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: 4/30/20
Item 1. | Reports to Stockholders. |
Internet Delivery of Fund Reports Unless You Request Paper Copies: Effective January 1, 2021, as permitted by the SEC, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request them from the Fund or your financial intermediary. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. If you have not signed up for electronic delivery, we would encourage you to join fellow shareholders who have. You may elect to receive shareholder reports and other communications electronically from the Fund by calling (800) 632-2301 or by contacting your financial intermediary.
You may elect to continue to receive paper copies of all your future shareholder reports free of charge by contacting your financial intermediary or, if you invest directly with a Fund, calling (800) 632-2301 to let the Fund know of your request. Your election to receive reports in paper will apply to all funds held in your account.
SHAREHOLDER LETTER
Dear Shareholder:
During the 12 months ended April 30, 2020, the U.S. economy showed mixed results, growing moderately through the end of 2019 amid concerns about trade, but contracting in 2020’s first quarter in response to the novel coronavirus (COVID-19) pandemic. The U.S. Federal Reserve (Fed), having lowered the target range for the federal funds rate in October for the third time during 2019, held the rate unchanged through February 2020. However, given larger economic risks posed by the pandemic, the Fed lowered its key rate again by 0.50% on March 3 and further by 1.00% on March 15, resulting in a target range of 0.00%–0.25%. In its efforts to support U.S. economic activity, the Fed also announced broad quantitative easing measures to support credit markets.
U.S. equities advanced strongly during most of the reporting period, aided by steady economic growth, easing trade tensions and supportive monetary policy. However, a sharp selloff began in late February 2020 amid fears of a global economic slowdown due to the COVID-19 pandemic. Concerns about global supply chain disruptions and subdued consumer spending drove many investors to sell equity holdings in favor of perceived safe investments such as government bonds and cash. In this environment, U.S. stocks, as measured by the Standard & Poor’s® 500 Index, posted a marginally positive total return for the 12-month period.
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 Perks, CFA
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2020, 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.
CFA® is a trademark owned by CFA Institute.
Not FDIC Insured | | | May Lose Value | | | No Bank Guarantee |
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Contents
Annual Report
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools. |
2 | Annual Report | franklintempleton.com |
ANNUAL REPORT
U.S. equities, as measured by the Standard & Poor’s 500 Index (S&P 500®), posted a modest total return during the 12 months under review. Equities advanced strongly during most of the reporting period, aided by relatively steady economic growth, easing trade tensions and the U.S. Federal Reserve’s (Fed’s) supportive monetary policy. However, a sharp selloff began in late February 2020 amid investor fears of a global economic slowdown due to the novel coronavirus (COVID-19) pandemic. Concerns about global supply chain disruptions and subdued consumer spending drove many investors to sell equity holdings in favor of perceived safe investments such as government bonds and cash.
The Fed lowered the federal funds target rate three times in 2019 to a range of 1.50%–1.75%. The labor market remained strong through February 2020 and supported consumer spending.
However, economic activity contracted considerably as the COVID-19 pandemic spread and many state and local governments issued stay-at-home orders, which included business closures and restrictions. Layoffs in many industries, particularly retail, restaurants and hospitality, led to approximately 30 million workers filing for unemployment benefits in the last six weeks of the reporting period. As a result, the unemployment rate rose from a 50-year low of 3.5% in February 2020 to 14.7% at period-end, the highest level since the Great Depression.1
In an effort to buffer the sharp drop in economic activity, the Fed cut the federal funds target rate twice to a range of 0.00%–0.25% and announced broad quantitative easing measures aimed at ensuring the free flow of credit to borrowers and supporting credit markets with unlimited amounts of bond purchases. Meanwhile, Congress passed the Coronavirus Aid, Relief and Economic Security Act to provide economic relief for individuals and businesses, as well as additional funding for small businesses, while also considering proposals for longer-term economic stimulus. Investor sentiment was bolstered by the fiscal and monetary stimulus measures, anticipated development of COVID-19 treatments and gradual easing of social distancing policies beginning in late April 2020. U.S. stocks, as measured by the S&P 500,
bounced from multi-year lows and finished the reporting period relatively flat.
The foregoing information reflects our analysis and opinions as of April 30, 2020. 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.
See www.franklintempletondatasources.com for additional data provider information.
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Franklin Growth Opportunities Fund
This annual report for Franklin Growth Opportunities Fund covers the fiscal year ended April 30, 2020.
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 posted a +8.90% 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 those Russell 3000® Index companies with relatively higher price-to-book ratios and higher forecasted growth rates, posted a +9.47% total return.1 The Fund’s broad benchmark, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, posted a +0.86% 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 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
Portfolio Composition
Based on Total Net Assets as of 4/30/20
management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.
Manager’s Discussion
During the 12 months under review, key contributors to the Fund’s performance relative to the Russell 3000® Growth Index included stock selection in the financials, real estate and industrials 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.
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 30.
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FRANKLIN GROWTH OPPORTUNITIES FUND
Within financials, cloud-based software solutions firm Bill.com Holdings, investment decision support tools provider MSCI and electronic trading platform operator MarketAxess Holdings aided relative results. Bill.com reported better-than-expected revenues and earnings for fiscal second-quarter 2020 (ended December 31, 2019), driven by core subscription and transaction growth. MSCI continued its track record of delivering best-in-class revenue growth among its peers, with better-than-expected first-quarter 2020 earnings driven by expense and tax management. Most of the key metrics looked healthy to us, including double-digit percentage index subscription growth and increased profit margins due to solid expense management.
In real estate, SBA Communications, a real estate investment trust that provides wireless communication infrastructures, boosted relative results. The company continued to generate strong operating results in its leasing and site development business amid 4G densification projects and early 5G deployment.
Within industrials, CoStar Group, which provides information, analytics and marketing services to the commercial real estate industry, aided relative results.
Other notable relative contributors included medical devices company Nevro, health care equipment and services firm West Pharmaceutical Services, and e-commerce and cloud computing services company Amazon.com.
In contrast, key detractors from the Fund’s relative performance included stock selection in the information technology (IT) and communication services sectors and an overweighting in the energy sector.
Within IT, the share prices of electronic products manufacturer Apple and software and services firm Microsoft rose during the period, but our underweighted positions hurt relative results. Education technology firm 2U’s (not held at period-end) share price declined as the company experienced broad challenges across its graduate- and short-course portfolios, including increased competition, regulatory uncertainty and delayed launches.
In the energy and communication services sectors, our positions in oil and natural gas company Diamondback Energy (not held at period-end) and family entertainment and media enterprise Walt Disney, respectively, dampened relative results.
Other key relative detractors included holdings in cannabinoid-based drug developer GW Pharmaceuticals and biotechnology companies Sage Therapeutics and Heron Therapeutics. Shares of GW Pharmaceuticals declined due
Top 10 Holdings | ||||
4/30/20 | ||||
Company Sector/Industry | % of Total Net Assets | |||
Amazon.com Inc. Consumer Discretionary | 9.3% | |||
Microsoft Corp. Information Technology | 6.7% | |||
Mastercard Inc. Information Technology | 4.9% | |||
Visa Inc. Information Technology | 3.9% | |||
SBA Communications Corp. Real Estate | 3.5% | |||
Alphabet Inc. Communication Services | 3.2% | |||
Apple Inc. Information Technology | 3.2% | |||
ServiceNow Inc. Information Technology | 3.1% | |||
CoStar Group Inc. Industrials | 2.5% | |||
Adobe Inc. Information Technology | 2.3% |
to concerns about sales figures for its leading epilepsy treatment.
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 |
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FRANKLIN GROWTH OPPORTUNITIES FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2020, 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, 2020
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 4/30/201
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 5.50% and the minimum is 0%. Class A: 5.50% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class | | Cumulative Total Return | 2 | | Average Annual Total Return | 3 | ||
A4 | ||||||||
1-Year | +8.90% | +2.91% | ||||||
5-Year | +66.36% | +9.47% | ||||||
10-Year | +225.27% | +11.88% | ||||||
Advisor | ||||||||
1-Year | +9.20% | +9.20% | ||||||
5-Year | +68.49% | +11.00% | ||||||
10-Year | +234.40% | +12.83% |
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 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.
Class A (5/1/10–4/30/20)
Advisor Class (5/1/10–4/30/20)
See page 9 for Performance Summary footnotes.
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FRANKLIN GROWTH OPPORTUNITIES FUND
PERFORMANCE SUMMARY
Distributions (5/1/19–4/30/20)
Share Class | Long-Term Capital Gain | |||
A | $3.4218 | |||
C | $3.4218 | |||
R | $3.4218 | |||
R6 | $3.4218 | |||
Advisor | $3.4218 |
Total Annual Operating Expenses6
Share Class | With Fee Waiver | Without Fee Waiver | ||||||
A | 0.95% | 0.95% | ||||||
Advisor | 0.70% | 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. 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. 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. Unexpected events and their aftermaths, such as the spread of deadly diseases; natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. 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 8/31/20. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns (with sales charges) would have differed. Average annual total returns (with sales charges) have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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 U.S. 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.
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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 | Beginning Account Value 11/1/19 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Net Annualized Expense Ratio2 | |||||||||||||||||||||||||||||||||||||||
A | $ | 1,000 | $ | 1,081.00 | $ | 4.92 | $ | 1,020.14 | $ | 4.77 | 0.95 | % | |||||||||||||||||||||||||||||||||
C | $ | 1,000 | $ | 1,077.10 | $ | 8.78 | $ | 1,016.41 | $ | 8.52 | 1.70 | % | |||||||||||||||||||||||||||||||||
R | $ | 1,000 | $ | 1,079.80 | $ | 6.15 | $ | 1,018.95 | $ | 5.97 | 1.19 | % | |||||||||||||||||||||||||||||||||
R6 | $ | 1,000 | $ | 1,083.20 | $ | 3.06 | $ | 1,021.93 | $ | 2.97 | 0.59 | % | |||||||||||||||||||||||||||||||||
Advisor | $ | 1,000 | $ | 1,082.60 | $ | 3.62 | $ | 1,021.38 | $ | 3.52 | 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 182/366 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 Small Cap Growth Fund
This annual report for Franklin Small Cap Growth Fund covers the fiscal year ended April 30, 2020.
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 the equity securities 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 posted a -6.25% cumulative total return for the 12 months under review. In comparison, the Russell 2000® Growth Index, which measures performance of those Russell 2000® Index companies with relatively higher price-to-book ratios and higher forecasted growth rates, posted a -9.22% total return.2 The Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, posted a +0.86% total return.2 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. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced
Portfolio Composition
Based on Total Net Assets as of 4/30/20
and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.
Manager’s Discussion
During the 12 months under review, key contributors to the Fund’s performance relative to the Russell 2000® Growth Index included stock selection and an overweighting in the information technology (IT) sector, as well as stock selection in the consumer discretionary and health care sectors.
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.
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 39.
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FRANKLIN SMALL CAP GROWTH FUND
Within IT, Lattice Semiconductor, which designs, develops and markets programmable logic products and related software, boosted relative results.
In consumer discretionary, digital sports entertainment and gaming company DraftKings, chicken wings restaurant operator and franchisor WingStop and at-home fitness platform company Peloton Interactive boosted relative results. DraftKings has generated revenue from online gambling and has created new products such as simulated sports events, though the company’s operations have been impacted by the suspension, postponement or cancelation of sports seasons and events due to the novel coronavirus (COVID-19) pandemic.
In the health care sector, biotechnology firm Iovance Biotherapeutics, clinical-stage biopharmaceutical company Reata Pharmaceuticals and fully integrated biopharmaceutical company Array BioPharma (not held at period-end) aided relative results. Iovance Biotherapeutics shares were supported by promising data from clinical studies of experimental treatments for cervical cancer and melanoma and anticipation of test results for a particular class of cancer drugs. Reata Pharmaceuticals’ shares benefited from investor optimism about the timing of regulatory filings for bardoxolone, a treatment for kidney-related genetic disorder Alport Syndrome, and omaveloxolone, a treatment for neuromuscular disorder Friedreich’s ataxia.
Other notable relative contributors included medical devices company Nevro.
In contrast, key detractors from the Fund’s relative performance included stock selection in the industrials, energy and communication services sectors, as well as an overweighting in the energy sector.
Within industrials, our positions in budget airline Spirit Airlines, infrastructure solutions company Granite Construction and online marketplace operator Upwork (not held at period-end) hindered relative results. Spirit Airlines was negatively impacted by lockdowns and stay-at-home orders associated with mitigating the spread of the COVID-19 pandemic.
In the energy sector, our holdings in oil and natural gas company Callon Petroleum (not held at period-end) and energy equipment and services provider Liberty Oilfield Services (not held at period-end) hurt relative results.
In communication services, our position in Yelp (not held at period-end), which hosts an online database of user-generated reviews of local businesses, dampened relative results.
Top 10 Holdings | ||||
4/30/20 | ||||
Company Sector/Industry | % of Total Net Assets | |||
DraftKings Inc. Consumer Discretionary | 3.0% | |||
Lattice Semiconductor Corp. Information Technology | 1.8% | |||
Wingstop Inc. Consumer Discretionary | 1.8% | |||
Livongo Health Inc. Health Care | 1.6% | |||
PTC Therapeutics Inc. Health Care | 1.6% | |||
Alteryx Inc. Information Technology | 1.6% | |||
Iovance Biotherapeutics Inc. Health Care | 1.5% | |||
Kennametal Inc. Industrials | 1.4% | |||
iRhythm Technologies Inc. Health Care | 1.3% | |||
BWX Technologies Inc. Industrials | 1.3% |
Other key relative detractors included our positions in education technology firm 2U (not held at period-end) and satellite communication company ViaSat. 2U’s share price declined as the company experienced broad challenges across its graduate- and short-course portfolios, including increased competition, regulatory uncertainty and delayed launches. ViaSat was negatively affected by emerging competition and the economic impact associated with the COVID-19 pandemic.
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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, 2020, 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 SMALL CAP GROWTH FUND
Performance Summary as of April 30, 2020
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 4/30/201
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 5.50% and the minimum is 0%. Class A: 5.50% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class | | Cumulative Total Return | 2 | | Average Annual Total Return | 3 | ||
A4 | ||||||||
1-Year | -6.25% | -11.41% | ||||||
5-Year | +38.28% | +5.49% | ||||||
10-Year | +190.64% | +10.63% | ||||||
Advisor | ||||||||
1-Year | -5.99% | -5.99% | ||||||
5-Year | +40.00% | +6.96% | ||||||
10-Year | +198.85% | +11.57% |
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 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.
Class A (5/1/10–4/30/20)
Advisor Class (5/1/10–4/30/20)
See page 16 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 15 |
FRANKLIN SMALL CAP GROWTH FUND
PERFORMANCE SUMMARY
Distributions (5/1/19–4/30/20)
Share Class | Short-Term Capital Gain | Long-Term Capital Gain | Total | |||||||||
A | $0.1977 | $1.2337 | $1.4314 | |||||||||
C | $0.1977 | $1.2337 | $1.4314 | |||||||||
R | $0.1977 | $1.2337 | $1.4314 | |||||||||
R6 | $0.1977 | $1.2337 | $1.4314 | |||||||||
Advisor | $0.1977 | $1.2337 | $1.4314 |
Total Annual Operating Expenses6
Share Class | With Fee Waiver | Without Fee Waiver | ||||||
A | 1.07% | 1.08% | ||||||
Advisor | 0.82% | 0.83% |
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. Unexpected events and their aftermaths, such as the spread of deadly diseases; natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. 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 8/31/20. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns (with sales charges) would have differed. Average annual total returns (with sales charges) have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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 U.S. 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.
16 | Annual Report | franklintempleton.com |
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 11/1/19 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Net Annualized Expense Ratio2 | |||||||||||||||||||||||||||||||||||||||
A | $ | 1,000 | $ | 937.00 | $ | 5.20 | $ | 1,019.49 | $ | 5.42 | 1.08 | % | |||||||||||||||||||||||||||||||||
C | $ | 1,000 | $ | 933.00 | $ | 8.80 | $ | 1,015.76 | $ | 9.17 | 1.83 | % | |||||||||||||||||||||||||||||||||
R | $ | 1,000 | $ | 935.80 | $ | 6.40 | $ | 1,018.25 | $ | 6.67 | 1.33 | % | |||||||||||||||||||||||||||||||||
R6 | $ | 1,000 | $ | 939.00 | $ | 3.13 | $ | 1,021.63 | $ | 3.27 | 0.65 | % | |||||||||||||||||||||||||||||||||
Advisor | $ | 1,000 | $ | 938.50 | $ | 4.05 | $ | 1,020.69 | $ | 4.22 | 0.83 | % |
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 182/366 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-Mid Cap Growth Fund
This annual report for Franklin Small-Mid Cap Growth Fund covers the fiscal year ended April 30, 2020.
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 the 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 posted a +2.97% cumulative total return for the 12 months under review. In comparison, the Russell Midcap® Growth Index, which measures performance of those Russell Midcap® Index companies with relatively higher price-to-book ratios and higher forecasted growth rates, posted a +0.23% total return.2 Also in comparison, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, posted a +0.86% 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 emerging leaders. We define quality
Portfolio Composition
Based on Total Net Assets as of 4/30/20
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.
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 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.
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 48.
18 | Annual Report | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
Manager’s Discussion
During the 12 months under review, key contributors to the Fund’s performance relative to the Russell Midcap® Growth Index included stock selection in the financials and industrials sectors, as well as stock selection and an underweighting in the communication services sector.
