefit (Note 1g) | 1,390,539 | |||
Change in deferred taxes on unrealized appreciation | 126,725 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (92,950,330 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (206,163,651 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 43,382,147 | ||
|
|
~Foreign taxes withheld on interest | $ | 815,102 | ||
#Net of foreign taxes | $ | 131,270 |
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Changes in Net Assets
Franklin Strategic Income Fund
Year Ended April 30, | ||||||||
2018 | 2017 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 249,545,798 | $ | 296,053,367 | ||||
Net realized gain (loss) | (113,213,321 | ) | (178,596,599 | ) | ||||
Net change in unrealized appreciation (depreciation) | (92,950,330 | ) | 411,590,994 | |||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | 43,382,147 | 529,047,762 | ||||||
|
| |||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class A | (106,537,907 | ) | (76,684,998 | ) | ||||
Class C | (31,329,580 | ) | (21,849,570 | ) | ||||
Class R | (3,355,206 | ) | (2,644,424 | ) | ||||
Class R6 | (13,824,604 | ) | (9,361,333 | ) | ||||
Advisor Class | (32,910,570 | ) | (19,738,810 | ) | ||||
|
| |||||||
Total distributions to shareholders | (187,957,867 | ) | (130,279,135 | ) | ||||
|
| |||||||
Capital share transactions: (Note 2) | ||||||||
Class A | (461,379,634 | ) | (898,775,869 | ) | ||||
Class C | (280,427,839 | ) | (344,124,057 | ) | ||||
Class R | (38,252,437 | ) | (44,210,930 | ) | ||||
Class R6 | 75,196,883 | 61,813,436 | ||||||
Advisor Class | (113,689,921 | ) | 112,378,776 | |||||
|
| |||||||
Total capital share transactions | (818,552,948 | ) | (1,112,918,644 | ) | ||||
|
| |||||||
Net increase (decrease) in net assets | (963,128,668 | ) | (714,150,017 | ) | ||||
Net assets: | ||||||||
Beginning of year | 6,805,526,957 | 7,519,676,974 | ||||||
|
| |||||||
End of year | $ | 5,842,398,289 | $ | 6,805,526,957 | ||||
|
| |||||||
Distributions in excess of net investment income included in net assets: End of year | $ | (39,100,421 | ) | $ | (118,770,181 | ) | ||
|
|
46 | Annual Report | | The accompanying notes are an integral part of these consolidated financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Notes to Consolidated 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 (1940 Act) as an open-end management investment company, consisting of eight separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Strategic Income Fund (Fund) is included in this report. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6, and Advisor Class. Each class of shares may differ by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees due to differing arrangements for distribution and transfer agent fees.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments listed on an 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. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities 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.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the date that the values of the foreign debt securities are determined.
Investments in open-end mutual funds are valued at the closing NAV.
Certain derivative financial instruments are centrally cleared or trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to
franklintempleton.com | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting
Policies (continued)
a. Financial Instrument Valuation (continued)
calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Fund’s business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC 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 Depositary 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 that may call into question the reliability of the values of the foreign securities 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.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Fund’s NAV is not calculated, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Board.
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 in the Consolidated Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a When-Issued, Delayed Delivery and TBA Basis
The Fund purchases securities on a when-issued or 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 and collateral has been pledged and/or received for open TBA trades.
48 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
d. Derivative Financial Instruments
The Fund invested in derivative financial instruments in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Consolidated Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Consolidated Statement of Operations.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of
collateral is required by either the Fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty the next business day, or within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to interest rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset at a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities.
The Fund entered into OTC forward exchange contracts primarily 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 at a specific exchange rate on a future date.
The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (OTC credit default swaps) or may be executed in a multilateral trade facility platform, such as a registered exchange (centrally cleared credit default swaps). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, a basket of issuers or indices, or a tranche of a credit index or basket of issuers or indices. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract
franklintempleton.com | Annual Report | 49 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting
Policies (continued)
d. Derivative Financial Instruments (continued)
from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Consolidated Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Consolidated Statement of Operations.
The Fund invests in value recovery instruments (VRI) primarily to gain exposure to economic growth. Periodic payments from VRI are dependent on established benchmarks for underlying variables. VRI has a notional amount, which is used to calculate amounts of payments to holders. Payments are recorded upon receipt as realized gains in the Consolidated Statement of Operations. The risks of investing in VRI include growth risk, liquidity, and the potential loss of investment.
See Note 9 regarding other derivative information.
e. Restricted Cash
At April 30, 2018, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Consolidated Statement of Assets and Liabilities.
f. Loan Participation Notes
The Fund invests in loan participation notes (Participations). Participations are loans originally issued to a borrower by one or more financial institutions (the Lender) and subsequently
sold to other investors, such as the Fund. Participations typically result in the Fund having a contractual relationship only with the Lender and not with the borrower. The Fund has the right to receive from the Lender any payments of principal, interest and fees which the Lender received from the borrower. The Fund generally has no rights to either enforce compliance by the borrower with the terms of the loan agreement or to any collateral relating to the original loan. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. The Participations may also involve interest rate risk and liquidity risk, including the potential default or insolvency of the borrower and/or the Lender.
g. FT Holdings Corporation II (FT Subsidiary)
The Fund invests in certain financial instruments through its investment in FT Subsidiary. FT Subsidiary is a Delaware Corporation, is a wholly-owned subsidiary of the Fund, and is able to invest in certain financial instruments consistent with the investment objective of the Fund. At April 30, 2018, FT Subsidiary’s investment, Turtle Bay Resort, as well as any other assets and liabilities of FT Subsidiary are reflected in the Fund’s Consolidated Statement of Investments and Consolidated Statement of Assets and Liabilities.