Within financials, electronic trading platform provider MarketAxess Holdings, cloud-based software solutions firm Bill.com Holdings and investment decision support tools provider MSCI bolstered relative results.
In the industrials and communication services sectors, real estate information and marketing company CoStar Group and social game services provider Zynga, respectively, aided relative returns.
Other key notable relative contributors included cloud-based electronic signature solutions provider DocuSign, digital sports entertainment and gaming company DraftKings and medical device manufacturing firm DexCom. DocuSign’s revenue and earnings were boosted by broadened product offerings after introducing the DocuSign Agreement Cloud last year and maintaining strong growth from its eSignature products. DraftKings has generated revenue from online gambling and has created new products such as simulated sports events, though the company’s operations have been impacted by the suspension, postponement or cancelation of sports seasons and events due to the novel coronavirus (COVID-19) pandemic. DexCom continued to offer leading technology in a growing market and reported strong first-quarter 2020 results, and we believe the company’s underlying operational momentum may largely offset potential COVID-19 disruptions.
In contrast, key detractors from the Fund’s relative performance included stock selection in the materials and energy sectors, as well as an overweighting in the consumer discretionary sector.
Within energy, our position in oil and natural gas company Diamondback Energy (not held at period-end) hurt relative results.
In the consumer discretionary and materials sectors, discount retailer Dollar General (not held at period-end) and specialty chemicals manufacturer Ingevity, respectively, hindered relative returns.
Other key relative detractors included our positions in education technology firm 2U (not held at period-end), semiconductor company Advanced Micro Devices (not held at period-end), satellite communication company ViaSat and
Top 10 Holdings | ||||
4/30/20 | ||||
Company Sector/Industry | % of Total Net Assets | |||
CoStar Group Inc. Industrials | 2.4% | |||
SBA Communications Corp. Real Estate | 2.4% | |||
DocuSign Inc. Information Technology | 2.2% | |||
MSCI Inc. Financials | 2.2% | |||
Verisk Analytics Inc. Industrials | 2.1% | |||
Synopsys Inc. Information Technology | 2.1% | |||
DexCom Inc. Health Care | 2.0% | |||
Global Payments Inc. Information Technology | 1.9% | |||
MarketAxess Holdings Inc. Financials | 1.9% | |||
Black Knight Inc. Information Technology | 1.8% |
medical devices firm ABIOMED (not held at period-end). 2U’s share price declined as the company experienced broad challenges across its graduate- and short-course portfolios, including increased competition, regulatory uncertainty and delayed launches. Advance Micro Devices’ share price rose during the period, but our underweighted position dampened relative results. ViaSat was negatively affected by emerging competition and the economic impact associated with the COVID-19 pandemic.
3⁄8franklintempleton.com | Annual Report | 19 |
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.
Sincerely,
John P. Scandalios | ||
| ||
Michael P. McCarthy, CFA
Portfolio Management Team
|
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2020, 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-MID CAP GROWTH FUND
Performance Summary as of April 30, 2020
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 4/30/201
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 5.50% and the minimum is 0%. Class A: 5.50% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
Share Class | | Cumulative Total Return | 2 | | Average Annual Total Return3 | | ||
A4 | ||||||||
1-Year | +2.97% | -2.69% | ||||||
5-Year | +44.59% | +6.44% | ||||||
10-Year | +178.48% | +10.16% | ||||||
Advisor | ||||||||
1-Year | +3.26% | +3.26% | ||||||
5-Year | +46.39% | +7.92% | ||||||
10-Year | +185.61% | +11.06% |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 23 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 21 |
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.
Class A (5/1/10–4/30/20)
Advisor Class (5/1/10–4/30/20)
See page 23 for Performance Summary footnotes.
22 | Annual Report | franklintempleton.com |
FRANKLIN SMALL-MID CAP GROWTH FUND
PERFORMANCE SUMMARY
Distributions (5/1/19–4/30/20)
Share Class | Short-Term Capital Gain | Long-Term Capital Gain | Total | |||||||||
A | $0.2753 | $5.9139 | $6.1892 | |||||||||
C | $0.2753 | $5.9139 | $6.1892 | |||||||||
R | $0.2753 | $5.9139 | $6.1892 | |||||||||
R6 | $0.2753 | $5.9139 | $6.1892 | |||||||||
Advisor | $0.2753 | $5.9139 | $6.1892 |
Total Annual Operating Expenses6
Share Class | With Fee Waiver | Without Fee Waiver | ||||||
A | 0.91% | 0.92% | ||||||
Advisor | 0.66% | 0.67% |
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. Unexpected events and their aftermaths, such as the spread of deadly diseases; natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. 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 8/31/20. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns (with sales charges) would have differed. Average annual total returns (with sales charges) have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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 U.S. 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.
franklintempleton.com | Annual Report | 23 |
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 11/1/19 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Net Annualized Expense Ratio2 | |||||||||||||||||||||||||||||||||||||||
A | $1,000 | $1,045.10 | $4.37 | $1,020.59 | $4.32 | 0.86% | |||||||||||||||||||||||||||||||||||||||
C | $1,000 | $1,040.50 | $8.07 | $1,016.96 | $7.97 | 1.59% | |||||||||||||||||||||||||||||||||||||||
R | $1,000 | $1,043.70 | $5.49 | $1,019.49 | $5.42 | 1.08% | |||||||||||||||||||||||||||||||||||||||
R6 | $1,000 | $1,047.50 | $2.44 | $1,022.48 | $2.41 | 0.48% | |||||||||||||||||||||||||||||||||||||||
Advisor | $1,000 | $1,046.80 | $3.10 | $1,021.83 | $3.07 | 0.61% |
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 182/366 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 STRATEGIC SERIES
Franklin Growth Opportunities Fund
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $39.57 | $38.58 | $34.81 | $30.40 | $33.13 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.14 | ) | (0.13 | ) | (0.10 | ) | (0.09 | ) | (0.19 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.59 | 5.29 | 7.03 | 5.14 | (1.88 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 3.45 | 5.16 | 6.93 | 5.05 | (2.07 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (3.42 | ) | (4.17 | ) | (3.16 | ) | (0.64 | ) | (0.66 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $39.60 | $39.57 | $38.58 | $34.81 | $30.40 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | 8.90% | 15.91% | 20.43% | 16.88% | (6.36)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.95% | 0.94% | 1.02% | 1.05% | 1.11% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.95% | d,e | 0.94% | d,e | 0.99% | d | 0.97% | d | 1.10% | |||||||||||
Net investment income (loss) | (0.35)% | (0.32)% | (0.27)% | (0.30)% | (0.58)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $2,883,392 | $2,819,007 | $2,428,175 | $2,272,831 | $548,871 | |||||||||||||||
Portfolio turnover rate | 19.47% | 24.21% | 22.68% | 47.75% | 25.56% |
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 | 25 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $32.47 | $32.67 | $30.12 | $26.59 | $29.27 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.35 | ) | (0.35 | ) | (0.33 | ) | (0.29 | ) | (0.37 | ) | ||||||||||
Net realized and unrealized gains (losses) | 2.91 | 4.32 | 6.04 | 4.46 | (1.65 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 2.56 | 3.97 | 5.71 | 4.17 | (2.02 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (3.42 | ) | (4.17 | ) | (3.16 | ) | (0.64 | ) | (0.66 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $31.61 | $32.47 | $32.67 | $30.12 | $26.59 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | 8.10% | 15.10% | 19.53% | 15.98% | (7.03)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.70% | 1.69% | 1.77% | 1.80% | 1.85% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.70% | d,e | 1.69% | d,e | 1.74% | d | 1.72% | d | 1.84% | |||||||||||
Net investment income (loss) | (1.10)% | (1.07)% | (1.02)% | (1.05)% | (1.32)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $216,757 | $244,574 | $400,295 | $390,123 | $137,882 | |||||||||||||||
Portfolio turnover rate | 19.47% | 24.21% | 22.68% | 47.75% | 25.56% |
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%.
26 | 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $37.57 | $36.93 | $33.52 | $29.37 | $32.10 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.22 | ) | (0.21 | ) | (0.18 | ) | (0.17 | ) | (0.26 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.39 | 5.02 | 6.75 | 4.96 | (1.81 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 3.17 | 4.81 | 6.57 | 4.79 | (2.07 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (3.42 | ) | (4.17 | ) | (3.16 | ) | (0.64 | ) | (0.66 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $37.32 | $37.57 | $36.93 | $33.52 | $29.37 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 8.64% | 15.66% | 20.14% | 16.62% | (6.60)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.20% | 1.19% | 1.27% | 1.30% | 1.35% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.20% | c,d | 1.19% | c,d | 1.24% | c | 1.22% | c | 1.34% | |||||||||||
Net investment income (loss) | (0.60)% | (0.57)% | (0.52)% | (0.55)% | (0.82)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $31,060 | $37,105 | $36,582 | $50,429 | $39,786 | |||||||||||||||
Portfolio turnover rate | 19.47% | 24.21% | 22.68% | 47.75% | 25.56% |
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 | 27 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Growth Opportunities Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $43.42 | $41.78 | $37.30 | $32.39 | $35.09 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | 0.01 | 0.01 | 0.07 | 0.05 | (0.05 | ) | ||||||||||||||
Net realized and unrealized gains (losses) | 3.96 | 5.80 | 7.57 | 5.50 | (1.99 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 3.97 | 5.81 | 7.64 | 5.55 | (2.04 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (3.42 | ) | (4.17 | ) | (3.16 | ) | (0.64 | ) | (0.66 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $43.97 | $43.42 | $41.78 | $37.30 | $32.39 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 9.34% | 16.26% | 20.98% | 17.42% | (5.94)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.59% | 0.59% | 0.58% | 0.59% | 0.67% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.59% | c,d | 0.58% | c | 0.55% | c | 0.51% | c | 0.66% | |||||||||||
Net investment income (loss) | 0.01% | 0.04% | 0.17% | 0.16% | (0.14)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $383,208 | $418,174 | $369,688 | $291,825 | $235,620 | |||||||||||||||
Portfolio turnover rate | 19.47% | 24.21% | 22.68% | 47.75% | 25.56% |
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%.
28 | 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $42.87 | $41.34 | $37.02 | $32.20 | $34.96 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.04 | ) | (0.03 | ) | (0.01 | ) | (0.02 | ) | (0.11 | ) | ||||||||||
Net realized and unrealized gains (losses) | 3.90 | 5.73 | 7.49 | 5.48 | (1.99 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 3.86 | 5.70 | 7.48 | 5.46 | (2.10 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (3.42 | ) | (4.17 | ) | (3.16 | ) | (0.64 | ) | (0.66 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $43.31 | $42.87 | $41.34 | $37.02 | $32.20 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 9.20% | 16.16% | 20.71% | 17.21% | (6.11)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.70% | 0.69% | 0.77% | 0.80% | 0.85% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.70% | c,d | 0.69% | c,d | 0.74% | c | 0.72% | c | 0.84% | |||||||||||
Net investment income (loss) | (0.10)% | (0.07)% | (0.02)% | (0.05)% | (0.32)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $467,727 | $506,964 | $583,509 | $537,193 | $256,377 | |||||||||||||||
Portfolio turnover rate | 19.47% | 24.21% | 22.68% | 47.75% | 25.56% |
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 | 29 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2020
Franklin Growth Opportunities Fund | ||||||||||||||
Country | Shares | Value | ||||||||||||
Common Stocks 95.3% | ||||||||||||||
Communication Services 5.7% | ||||||||||||||
a | Alphabet Inc., C | United States | 95,505 | $ | 128,803,773 | |||||||||
a | Facebook Inc., A | United States | 151,743 | 31,063,310 | ||||||||||
a | Liberty Broadband Corp., C | United States | 346,818 | 42,547,632 | ||||||||||
The Walt Disney Co. | United States | 240,488 | 26,008,777 | |||||||||||
|
| |||||||||||||
228,423,492 | ||||||||||||||
|
| |||||||||||||
Consumer Discretionary 11.9% | ||||||||||||||
a | Amazon.com Inc. | United States | 150,299 | 371,839,726 | ||||||||||
Aptiv PLC | United States | 200,829 | 13,967,657 | |||||||||||
a | Burlington Stores Inc. | United States | 51,461 | 9,401,410 | ||||||||||
a | Chipotle Mexican Grill Inc. | United States | 25,751 | 22,623,541 | ||||||||||
NIKE Inc., B | United States | 275,259 | 23,997,080 | |||||||||||
a | Peloton Interactive Inc., A | United States | 663,400 | 20,897,100 | ||||||||||
a | Tesla Inc. | United States | 16,421 | 12,839,251 | ||||||||||
|
| |||||||||||||
475,565,765 | ||||||||||||||
|
| |||||||||||||
Consumer Staples 2.5% | ||||||||||||||
Constellation Brands Inc., A | United States | 167,865 | 27,645,687 | |||||||||||
a | Freshpet Inc. | United States | 160,800 | 12,125,928 | ||||||||||
Lamb Weston Holdings Inc. | United States | 268,081 | 16,449,450 | |||||||||||
a | Monster Beverage Corp. | United States | 352,068 | 21,761,323 | ||||||||||
a | Nomad Foods Ltd. | United Kingdom | 959,344 | 19,772,080 | ||||||||||
|
| |||||||||||||
97,754,468 | ||||||||||||||
|
| |||||||||||||
Financials 6.3% | ||||||||||||||
The Charles Schwab Corp. | United States | 515,392 | 19,440,586 | |||||||||||
Intercontinental Exchange Inc. | United States | 521,651 | 46,661,682 | |||||||||||
MarketAxess Holdings Inc. | United States | 105,804 | 48,141,878 | |||||||||||
MSCI Inc. | United States | 234,689 | 76,743,303 | |||||||||||
S&P Global Inc. | United States | 207,946 | 60,903,225 | |||||||||||
|
| |||||||||||||
251,890,674 | ||||||||||||||
|
| |||||||||||||
Health Care 15.4% | ||||||||||||||
AstraZeneca PLC, ADR | United Kingdom | 402,959 | 21,066,697 | |||||||||||
b | Danaher Corp. | United States | 177,119 | 28,951,872 | ||||||||||
a | Deciphera Pharmaceuticals Inc. | United States | 268,895 | 15,590,532 | ||||||||||
a | Edwards Lifesciences Corp. | United States | 245,924 | 53,488,470 | ||||||||||
a | Guardant Health Inc. | United States | 176,701 | 13,598,909 | ||||||||||
a | GW Pharmaceuticals PLC, ADR | United Kingdom | 168,917 | 16,915,348 | ||||||||||
a | Heron Therapeutics Inc. | United States | 2,500,782 | 35,661,151 | ||||||||||
a | IDEXX Laboratories Inc. | United States | 104,759 | 29,081,098 | ||||||||||
a | Illumina Inc. | United States | 82,019 | 26,166,522 | ||||||||||
a | Intuitive Surgical Inc. | United States | 63,742 | 32,564,513 | ||||||||||
a | Nevro Corp. | United States | 386,672 | 45,488,094 | ||||||||||
a,c | Novavax Inc. | United States | 430,885 | 7,811,945 | ||||||||||
a | PTC Therapeutics Inc. | United States | 495,945 | 25,253,519 | ||||||||||
a | Reata Pharmaceuticals Inc. | United States | 135,829 | 21,482,715 | ||||||||||
UnitedHealth Group Inc. | United States | 309,579 | 90,542,570 | |||||||||||
a | Veeva Systems Inc. | United States | 396,044 | 75,565,195 |
30 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Growth Opportunities Fund (continued)
Country | Shares | Value | ||||||||||||
Common Stocks (continued) | ||||||||||||||
Health Care (continued) | ||||||||||||||
West Pharmaceutical Services Inc. | United States | 384,134 | $ | 72,701,201 | ||||||||||
|
| |||||||||||||
611,930,351 | ||||||||||||||
|
| |||||||||||||
Industrials 9.3% | ||||||||||||||
a | CoStar Group Inc. | United States | 152,525 | 98,875,857 | ||||||||||
Honeywell International Inc. | United States | 220,100 | 31,232,190 | |||||||||||
IHS Markit Ltd. | United States | 417,791 | 28,117,334 | |||||||||||
United Technologies Corp. | United States | 470,770 | 30,510,604 | |||||||||||
Republic Services Inc. | United States | �� | 158,671 | 12,430,286 | ||||||||||
Roper Technologies Inc | United States | 128,568 | 43,845,545 | |||||||||||
TransUnion | United States | 239,903 | 18,901,957 | |||||||||||
Union Pacific Corp. | United States | 142,799 | 22,817,852 | |||||||||||
a | Univar Solutions Inc. | United States | 950,507 | 13,801,362 | ||||||||||
Verisk Analytics Inc. | United States | 444,769 | 67,974,046 | |||||||||||
|
| |||||||||||||
368,507,033 | ||||||||||||||
|
| |||||||||||||
Information Technology 38.9% | ||||||||||||||
a | Adobe Inc. | United States | 256,362 | 90,659,858 | ||||||||||
Analog Devices Inc. | United States | 266,301 | 29,186,590 | |||||||||||
Apple Inc. | United States | 436,508 | 128,246,050 | |||||||||||
a | Atlassian Corp. PLC | United States | 83,270 | 12,947,652 | ||||||||||
a | Autodesk Inc. | United States | 89,315 | 16,713,516 | ||||||||||
a,c | Bill.Com Holdings Inc. | United States | 30,900 | 1,819,701 | ||||||||||
a,d | Bill.Com Holdings Inc. | United States | 812,499 | 43,653,245 | ||||||||||
a | Black Knight Inc. | United States | 286,192 | 20,196,569 | ||||||||||
a | DocuSign Inc. | United States | 100,636 | 10,541,621 | ||||||||||
a | Fiserv Inc. | United States | 287,049 | 29,583,270 | ||||||||||
Intuit Inc. | United States | 73,846 | 19,924,389 | |||||||||||
a,d,e | LegalZoom.com Inc. | United States | 1,673,284 | 20,046,660 | ||||||||||
Mastercard Inc., A | United States | 702,123 | 193,062,761 | |||||||||||
Microsoft Corp. | United States | 1,490,069 | 267,035,265 | |||||||||||
Monolithic Power Systems | United States | 229,711 | 45,921,526 | |||||||||||
NVIDIA Corp. | United States | 167,870 | 49,065,043 | |||||||||||
a | Okta Inc., A | United States | 96,161 | 14,549,159 | ||||||||||
a | PayPal Holdings Inc. | United States | 422,534 | 51,971,682 | ||||||||||
a | PTC Inc. | United States | 296,019 | 20,499,316 | ||||||||||
a | salesforce.com Inc. | United States | 258,798 | 41,912,336 | ||||||||||
a | ServiceNow Inc. | United States | 349,729 | 122,943,733 | ||||||||||
a | Shopify Inc., A | Canada | 26,658 | 16,855,587 | ||||||||||
a | Synopsys Inc. | United States | 71,815 | 11,283,573 | ||||||||||
a | Twilio Inc., A | United States | 363,866 | 40,862,152 | ||||||||||
a | Tyler Technologies Inc. | United States | 90,327 | 28,966,966 | ||||||||||
Visa Inc., A | United States | 875,344 | 156,441,480 | |||||||||||
a | Workday Inc., A | United States | 132,830 | 20,442,537 | ||||||||||
Xilinx Inc. | United States | 193,375 | 16,900,975 | |||||||||||
a | Zendesk Inc. | United States | 257,992 | 19,834,425 | ||||||||||
a | Zoom Video Communications Inc., A | United States | 63,704 | 8,610,870 | ||||||||||
|
| |||||||||||||
1,550,678,507 | ||||||||||||||
|
|
franklintempleton.com | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Growth Opportunities Fund (continued)
Country | Shares | Value | ||||||||||||
Common Stocks (continued) | ||||||||||||||
Materials 1.0% | ||||||||||||||
b | Ecolab Inc. | United States | 108,225 | $ | 20,941,538 | |||||||||
b | Linde PLC | United Kingdom | 85,893 | 15,803,453 | ||||||||||
Martin Marietta Materials Inc. | United States | 19,739 | 3,754,950 | |||||||||||
|
| |||||||||||||
40,499,941 | ||||||||||||||
|
| |||||||||||||
Real Estate 4.3% | ||||||||||||||
American Tower Corp. | United States | 129,305 | 30,774,590 | |||||||||||
SBA Communications Corp., A | United States | 479,438 | 138,998,665 | |||||||||||
|
| |||||||||||||
169,773,255 | ||||||||||||||
|
| |||||||||||||
Total Common Stocks (Cost $1,630,634,417) | 3,795,023,486 | |||||||||||||
|
| |||||||||||||
Preferred Stocks 3.8% | ||||||||||||||
Communication Services 0.2% | ||||||||||||||
a,d,e | Tanium Inc., pfd., G | United States | 805,800 | 6,038,708 | ||||||||||
|
| |||||||||||||
Consumer Discretionary 1.7% | ||||||||||||||
a,d,e | ClearMotion Inc., pfd., C | United States | 2,610,594 | 7,675,295 | ||||||||||
a,d,e | ClearMotion Inc., pfd., D | United States | 3,698,772 | 11,397,363 | ||||||||||
a,d,e | Proterra Inc., pfd., 5, 144A | United States | 2,362,202 | 19,730,101 | ||||||||||
a,d,e | Proterra Inc., pfd., 6, 144A | United States | 596,775 | 4,984,515 | ||||||||||
a,d,e | Proterra Inc., pfd., 7 | United States | 780,667 | 6,520,458 | ||||||||||
a,d,e | Proterra Inc., pfd., 8 | United States | 289,016 | 2,413,982 | ||||||||||
a,d,e | Sweetgreen Inc., pfd., H | United States | 928,488 | 13,435,041 | ||||||||||
a,d,e | Sweetgreen Inc., pfd., I | United States | 100,835 | 1,621,077 | ||||||||||
|
| |||||||||||||
67,777,832 | ||||||||||||||
|
| |||||||||||||
Health Care 0.5% | ||||||||||||||
a,d,e | Tempus Labs Inc., pfd., F | United States | 504,854 | 15,849,773 | ||||||||||
a,d,e | Tempus Labs Inc., pfd., G | United States | 126,131 | 4,843,333 | ||||||||||
|
| |||||||||||||
20,693,106 | ||||||||||||||
|
| |||||||||||||
Industrials 0.8% | ||||||||||||||
a,d,e | Optoro Inc., pfd., E | United States | 509,182 | 13,293,475 | ||||||||||
a,d,e | Wheels Up Partners LLC, pfd., D | United States | 5,028,735 | 17,193,220 | ||||||||||
|
| |||||||||||||
30,486,695 | ||||||||||||||
|
| |||||||||||||
Information Technology 0.6% | ||||||||||||||
a,d,e | Confluent Inc., pfd., E | United States | 642,459 | 9,616,776 | ||||||||||
a,d,e | GitLab Inc., pfd., E | United States | 201,294 | 3,532,583 | ||||||||||
a,d,e | Hashicorp Inc., E | United States | 207,551 | 12,004,812 | ||||||||||
|
| |||||||||||||
25,154,171 | ||||||||||||||
|
| |||||||||||||
Total Preferred Stocks (Cost $125,855,686) | 150,150,512 | |||||||||||||
|
| |||||||||||||
Total Investments before Short Term Investments | 3,945,173,998 | |||||||||||||
|
|
32 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Growth Opportunities Fund (continued)
Country | Shares | Value | ||||||||||||
Short Term Investments 1.4% | ||||||||||||||
Money Market Funds (Cost $47,687,960) 1.2% | ||||||||||||||
f,g | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 47,687,960 | $ | 47,687,960 | |||||||||
|
| |||||||||||||
h | Investments from Cash Collateral Received for Loaned Securities (Cost $9,585,975) 0.2% | |||||||||||||
Money Market Funds 0.2% | ||||||||||||||
f,g | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 9,585,975 | 9,585,975 | ||||||||||
|
| |||||||||||||
Total Investments (Cost $1,813,764,038) 100.5% | 4,002,447,933 | |||||||||||||
Other Assets, less Liabilities (0.5)% | (20,304,732 | ) | ||||||||||||
|
| |||||||||||||
Net Assets 100.0% | $ | 3,982,143,201 | ||||||||||||
|
|
See Abbreviations on page 78.
aNon-income producing.
bA portion or all of the security purchased on a delayed delivery basis. See Note 1(c).
cA portion or all of the security is on loan at April 30, 2020. See Note 1(d).
dFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
eSee Note 8 regarding restricted 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 | 33 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $21.46 | $23.01 | $19.60 | $16.37 | $18.83 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.11 | ) | (0.15 | ) | (0.13 | ) | (0.11 | ) | (0.08 | ) | ||||||||||
Net realized and unrealized gains (losses) | (1.07 | ) | 2.86 | 3.96 | 3.34 | (2.03 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (1.18 | ) | 2.71 | 3.83 | 3.23 | (2.11 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (1.43 | ) | (4.26 | ) | (0.42 | ) | — | (0.35 | ) | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $18.85 | $21.46 | $23.01 | $19.60 | $16.37 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | (6.25)% | 16.06% | 19.71% | 19.73% | (11.28)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.07% | 1.07% | 1.11% | 1.10% | 1.13% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.06% | 1.06% | 1.10% | 1.08% | 1.11% | |||||||||||||||
Net investment income (loss) | (0.51)% | (0.68)% | (0.61)% | (0.61)% | (0.44)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $686,791 | $713,442 | $665,251 | $719,752 | $792,072 | |||||||||||||||
Portfolio turnover rate | 35.29% | 42.10% | 29.82% | 29.93% | 43.99% |
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%.
34 | 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $17.15 | $19.41 | $16.71 | $14.07 | $16.36 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.21 | ) | (0.28 | ) | (0.25 | ) | (0.21 | ) | (0.18 | ) | ||||||||||
Net realized and unrealized gains (losses) | (0.82 | ) | 2.28 | 3.37 | 2.85 | (1.76 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (1.03 | ) | 2.00 | 3.12 | 2.64 | (1.94 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (1.43 | ) | (4.26 | ) | (0.42 | ) | — | (0.35 | ) | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $14.69 | $17.15 | $19.41 | $16.71 | $14.07 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | (6.97)% | 15.31% | 18.79% | 18.76% | (11.95)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.82% | 1.82% | 1.86% | 1.85% | 1.88% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.81% | 1.81% | 1.85% | 1.83% | 1.86% | |||||||||||||||
Net investment income (loss) | (1.26)% | (1.43)% | (1.36)% | (1.36)% | (1.19)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $66,269 | $90,513 | $132,116 | $142,539 | $157,175 | |||||||||||||||
Portfolio turnover rate | 35.29% | 42.10% | 29.82% | 29.93% | 43.99% |
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%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $20.15 | $21.93 | $18.74 | $15.70 | $18.11 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.15 | ) | (0.20 | ) | (0.17 | ) | (0.15 | ) | (0.12 | ) | ||||||||||
Net realized and unrealized gains (losses) | (0.99 | ) | 2.68 | 3.78 | 3.19 | (1.94 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (1.14 | ) | 2.48 | 3.61 | 3.04 | (2.06 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (1.43 | ) | (4.26 | ) | (0.42 | ) | — | (0.35 | ) | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $17.58 | $20.15 | $21.93 | $18.74 | $15.70 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (6.47)% | 15.78% | 19.37% | 19.36% | (11.46)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.32% | 1.32% | 1.36% | 1.35% | 1.38% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 1.31% | 1.31% | 1.35% | 1.33% | 1.36% | |||||||||||||||
Net investment income (loss) | (0.76)% | (0.93)% | (0.86)% | (0.86)% | (0.69)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $54,369 | $74,634 | $71,398 | $79,995 | $79,929 | |||||||||||||||
Portfolio turnover rate | 35.29% | 42.10% | 29.82% | 29.93% | 43.99% |
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%.
36 | 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $23.73 | $24.88 | $21.06 | $17.52 | $20.02 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.02 | ) | (0.07 | ) | (0.03 | ) | (0.03 | ) | 0.01 | |||||||||||
Net realized and unrealized gains (losses) | (1.21 | ) | 3.18 | 4.27 | 3.57 | (2.16 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (1.23 | ) | 3.11 | 4.24 | 3.54 | (2.15 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (1.43 | ) | (4.26 | ) | (0.42 | ) | — | (0.35 | ) | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $21.07 | $23.73 | $24.88 | $21.06 | $17.52 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (5.86)% | 16.50% | 20.23% | 20.21% | (10.81)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.67% | 0.67% | 0.65% | 0.63% | 0.63% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.64% | 0.64% | 0.63% | 0.61% | 0.61% | |||||||||||||||
Net investment income (loss) | (0.09)% | (0.26)% | (0.14)% | (0.14)% | 0.06% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $1,136,759 | $1,084,442 | $935,509 | $858,972 | $846,724 | |||||||||||||||
Portfolio turnover rate | 35.29% | 42.10% | 29.82% | 29.93% | 43.99% |
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%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $23.37 | $24.61 | $20.88 | $17.41 | $19.94 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.06 | ) | (0.10 | ) | (0.08 | ) | (0.07 | ) | (0.04 | ) | ||||||||||
Net realized and unrealized gains (losses) | (1.18 | ) | 3.12 | 4.23 | 3.54 | (2.14 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (1.24 | ) | 3.02 | 4.15 | 3.47 | (2.18 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (1.43 | ) | (4.26 | ) | (0.42 | ) | — | (0.35 | ) | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $20.70 | $23.37 | $24.61 | $20.88 | $17.41 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (5.99)% | 16.30% | 19.97% | 19.93% | (11.06)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.82% | 0.82% | 0.86% | 0.85% | 0.88% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.81% | 0.81% | 0.85% | 0.83% | 0.86% | |||||||||||||||
Net investment income (loss) | (0.26)% | (0.43)% | (0.36)% | (0.36)% | (0.19)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $428,155 | $725,622 | $713,135 | $805,661 | $850,975 | |||||||||||||||
Portfolio turnover rate | 35.29% | 42.10% | 29.82% | 29.93% | 43.99% |
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%.