During the year ended April 30, 2018, Turtle Bay Resort paid a distribution to FT Subsidiary upon the sale of a majority of its assets to a third party. The distribution received is reflected net of taxes as other income and capital gain distribution received in FT Subsidiary in the Consolidated Statement of Operations. For U.S. income tax purposes, this distribution is taxable to FT Subsidiary, and as such an estimated tax liability was recorded in FT Subsidiary. The estimated tax liability was calculated using FT Subsidiary’s prior year effective federal rate of 34%, and a blended Hawaii state rate of 4% of the 2017 estimated capital gain and 6.4% of the 2017 estimated ordinary income. The tax liability is reflected as FT Subsidiary income taxes in the Consolidated Statement of Assets and Liabilities. In addition, a deferred tax benefit was recorded on the unrealized depreciation of the security. When the Fund disposes of the security, the deferred asset is relieved and the Fund should incur a realized tax benefit. The estimated deferred tax benefit was calculated using a federal rate of 21% and a Hawaii state rate (net of federal tax benefit) of 3%. This is reflected as FT Subsidiary deferred tax benefit in the Consolidated Statement of Assets and Liabilities.
50 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
The financial statements have been consolidated and include the accounts of the Fund and FT Subsidiary. All intercompany transactions and balances have been eliminated. At April 30, 2018, the net assets of FT Subsidiary were $19,332,622 representing less than 1% of the Fund’s consolidated net assets. The Fund’s investment in FT Subsidiary is limited to 25% of consolidated assets.
h. Mortgage Dollar Rolls
The Fund enters into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution where the Fund sells (or buys) mortgage-backed securities for delivery on a specified date and simultaneously contracts to repurchase (or sell) substantially similar (same type, coupon, and maturity) securities at a future date and at a predetermined price. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. Transactions in mortgage dollar rolls are accounted for as purchases and sales and may result in an increase to the Fund’s portfolio turnover rate. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.
i. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that 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 certain restrictions on resale.
j. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income
and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of April 30, 2018, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
k. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Paydown gains and losses are recorded as an adjustment to interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
franklintempleton.com | Annual Report | 51 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting
Policies (continued)
k. 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, excluding 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 are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income in the Consolidated Statement of Operations.
l. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
m. 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, 2018, there were unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Year Ended April 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Class A Shares: | ||||||||||||||||
Shares sold | 43,921,154 | $ | 432,817,045 | 52,682,489 | $ | 505,267,299 | ||||||||||
Shares issued in reinvestment of distributions | 10,060,731 | 98,645,567 | 7,476,400 | 71,451,152 | ||||||||||||
Shares redeemed | (100,902,437 | ) | (992,842,246 | ) | (153,723,653 | ) | (1,475,494,320 | ) | ||||||||
Net increase (decrease) |
|
(46,920,552 |
) | $ | (461,379,634 | ) | (93,564,764 | ) | $ | (898,775,869 | ) | |||||
Class C Shares: | ||||||||||||||||
Shares sold | 8,181,686 | $ | 80,552,705 | 12,084,940 | $ | 115,680,760 | ||||||||||
Shares issued in reinvestment of distributions | 2,971,594 | 29,122,692 | 2,077,286 | 19,824,729 | ||||||||||||
Shares redeemed | (39,654,519 | ) | (390,103,236 | ) | (50,018,546 | ) | (479,629,546 | ) | ||||||||
Net increase (decrease) |
|
(28,501,239 |
) | $ | (280,427,839 | ) | (35,856,320 | ) | $ | (344,124,057 | ) | |||||
Class R Shares: | ||||||||||||||||
Shares sold | 2,109,693 | $ | 20,673,849 | 3,506,082 | $ | 33,582,209 | ||||||||||
Shares issued in reinvestment of distributions | 334,005 | 3,263,282 | 270,945 | 2,577,967 | ||||||||||||
Shares redeemed | (6,343,188 | ) | (62,189,568 | ) | (8,402,262 | ) | (80,371,106 | ) | ||||||||
Net increase (decrease) |
|
(3,899,490 |
) | $ | (38,252,437 | ) | (4,625,235 | ) | $ | (44,210,930 | ) |
52 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
Year Ended April 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Class R6 Shares: | ||||||||||||||||
Shares sold | 16,787,902 | $ | 165,966,032 | 29,445,785 | $ | 281,752,337 | ||||||||||
Shares issued in reinvestment of distributions | 1,355,636 | 13,298,999 | 939,596 | 9,020,539 | ||||||||||||
Shares redeemed | (10,569,929 | ) | (104,068,148 | ) | (23,650,469 | ) | (228,959,440 | ) | ||||||||
Net increase (decrease) |
|
7,573,609 |
| $ | 75,196,883 | 6,734,912 | $ | 61,813,436 | ||||||||
Advisor Class Shares: | ||||||||||||||||
Shares sold | 27,736,896 | $ | 273,558,768 | 56,693,852 | $ | 545,767,778 | ||||||||||
Shares issued in reinvestment of distributions | 3,187,566 | 31,290,077 | 1,934,521 | 18,551,538 | ||||||||||||
Shares redeemed | (42,428,324 | ) | (418,538,766 | ) | (47,049,436 | ) | (451,940,540 | ) | ||||||||
Net increase (decrease) |
|
(11,503,862 |
) | $ | (113,689,921 | ) | 11,578,937 | $ | 112,378,776 |
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 |
For the year ended April 30, 2018, the gross effective investment management fee rate was 0.454% of the Fund’s average daily net assets.
franklintempleton.com | Annual Report | 53 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
3. Transactions with Affiliates (continued)
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for each share class, with the exception of Class R6 and 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 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 plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
Class A | 0.25 | % | ||
Class C | 0.65 | % | ||
Class R | 0.50 | % |
d. Sales Charges/Underwriting Agreements
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the year:
Sales charges retained net of commissions paid to unaffiliated brokers/dealers | $ | 567,422 | ||
CDSC retained | $ | 59,091 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. Effective November 1, 2017, the fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. Prior to November 1, 2017, the fees were account based fees that varied based on fund or account type. In addition, each class reimburses Investor Services for out of pocket expenses incurred and, except for Class R6, reimburses shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the year ended April 30, 2018, the Fund paid transfer agent fees of $10,122,876, of which $4,017,004 was retained by Investor Services.