38 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2020
Franklin Small Cap Growth Fund | ||||||||||||||
�� | Country | Shares/ Warrants | Value | |||||||||||
Common Stocks and Other Equity Interests 92.4% | ||||||||||||||
Consumer Discretionary 14.3% | ||||||||||||||
American Eagle Outfitters Inc. | United States | 2,233,100 | $ | 17,753,145 | ||||||||||
a | Boot Barn Holdings Inc. | United States | 1,180,960 | 21,800,522 | ||||||||||
Dave & Buster’s Entertainment Inc. | United States | 402,100 | 5,886,744 | |||||||||||
a | DraftKings Inc., A | United States | 507,932 | 9,884,357 | ||||||||||
a,b | DraftKings Inc., A | United States | 3,502,931 | 60,602,791 | ||||||||||
a,b | DraftKings Inc., wts., A, 4/23/25 | United States | 102,675 | 637,467 | ||||||||||
a | Five Below Inc. | United States | 277,200 | 24,992,352 | ||||||||||
a | Grand Canyon Education Inc. | United States | 293,700 | 25,264,074 | ||||||||||
Lithia Motors Inc. | United States | 153,426 | 16,962,779 | |||||||||||
a | M/I Homes Inc. | United States | 872,446 | 22,212,475 | ||||||||||
a | Peloton Interactive Inc., A | United States | 815,769 | 25,696,723 | ||||||||||
a | RH | United States | 96,800 | 13,917,904 | ||||||||||
a | Sportsman’s Warehouse Holdings Inc. | United States | 1,909,503 | 13,672,041 | ||||||||||
Steven Madden Ltd. | United States | 892,050 | 22,363,693 | |||||||||||
a | TRI Pointe Group Inc. | United States | 1,324,600 | 15,206,408 | ||||||||||
Wingstop Inc. | United States | 358,929 | 42,091,604 | |||||||||||
|
| |||||||||||||
338,945,079 | ||||||||||||||
|
| |||||||||||||
Consumer Staples 4.4% | ||||||||||||||
a | BellRing Brands Inc., A | United States | 1,086,400 | 19,044,592 | ||||||||||
a | Grocery Outlet Holding Corp. | United States | 805,500 | 26,798,985 | ||||||||||
a | Hostess Brands Inc., A | United States | 1,007,600 | 12,111,352 | ||||||||||
a | Nomad Foods Ltd. | United Kingdom | 937,100 | 19,313,631 | ||||||||||
a | The Simply Good Foods Co. | United States | 1,385,500 | 26,116,675 | ||||||||||
|
| |||||||||||||
103,385,235 | ||||||||||||||
|
| |||||||||||||
Financials 5.8% | ||||||||||||||
Ares Management Corp., A | United States | 415,800 | 13,950,090 | |||||||||||
Evercore Inc. | United States | 180,800 | 9,329,280 | |||||||||||
Houlihan Lokey Inc. | United States | 505,500 | 30,016,590 | |||||||||||
a | Metropolitan Bank Holding Corp. | United States | 291,361 | 7,310,247 | ||||||||||
Pinnacle Financial Partners Inc. | United States | 484,504 | 19,501,286 | |||||||||||
a | PRA Group Inc. | United States | 664,400 | 18,430,456 | ||||||||||
TCF Financial Corp. | United States | 580,723 | 17,241,666 | |||||||||||
Western Alliance Bancorp | United States | 569,500 | 20,433,660 | |||||||||||
|
| |||||||||||||
136,213,275 | ||||||||||||||
|
| |||||||||||||
Health Care 24.6% | ||||||||||||||
a | Argenx SE, ADR | Netherlands | 83,700 | 12,261,213 | ||||||||||
a | Ascendis Pharma AS, ADR | Denmark | 178,900 | 24,282,097 | ||||||||||
a | Collegium Pharmaceutical Inc. | United States | 758,300 | 15,681,644 | ||||||||||
a | Deciphera Pharmaceuticals Inc. | United States | 463,900 | 26,896,922 | ||||||||||
a | Emergent BioSolutions Inc. | United States | 359,000 | 26,548,050 | ||||||||||
a | Global Blood Therapeutics Inc. | United States | 311,800 | 23,858,936 | ||||||||||
a | GW Pharmaceuticals PLC, ADR | United Kingdom | 297,000 | 29,741,580 | ||||||||||
a | HealthEquity Inc. | United States | 428,216 | 24,095,714 | ||||||||||
a | Heron Therapeutics Inc. | United States | 1,671,308 | 23,832,852 | ||||||||||
a | Insmed Inc. | United States | 361,800 | 8,321,400 |
franklintempleton.com | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small Cap Growth Fund (continued)
Country | Shares/ Warrants | Value | ||||||||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||||||
Health Care (continued) | ||||||||||||||
a | Inspire Medical Systems Inc. | United States | 323,744 | $ | 23,199,495 | |||||||||
a | Integer Holdings Corp. | United States | 369,000 | 27,475,740 | ||||||||||
a | Iovance Biotherapeutics Inc. | United States | 1,067,700 | 34,326,555 | ||||||||||
a | iRhythm Technologies Inc. | United States | 300,497 | 31,744,503 | ||||||||||
a | Livongo Health Inc. | United States | 975,985 | 39,049,160 | ||||||||||
a | Neogen Corp. | United States | 187,566 | 11,739,756 | ||||||||||
a | NeoGenomics Inc. | United States | 1,062,300 | 29,043,282 | ||||||||||
a | Nevro Corp. | United States | 204,300 | 24,033,852 | ||||||||||
a,c | Novavax Inc. | United States | 331,000 | 6,001,030 | ||||||||||
a | Odonate Therapeutics Inc. | United States | 383,200 | 10,787,080 | ||||||||||
a | Penumbra Inc. | United States | 159,700 | 28,318,004 | ||||||||||
a | Pfenex Inc. | United States | 1,097,731 | 6,311,953 | ||||||||||
a | Phreesia Inc. | United States | 525,982 | 13,354,683 | ||||||||||
a | PTC Therapeutics Inc. | United States | 753,100 | 38,347,852 | ||||||||||
a | Reata Pharmaceuticals Inc. | United States | 136,974 | 21,663,808 | ||||||||||
a | Revance Therapeutics Inc. | United States | 1,249,692 | 23,131,799 | ||||||||||
|
| |||||||||||||
584,048,960 | ||||||||||||||
|
| |||||||||||||
Industrials 14.4% | ||||||||||||||
Allegiant Travel Co. | United States | 232,648 | 18,258,215 | |||||||||||
Arcosa Inc. | United States | 766,900 | 28,582,363 | |||||||||||
a | Axon Enterprise Inc. | United States | 413,700 | 30,080,127 | ||||||||||
a | Beacon Roofing Supply Inc. | United States | 878,200 | 19,320,400 | ||||||||||
BWX Technologies Inc. | United States | 594,300 | 31,533,558 | |||||||||||
Cubic Corp. | United States | 715,171 | 27,326,684 | |||||||||||
Granite Construction Inc. | United States | 1,049,543 | 17,254,487 | |||||||||||
Healthcare Services Group Inc. | United States | 822,800 | 20,973,172 | |||||||||||
Kennametal Inc. | United States | 1,256,200 | 32,171,282 | |||||||||||
a | Kratos Defence & Security Solutions Inc. | United States | 1,708,764 | 25,665,635 | ||||||||||
a | Mercury Systems Inc. | United States | 285,316 | 25,438,775 | ||||||||||
a | Spirit Airlines Inc. | United States | 1,150,000 | 17,273,000 | ||||||||||
a | Univar Solutions Inc. | United States | 1,854,832 | 26,932,161 | ||||||||||
US Ecology Inc. | United States | 648,376 | 21,253,765 | |||||||||||
|
| |||||||||||||
342,063,624 | ||||||||||||||
|
| |||||||||||||
Information Technology 27.0% | ||||||||||||||
a | Alteryx Inc. | United States | 329,100 | 37,247,538 | ||||||||||
a | Avalara Inc. | United States | 268,846 | 24,026,767 | ||||||||||
a,c | Bill.Com Holdings Inc. | United States | 397,108 | 23,385,690 | ||||||||||
a | CloudFlare Inc., A | United States | 1,314,300 | 30,964,908 | ||||||||||
a | Envestnet Inc. | United States | 405,722 | 25,365,740 | ||||||||||
a | Hubspot Inc. | United States | 183,529 | 30,948,495 | ||||||||||
a | Lattice Semiconductor Corp. | United States | 1,898,700 | 42,739,737 | ||||||||||
a,b,d | LegalZoom.com Inc. | United States | 1,431,280 | 17,147,349 | ||||||||||
a | LiveRamp Holdings Inc. | United States | 489,200 | 18,521,112 | ||||||||||
ManTech International Corp., A | United States | 334,500 | 24,940,320 | |||||||||||
Monolithic Power Systems | United States | 156,900 | 31,365,879 | |||||||||||
a | Onto Innovation Inc. | United States | 901,300 | 29,256,198 |
40 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small Cap Growth Fund (continued)
Country | Shares/ Warrants | Value | ||||||||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||||||
Information Technology (continued) | ||||||||||||||
a | Pagerduty Inc. | United States | 826,200 | $ | 17,441,082 | |||||||||
a | Paylocity Holding Corp. | United States | 268,132 | 30,709,158 | ||||||||||
a | Pluralsight Inc., A | United States | 252,800 | 4,156,032 | ||||||||||
a | Q2 Holdings Inc. | United States | 350,400 | 27,933,888 | ||||||||||
a | Repay Holdings Corp. | United States | 1,331,900 | 23,801,053 | ||||||||||
a | Semtech Corp. | United States | 652,300 | 29,510,052 | ||||||||||
a | Silicon Laboratories Inc. | United States | 311,100 | 30,245,142 | ||||||||||
a | USA Technologies Inc. | United States | 1,344,300 | 9,880,605 | ||||||||||
a | ViaSat Inc. | United States | 546,283 | 23,162,399 | ||||||||||
a | Viavi Solutions Inc. | United States | 2,074,100 | 25,055,128 | ||||||||||
a | Wix.com Ltd. | Israel | 215,500 | 28,189,555 | ||||||||||
a | Zendesk Inc. | United States | 350,914 | 26,978,268 | ||||||||||
a | Zscaler Inc. | United States | 417,000 | 27,972,360 | ||||||||||
|
| |||||||||||||
640,944,455 | ||||||||||||||
|
| |||||||||||||
Materials 1.1% | ||||||||||||||
a | Ingevity Corp. | United States | 510,729 | 26,517,050 | ||||||||||
|
| |||||||||||||
Real Estate 0.8% | ||||||||||||||
Coresite Realty Corp. | United States | 155,700 | 18,869,283 | |||||||||||
|
| |||||||||||||
Total Common Stocks and Other Equity Interests | 2,190,986,961 | |||||||||||||
|
| |||||||||||||
Preferred Stocks 4.6% | ||||||||||||||
Consumer Discretionary 2.9% | ||||||||||||||
a,b,d | ClearMotion Inc., pfd., D | United States | 3,698,772 | 11,397,363 | ||||||||||
a,b,d | Proterra Inc., pfd., 5, 144A | United States | 1,787,047 | 14,926,165 | ||||||||||
a,b,d | Proterra Inc., pfd., 6, 144A | United States | 1,310,834 | 10,948,635 | ||||||||||
a,b,d | Proterra Inc., pfd., 7 | United States | 536,367 | 4,479,962 | ||||||||||
a,b,d | Rent the Runway Inc., pfd., F | United States | 596,471 | 11,535,214 | ||||||||||
a,b,d | Rent the Runway Inc., pfd., G | United States | 203,515 | 2,864,474 | ||||||||||
a,b,d | Sweetgreen Inc., pfd., H | United States | 383,435 | 5,548,230 | ||||||||||
a,b,d | Sweetgreen Inc., pfd., I | United States | 41,641 | 669,443 | ||||||||||
a,b,d | Tula eTechnology Inc. | United States | 361,111 | — | ||||||||||
a,b,d | Tula Technology Inc., E | United States | 3,611,111 | 7,165,798 | ||||||||||
|
| |||||||||||||
69,535,284 | ||||||||||||||
|
| |||||||||||||
Industrials 1.2% | ||||||||||||||
a,b,d | Optoro Inc., pfd., E | United States | 508,130 | 13,266,009 | ||||||||||
a,b,d | Wheels Up Partners LLC, pfd., D | United States | 4,310,344 | 14,737,045 | ||||||||||
|
| |||||||||||||
28,003,054 | ||||||||||||||
|
| |||||||||||||
Information Technology 0.5% | ||||||||||||||
a,b,d | Smule Inc., pfd., G, 144A | United States | 1,542,673 | 9,464,137 | ||||||||||
a,b,d | Smule Inc., pfd., H, 144A | United States | 352,675 | 2,548,305 | ||||||||||
|
| |||||||||||||
12,012,442 | ||||||||||||||
|
| |||||||||||||
Total Preferred Stocks (Cost $97,407,769) | 109,550,780 | |||||||||||||
|
|
franklintempleton.com | Annual Report | 41 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small Cap Growth Fund (continued)
Country | Shares | Value | ||||||||||||
Escrows and Litigation Trusts (Cost $0) 0.0% | ||||||||||||||
b | DraftKings Inc., Escrow Account, | United States | 32,658 | $ | — | |||||||||
|
| |||||||||||||
Total Investments before Short Term Investments | 2,300,537,741 | |||||||||||||
|
| |||||||||||||
Short Term Investments 4.6% | ||||||||||||||
Money Market Funds (Cost $74,538,382) 3.1% | ||||||||||||||
e,f | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 74,538,382 | 74,538,382 | ||||||||||
|
| |||||||||||||
g | Investments from Cash Collateral Received for Loaned Securities (Cost $34,288,350) 1.5% | |||||||||||||
Money Market Funds 1.5% | ||||||||||||||
e,f | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 34,288,350 | 34,288,350 | ||||||||||
|
| |||||||||||||
Total Investments (Cost $1,881,026,072) 101.6% | 2,409,364,473 | |||||||||||||
Other Assets, less Liabilities (1.6)% | (37,022,713 | ) | ||||||||||||
|
| |||||||||||||
Net Assets 100.0% | $ | 2,372,341,760 | ||||||||||||
|
|
See Abbreviations on page 78.
a Non-income producing.
b Fair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
c A portion or all of the security is on loan at April 30, 2020. See Note 1(d).
d See Note 8 regarding restricted securities.
e See Note 3(f) regarding investments in affiliated management investment companies.
f The rate shown is the annualized seven-day effective yield at period end.
g See Note 1(d) regarding securities on loan.
42 | 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
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $37.17 | $36.07 | $34.35 | $31.84 | $38.38 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.07 | ) | (0.09 | ) | (0.15 | ) | (0.11 | ) | (0.03 | )c | ||||||||||
Net realized and unrealized gains (losses) | 1.24 | 5.33 | 4.97 | 4.73 | (3.37 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 1.17 | 5.24 | 4.82 | 4.62 | (3.40 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (6.19 | ) | (4.14 | ) | (3.10 | ) | (2.11 | ) | (3.14 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $32.15 | $37.17 | $36.07 | $34.35 | $31.84 | |||||||||||||||
|
| |||||||||||||||||||
Total returnd | 2.97% | 17.43% | 14.28% | 15.01% | (9.02)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.88% | 0.88% | 1.02% | 0.95% | 0.96% | |||||||||||||||
Expenses net of waiver and payments by affiliatese | 0.87% | 0.87% | 1.00% | 0.94% | 0.95% | |||||||||||||||
Net investment income (loss) | (0.21)% | (0.25)% | (0.41)% | (0.34)% | (0.08)% | c | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $2,515,801 | $2,684,131 | $2,262,471 | $2,303,113 | $2,231,822 | |||||||||||||||
Portfolio turnover rate | 52.98% | 54.28% | 38.35% | 35.46% | 38.72% |
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%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $24.98 | $25.84 | $25.59 | $24.40 | $30.43 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.22 | ) | (0.26 | ) | (0.31 | ) | (0.27 | ) | (0.23 | )c | ||||||||||
Net realized and unrealized gains (losses) | 0.84 | 3.54 | 3.66 | 3.57 | (2.66 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 0.62 | 3.28 | 3.35 | 3.30 | (2.89 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (6.19 | ) | (4.14 | ) | (3.10 | ) | (2.11 | ) | (3.14 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $19.41 | $24.98 | $25.84 | $25.59 | $24.40 | |||||||||||||||
|
| |||||||||||||||||||
Total returnd | 2.14% | 16.68% | 13.39% | 14.15% | (9.72)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.63% | 1.63% | 1.77% | 1.70% | 1.71% | |||||||||||||||
Expenses net of waiver and payments by affiliatese | 1.62% | 1.62% | 1.75% | 1.69% | 1.70% | |||||||||||||||
Net investment income (loss) | (0.96)% | (1.00)% | (1.16)% | (1.09)% | (0.83)% | c | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $138,940 | $173,334 | $334,769 | $371,262 | $377,024 | |||||||||||||||
Portfolio turnover rate | 52.98% | 54.28% | 38.35% | 35.46% | 38.72% |
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%.
44 | 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $33.66 | $33.15 | $31.87 | $29.75 | $36.18 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.14 | ) | (0.16 | ) | (0.22 | ) | (0.18 | ) | (0.11 | )c | ||||||||||
Net realized and unrealized gains (losses) | 1.12 | 4.81 | 4.60 | 4.41 | (3.18 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 0.98 | 4.65 | 4.38 | 4.23 | (3.29 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (6.19 | ) | (4.14 | ) | (3.10 | ) | (2.11 | ) | (3.14 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $28.45 | $33.66 | $33.15 | $31.87 | $29.75 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 2.69% | 17.17% | 14.00% | 14.70% | (9.24)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.12% | 1.12% | 1.26% | 1.19% | 1.21% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.11% | 1.11% | 1.24% | 1.18% | 1.20% | |||||||||||||||
Net investment income (loss) | (0.45)% | (0.49)% | (0.65)% | (0.58)% | (0.33)% | c | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $40,997 | $50,721 | $70,692 | $81,864 | $86,989 | |||||||||||||||
Portfolio turnover rate | 52.98% | 54.28% | 38.35% | 35.46% | 38.72% |
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%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Small-Mid Cap Growth Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $41.83 | $39.91 | $37.51 | $34.43 | $41.04 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.07 | 0.05 | 0.05 | 0.05 | 0.15 | c | ||||||||||||||
Net realized and unrealized gains (losses) | 1.41 | 6.01 | 5.45 | 5.14 | (3.62 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 1.48 | 6.06 | 5.50 | 5.19 | (3.47 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (6.19 | ) | (4.14 | ) | (3.10 | ) | (2.11 | ) | (3.14 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $37.12 | $41.83 | $39.91 | $37.51 | $34.43 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 3.40% | 17.82% | 14.90% | 15.51% | (8.54)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.52% | 0.52% | 0.50% | 0.48% | 0.48% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 0.48% | 0.49% | 0.47% | 0.47% | 0.47% | |||||||||||||||
Net investment income | 0.18% | 0.13% | 0.12% | 0.13% | 0.40% | c | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $224,341 | $259,053 | $275,835 | $222,577 | $242,237 | |||||||||||||||
Portfolio turnover rate | 52.98% | 54.28% | 38.35% | 35.46% | 38.72% |
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 0.10%.
dBenefit of expense reduction rounds to less than 0.01%.
46 | 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $41.09 | $39.33 | $37.11 | $34.15 | $40.83 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | 0.02 | 0.01 | (0.06 | ) | (0.03 | ) | 0.06c | |||||||||||||
Net realized and unrealized gains (losses) | 1.38 | 5.89 | 5.38 | 5.10 | (3.60 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 1.40 | 5.90 | 5.32 | 5.07 | (3.54 | ) | ||||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net realized gains | (6.19 | ) | (4.14 | ) | (3.10 | ) | (2.11 | ) | (3.14 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $36.30 | $41.09 | $39.33 | $37.11 | $34.15 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 3.26% | 17.67% | 14.57% | 15.28% | (8.79)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.63% | 0.63% | 0.77% | 0.70% | 0.71% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 0.62% | 0.62% | 0.75% | 0.69% | 0.70% | |||||||||||||||
Net investment income (loss) | 0.04% | —% | e | (0.16)% | (0.09)% | 0.17% | c | |||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $302,329 | $355,141 | $520,842 | $584,840 | $551,176 | |||||||||||||||
Portfolio turnover rate | 52.98% | 54.28% | 38.35% | 35.46% | 38.72% |
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%.
eRounds to less than 0.01%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2020
Franklin Small-Mid Cap Growth Fund | ||||||||||
Shares/ Warrants | Value | |||||||||
Common Stocks and Other Equity Interests 98.2% | ||||||||||
Communication Services 3.8% | ||||||||||
a | IAC/InterActiveCorp. | 141,000 | $ | 31,510,680 | ||||||
a | Pinterest Inc., A | 1,455,000 | 30,060,300 | |||||||
a | Roku Inc. | 141,278 | 17,127,132 | |||||||
a | Spotify Technology SA | 159,500 | 24,175,415 | |||||||
a | Zynga Inc. | 2,725,000 | 20,546,500 | |||||||
|
| |||||||||
123,420,027 | ||||||||||
|
| |||||||||
Consumer Discretionary 14.9% | ||||||||||
Aptiv PLC | 235,000 | 16,344,250 | ||||||||
a | Burlington Stores Inc. | 218,000 | 39,826,420 | |||||||
a | Chipotle Mexican Grill Inc. | 52,300 | 45,948,165 | |||||||
Domino’s Pizza Inc. | 87,000 | 31,487,910 | ||||||||
a | DraftKings Inc., A | 221,000 | 4,300,660 | |||||||
a,b | DraftKings Inc., A | 2,820,022 | 48,788,058 | |||||||
a,b | DraftKings Inc., wts., A, 4/23/25 | 35,231 | 140,884 | |||||||
a | Five Below Inc. | 249,500 | 22,494,920 | |||||||
Levi Strauss & Co., A | 1,200,000 | 15,468,000 | ||||||||
Marriott International Inc., A | 135,700 | 12,340,558 | ||||||||
a | NVR Inc. | 8,550 | 26,505,000 | |||||||
a | O’Reilly Automotive Inc. | 97,000 | 37,474,980 | |||||||
a | Peloton Interactive Inc., A | 620,000 | 19,530,000 | |||||||
a | RH | 114,000 | 16,390,920 | |||||||
Tractor Supply Co. | 478,500 | 48,534,255 | ||||||||
a | Ulta Beauty Inc. | 134,000 | 29,201,280 | |||||||
Vail Resorts Inc. | 185,000 | 31,635,000 | ||||||||
Wingstop Inc. | 282,000 | 33,070,140 | ||||||||
|
| |||||||||
479,481,400 | ||||||||||
|
| |||||||||
Consumer Staples 2.7% | ||||||||||
a | BellRing Brands Inc., A | 679,800 | 11,916,894 | |||||||
Church & Dwight Co. Inc. | 495,000 | 34,645,050 | ||||||||
a | Grocery Outlet Holding Corp. | 161,500 | 5,373,105 | |||||||
McCormick & Co. Inc. | 216,000 | 33,877,440 | ||||||||
|
| |||||||||
85,812,489 | ||||||||||
|
| |||||||||
Financials 7.0% | ||||||||||
Ares Management Corp., A | 724,000 | 24,290,200 | ||||||||
MarketAxess Holdings Inc. | 134,500 | 61,198,845 | ||||||||
MSCI Inc. | 212,500 | 69,487,500 | ||||||||
TCF Financial Corp. | 502,000 | 14,904,380 | ||||||||
Tradeweb Markets Inc. | 748,600 | 39,046,976 | ||||||||
Western Alliance Bancorp | 435,000 | 15,607,800 | ||||||||
|
| |||||||||
224,535,701 | ||||||||||
|
| |||||||||
Health Care 14.8% | ||||||||||
a | 10X Genomics Inc., A | 132,000 | 10,542,840 | |||||||
a | Argenx SE, ADR (Netherlands) | 73,000 | 10,693,770 | |||||||
Bio-Techne Corp. | 53,700 | 12,082,500 |
48 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small-Mid Cap Growth Fund (continued)
Shares/ Warrants | Value | |||||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Health Care (continued) | ||||||||||
a | Centene Corp. | 173,000 | $ | 11,518,340 | ||||||
a | Deciphera Pharmaceuticals Inc. | 125,000 | 7,247,500 | |||||||
a | DexCom Inc. | 189,414 | 63,491,573 | |||||||
a | Elanco Animal Health Inc. | 660,000 | 16,308,600 | |||||||
a | Guardant Health Inc. | 257,000 | 19,778,720 | |||||||
a | GW Pharmaceuticals PLC, ADR (United Kingdom) | 176,700 | 17,694,738 | |||||||
a | HealthEquity Inc. | 336,000 | 18,906,720 | |||||||
a | Heron Therapeutics Inc. | 1,124,000 | 16,028,240 | |||||||
a | IDEXX Laboratories Inc. | 198,500 | 55,103,600 | |||||||
a | Iovance Biotherapeutics Inc. | 98,000 | 3,150,700 | |||||||
a | iRhythm Technologies Inc. | 154,450 | 16,316,098 | |||||||
a | Livongo Health Inc. | 483,000 | 19,324,830 | |||||||
a | Mettler-Toledo International Inc. | 73,150 | 52,663,611 | |||||||
a | Penumbra Inc. | 185,247 | 32,847,998 | |||||||
a | PTC Therapeutics Inc. | 320,000 | 16,294,400 | |||||||
a | Reata Pharmaceuticals Inc. | 107,000 | 16,923,120 | |||||||
a | Revance Therapeutics Inc. | 575,000 | 10,643,250 | |||||||
a | Veeva Systems Inc. | 256,000 | 48,844,800 | |||||||
|
| |||||||||
476,405,948 | ||||||||||
|
| |||||||||
Industrials 13.9% | ||||||||||
a | CoStar Group Inc. | 121,300 | 78,633,938 | |||||||
Fastenal Co. | 639,000 | 23,144,580 | ||||||||
Fortive Corp. | 599,500 | 38,368,000 | ||||||||
IDEX Corp. | 263,500 | 40,481,505 | ||||||||
a | Kratos Defence & Security Solutions Inc. | 215,000 | 3,229,300 | |||||||
a | Mercury Systems Inc. | 377,000 | 33,613,320 | |||||||
Old Dominion Freight Line Inc. | 114,150 | 16,584,853 | ||||||||
Republic Services Inc. | 501,000 | 39,248,340 | ||||||||
Roper Technologies Inc. | 141,930 | 48,402,388 | ||||||||
Stanley Black & Decker Inc. | 202,500 | 22,315,500 | ||||||||
TransUnion | 457,000 | 36,007,030 | ||||||||
Verisk Analytics Inc. | 444,000 | 67,856,520 | ||||||||
|
| |||||||||
447,885,274 | ||||||||||
|
| |||||||||
Information Technology 36.1% | ||||||||||
a | Adyen NV (Netherlands) | 23,750 | 23,451,814 | |||||||
a | Alteryx Inc. | 296,000 | 33,501,280 | |||||||
Amphenol Corp., A | 443,000 | 39,099,180 | ||||||||
a | ANSYS Inc. | 176,500 | 46,212,995 | |||||||
a | Atlassian Corp. PLC | 311,000 | 48,357,390 | |||||||
a,c | Bill.Com Holdings Inc. | 197,400 | 11,624,886 | |||||||
a,b | Bill.Com Holdings Inc. | 433,333 | 23,281,742 | |||||||
a | Black Knight Inc. | 841,000 | 59,349,370 | |||||||
Booz Allen Hamilton Holding Corp. | 20,000 | 1,468,800 | ||||||||
a | CloudFlare Inc., A | 1,089,400 | 25,666,264 | |||||||
a | DocuSign Inc. | 686,000 | 71,858,500 |
franklintempleton.com | Annual Report | 49 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small-Mid Cap Growth Fund (continued)
Shares/ Warrants | Value | |||||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Information Technology (continued) | ||||||||||
Entegris Inc. | 115,000 | $ | 6,236,450 | |||||||
a | EPAM Systems Inc. | 159,000 | 35,121,510 | |||||||
Global Payments Inc. | 373,500 | 62,008,470 | ||||||||
a | GoDaddy Inc., A | 676,800 | 46,990,224 | |||||||
Jack Henry & Associates Inc. | 120,500 | 19,707,775 | ||||||||
a | Keysight Technologies Inc. | 391,000 | 37,837,070 | |||||||
KLA Corp. | 284,500 | 46,683,605 | ||||||||
a | Lattice Semiconductor Corp. | 1,225,214 | 27,579,567 | |||||||
Microchip Technology Inc. | 230,000 | 20,177,900 | ||||||||
Monolithic Power Systems | 206,500 | 41,281,415 | ||||||||
NXP Semiconductors NV (Netherlands) | 163,000 | 16,229,910 | ||||||||
a | Okta Inc., A | 245,500 | 37,144,150 | |||||||
a | Paylocity Holding Corp. | 340,000 | 38,940,200 | |||||||
a,b,d | Phononic Devices Inc., wts., 12/01/29 | 511,298 | 628,432 | |||||||
a | Q2 Holdings Inc. | 318,000 | 25,350,960 | |||||||
a | Semtech Corp. | 343,963 | 15,560,886 | |||||||
a | SiTime Corp. (Japan) | 469,000 | 10,158,540 | |||||||
a | Square Inc., A | 414,000 | 26,967,960 | |||||||
a | Synopsys Inc. | 420,500 | 66,068,960 | |||||||
a | Twilio Inc., A | 450,000 | 50,535,000 | |||||||
a | ViaSat Inc. | 304,050 | 12,891,720 | |||||||
a | WEX Inc. | 139,500 | 18,458,640 | |||||||
a | Wix.com Ltd. (Israel) | 165,500 | 21,649,055 | |||||||
a | Workday Inc., A | 107,500 | 16,544,250 | |||||||
Xilinx Inc. | 330,500 | 28,885,700 | ||||||||
a | Zendesk Inc. | 445,000 | 34,211,600 | |||||||
a | Zscaler Inc. | 245,500 | 16,468,140 | |||||||
|
| |||||||||
1,164,190,310 | ||||||||||
|
| |||||||||
Materials 2.6% | ||||||||||
Ball Corp. | 551,000 | 36,140,090 | ||||||||
a | Ingevity Corp. | 370,780 | 19,250,898 | |||||||
Martin Marietta Materials Inc. | 153,000 | 29,105,190 | ||||||||
|
| |||||||||
84,496,178 | ||||||||||
|
| |||||||||
Real Estate 2.4% | ||||||||||
SBA Communications Corp., A | 268,000 | 77,698,560 | ||||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests (Cost $2,296,829,586) | 3,163,925,887 | |||||||||
|
| |||||||||
Preferred Stocks 0.5% | ||||||||||
Consumer Discretionary 0.4% | ||||||||||
a,b,d | Proterra Inc., pfd., 5, 144A | 1,416,913 | 11,834,651 | |||||||
|
| |||||||||
Information Technology 0.1% | ||||||||||
a,b,d | Phononic Devices Inc., pfd., F | 2,970,061 | 3,875,755 | |||||||
|
| |||||||||
Total Preferred Stocks (Cost $14,635,912) | 15,710,406 | |||||||||
|
|
50 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Small-Mid Cap Growth Fund (continued)
Principal Amount | Value | |||||||||
e,f | Senior Floating Rate Interests (Cost $481,096) 0.0%† | |||||||||
Information Technology 0.0%† | ||||||||||
b,d,g | Phononic Devices Inc., Term Loan A, PIK, 12.00%, 1/17/24 | $ | 481,096 | $ | 394,282 | |||||
|
| |||||||||
Shares | ||||||||||
Escrows and Litigation Trusts (Cost $0) 0.0% | ||||||||||
b | DraftKings Inc., Escrow Account, | 26,292 | — | |||||||
|
| |||||||||
Total Investments before Short Term Investments (Cost $2,311,946,594) |
| 3,180,030,575 | ||||||||
|
| |||||||||
Short Term Investments 2.1% | ||||||||||
Money Market Funds (Cost $52,245,134) 1.6% | ||||||||||
h,i | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | 52,245,134 | 52,245,134 | |||||||
|
| |||||||||
j | Investments from Cash Collateral Received for Loaned Securities 0.5% | |||||||||
Money Market Funds (Cost $14,660,525) 0.5% | ||||||||||
h,i | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | 14,660,525 | 14,660,525 | |||||||
|
| |||||||||
Total Investments (Cost $2,378,852,253) 100.8% | 3,246,936,234 | |||||||||
Other Assets, less Liabilities (0.8)% | (24,529,095 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 3,222,407,139 | ||||||||
|
|
See Abbreviations on page 78.
†Rounds to less than 0.1% of net assets.
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, 2020. See Note 1(d).
dSee Note 8 regarding restricted securities.
eThe coupon rate shown represents the rate at period end.
fSee Note 1(e) regarding senior floating rate interests.
gIncome may be received in additional securities and/or cash.
hSee Note 3(f) regarding investments in affiliated management investment companies.
iThe rate shown is the annualized seven-day effective yield at period end.
jSee Note 1(d) regarding securities on loan.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 51 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Assets and Liabilities
April 30, 2020
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Assets: | ||||||||||||
Investments in securities: | ||||||||||||
Cost - Unaffiliated issuers | $1,756,490,103 | $ | 1,772,199,340 | $ | 2,311,946,594 | |||||||
Cost - Non-controlled affiliates (Note 3f and 9) | 57,273,935 | 108,826,732 | 66,905,659 | |||||||||
|
| |||||||||||
Value - Unaffiliated issuers+ | $3,945,173,998 | $ | 2,300,537,741 | $ | 3,180,030,575 | |||||||
Value - Non-controlled affiliates (Note 3f and 9) | 57,273,935 | 108,826,732 | 66,905,659 | |||||||||
Receivables: | ||||||||||||
Investment securities sold | 12,202,474 | 6,152,627 | 4,522,076 | |||||||||
Capital shares sold | 2,862,896 | 2,599,640 | 2,303,466 | |||||||||
Dividends and interest | 487,109 | 208,701 | 337,600 | |||||||||
Other assets | 4,337 | 2,830 | 3,573 | |||||||||
|
| |||||||||||
Total assets | 4,018,004,749 | 2,418,328,271 | 3,254,102,949 | |||||||||
|
| |||||||||||
Liabilities: | ||||||||||||
Payables: | ||||||||||||
Investment securities purchased | 12,494,095 | 5,142,615 | 10,793,695 | |||||||||
Capital shares redeemed | 10,588,425 | 4,679,511 | 3,607,295 | |||||||||
Management fees | 1,648,582 | 1,082,485 | 1,086,568 | |||||||||
Distribution fees | 719,112 | 196,273 | 590,861 | |||||||||
Transfer agent fees | 615,996 | 448,497 | 729,729 | |||||||||
Payable upon return of securities loaned | 9,585,975 | 34,288,350 | 14,660,525 | |||||||||
Accrued expenses and other liabilities | 209,363 | 148,780 | 227,137 | |||||||||
|
| |||||||||||
Total liabilities | 35,861,548 | 45,986,511 | 31,695,810 | |||||||||
|
| |||||||||||
Net assets, at value | $3,982,143,201 | $ | 2,372,341,760 | $ | 3,222,407,139 | |||||||
|
| |||||||||||
Net assets consist of: | ||||||||||||
Paid-in capital | $1,769,429,884 | $ | 1,875,678,989 | $ | 2,307,472,922 | |||||||
Total distributable earnings (losses) | 2,212,713,317 | 496,662,771 | 914,934,217 | |||||||||
|
| |||||||||||
Net assets, at value | $3,982,143,201 | $ | 2,372,341,760 | $ | 3,222,407,139 | |||||||
|
|
+Includes securities loaned | $ | 9,146,086 | $ | 32,703,179 | $ | 10,935,873 |
52 | 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, 2020
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Class A: | ||||||||||||
Net assets, at value | $2,883,392,395 | $ 686,791,079 | $2,515,800,942 | |||||||||
|
| |||||||||||
Shares outstanding | 72,821,867 | 36,436,817 | 78,247,003 | |||||||||
|
| |||||||||||
Net asset value per sharea | $39.60 | $18.85 | $32.15 | |||||||||
|
| |||||||||||
Maximum offering price per share (net asset value per share ÷ 94.50%) | $41.90 | $19.95 | $34.02 | |||||||||
|
| |||||||||||
Class C: | ||||||||||||
Net assets, at value | $ 216,756,727 | $ 66,268,641 | $ 138,939,877 | |||||||||
|
| |||||||||||
Shares outstanding | 6,857,603 | 4,510,319 | 7,156,957 | |||||||||
|
| |||||||||||
Net asset value and maximum offering price per sharea | $31.61 | $14.69 | $19.41 | |||||||||
|
| |||||||||||
Class R: | ||||||||||||
Net assets, at value | $ 31,059,511 | $ 54,368,881 | $ 40,997,076 | |||||||||
|
| |||||||||||
Shares outstanding | 832,307 | 3,093,312 | 1,440,778 | |||||||||
|
| |||||||||||
Net asset value and maximum offering price per share | $37.32 | $17.58 | $28.45 | |||||||||
|
| |||||||||||
Class R6: | ||||||||||||
Net assets, at value | $ 383,207,822 | $1,136,758,585 | $ 224,340,570 | |||||||||
|
| |||||||||||
Shares outstanding | 8,715,435 | 53,949,158 | 6,044,116 | |||||||||
|
| |||||||||||
Net asset value and maximum offering price per share | $43.97 | $21.07 | $37.12 | |||||||||
|
| |||||||||||
Advisor Class: | ||||||||||||
Net assets, at value | $ 467,726,746 | $ 428,154,574 | $ 302,328,674 | |||||||||
|
| |||||||||||
Shares outstanding | 10,798,884 | 20,686,514 | 8,328,973 | |||||||||
|
| |||||||||||
Net asset value and maximum offering price per share | $43.31 | $20.70 | $36.30 | |||||||||
|
|
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 | 53 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations
for the year ended April 30, 2020
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Investment income: | ||||||||||||
Dividends: (net of foreign taxes)* | ||||||||||||
Unaffiliated issuers | $ 20,882,947 | $ 10,828,030 | $ 18,131,451 | |||||||||
Non-controlled affiliates (Note 3f and 9) | 428,369 | 976,565 | 1,573,227 | |||||||||
Interest: | ||||||||||||
Unaffiliated issuers | — | — | 16,678 | |||||||||
Income from securities loaned: | ||||||||||||
Unaffiliated entities (net of fees and rebates) | 2,211,519 | 1,910,492 | 2,173,970 | |||||||||
Non-controlled affiliates (Note 3f) | 198,031 | 430,171 | 413,049 | |||||||||
|
| |||||||||||
Total investment income | 23,720,866 | 14,145,258 | 22,308,375 | |||||||||
|
| |||||||||||
Expenses: | ||||||||||||
Management fees (Note 3a) | 21,551,052 | 15,909,084 | 15,347,668 | |||||||||
Distribution fees: (Note 3c) | ||||||||||||
Class A | 7,056,910 | 1,782,222 | 6,491,737 | |||||||||
Class C | 2,233,978 | 798,300 | 1,536,222 | |||||||||
Class R | 167,014 | 327,043 | 227,131 | |||||||||
Transfer agent fees: (Note 3e) | ||||||||||||
Class A | 3,885,497 | 1,379,772 | 4,140,498 | |||||||||
Class C | 307,485 | 154,519 | 244,935 | |||||||||
Class R | 46,391 | 126,688 | 74,143 | |||||||||
Class R6 | 100,818 | 410,476 | 111,467 | |||||||||
Advisor Class | 682,148 | 1,176,315 | 508,633 | |||||||||
Custodian fees (Note 4) | 36,547 | 24,154 | 24,786 | |||||||||
Reports to shareholders | 274,709 | 161,902 | 318,644 | |||||||||
Registration and filing fees | 154,815 | 122,809 | 152,961 | |||||||||
Professional fees | 94,595 | 95,455 | 81,763 | |||||||||
Trustees’ fees and expenses | 48,718 | 32,374 | 42,611 | |||||||||
Other | 78,355 | 62,171 | 69,816 | |||||||||
|
| |||||||||||
Total expenses | 36,719,032 | 22,563,284 | 29,373,015 | |||||||||
Expense reductions (Note 4) | (903 | ) | (174 | ) | (201 | ) | ||||||
Expenses waived/paid by affiliates (Note 3f and 3g) | (147,145 | ) | (523,716 | ) | (520,930 | ) | ||||||
|
| |||||||||||
Net expenses | 36,570,984 | 22,039,394 | 28,851,884 | |||||||||
|
| |||||||||||
Net investment income (loss) | (12,850,118 | ) | (7,894,136 | ) | (6,543,509 | ) | ||||||
|
| |||||||||||
Realized and unrealized gains (losses): | ||||||||||||
Net realized gain (loss) from: | ||||||||||||
Investments: | ||||||||||||
Unaffiliated issuers | 133,545,617 | 13,231,650 | 192,316,731 | |||||||||
Non-controlled affiliates (Note 3f and 9) | — | 4,442,023 | — | |||||||||
Foreign currency transactions | — | 1,570 | 18,213 | |||||||||
|
| |||||||||||