54 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
f. Investments in Affiliated Management Investment Companies
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Consolidated Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. During the year ended April 30, 2018, the Fund held investments in affiliated management investment companies as follows:
Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Held at End of Year | Value at End of Year | Dividend Income | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
Controlled Affiliates | ||||||||||||||||||||||||||||||||
Franklin Lower Tier Floating Rate Fund | 25,361,119 | — | — | 25,361,119 | 250,567,853 | 24,168,132 | 7,017,422 | a | (16,991,950) | |||||||||||||||||||||||
Franklin Middle Tier Floating Rate Fund | 21,833,687 | — | — | 21,833,687 | 206,546,684 | 15,118,234 | — | (13,100,212) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Total Controlled Affiliates |
| $ | 457,114,537 | $ | 39,286,366 | $ | 7,017,422 | $ | (30,092,162) | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 1.30% | 204,828,690 | 1,219,799,352 | (1,224,434,681) | 200,193,361 | 200,193,361 | 917,362 | — | — | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Total Affiliated Securities |
| $ | 657,307,898 | $ | 40,203,728 | $ | 7,017,422 | $ | (30,092,162) | |||||||||||||||||||||||
|
|
aIncludes realized gain distributions received.
g. Waiver and Expense Reimbursements
Investor Services has voluntary agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.02%. Investor Services may discontinue this waiver in the future.
h. Other Affiliated Transactions
At April 30, 2018, one or more of funds in Franklin Fund Allocator Series owned 5.0% of the Fund’s outstanding shares.
During the year ended April 30, 2018, Advisers reimbursed the Fund $602,555 for losses resulting from a NAV error. This reimbursement is reflected in capital share transactions in the Consolidated Statements of Changes in Net Assets.
i. Interfund Transactions
The Fund engaged in purchases and sales of investments with funds or other accounts that have common investment managers (or affiliated investment managers), directors, trustees or officers. During the year ended April 30, 2018, these purchase and sale transactions aggregated $13,298,013 and $0, respectively.
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, 2018, the custodian fees were reduced as noted in the Consolidated Statement of Operations.
franklintempleton.com | Annual Report | 55 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At April 30, 2018, the capital loss carryforwards were as follows:
Capital loss carryforwards: | ||||
Short Term | $ | 43,255,168 | ||
Long Term | 367,965,376 | |||
|
| |||
Total capital loss carryforwards | $ | 411,220,544 | ||
|
|
For tax purposes, the Fund may elect to defer any portion of a late-year ordinary loss to the first day of the following fiscal year. At April 30, 2018, the Fund deferred late-year ordinary losses of $8,967,409.
The tax character of distributions paid during the years ended April 30, 2018 and 2017, was as follows:
2018 | 2017 | |||||||
|
| |||||||
Distributions paid from ordinary income | $ | 187,957,867 | $ | 130,279,135 | ||||
|
|
At April 30, 2018, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 6,363,384,143 | ||
|
| |||
Unrealized appreciation | $ | 80,832,063 | ||
Unrealized depreciation | (280,378,222) | |||
|
| |||
Net unrealized appreciation (depreciation) | $ | (199,546,159) | ||
|
|
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, bond discounts and premiums and inflation related adjustments on foreign securities.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2018, aggregated $7,647,281,627 and $8,471,902,432, respectively.
7. Credit Risk and Defaulted Securities
At April 30, 2018, the Fund had 50.8% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade and unrated securities, if any. 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, 2018, the aggregate value of these securities was $27,636,500, representing 0.5% 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 in the accompanying Consolidated Statement of Investments.
56 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
8. Restricted Securities
The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act). 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, 2018, investments in restricted securities, excluding securities exempt from registration under the 1933 Act deemed to be liquid, were as follows:
Principal Amount/ Shares | Issuer | Acquisition Date | Cost | Value | ||||||||||
125,940,079 | K2016470219 South Africa Ltd., A | 2/08/13 - 2/01/17 | $ | 977,122 | $ | 101,061 | ||||||||
12,532,821 | K2016470219 South Africa Ltd., B | 2/01/17 | 9,305 | 10,057 | ||||||||||
9,545,517 | K2016470219 South Africa Ltd., senior secured note, 144A, PIK, 3.00%, 12/31/22 | 2/08/13 - 12/29/17 | 16,375,718 | 47,251 | ||||||||||
1,665,603 | K2016470260 South Africa Ltd., senior secured note, 144A, PIK, 25.00%, 12/31/22 | 2/01/17 - 12/29/17 | 1,619,230 | 230,474 | ||||||||||
|
| |||||||||||||
Total Restricted Securities (Value is 0.0%† of Net Assets) | $ | 18,981,375 | $ | 388,843 | ||||||||||
|
|
†Rounds to less than 0.1% of net assets.