Net realized gain (loss) | 133,545,617 | 17,675,243 | 192,334,944 | |||||||||
|
| |||||||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||||||
Investments: | ||||||||||||
Unaffiliated issuers | 214,046,447 | (159,313,025 | ) | (99,401,303 | ) | |||||||
Non-controlled affiliates (Note 3f and 9) | — | (8,168,573 | ) | — | ||||||||
|
|
54 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Operations (continued)
for the year ended April 30, 2020
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Net change in unrealized appreciation (depreciation) | $214,046,447 | $(167,481,598 | ) | $(99,401,303 | ) | |||||||
|
| |||||||||||
Net realized and unrealized gain (loss) | 347,592,064 | (149,806,355 | ) | 92,933,641 | ||||||||
|
| |||||||||||
Net increase (decrease) in net assets resulting from operations | $334,741,946 | $(157,700,491 | ) | $ 86,390,132 | ||||||||
|
| |||||||||||
*Foreign taxes withheld on dividends | $ | 6,488 | $ | — | $ | 12,332 |
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 55 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | |||||||||||||||
Year Ended April 30, | Year Ended April 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Increase (decrease) in net assets: | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | $ (12,850,118 | ) | $ (12,309,279 | ) | $ (7,894,136 | ) | $ (12,755,804 | ) | ||||||||
Net realized gain (loss) | 133,545,617 | 459,863,571 | 17,675,243 | 359,902,029 | ||||||||||||
Net change in unrealized appreciation (depreciation) | 214,046,447 | 124,321,685 | (167,481,598 | ) | 33,288,454 | |||||||||||
|
| |||||||||||||||
Net increase (decrease) in net assets resulting from operations | 334,741,946 | 571,875,977 | (157,700,491 | ) | 380,434,679 | |||||||||||
|
| |||||||||||||||
Distributions to shareholders: | ||||||||||||||||
Class A | (237,578,955 | ) | (270,776,543 | ) | (48,340,636 | ) | (119,248,780 | ) | ||||||||
Class C | (22,239,105 | ) | (29,467,299 | ) | (6,520,298 | ) | (19,107,819 | ) | ||||||||
Class R | (2,892,923 | ) | (3,826,333 | ) | (4,473,797 | ) | (13,109,783 | ) | ||||||||
Class R6 | (28,916,895 | ) | (36,746,123 | ) | (64,617,144 | ) | (158,804,029 | ) | ||||||||
Advisor Class | (38,146,343 | ) | (56,405,582 | ) | (40,149,307 | ) | (120,036,837 | ) | ||||||||
|
| |||||||||||||||
Total distributions to shareholders | (329,774,221 | ) | (397,221,880 | ) | (164,101,182 | ) | (430,307,248 | ) | ||||||||
|
| |||||||||||||||
Capital share transactions: (Note 2) | ||||||||||||||||
Class A | 62,785,864 | 274,938,208 | 68,255,158 | 66,793,851 | ||||||||||||
Class C | (22,481,948 | ) | (164,852,400 | ) | (12,115,565 | ) | (37,156,667 | ) | ||||||||
Class R | (5,745,243 | ) | (765,911 | ) | (11,347,524 | ) | 5,850,633 | |||||||||
Class R6 | (39,007,657 | ) | 25,388,596 | 198,501,453 | 156,516,510 | |||||||||||
Advisor Class | (44,198,935 | ) | (101,787,858 | ) | (237,802,378 | ) | 29,111,361 | |||||||||
|
| |||||||||||||||
Total capital share transactions | (48,647,919 | ) | 32,920,635 | 5,491,144 | 221,115,688 | |||||||||||
|
| |||||||||||||||
Net increase (decrease) in net assets | (43,680,194 | ) | 207,574,732 | (316,310,529 | ) | 171,243,119 | ||||||||||
|
| |||||||||||||||
Net assets: | ||||||||||||||||
Beginning of year | 4,025,823,395 | 3,818,248,663 | 2,688,652,289 | 2,517,409,170 | ||||||||||||
|
| |||||||||||||||
End of year | $3,982,143,201 | $4,025,823,395 | $2,372,341,760 | $2,688,652,289 | ||||||||||||
|
|
56 | 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 (continued)
Franklin Small-Mid Cap Growth Fund | ||||||||
Year Ended April 30, | ||||||||
2020 | 2019 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income (loss) | $ (6,543,509 | ) | $ (8,359,866 | ) | ||||
Net realized gain (loss) | 192,334,944 | 651,025,562 | ||||||
Net change in unrealized appreciation (depreciation) | (99,401,303 | ) | (99,480,161 | ) | ||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | 86,390,132 | 543,185,535 | ||||||
|
| |||||||
Distributions to shareholders: | ||||||||
Class A | (425,921,425 | ) | (273,591,265 | ) | ||||
Class C | (36,725,001 | ) | (25,744,621 | ) | ||||
Class R | (8,320,703 | ) | (8,327,251 | ) | ||||
Class R6 | (36,761,924 | ) | (27,160,456 | ) | ||||
Advisor Class | (46,972,961 | ) | (54,511,212 | ) | ||||
|
| |||||||
Total distributions to shareholders | (554,702,014 | ) | (389,334,805 | ) | ||||
|
| |||||||
Capital share transactions: (Note 2) | ||||||||
Class A | 190,363,531 | 299,393,170 | ||||||
Class C | (152,558 | ) | (163,688,617 | ) | ||||
Class R | (2,601,164 | ) | (20,982,789 | ) | ||||
Class R6 | (3,283,468 | ) | (34,742,726 | ) | ||||
Advisor Class | (15,986,912 | ) | (176,059,390 | ) | ||||
|
| |||||||
Total capital share transactions | 168,339,429 | (96,080,352 | ) | |||||
|
| |||||||
Net increase (decrease) in net assets | (299,972,453 | ) | 57,770,378 | |||||
Net assets: | ||||||||
Beginning of year | 3,522,379,592 | 3,464,609,214 | ||||||
|
| |||||||
End of year | $3,222,407,139 | $3,522,379,592 | ||||||
|
|
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 57 |
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 ten separate funds, three 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. Class C shares automatically convert to Class A shares after they have been held for 10 years. 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 each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. 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 Funds may 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.
Debt securities generally trade in the OTC market rather than on a securities exchange. The Funds’ 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.
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 Funds primarily employ 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.
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
58 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
into question the reliability of the value of a portfolio security held by the Funds. 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. Securities Purchased on a Delayed Delivery Basis
Certain or all Funds purchase securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
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 and/or uninvested cash as included in due from custodian in the Statements of Assets and Liabilities. 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
franklintempleton.com | Annual Report | 59 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Organization and Significant Accounting Policies (continued)
d. Securities Lending (continued)
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.
e. Senior Floating Rate Interests
Certain or all Funds invest 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 Funds invest are generally readily marketable, but may be subject to certain restrictions on resale. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced its intention to cease sustaining LIBOR after 2021. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments that use or may use a floating rate based on LIBOR cannot yet be determined.
f. 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, 2020, 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.
g. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except 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 or based on the ratio of number of shareholders of each Fund to the combined number of shareholders 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.
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
h. 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.
i. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust.
Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At April 30, 2020, there were an unlimited number of shares authorized (without par value). Transactions in the Funds’ shares were as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | |||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||
Class A Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares solda | 9,010,676 | $ | 350,593,688 | 9,570,599 | $ | 191,507,079 | ||||||||||||||
Shares issued in reinvestment of distributions | 5,700,998 | 220,628,503 | 2,179,464 | 46,378,986 | ||||||||||||||||
Shares redeemed | (13,139,219 | ) | (508,436,327 | ) | (8,559,848 | ) | (169,630,907 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | 1,572,455 | $ | 62,785,864 | 3,190,215 | $ | 68,255,158 | ||||||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares solda | 11,527,502 | $ | 446,798,931 | 7,109,392 | $ | 159,713,318 | ||||||||||||||
Shares issued in reinvestment of distributions | 7,925,459 | 253,773,429 | 6,425,425 | 111,866,657 | ||||||||||||||||
Shares redeemed | (11,143,246 | ) | (425,634,152 | ) | (9,200,387 | ) | (204,786,124 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | 8,309,715 | $ | 274,938,208 | 4,334,430 | $ | 66,793,851 | ||||||||||||||
|
| |||||||||||||||||||
Class C Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 1,293,129 | $ | 40,701,483 | 568,029 | $ | 8,922,309 | ||||||||||||||
Shares issued in reinvestment of distributions | 702,780 | 21,772,176 | 377,981 | 6,285,830 | ||||||||||||||||
Shares redeemeda | (2,670,750 | ) | (84,955,607 | ) | (1,712,157 | ) | (27,323,704 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (674,841 | ) | $ | (22,481,948 | ) | (766,147 | ) | $ | (12,115,565 | ) | ||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 1,419,843 | $ | 46,769,565 | 616,858 | $ | 10,919,327 | ||||||||||||||
Shares issued in reinvestment of distributions | 1,096,405 | 28,890,280 | 1,309,694 | 18,270,229 | ||||||||||||||||
Shares redeemeda | (7,237,389 | ) | (240,512,245 | ) | (3,457,014 | ) | (66,346,223 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (4,721,141 | ) | $ | (164,852,400 | ) | (1,530,462 | ) | $ | (37,156,667 | ) | ||||||||||
|
|
franklintempleton.com | Annual Report | 61 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest (continued)
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | |||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||
Class R Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 153,696 | $ | 5,674,779 | 629,374 | $ | 11,840,906 | ||||||||||||||
Shares issued in reinvestment of distributions | 77,840 | 2,841,942 | 224,509 | 4,458,744 | ||||||||||||||||
Shares redeemed | (386,976 | ) | (14,261,964 | ) | (1,464,103 | ) | (27,647,174 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (155,440 | ) | $ | (5,745,243 | ) | (610,220 | ) | $ | (11,347,524 | ) | ||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 181,946 | $ | 6,761,234 | 1,090,360 | $ | 23,643,908 | ||||||||||||||
Shares issued in reinvestment of distributions | 123,799 | 3,767,199 | 792,641 | 12,967,603 | ||||||||||||||||
Shares redeemed | (308,476 | ) | (11,294,344 | ) | (1,435,500 | ) | (30,760,878 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (2,731 | ) | $ | (765,911 | ) | 447,501 | $ | 5,850,633 | ||||||||||||
|
| |||||||||||||||||||
Class R6 Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 1,145,175 | $ | 48,845,021 | 19,214,024 | $ | 441,200,848 | ||||||||||||||
Shares issued in reinvestment of distributions | 497,757 | 21,363,741 | 2,403,945 | 57,093,695 | ||||||||||||||||
Shares redeemed | (2,557,431 | ) | (109,216,419 | ) | (13,369,234 | ) | (299,793,090 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (914,499 | ) | $ | (39,007,657 | ) | 8,248,735 | $ | 198,501,453 | ||||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 1,593,233 | $ | 65,447,277 | 14,008,871 | $ | 340,717,317 | ||||||||||||||
Shares issued in reinvestment of distributions | 798,910 | 28,041,731 | 7,029,042 | 135,098,188 | ||||||||||||||||
Shares redeemed | (1,611,469 | ) | (68,100,412 | ) | (12,935,223 | ) | (319,298,995 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | 780,674 | $ | 25,388,596 | 8,102,690 | $ | 156,516,510 | ||||||||||||||
|
| |||||||||||||||||||
Advisor Class Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 1,896,594 | $ | 77,753,071 | 5,254,643 | $ | 114,830,032 | ||||||||||||||
Shares issued in reinvestment of distributions | 881,490 | 37,286,998 | 1,514,761 | 35,354,523 | ||||||||||||||||
Shares redeemed | (3,804,471 | ) | (159,239,004 | ) | (17,129,278 | ) | (387,986,933 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (1,026,387 | ) | $ | (44,198,935 | ) | (10,359,874 | ) | $ | (237,802,378 | ) | ||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 4,826,217 | $ | 192,490,364 | 6,621,879 | $ | 160,225,038 | ||||||||||||||
Shares issued in reinvestment of distributions | 1,596,331 | 55,344,783 | 5,738,085 | 108,679,322 | ||||||||||||||||
Shares redeemed | (8,711,497 | ) | (349,623,005 | ) | (10,287,992 | ) | (239,792,999 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (2,288,949 | ) | $ | (101,787,858 | ) | 2,071,972 | $ | 29,111,361 | ||||||||||||
|
|
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Small-Mid Cap Growth Fund | ||||||||
Shares | Amount | |||||||
Class A Shares: | ||||||||
Year ended April 30, 2020 | ||||||||
Shares solda | 10,129,339 | $ | 347,408,925 | |||||
Shares issued in reinvestment of distributions | 12,415,749 | 403,511,847 | ||||||
Shares redeemed | (16,517,051 | ) | (560,557,241 | ) | ||||
|
| |||||||
Net increase (decrease) | 6,028,037 | $ | 190,363,531 | |||||
|
| |||||||
Year ended April 30, 2019 | ||||||||
Shares solda | 14,858,754 | $ | 536,401,847 | |||||
Shares issued in reinvestment of distributions | 8,741,011 | 259,433,312 | ||||||
Shares redeemed | (14,104,259 | ) | (496,441,989 | ) | ||||
|
| |||||||
Net increase (decrease) | 9,495,506 | $ | 299,393,170 | |||||
|
| |||||||
Class C Shares: | ||||||||
Year ended April 30, 2020 | ||||||||
Shares sold | 923,627 | $ | 20,355,427 | |||||
Shares issued in reinvestment of distributions | 1,836,941 | 36,150,992 | ||||||
Shares redeemeda | (2,541,653 | ) | (56,658,977 | ) | ||||
|
| |||||||
Net increase (decrease) | 218,915 | $ | (152,558 | ) | ||||
|
| |||||||
Year ended April 30, 2019 | ||||||||
Shares sold | 1,512,688 | $ | 38,650,988 | |||||
Shares issued in reinvestment of distributions | 1,265,311 | 25,318,892 | ||||||
Shares redeemeda | (8,796,878 | ) | (227,658,497 | ) | ||||
|
| |||||||
Net increase (decrease) | (6,018,879 | ) | $ | (163,688,617 | ) | |||
|
| |||||||
Class R Shares: | ||||||||
Year ended April 30, 2020 | ||||||||
Shares sold | 266,016 | $ | 8,098,504 | |||||
Shares issued in reinvestment of distributions | 285,909 | 8,231,336 | ||||||
Shares redeemed | (618,220 | ) | (18,931,004 | ) | ||||
|
| |||||||
Net increase (decrease) | (66,295 | ) | $ | (2,601,164 | ) | |||
|
| |||||||
Year ended April 30, 2019 | ||||||||
Shares sold | 402,799 | $ | 13,332,859 | |||||
Shares issued in reinvestment of distributions | 300,662 | 8,087,803 | ||||||
Shares redeemed | (1,329,075 | ) | (42,403,451 | ) | ||||
|
| |||||||
Net increase (decrease) | (625,614 | ) | $ | (20,982,789 | ) | |||
|
|
franklintempleton.com | Annual Report | 63 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest (continued)
Franklin Small-Mid Cap Growth Fund | ||||||||
Shares | Amount | |||||||
Class R6 Shares: | ||||||||
Year ended April 30, 2020 | ||||||||
Shares sold | 1,909,281 | $ | 74,347,388 | |||||
Shares issued in reinvestment of distributions | 888,615 | 33,287,500 | ||||||
Shares redeemed | (2,947,420 | ) | (110,918,356 | ) | ||||
|
| |||||||
Net increase (decrease) | (149,524 | ) | $ | (3,283,468 | ) | |||
|
| |||||||
Year ended April 30, 2019 | ||||||||
Shares sold | 2,051,263 | $ | 81,360,684 | |||||
Shares issued in reinvestment of distributions | 733,010 | 24,453,238 | ||||||
Shares redeemed | (3,502,497 | ) | (140,556,648 | ) | ||||
|
| |||||||
Net increase (decrease) | (718,224 | ) | $ | (34,742,726 | ) | |||
|
| |||||||
Advisor Class Shares: | ||||||||
Year ended April 30, 2020 | ||||||||
Shares sold | 1,829,927 | $ | 68,814,106 | |||||
Shares issued in reinvestment of distributions | 1,212,081 | 44,434,905 | ||||||
Shares redeemed | (3,356,267 | ) | (129,235,923 | ) | ||||
|
| |||||||
Net increase (decrease) | (314,259 | ) | $ | (15,986,912 | ) | |||
|
| |||||||
Year ended April 30, 2019 | ||||||||
Shares sold | 3,117,800 | $ | 123,344,447 | |||||
Shares issued in reinvestment of distributions | 1,592,925 | 52,232,005 | ||||||
Shares redeemed | (9,309,703 | ) | (351,635,842 | ) | ||||
|
| |||||||
Net increase (decrease) | (4,598,978 | ) | $ | (176,059,390 | ) | |||
|
|
aMay include a portion of Class C shares that were automatically converted to Class A.
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton. 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 |
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FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
a. Management Fees
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 |
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 |
franklintempleton.com | Annual Report | 65 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
a. Management Fees (continued)
For the year ended April 30, 2020, each Fund’s gross effective investment management fee rate based on average daily net assets was as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||
0.544% | 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 Fund’s 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 Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Reimbursement Plans: | ||||||||||||
Class A. | 0.35% | 0.35% | 0.25% | |||||||||
Compensation Plans: | ||||||||||||
Class C | 1.00% | 1.00% | 1.00% | |||||||||
Class R | 0.50% | 0.50% | 0.50% |
For 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.
66 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
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 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 | $328,028 | $166,962 | $360,570 | |||||||||
CDSC retained | $ 15,589 | $ (956 | ) | $ 19,281 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. 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, 2020, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Transfer agent fees | $2,295,295 | $1,405,689 | $2,027,796 |
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, 2020, investments in affiliated management investment companies were as follows:
Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares Held at End of Year | Investment Income | |||||||||||||||||||||||||
Franklin Growth Opportunities Fund |
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Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
Dividends | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $69,126,928 | $631,374,751 | $(652,813,719 | ) | $ — | $ — | $47,687,960 | 47,687,960 | $428,369 |
franklintempleton.com | Annual Report | 67 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
f. Investments in Affiliated Management Investment Companies (continued)
Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares Held at End of Year | Investment Income | |||||||||||||||||||||||||
Franklin Growth Opportunities Fund (continued) |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates (continued) |
| |||||||||||||||||||||||||||||||
| Income from securities loaned | | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $ — | $ 243,081,295 | $ (233,495,320 | ) | $ — | $ — | $ 9,585,975 | 9,585,975 | $ 198,031 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $ 69,126,928 | $ 874,456,046 | $ (886,309,039 | ) | $ — | $ — | $ 57,273,935 | $ 626,400 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Franklin Small Cap Growth Fund |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
Dividends | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $ 70,752,806 | $ 522,577,554 | $ ��(518,791,978 | ) | $ — | $ — | $ 74,538,382 | 74,538,382 | $ 976,565 | |||||||||||||||||||||||
| Income from securities loaned | | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | 18,262,684 | 442,610,348 | (426,584,682 | ) | — | — | 34,288,350 | 34,288,350 | 430,171 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $ 89,015,490 | $ 965,187,902 | $ (945,376,660 | ) | $ — | $ — | $108,826,732 | $1,406,736 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Franklin Small-Mid Cap Growth Fund |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
Dividends | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $124,157,073 | $ 723,917,019 | $ (795,828,958 | ) | $ — | $ — | $ 52,245,134 | 52,245,134 | $1,573,227 | |||||||||||||||||||||||
| Income from securities loaned | | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | 6,811,635 | 333,855,812 | (326,006,922 | ) | — | — | 14,660,525 | 14,660,525 | 413,049 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $130,968,708 | $1,057,772,831 | $(1,121,835,880 | ) | $ — | $ — | $ 66,905,659 | $1,986,276 | ||||||||||||||||||||||||
|
|
|
|
g. Waiver and Expense Reimbursements
For Franklin Growth Opportunities Fund, Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth 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%, 0.02% and 0.02%, respectively based on the average net assets of the class until August 31, 2020.
Prior to September 1, 2019, for Franklin Growth Opportunities Fund, Investor Services had voluntarily agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.02% based on the average net assets of the class.
68 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
h. 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, 2020, were as follows:
Franklin Growth Opportunities Fund | Franklin Small-Mid Cap Growth Fund | |||||||
Purchases | $ — | $3,099,250 | ||||||
Sales. | $1,696,760 | $2,323,880 |
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, 2020, the custodian fees were reduced as noted in the Statements of Operations.
5. Income Taxes
For tax purposes, the Funds may elect to defer any portion of a post-October capital loss or late-year ordinary loss to the first day of the following fiscal year. At April 30, 2020, the deferred losses were as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Post-October capital losses | $ — | $16,223,354 | $46,315,087 | |||||||||
Late-year ordinary losses | $5,136,150 | $ 3,339,517 | $ 2,637,568 |
The tax character of distributions paid during the years ended April 30, 2020 and 2019, was as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Distributions paid from: | ||||||||||||||||||||||||
Ordinary income | $ — | $ — | $ 22,658,947 | $ 13,084,020 | $ 23,014,333 | $ 26,220,410 | ||||||||||||||||||
Long term capital gain | 329,774,221 | 397,221,880 | 141,442,235 | 417,223,228 | 531,687,681 | 363,114,395 | ||||||||||||||||||
|
| |||||||||||||||||||||||
$329,774,221 | $397,221,880 | $164,101,182 | $430,307,248 | $554,702,014 | $389,334,805 | |||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 69 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
5. Income Taxes (continued)
At April 30, 2020, the cost of investments, net unrealized appreciation (depreciation) and undistributed long term capital gains for income tax purposes were as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Cost of investments | $1,815,806,995 | $1,893,138,860 | $2,381,402,148 | |||||||||
|
| |||||||||||
Unrealized appreciation | $2,232,980,485 | $ 717,110,793 | $ 956,730,943 | |||||||||
Unrealized depreciation | (46,339,547 | ) | (200,885,180 | ) | (91,196,857 | ) | ||||||
|
| |||||||||||
Net unrealized appreciation (depreciation) | $2,186,640,938 | $ 516,225,613 | $ 865,534,086 | |||||||||
|
| |||||||||||
Distributable earnings: | ||||||||||||
Undistributed long term capital gains | $ 31,208,536 | $ — | $ 90,544,766 | |||||||||
|
|
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.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2020, were as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Purchases | $ 764,389,713 | $ 883,185,903 | $1,725,795,990 | |||||||||
Sales. | $1,128,343,035 | $1,052,220,532 | $2,052,116,048 |
At April 30, 2020, in connection with securities lending transactions, certain or all Funds loaned investments and received cash collateral as follows:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||||
Securities lending transactionsa: | ||||||||||||
Equity Investmentsb | $ | 9,585,975 | $ | 34,288,350 | $ | 14,660,525 |
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. Novel Coronavirus Pandemic
The global outbreak of the novel coronavirus disease, known as COVID-19, has caused adverse effects on many companies, sectors, nations, regions and the markets in general, and may continue for an unpredictable duration. The effects of this pandemic may materially impact the value and performance of the Funds, their ability to buy and sell fund investments at appropriate valuations and their ability to achieve their investment objectives.
70 | 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, 2020, investments in restricted securities, excluding securities exempt from registration under the 1933 Act, were as follows:
Principal Amount/ Shares/ Warrants | Issuer | Acquisition Date | Cost | Value | ||||||||||||
Franklin Growth Opportunities Fund | ||||||||||||||||
2,610,594 | ClearMotion Inc., pfd., C | 11/06/17 | $ | 5,500,000 | $ | 7,675,295 | ||||||||||
3,698,772 | ClearMotion Inc., pfd., D | 12/21/18 | 10,000,000 | 11,397,363 | ||||||||||||
642,459 | Confluent Inc., pfd., E | 4/13/20 | 9,616,776 | 9,616,776 | ||||||||||||
201,294 | GitLab Inc., pfd., E | 9/11/19 | 3,749,986 | 3,532,583 | ||||||||||||
207,551 | Hashicorp Inc., E. | 3/06/20 | 12,004,812 | 12,004,812 | ||||||||||||
1,673,284 | LegalZoom.com Inc. | 7/20/18 | 16,479,337 | 20,046,660 | ||||||||||||
509,182 | Optoro Inc., pfd., E | 7/24/18 | 10,020,702 | 13,293,475 | ||||||||||||
2,362,202 | Proterra Inc., pfd., 5, 144A | 9/21/16 - 1/13/17 | 11,896,616 | 19,730,101 | ||||||||||||
596,775 | Proterra Inc., pfd., 6, 144A | 6/07/17 | 3,306,052 | 4,984,515 | ||||||||||||
780,667 | Proterra Inc., pfd., 7. | 5/21/18 - 9/18/18 | 5,094,960 | 6,520,458 | ||||||||||||
289,016 | Proterra Inc., pfd., 8. | 8/02/19 | 1,996,378 | 2,413,982 | ||||||||||||
928,488 | Sweetgreen Inc., pfd., H. | 11/09/18 | 12,107,484 | 13,435,041 | ||||||||||||
100,835 | Sweetgreen Inc., pfd., I | 9/16/19 | 1,724,279 | 1,621,077 | ||||||||||||
805,800 | Tanium Inc., pfd., G | 9/14/15 | 4,000,233 | 6,038,708 | ||||||||||||
504,854 | Tempus Labs Inc., pfd., F | 5/29/19 | 12,499,983 | 15,849,773 | ||||||||||||
126,131 | Tempus Labs Inc., pfd., G | 2/06/20 | 4,837,427 | 4,843,333 | ||||||||||||
5,028,735 | Wheels Up Partners LLC, pfd., D | 5/16/19 - 8/02/19 | 17,499,998 | 17,193,220 | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 4.3% of Net Assets) | $ | 142,335,023 | $ | 170,197,172 | ||||||||||||
|
| |||||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||
3,698,772 | ClearMotion Inc., pfd., D | 12/21/18 | $ | 10,000,000 | $ | 11,397,363 | ||||||||||
1,431,280 | LegalZoom.com Inc. | 7/20/18 | 14,095,961 | 17,147,349 | ||||||||||||
508,130 | Optoro Inc., pfd., E | 7/24/18 | 9,999,999 | 13,266,009 | ||||||||||||
1,787,047 | Proterra Inc., pfd., 5, 144A | 9/21/16 - 1/13/17 | 8,999,998 | 14,926,165 | ||||||||||||
1,310,834 | Proterra Inc., pfd., 6, 144A | 6/07/17 - 1/02/18 | 7,261,842 | 10,948,635 | ||||||||||||
536,367 | Proterra Inc., pfd., 7. | 5/21/18 | 3,500,556 | 4,479,962 | ||||||||||||
596,471 | Rent the Runway Inc., pfd., F | 3/21/19 | 13,333,328 | 11,535,214 | ||||||||||||
203,515 | Rent the Runway Inc., pfd., G | 4/30/20 | 3,000,006 | 2,864,474 | ||||||||||||
1,542,673 | Smule Inc., pfd., G, 144A | 5/31/16 | 11,099,995 | 9,464,137 | ||||||||||||
352,675 | Smule Inc., pfd., H, 144A | 4/27/17 | 2,999,995 | 2,548,305 | ||||||||||||
383,435 | Sweetgreen Inc., pfd., H | 11/09/18 | 4,999,992 | 5,548,230 | ||||||||||||
41,641 | Sweetgreen Inc., pfd., I | 9/16/19 | 712,061 | 669,443 | ||||||||||||
361,111 | Tula eTechnology Inc. | 11/01/18 | — | — |
franklintempleton.com | Annual Report | 71 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
8. Restricted Securities (continued)
Principal Amount/ Shares/ Warrants | Issuer | Acquisition Date | Cost | Value | ||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||
3,611,111 | Tula Technology Inc., E | 9/08/17 | $ | 6,500,000 | $ | 7,165,798 | ||||||||||
4,310,344 | Wheels Up Partners LLC, pfd., D | 5/16/19 - 8/02/19 | 14,999,997 | 14,737,045 | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 5.3% of Net Assets) | $ | 111,503,730 | $ | 126,698,129 | ||||||||||||
|
| |||||||||||||||
Franklin Small-Mid Cap Growth Fund | ||||||||||||||||
2,970,061 | Phononic Devices Inc., pfd., F. | 6/06/19 | $ | 7,499,998 | $ | 3,875,755 | ||||||||||
481,096 | Phononic Devices Inc., Term Loan A, PIK, 12.00%, 1/17/24 | 1/17/20 | 481,096 | 394,282 | ||||||||||||
511,298 | Phononic Devices Inc., wts., 12/01/29 | 1/17/20 | 47 | 628,432 | ||||||||||||
1,416,913 | Proterra Inc., pfd., 5, 144A | 9/21/16 | 7,135,914 | 11,834,651 | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 0.5% of Net Assets) | $ | 15,117,055 | $ | 16,733,120 | ||||||||||||
|
|
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, 2020, investments in “affiliated companies” were as follows:
Name of Issuer | Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares Held at End of Year | Dividend Income | ||||||||||||||||||||||||
Franklin Small Cap Growth Fund |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
The KeyW Holding Corp. | $ | 33,592,278 | $ | — | $ | (33,325,672 | ) | $ | 7,901,967 | $ | (8,168,573 | ) | $ | —a | — | $ | — | |||||||||||||||
Sportsman’s Warehouse Holdings Inc. | 16,003,372 | $ | 1,768,014 | (13,650,281 | ) | (3,459,944 | ) | —b | —b | — | — | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $ | 49,595,650 | $ | 1,768,014 | $ | (46,975,953 | ) | $ | 4,442,023 | $ | (8,168,573 | ) | $ | — | $ | — | ||||||||||||||||
|
|
|
|
aAs of April 30, 2020, no longer held by the fund.
bAs of April 30, 2020, 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, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 5, 2021. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their relative share of the aggregate net assets of
72 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
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, 2020, 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.
A summary of inputs used as of April 30, 2020, in valuing the Funds’ assets carried at fair value, is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Franklin Growth Opportunities Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Communication Services | $ | 228,423,492 | $ | — | $ | 6,038,708 | $ | 234,462,200 | ||||||||
Consumer Discretionary | 475,565,765 | — | 67,777,832 | 543,343,597 | ||||||||||||
Health Care | 611,930,351 | — | 20,693,106 | 632,623,457 | ||||||||||||
Industrials | 368,507,033 | — | 30,486,695 | 398,993,728 | ||||||||||||
Information Technology | 1,486,978,602 | — | 88,854,076 | 1,575,832,678 | ||||||||||||
All Other Equity Investments | 559,918,338 | — | — | 559,918,338 | ||||||||||||
Short Term Investments | 57,273,935 | — | — | 57,273,935 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 3,788,597,516 | $ | — | $ | 213,850,417 | $ | 4,002,447,933 | ||||||||
|
| |||||||||||||||
Franklin Small Cap Growth Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Consumer Discretionary | $ | 277,704,821 | $ | — | $ | 130,775,542 | c | $ | 408,480,363 | |||||||
Industrials | 342,063,624 | — | 28,003,054 | 370,066,678 | ||||||||||||
Information Technology | 623,797,106 | — | 29,159,791 | 652,956,897 | ||||||||||||
All Other Equity Investments | 869,033,803 | — | — | 869,033,803 | ||||||||||||
Escrows and Litigation Trusts | — | — | — | c | — | |||||||||||
Short Term Investments | 108,826,732 | — | — | 108,826,732 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 2,221,426,086 | $ | — | $ | 187,938,387 | $ | 2,409,364,473 | ||||||||
|
|
franklintempleton.com | Annual Report | 73 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
11. Fair Value Measurements (continued)
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Franklin Small-Mid Cap Growth Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments:b | ||||||||||||||||
Consumer Discretionary | $ | 430,552,458 | $ | — | $ | 60,763,593 | c | $ | 491,316,051 | |||||||
Information Technology | 1,140,280,136 | — | 27,785,929 | 1,168,066,065 | ||||||||||||
All Other Equity Investments | 1,520,254,177 | — | — | 1,520,254,177 | ||||||||||||
Senior Floating Rate Interests | — | — | 394,282 | 394,282 | ||||||||||||
Escrows and Litigation Trusts | — | — | —c | — | ||||||||||||
Short Term Investments | 66,905,659 | — | — | 66,905,659 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 3,157,992,430 | $ | — | $ | 88,943,804 | $ | 3,246,936,234 | ||||||||
|
|
aFor detailed categories, see the accompanying Statement of Investments.
bIncludes common and preferred stocks as well as other equity interests.
cIncludes securities determined to have no value at April 30, 2020.