9. Other Derivative Information
At April 30, 2018, the Fund’s investments in derivative contracts are reflected in the Consolidated Statement of Assets and Liabilities as follows:
Asset Derivatives | Liability Derivatives | |||||||||||
| ||||||||||||
Derivative Contracts Not Accounted for as Hedging Instruments | Consolidated Statement of Assets and Liabilities Location | Fair Value | Consolidated Statement of Assets and Liabilities Location | Fair Value | ||||||||
Interest rate contracts | Variation margin on futures contracts | $ | 1,060,225 | a | Variation margin on futures contracts | $ | 25,019 | a | ||||
Foreign exchange contracts | Unrealized appreciation on OTC forward exchange contracts | 7,322,474 | Unrealized depreciation on OTC forward exchange contracts | 7,011,263 | ||||||||
Credit contracts | Variation margin on centrally cleared swap contracts | 28,061 | a | Variation margin on centrally cleared swap contracts | — | |||||||
OTC swap contracts (upfront payments) | 5,544,061 | OTC swap contracts (upfront receipts) | 9,784,213 | |||||||||
Unrealized appreciation on OTC swap contracts | 407,429 | Unrealized depreciation on OTC swap contracts | 1,647,956 | |||||||||
Value recovery instruments | Investments in securities, at value | 13,894,474 | b | — | ||||||||
|
|
|
| |||||||||
Totals | $ | 28,256,724 | $ | 18,468,451 | ||||||||
|
|
|
|
aThis amount reflects the cumulative appreciation (depreciation) of futures contracts and centrally cleared swap contracts as reported in the Consolidated Statement of Investments. Only the variation margin receivable/payable at year end is separately reported within the Consolidated Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.
bVRI are included in investments securities, at value in the Consolidated Statement of Assets and Liabilities.
franklintempleton.com | Annual Report | 57 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
9. Other Derivative Information (continued)
For the year ended April 30, 2018, the effect of derivative contracts in the Fund’s Consolidated Statement of Operations was as follows:
Derivative Contracts Not Accounted for as Hedging Instruments | Consolidated Statement of Operations Location | Net Realized Gain (Loss) for the Year | Consolidated Statement of Operations Location | Net Change in Unrealized Appreciation (Depreciation) for the Year | ||||||
Net realized gain (loss) from: | Net change in unrealized appreciation (depreciation) on: | |||||||||
Interest rate contracts | Futures contracts | $ | (992,424) | Futures contracts | $ (1,974,659) | |||||
Foreign exchange contracts | Forward exchange contracts | (34,920,481) | Forward exchange contracts | (227,693) | ||||||
Credit contracts | Swap contracts | 3,847,817 | Swap contracts | (814,289) | ||||||
Value recovery instruments | Investments | — | Investments | 6,637,736a | ||||||
|
|
| ||||||||
Totals | $ | (32,065,088) | $ 3,621,095 | |||||||
|
|
|
aVRI are included in net change in unrealized appreciaiton (depreciation) on investments in the Consolidated Statement of Operations.
For the year ended April 30, 2018, the average month end notional amount of futures contracts and swap contracts, the average month end contract value for forward exchange contracts and average month end fair value of VRI, were as follows:
Futures contracts | $ | 163,670,048 | ||
Swap contracts | 293,872,385 | |||
Forward exchange contracts | 845,623,700 | |||
VRI | 11,215,112 |
At April 30, 2018, the Fund’s OTC derivative assets and liabilities are as follows:
Gross Amounts of Assets and Liabilities Presented in the Consolidated Statement of Assets and Liabilities | ||||||||
|
| |||||||
Assetsa | Liabilitiesa | |||||||
| ||||||||
Derivatives | ||||||||
Forward exchange contracts | $ 7,322,474 | $ 7,011,263 | ||||||
Swap contracts | 5,951,490 | 11,432,169 | ||||||
|
| |||||||
Total | $13,273,964 | $18,443,432 | ||||||
|
|
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities.
58 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
At April 30, 2018, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||||||||||
Consolidated Statement of Assets and Liabilities | ||||||||||||||||||||
Gross Amounts of Assets Presented in
| Financial
| Financial
| Cash
| Net Amount
| ||||||||||||||||
Counterparty | ||||||||||||||||||||
CITI | $ 926,320 | $ (926,320 | ) | $ — | $ — | $ — | ||||||||||||||
DBAB | 1,906,174 | (1,906,174 | ) | — | — | — | ||||||||||||||
JPHQ | 5,452,214 | (5,452,214 | ) | — | — | — | ||||||||||||||
MSCO | 4,989,256 | (230,093 | ) | — | (4,759,163 | ) | — | |||||||||||||
Total | $13,273,964 | $(8,514,801 | ) | $ — | $(4,759,163 | ) | $ — |
At April 30, 2018, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:
Amounts Not Offset in the | ||||||||||||||||||||
Consolidated Statement of Assets and Liabilities | ||||||||||||||||||||
Gross Amounts of | Financial Instruments Available for Offset | Financial Instruments Collateral Pledged | Cash Collateral Pledgeda | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
CITI | $ 8,933,723 | $ (926,320 | ) | $ — | $(8,007,403 | ) | $ — | |||||||||||||
DBAB | 1,999,206 | (1,906,174 | ) | — | (93,032 | ) | — | |||||||||||||
JPHQ | 7,280,410 | (5,452,214 | ) | — | (1,828,196 | ) | — | |||||||||||||
MSCO | 230,093 | (230,093 | ) | — | — | — | ||||||||||||||
Total | $18,443,432 | $(8,514,801 | ) | $ — | $(9,928,631 | ) | $ — |
aIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
See Note 1(d) regarding derivative financial instruments.
See Abbreviations on page 62.
10. 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. During the year ended April 30, 2018, investments in “affiliated companies” were as follows:
Name of Issuer | Number of at Beginning | Gross Additions | Gross Reductions | Number of at End of Year | Value at End | Dividend Income | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
CHC Group LLC | 168,355 | — | (168,355 | ) | — | $— | $— | $(1,170,097) | $420,888 | |||||||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 59 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
11. 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 $2 billion (Global Credit Facility) which matures on February 8, 2019. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Consolidated Statement of Operations. During the year ended April 30, 2018, the Fund did not use the Global Credit Facility.
12. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
• | Level 1 – quoted prices in active markets for identical financial instruments |
• | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
• | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
60 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
A summary of inputs used as of April 30, 2018, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
Level 1
| Level 2
| Level 3
| Total
| |||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Consumer Services | $ | — | $ | — | $ | 1,009,115 | $ | 1,009,115 | ||||||||
Energy | 16,356,956 | 9,565,263 | 1,083 | 25,923,302 | ||||||||||||
Materials | 702,624 | 6,347 | — | 708,971 | ||||||||||||
Retailing | — | — | 111,118 | 111,118 | ||||||||||||
Transportation | — | — | 1,895,749 | 1,895,749 | ||||||||||||
All Other Equity Investments | 457,114,537 | — | — | 457,114,537 | ||||||||||||
Convertible Bonds | — | 5,373,429 | — | 5,373,429 | ||||||||||||
Corporate Bonds: | ||||||||||||||||
Retailing | — | 57,050,993 | 230,474 | 57,281,467 | ||||||||||||
All Other Corporate Bonds | — | 2,790,715,474 | — | 2,790,715,474 | ||||||||||||
Senior Floating Rate Interests | — | 492,412,393 | — | 492,412,393 | ||||||||||||
Foreign Government and Agency Securities | — | 392,789,256 | — | 392,789,256 | ||||||||||||
U.S. Government and Agency Securities | — | 225,059,251 | — | 225,059,251 | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 904,406,432 | — | 904,406,432 | ||||||||||||
Mortgage-Backed Securities | — | 537,088,865 | — | 537,088,865 | ||||||||||||
Municipal Bonds | — | 72,442,027 | — | 72,442,027 | ||||||||||||
Escrows and Litigation Trusts | — | 281,250 | — | c | 281,250 | |||||||||||
Short Term Investments | 203,993,032 | — | — | 203,993,032 | ||||||||||||
Total Investments in Securities | $ | 678,167,149 | $ | 5,487,190,980 | $ | 3,247,539 | $ | 6,168,605,668 | ||||||||
Other Financial Instruments: | ||||||||||||||||
Futures Contracts | $ | 1,060,225 | $ | — | $ | — | $ | 1,060,225 | ||||||||
Forward Exchange Contracts | — | 7,322,474 | — | 7,322,474 | ||||||||||||
Swap Contracts | — | 435,490 | — | 435,490 | ||||||||||||
Total Other Financial Instruments | $ | 1,060,225 | $ | 7,757,964 | $ | — | $ | 8,818,189 | ||||||||
Liabilities: | ||||||||||||||||
Other Financial Instruments: | ||||||||||||||||
Futures Contracts | $ | 25,019 | $ | — | $ | — | $ | 25,019 | ||||||||
Forward Exchange Contracts | — | 7,011,263 | — | 7,011,263 | ||||||||||||
Swap Contracts | — | 1,647,956 | — | 1,647,956 | ||||||||||||
Total Other Financial Instruments | $ | 25,019 | $ | 8,659,219 | $ | — | $ | 8,684,238 |
aFor detailed categories, see the accompanying Consolidated Statement of Investments.
bIncludes common, convertible preferred stocks and management investment companies as well as other equity investments.
cIncludes securities determined to have no value at April 30, 2018.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the beginning and/or end of the year.
13. New Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in the ASU shorten the amortization period for certain callable debt securities acquired at a premium, to be amortized to the earliest call date. The ASU does not require an accounting change for securities acquired at a discount, which continues to be amortized to maturity. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact to the financial statements.
franklintempleton.com | Annual Report | 61 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
14. 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.
Abbreviations
Counterparty | Currency | Selected Portfolio | ||||||||
CITI | Citigroup, Inc. | BRL | Brazilian Real | ARM | Adjustable Rate Mortgage | |||||
DBAB | Deutsche Bank AG | EUR | Euro | CDO | Collateralized Debt Obligation | |||||
JPHQ | JP Morgan Chase & Co. | GBP | British Pound | CLO | Collateralized Loan Obligation | |||||
MSCO | Morgan Stanley | IDR | Indonesian Rupiah | CMT | Constant Maturity Treasury Index | |||||
MXN | Mexican Peso | EDA | Economic Development Authority | |||||||
MYR | Malaysian Ringgit | FRN | Floating Rate Note | |||||||
USD | United States Dollar | GDP | Gross Domestic Product | |||||||
GO | General Obligation | |||||||||
HDC | Housing Development Corp. | |||||||||
LIBOR | London InterBank Offered Rate | |||||||||
MBS | Mortgage-Backed Security | |||||||||
PIK | Payment-In-Kind | |||||||||
RDA | Redevelopment Agency/Authority | |||||||||
SF | Single Family | |||||||||
SFR | Single Family Revenue | |||||||||
TBD | To be determined | |||||||||
T-Note | Treasury Note | |||||||||
VRI | Value Recovery Instruments |
Index
| ||||
CDX.EM.29 | CDX Emerging Markets Index | |||
MCDX.NA.30 | MCDX North America Index |
62 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Franklin Strategic Series and Shareholders of Franklin Strategic Income Fund
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated statement of investments, of Franklin Strategic Income Fund and its subsidiary (the “Fund”) as of April 30, 2018, the related consolidated statements of operations for the year ended April 30, 2018, the consolidated statement of changes in net assets for each of the two years in the period ended April 30, 2018, including the related notes, and the consolidated financial highlights for each of the periods indicated therein (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Fund as of April 30, 2018, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period ended April 30, 2018 and the consolidated financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities owned as of April 30, 2018 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 2018
We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.
franklintempleton.com | Annual Report | 63 |
FRANKLIN STRATEGIC INCOME FUND
Special Meeting of Shareholders
MEETING OF SHAREHOLDERS: OCTOBER 30, 2017 AND RECONVENED ON DECEMBER 15, 2017 AND DECEMBER 29, 2017
(UNAUDITED)
A Special Meeting of Shareholders of Franklin Strategic Series was held at the offices of Franklin Templeton Investments, One Franklin Parkway, San Mateo, California on October 30, 2017 and reconvened on December 15, 2017 and December 29, 2017. The purpose of the meeting was to elect Trustees of Franklin Strategic Series and to vote on the following proposals for the Fund: to approve the use of a “manager of managers” structure whereby the Fund’s investment manager would be able to hire and replace subadvisers without shareholder approval and to approve an amended fundamental investment restriction regarding investments in commodities. At the meeting, (i) the following persons were elected by the shareholders to serve as Trustees of Franklin Strategic Series: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, Gregory E. Johnson, Rupert H. Johnson, Jr., J. Michael Luttig, Larry D. Thompson, and John B. Wilson; and (ii) the proposals to use a “manager of managers” structure and to approve an amended fundamental investment restriction regarding investments in commodities were approved by shareholders of the Fund. No other business was transacted at the meeting.
In connection with the meeting, management is aware that some shareholders received from the proxy solicitor numerous calls and mailings that may have been distracting. Management is taking steps to ensure that, in the future, for any new shareholder meeting solicitations that occur, such activity is not repeated. Management apologizes for any inconvenience that may have been caused as a result of such calls and mailings.
The results of the voting at the meeting are as follows:
Proposal 1. | To elect a Board of Trustees: |
Name | For | Withheld | ||||||
Harris J. Ashton | 598,070,781 | 20,352,982 | ||||||
Terrence J. Checki | 598,448,935 | 19,974,827 | ||||||
Mary C. Choksi | 598,960,351 | 19,463,411 | ||||||
Edith E. Holiday | 598,977,253 | 19,446,508 | ||||||
Gregory E. Johnson | 598,637,629 | 19,786,057 | ||||||
Rupert H. Johnson, Jr. | 598,128,852 | 20,294,908 | ||||||
J. Michael Luttig | 598,807,794 | 19,616,557 | ||||||
Larry D. Thompson | 598,633,435 | 19,785,269 | ||||||
John B. Wilson | 598,721,357 | 19,697,837 |
Total Trust Shares Outstanding*: 1,025,185,272
* As of the record date.
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SPECIAL MEETING OF SHAREHOLDERS
Proposal 2. | To approve the use of a “manager of managers” structure whereby the Fund’s investment manager would be able to hire and replace subadvisers without shareholder approval: |
Shares | ||||
For | 293,832,359 | |||
Against | 17,836,866 | |||
Abstain | 14,610,490 | |||
Broker Non-Votes | 101,323,228 | |||
Total Fund Shares Voted | 427,602,945 | |||
Total Fund Shares Outstanding* | 664,645,812 |
Proposal 3. | To approve an amended fundamental investment restriction regarding investments in commodities: |
Shares | ||||
For | 296,927,571 | |||
Against | 12,192,060 | |||
Abstain | 17,160,085 | |||
Broker Non-Votes | 101,323,228 | |||
Total Fund Shares Voted | 427,602,945 | |||
Total Fund Shares Outstanding* | 664,645,812 |
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The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of US registered 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
Name, Year of Birth and Address
| Position
| Length of
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
Harris J. Ashton (1932) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1991 | 137 | Bar-S Foods (meat packing company) (1981-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). | ||||||||
Terrence J. Checki (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since December 2017 | 112 | Hess Corporation (exploration of oil and gas) (2014-present). | ||||
Principal Occupation During at Least the Past 5 Years: Member of the Council on Foreign Relations (1996-present); Member of the National Committee on U.S.-China Relations (1999-present); member of the Board of Trustees of the Economic Club of New York (2013-present); member of the Board of Trustees of the Foreign Policy Association (2005-present) and member of various other boards of trustees and advisory boards; and formerly, Executive Vice President of the Federal Reserve Bank of New York and Head of its Emerging Markets and Internal Affairs Group and Member of Management Committee (1995-2014); and Visiting Fellow at the Council on Foreign Relations (2014). | ||||||||
Mary C. Choksi (1950) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2014 | 137 | Avis Budget Group Inc. (car rental) (2007-present), Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (2017-present). | ||||
Principal Occupation During at Least the Past 5 Years: Director of various companies; and formerly, Founder and Senior Advisor, Strategic Investment Group (investment management group) (2015-2017); Founding Partner and Senior Managing Director, Strategic Investment Group (1987-2015); Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987). | ||||||||
Edith E. Holiday (1952) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 1998 | 137 | Hess Corporation (exploration of oil and gas) (1993-present), Canadian National Railway (railroad) (2001-present), White Mountains Insurance Group, Ltd. (holding company) (2004-present), Santander Consumer USA Holdings, Inc. (consumer finance) (2016-present), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). | ||||
Principal Occupation During at Least the Past 5 Years: Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison – United States Treasury Department (1988-1989). | ||||||||
J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2009 | 137 | Boeing Capital Corporation (aircraft financing) (2006-2013). | ||||
Principal Occupation During at Least the Past 5 Years: Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006). |
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Independent Board Members (continued)
Name, Year of Birth and Address
| Position
| Length of
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 137 | The Southern Company (energy company) (2014-present; previously 2010-2012), Graham Holdings Company (education and media organization) (2011-present) and Cbeyond, Inc. (business communications provider) (2010-2012). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director of various companies; Counsel, Finch McCranie, LLP (law firm) (2015-present); Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of automobiles and commercial vehicles) (2017-present); John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015-present; previously 2011-2012); and formerly, Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-2014); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).
| ||||||||
John B. Wilson (1959) One Franklin Parkway San Mateo, CA 94403-1906 | Lead Independent Trustee | Trustee since 2006 and Lead Independent Trustee since 2008 | 112 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing) (2002-present); Senior Advisor, McKinsey & Co. (consulting) (2017-present); serves on private and non-profit boards; and formerly, President, Staples International and Head of Global Transformation (office supplies) (2012-2016); Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (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
| ||||||||
Name,Year of Birth and Address
| Position
| Length of
| Number of Portfolios in
| Other Directorships Held
| ||||
**Gregory E. Johnson (1961) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2013 | 151 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).
| ||||||||
**Rupert H. Johnson, Jr. (1940) One Franklin Parkway San Mateo, CA 94403-1906 | Chairman of the Board and Trustee | Chairman of the Board since 2013 and Trustee since 1991 | 137 | None | ||||
Principal Occupation During at Least the 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 41 of the investment companies in Franklin Templeton Investments.
| ||||||||
Alison E. Baur (1964) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2012 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
|
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Interested Board Members and Officers (continued)
Name, Year of Birth and Address
| Position
| Length of
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 | Chief Financial Officer, Chief Accounting Officer and Treasurer | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments. | ||||||||
Aliya S. Gordon (1973) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
Matthew T. Hinkle (1971) One Franklin Parkway San Mateo, CA 94403-1906 | Chief Executive Officer – Finance and Administration | Since 2017 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton Investments (2009-2017). | ||||||||
Edward B. Jamieson (1948) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive Officer – Investment Management | Since 2010 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and 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. | ||||||||
Robert Lim (1948) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President – AML Compliance | Since 2016 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. | ||||||||
Christopher J. Molumphy (1962) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2000 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director and Executive Vice President, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments. |
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Interested Board Members and Officers (continued)
Name, Year of Birth and Address
| Position
| Length of
| Number of Portfolios in
| Other Directorships Held During at Least the Past 5 Years
| ||||
| ||||||||
Kimberly H. Novotny (1972) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Robert C. Rosselot (1960) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Chief Compliance Officer | Since 2013 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).
| ||||||||
| ||||||||
Karen L. Skidmore (1952) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President and Secretary | Since 2006 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Navid J. Tofigh (1972) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2015 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Craig S. Tyle (1960) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2005 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
| ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President | Since 2011 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.
| ||||||||
|
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*We base the number of portfolios on each separate series of the US registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated 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/342-5236 to request the SAI.
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FRANKLIN STRATEGIC INCOME FUND
Board Approval of Investment Management Agreements
FRANKLIN STRATEGIC SERIES
Franklin Strategic Income Fund
(Fund)
At an in-person meeting held on April 17, 2018 (Meeting), the Board of Trustees (Board) of Franklin Strategic Series (Trust), including a majority of the trustees who are not “interested persons” as defined in the Investment Company Act of 1940 (Independent Trustees), reviewed and approved the continuance of the investment management agreement between Franklin Advisers, Inc. (Manager) and the Trust, on behalf of the Fund (Management Agreement) for an additional one-year period. The Independent Trustees received advice from and met separately with Independent Trustee counsel in considering whether to approve the continuation of the Management Agreement.
In considering the continuation of the Management Agreement, the Board reviewed and considered information provided by the Manager at the Meeting and throughout the year at meetings of the Board and its committees. The Board also reviewed and considered information provided in response to a detailed set of requests for information submitted to the Manager by Independent Trustee counsel on behalf of the Independent Trustees in connection with the annual contract renewal process. In addition, prior to the Meeting, the Independent Trustees held a telephonic contract renewal meeting at which the Independent Trustees conferred amongst themselves and Independent Trustee counsel about contract renewal matters. The Board reviewed and considered all of the factors it deemed relevant in approving the continuance of the Management Agreement, including, but not limited to: (i) the nature, extent and quality of the services provided by the Manager; (ii) the investment performance of the Fund; (iii) the costs of the services provided and profits realized by the Manager and its affiliates from the relationship with the Fund; (iv) the extent to which economies of scale are realized as the Fund grows; and (v) whether fee levels reflect these economies of scale for the benefit of Fund investors.
In approving the continuance of the Management Agreement, the Board, including a majority of the Independent Trustees, determined that the terms of the Management Agreement are fair and reasonable and that the continuance of such Management Agreement is in the interests of the Fund and its shareholders. While attention was given to all information
furnished, the following discusses some primary factors relevant to the Board’s determination.
Nature, Extent and Quality of Services
The Board reviewed and considered information regarding the nature, extent and quality of investment management services provided by the Manager and its affiliates to the Fund and its shareholders. This information included, among other things, the qualifications, background and experience of the senior management and investment personnel of the Manager; the structure of investment personnel compensation; oversight of third-party service providers; investment performance reports and related financial information for the Fund; reports on expenses, shareholder services, marketing support payments made to financial intermediaries and third party servicing arrangements; legal and compliance matters; risk controls; pricing and other services provided by the Manager and its affiliates; and management fees charged by the Manager and its affiliates to U.S. funds and other accounts, including management’s explanation of differences among accounts where relevant. The Board also reviewed and considered an annual report on payments made by Franklin Templeton Investments (FTI) or the Fund to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a guidance update in 2016 from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees. The Board noted management’s continuing efforts and expenditures in establishing effective business continuity plans and developing strategies to address areas of heightened concern in the mutual fund industry, such as cybersecurity and liquidity risk management. The Board also recognized management’s commitment to facilitating Board oversight of particular areas, including derivatives and payments to intermediaries, by enhanced reporting.
The Board also reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the Franklin Templeton family of funds. The Board noted the financial position of Franklin Resources, Inc. (FRI), the Manager’s parent, and its commitment to the mutual fund business as evidenced by its continued introduction of new funds, reassessment of the fund offerings in response to the market environment and project initiatives and capital investments relating to the services provided to the Fund by the FTI organization.
Following consideration of such information, the Board was satisfied with the nature, extent and quality of services provided
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by the Manager and its affiliates to the Fund and its shareholders.
Fund Performance
The Board reviewed and considered the performance results of the Fund over various time periods ended January 31, 2018. The Board considered the performance returns for the Fund in comparison to the performance returns of mutual funds deemed comparable to the Fund included in a universe (Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company data. The Board received a description of the methodology used by Broadridge to select the mutual funds included in a Performance Universe. The Board also reviewed and considered Fund performance reports provided and discussions that occurred with portfolio managers at Board meetings throughout the year. A summary of the Fund’s performance results is below.
The Performance Universe for the Fund included the Fund and all retail and institutional multi-sector income funds. The Board noted that the Fund’s annualized income return for the one- and three-year periods was below the median of its Performance Universe, but for the five- and 10-year periods was above the median of its Performance Universe. The Board also noted that the Fund’s annualized total return for the one-, three-, five- and 10-year periods was below the median of its Performance Universe. Given the Fund’s income-oriented investment objective, the Board concluded that the Fund’s performance was acceptable. In doing so, the Board noted the Fund’s positive longer term relative performance and that the Fund outperformed its benchmark over the one-, three- and five-year periods. The Board further noted management’s explanation that at the beginning of the one-year period the Fund’s portfolio was positioned more defensively than peers and so did not have as much exposure to high yield bonds and emerging market bonds and did not use leverage.
Comparative Fees and Expenses
The Board reviewed and considered information regarding the Fund’s actual total expense ratio and its various components, including, as applicable, management fees; transfer agent expenses; underlying fund expenses; Rule 12b-1 and non-Rule 12b-1 service fees; and other non-management fees. The Board also noted the quarterly and annual reports it receives on all marketing support payments made by FTI to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers (Management Rate), if
any, of the Fund in comparison to the median expense ratio and median Management Rate, respectively, of other mutual funds deemed comparable to and with a similar expense structure as the Fund selected by Broadridge (Expense Group). Broadridge fee and 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 and Management Rates generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Broadridge to be an appropriate measure of comparative fees and expenses. The Broadridge Management Rate includes administrative charges, and the actual total expense ratio, for comparative consistency, was shown for Class A shares for funds with multiple classes of shares. The Board received a description of the methodology used by Broadridge to select the mutual funds included in an Expense Group.
The Expense Group for the Fund included the Fund and eight other multi-sector income funds. The Board noted that the Management Rate and actual total expense ratio for the Fund were below the medians of its Expense Group. The Board concluded that the Management Rate charged to the Fund is reasonable.
Profitability
The Board reviewed and considered information regarding the profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board considered the Fund profitability analysis provided by the Manager that addresses the overall profitability of FTI’s U.S. fund business, as well as its profits in providing investment management and other services to each of the individual funds during the 12-month period ended September 30, 2017, being the most recent fiscal year-end for FRI. The Board noted that although management continually makes refinements to its methodologies used in calculating profitability in response to organizational and product related changes, the overall methodology has remained consistent with that used in the Fund’s profitability report presentations from prior years. Additionally, PricewaterhouseCoopers LLP, auditor to Franklin Resources, Inc. and certain Franklin Templeton funds, has been engaged by the Manager to periodically review and assess the allocation methodologies to be used solely by the Fund’s Board with respect to the profitability analysis.
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FRANKLIN STRATEGIC INCOME FUND
SHAREHOLDER INFORMATION
The Board noted management’s 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 noted management’s expenditures in improving shareholder services provided to the Fund, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from recent SEC and other regulatory requirements.
The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services, potential benefits resulting from personnel and systems enhancements necessitated by fund growth, as well as increased leverage with service providers and counterparties. Based upon its consideration of all these factors, the Board concluded 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, extent and quality of services provided to the Fund.
Economies of Scale
The Board reviewed and considered the extent to which the Manager may realize economies of scale, if any, as the Fund grows larger and whether the Fund’s management fee structure reflects any economies of scale for the benefit of shareholders. With respect to possible economies of scale, the Board noted the existence of management fee breakpoints, which operate generally to share any economies of scale with a Fund’s shareholders by reducing the Fund’s effective management fees as the Fund grows in size. The Board considered the Manager’s view that any analyses of potential economies of scale in managing a particular fund are inherently limited in light of the joint and common costs and investments the Manager incurs across the Franklin Templeton family of funds as a whole. The Board noted that the Fund had experienced a decrease in assets and would not be expected to demonstrate additional economies of scale in the near term.
Conclusion
Based on its review, consideration and evaluation of all factors it believed relevant, including the above-described factors and conclusions, the Board unanimously approved the continuation of the Management Agreement for an additional one-year period.
Proxy Voting Policies and Procedures
The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the US 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, on behalf of the Fund, files a complete statement of investments with the US 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.
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© 2018 Franklin Templeton Investments. All rights reserved. | 194 A 06/18 |
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 $407,625 for the fiscal year ended April 30, 2018 and $485,078 for the fiscal year ended April 30, 2017.
(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 $16,250 for the fiscal year ended April 30, 2018 and $16,250 for the fiscal year ended April 30, 2017. The services for which these fees were paid included tax compliance services related to year-end.
(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 $6,535 for the fiscal year ended April 30, 2018 and $0 for the fiscal year ended April 30, 2017. The services for which these fees were paid include 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 $65,225 for the fiscal year ended April 30, 2018 and $258,717 for the fiscal year ended April 30, 2017. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and derivatives assessments, compliance examination for Investment Advisor Act rule 204-2 and 206-4(2), account maintenance project, training on partnership tax accounting and capital account maintenance and benchmarking services in connection with the ICI TA survey.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii)
through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $88,010 for the fiscal year ended April 30, 2018 and $274,967 for the fiscal year ended April 30, 2017.
(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 changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting 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 Matthew T. Hinkle, 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 Matthew T. Hinkle, 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/ MATTHEW T. HINKLE | |
Matthew T. Hinkle | ||
Chief Executive Officer – | ||
Finance and Administration |
Date June 26, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By | /s/ MATTHEW T. HINKLE | |
Matthew T. Hinkle | ||
Chief Executive Officer – | ||
Finance and Administration |
Date June 26, 2018
By | /s/ GASTON GARDEY______ | |
Gaston Gardey | ||
Chief Financial Officer and | ||
Chief Accounting Officer |
Date June 26, 2018