A reconciliation in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 assets and/or liabilities at the beginning and/or end of the year. At April 30, 2020, the reconciliation is as follows:
Balance at Beginning of Year | Purchases | Sales | Transfer Into (Out of) Level 3 | Cost Basis Adjustmentsa | 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 Growth Opportunities Fund |
| |||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||
Equity Investments:b | ||||||||||||||||||||||||||||||||||||
Communication Services | $ | 4,893,610 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,145,098 | $ | 6,038,708 | $ | 1,145,098 | ||||||||||||||||||
Consumer Discretionary | 65,366,728 | 3,720,657 | — | — | — | — | (1,309,553 | ) | 67,777,832 | (1,309,553 | ) | |||||||||||||||||||||||||
Financials | 14,395,754 | — | — | — | (13,500,004 | ) | — | (895,750 | ) | — | — | |||||||||||||||||||||||||
Health Care | — | 17,337,410 | — | — | — | — | 3,355,696 | 20,693,106 | 3,355,696 | |||||||||||||||||||||||||||
Industrials | 12,168,487 | 17,499,998 | — | — | — | — | 818,210 | 30,486,695 | 818,210 | |||||||||||||||||||||||||||
Information Technology | 20,473,416 | 25,371,574 | — | — | 13,500,004 | — | 29,509,082 | 88,854,076 | 29,509,082 | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Total Investments in Securities | $ | 117,297,995 | $ | 63,929,639 | $ | — | $ | — | $ | — | $ | — | $ | 32,622,783 | $ | 213,850,417 | $ | 33,518,533 | ||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Franklin Small Cap Growth Fund |
| |||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||
Equity Investments:b | ||||||||||||||||||||||||||||||||||||
Consumer Discretionary | $ | 119,996,881 | c | $ | 3,712,067 | $ | — | $ | — | $ | (15,000,004 | ) | $ | — | $ | 22,066,598 | $ | 130,775,542 | c | $ | 30,259,876 | |||||||||||||||
Industrials | 12,143,346 | 14,999,997 | — | — | — | — | 859,711 | 28,003,054 | 859,711 | |||||||||||||||||||||||||||
Information Technology | 31,063,930 | — | — | — | — | — | (1,904,139 | ) | 29,159,791 | (1,904,139 | ) | |||||||||||||||||||||||||
Escrows and Litigation Trusts | — | — | — | — | — | — | — | —c | — | |||||||||||||||||||||||||||
|
|
74 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Balance at Beginning of Year | Purchases | Sales | Transfer Into (Out of) Level 3 | Cost Basis Adjustmentsa | 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 | ||||||||||||||||||||||||||||
Total Investments in Securities | $ | 163,204,157 | $ | 18,712,064 | $— | $— | $ | (15,000,004 | ) | $— | $ | 21,022,170 | $ | 187,938,387 | $ | 29,215,448 | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Franklin Small-Mid Cap Growth Fund | ||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||
Equity Investments:b | ||||||||||||||||||||||||||||||||||||
Consumer Discretionary | $ | 33,865,637 | $ | — | $— | $— | $ | — | $— | $ | 26,897,956 | $ | 60,763,593c | $ | 26,009,860 | |||||||||||||||||||||
Financials | 7,677,734 | — | — | — | (7,200,001 | ) | — | (477,733 | ) | — | — | |||||||||||||||||||||||||
Information Technology | — | 7,500,045 | — | — | 7,200,001 | — | 13,085,883 | 27,785,929 | 13,085,883 | |||||||||||||||||||||||||||
Senior Floating Rate Interests | — | 481,096 | — | — | — | — | (86,814 | ) | 394,282 | (86,814 | ) | |||||||||||||||||||||||||
Escrows and Litigation Trusts | — | — | — | — | — | — | — | —c | — | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Total Investments in Securities | $ | 41,543,371 | $ | 7,981,141 | $— | $— | $ | — | $— | $ | 39,419,292 | $ | 88,943,804 | $ | 39,008,929 | |||||||||||||||||||||
|
|
aMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.
bIncludes common and preferred stocks as well as other equity interests.
cIncludes securities determined to have no value.
Significant unobservable valuation inputs for material Level 3 assets and/or liabilities and impact to fair value as a result of changes in unobservable valuation inputs as of April 30, 2020, are as follows:
Description | Fair Value at End of Year | Valuation Technique | Unobservable Inputs | Amount/Range (Weighted Averagea) | Impact to Fair Value if Input Increasesb | |||||||||||||||
Franklin Growth Opportunities Fund | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||
Equity Investments:c | ||||||||||||||||||||
Communication Services | $ | 6,038,708 | Discounted cash flow | | Long term growth rate | | 5.0% | Increased | ||||||||||||
|
| |||||||||||||||||||
Discount rate | 9.1% | Decreasee | ||||||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | 23.5% | Decreased | ||||||||||||||||
| ||||||||||||||||||||
Consumer Discretionary | 67,777,832 | Discounted cash flow | | Forward EBITDA growth rate | | 4.0% | Increasee | |||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | 2.0% | Increased | ||||||||||||||||
|
| |||||||||||||||||||
Discount rate | | 8.9% - 12.7% (9.8%) |
| Decreasee | ||||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | | 18.4% - 30.6% (23.1%) | | Decreased | ||||||||||||||
|
| |||||||||||||||||||
Terminal multiple | 32.5x | Increased | ||||||||||||||||||
| ||||||||||||||||||||
Health Care | 20,693,106 | Discounted cash flow | Discount rate | 9.9% | Decreasee | |||||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | 5.0% | Increased | ||||||||||||||||
|
|
franklintempleton.com | Annual Report | 75 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
11. Fair Value Measurements (continued)
Description | Fair Value at End of Year | Valuation Technique | Unobservable Inputs | Amount/Range (Weighted Averagea) | Impact to Fair Value if Input Increasesb | |||||||||||||||
| Discount for lack of marketability | | 20.3% | Decreased | ||||||||||||||||
| ||||||||||||||||||||
Industrials | 30,486,695 | Discounted cash flow | Discount rate | | 10.8% -19.9% (14.8%) |
| Decreasee | |||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | | 3.0% - 5.0% (3.9%) |
| Increased | ||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | | 24.1% - 25.4% (24.8%) |
| Decreased | ||||||||||||||
| ||||||||||||||||||||
Information Technology | 63,699,905 | Discounted cash flow | Discount rate | 11.4% | | Decreasee | | |||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | 4.0% | Increasee | ||||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | 15.1% | | Decreased | | ||||||||||||||
|
| |||||||||||||||||||
Market comparables | | Discount for lack of marketability | | 8.8% | | Decreased | | |||||||||||||
| ||||||||||||||||||||
All Other Investmentsf | 25,154,171 | |||||||||||||||||||
| ||||||||||||||||||||
Total | $ | 213,850,417 | ||||||||||||||||||
|
Franklin Small Cap Growth Fund | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||
Equity Investments:c | ||||||||||||||||||||
Consumer Discretionary | $ | 127,273,601 | Discounted cash flow | | Forward EBITDA growth rate | | 4.0% | Increasee | ||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | | 2.0% - 4.0% (3.0%) |
| Increased | ||||||||||||||
|
| |||||||||||||||||||
Discount rate | | 8.9% - 14.2% (10.3%) |
| Decreasee | ||||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | | 18.4% - 30.6% (23.0%) |
| Decreased | ||||||||||||||
|
| |||||||||||||||||||
Terminal multiple | 32.5x | Increased | ||||||||||||||||||
|
| |||||||||||||||||||
Market comparables | EV / EBITDA multiple | 21.1x - 22.2x | Increased | |||||||||||||||||
|
| |||||||||||||||||||
EV / revenue multiple | 12.3x | Increase | ||||||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | | 11.1% - 20.6% (12.1%) |
| Decreasee | ||||||||||||||
| ||||||||||||||||||||
Industrials | 28,003,054 | Discounted cash flow | Discount rate | | 10.8% - 19.9% (15.1% | ) | Decreasee | |||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | | 3.0% - 5.0% (3.9%) |
| Increased | ||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | | 24.1% - 25.4% (24.8%) |
| Decreased | ||||||||||||||
| ||||||||||||||||||||
Information Technology | 29,159,791 | Market comparables | EV / revenue multiple | 2.7x | Increased | |||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | 10.2% | Decreased | ||||||||||||||||
|
| |||||||||||||||||||
Discounted cash flow | Discount rate | 11.4% | Decreasee | |||||||||||||||||
|
| |||||||||||||||||||
| Long term growth rate | | 4.0% | Increasee | ||||||||||||||||
|
|
76 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Description | Fair Value at End of Year | Valuation Technique | Unobservable Inputs | Amount/Range (Weighted Averagea) | Impact to Fair Value if Input Increasesb | |||||||||||||||
| Discount for lack of marketability | | 15.1% | Decreased | ||||||||||||||||
All Other Investmentsf | 3,501,941g | |||||||||||||||||||
Total | $ | 187,938,387 | ||||||||||||||||||
Franklin Small-Mid Cap Growth Fund | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||
Equity Investments:c | ||||||||||||||||||||
Consumer Discretionary | $ | 60,622,709 | Discounted cash flow | | Forward EBITDA growth rate | | 4.0% | Increased | ||||||||||||
Discount rate | 8.9% | Decreasee | ||||||||||||||||||
| Discount for lack of marketability | | 18.4% | Decreased | ||||||||||||||||
Market comparables | | Discount for lack of marketability | | 11.1% | Decreased | |||||||||||||||
Information Technology | 27,157,497 | Discounted cash flow | Discount rate | 16.0% | Decreased | |||||||||||||||
| Discount for lack of marketability | | 28.5% | Decreased | ||||||||||||||||
Terminal multiple | 20.3x | Increase | ||||||||||||||||||
Market comparables | | Discount for lack of marketability | | 8.8% | Decreased | |||||||||||||||
All Other Investmentsf | 1,163,598g | |||||||||||||||||||
Total | $ | 88,943,804 |
aWeighted based on the relative fair value of the financial instruments.
bRepresents the directional change in the fair value 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.
cIncludes common and preferred stocks as well as other equity interests.
dRepresents a significant impact to fair value but not net assets.
eRepresents a significant impact to fair value and net assets.
fIncludes fair value of immaterial assets and/or liabilities developed using various valuation techniques and unobservable inputs. May also include values derived using private transaction prices or non-public third party pricing information which is unobservable.
gIncludes securities determined to have no value at April 30, 2020.
Abbreviations
EBITDA | Earnings before interest, taxes, depreciation and amortization |
EV | Enterprise value |
12. New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provides optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management is currently evaluating the impact, if any, of applying this ASU.
franklintempleton.com | Annual Report | 77 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
13. 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 | |
PIK | Payment-In-Kind |
78 | 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 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 Growth Opportunities Fund, Franklin Small Cap Growth Fund and Franklin Small-Mid Cap Growth Fund (three of the funds constituting Franklin Strategic Series, hereafter collectively referred to as the “Funds”) as of April 30, 2020, the related statements of operations for the year ended April 30, 2020, the statements of changes in net assets for each of the two years in the period ended April 30, 2020, including the related notes, and the financial highlights for each of the five years in the period ended April 30, 2020 (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, 2020, 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, 2020 and each of the financial highlights for each of the five years in the period ended April 30, 2020 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, 2020 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 17, 2020
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 | 79 |
FRANKLIN STRATEGIC SERIES
Under Section 852(b)(3)(C) of the Internal Revenue 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, 2020:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||
|
| |||||||||
$329,774,221 | $141,442,235 | $531,687,681 |
Under Section 871(k)(2)(C) of the Internal Revenue Code, the Funds hereby report the maximum amount allowable but no less than the following amounts as short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Internal Revenue Code for the fiscal year ended April 30, 2020:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||
|
| |||||||||
$ — | $22,658,947 | $23,014,333 |
Under Section 854(b)(1)(A) of the Internal Revenue 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, 2020:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||
|
| |||||||||
0.00% | 44.13% | 75.76% |
Under Section 854(b)(1)(B) of the Internal Revenue 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 Internal Revenue Code for the fiscal year ended April 30, 2020:
Franklin Growth Opportunities Fund | Franklin Small Cap Growth Fund | Franklin Small-Mid Cap Growth Fund | ||||||||
|
| |||||||||
$19,529,074 | $9,999,320 | $17,716,218 |
Distributions, including qualified dividend income, paid during calendar year 2020 will be reported to shareholders on Form 1099-DIV by mid-February 2021. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
80 | Annual Report | franklintempleton.com |
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 U.S. registered portfolios overseen in the Franklin Templeton 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 | 129 | 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 2017 |
110 |
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) |
Trustee |
Since 2014 |
129 |
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) |
Lead Independent Trustee |
Trustee since 1998 and Lead Independent Trustee since 2019 |
129 |
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); formerly, 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).
|
franklintempleton.com | Annual Report | 81 |
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 | ||||
J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2009 | 129 | Boeing Capital Corporation (aircraft financing) (2006-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Private investor; and formerly, Counselor and Senior Advisor to the Chairman, CEO, and Board of Directors, of The Boeing Company (aerospace company), and member of the Executive Council (May 2019-January 1, 2020); Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (2006-2019); and Federal Appeals Court Judge, United States Court of Appeals for the Fourth Circuit (1991-2006).
| ||||||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 129 | 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).
|
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 | 140 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Executive Chairman, Chairman of the Board and Director, 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 39 of the investment companies in Franklin Templeton; Vice Chairman, Investment Company Institute; and formerly, Chief Executive Officer (2013-2020) and President (1994-2015), Franklin Resources, Inc.
| ||||||||
**Rupert H. Johnson, Jr. (1940) |
Chairman of the Board and Trustee |
Chairman of the Board since 2013 and Trustee since 1991 |
129 |
None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director (Vice Chairman), Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 37 of the investment companies in Franklin Templeton.
| ||||||||
Alison E. Baur (1964) |
Vice President |
Since 2012 |
Not Applicable |
Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Deputy General Counsel, Franklin Templeton; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton.
|
82 | Annual Report | franklintempleton.com |
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 | ||||
Breda M. Beckerle (1958) 280 Park Avenue New York, NY 10017 | Interim Chief Compliance Officer | Since January 2020 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chief Compliance Officer, Fiduciary Investment Management International, Inc., Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC; and officer of 41 of the investment companies in Franklin Templeton.
| ||||||||
Sonal Desai, Ph.D. (1963) |
Vice President |
Since 2018 |
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 17 of the investment companies in Franklin Templeton.
| ||||||||
Gaston Gardey (1967) |
Treasurer, Chief Financial Officer and Chief Accounting Officer |
Since 2009 |
Not Applicable |
Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting and officer of 24 of the investment companies in Franklin Templeton. | ||||||||
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President and Co- Secretary | Vice President since 2009 and Co-Secretary since 2019 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 41 of the investment companies in Franklin Templeton.
| ||||||||
Matthew T. Hinkle (1971) |
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 41 of the investment companies in Franklin Templeton; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton (2009-2017).
| ||||||||
Robert Lim (1948) |
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 41 of the investment companies in Franklin Templeton.
| ||||||||
Since 2013 |
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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 Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Edward D. Perks (1970) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive Officer – Investment Management | Since 2018 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton (since December 2018).
| ||||||||
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 and officer of 41 of the investment companies in Franklin Templeton.
| ||||||||
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 41 of the investment companies in Franklin Templeton.
| ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President and Co-Secretary | Vice President since 2011 and Co-Secretary since 2019 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 41 of the investment companies in Franklin Templeton.
|
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton 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 an 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 Mary C. Choksi as its audit committee financial expert. The Board believes that Ms. Choksi qualifies as such an expert in view of her extensive business background and experience. She currently serves as a director of Avis Budget Group, Inc. (2007-present) and formerly, Founder and Senior Advisor, Strategic Investment Group (1987 to 2017). Ms. Choksi has been a Member of the Fund’s Audit Committee since 2014. As a result of such background and experience, the Board believes that Ms. Choksi 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. Ms. Choksi 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 SERIES
Board Approval of Investment
Management Agreements
FRANKLIN STRATEGIC SERIES
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
(each a Fund)
At a meeting held on April 7, 2020 (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 and, in some cases, requested additional information from the Manager relating to the contract. 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, as well as information on succession planning where appropriate; 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 and shareholder services; 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 US 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 (FT) or the Funds to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements, which included discussion of the changing distribution landscape for the Funds. 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 reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the FT 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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SHAREHOLDER INFORMATION
investments relating to the services provided to the Funds by the FT organization. The Board specifically noted FT’s commitment to enhancing services and controlling costs, as reflected in its plan to outsource certain administrative functions, and growth opportunities, as evidenced by its upcoming acquisition of the Legg Mason companies. The Board acknowledged the change in leadership at FRI and the opportunity to hear from Jennifer Johnson, President and Chief Executive Officer of FRI, about goals she has for the company that will benefit the Funds.
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, 2020. 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 Growth Opportunities Fund - The Performance Universe for this Fund included the Fund and all retail and institutional multi-cap growth funds. The Board noted that the Fund’s annualized total return for the one-, three-, five- and 10-year periods was above the median of its Performance Universe. The Board concluded that the Fund’s performance was satisfactory.
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-, three-, five-and 10-year periods was above the median of its Performance Universe. The Board concluded that the Fund’s performance was satisfactory.
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 further noted that the Fund’s annualized total return for the one-, three-, five- and 10-year periods, while below the median, were 20.99%, 14.44%, 10.14% and 12.90%, respectively. The Board discussed this performance with management and management explained that sector allocation (primarily due to the Fund’s cash balance), the Fund’s relative bias toward smaller capitalization stocks, and stock selection were the primary detractors from relative performance over the one- and three-year periods, and that stock selection was the primary detractor from relative performance over the five-year period. Management further explained recent investment process enhancements, including greater involvement from the Investment Risk Management Group, the consolidation of certain of the Fund’s portfolio holdings and a reduction in the amount of the Fund’s cash balance. The Board concluded that the Fund’s Management Agreement should be continued for an additional one-year period, and management’s efforts should continue to be monitored.
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 FT to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers, if any (Management Rate) 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 to 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
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SHAREHOLDER INFORMATION
shown (i) for Class A shares for each of the Franklin Growth Opportunities Fund and the Franklin Small-Mid Cap Growth Fund and for each of the other funds in each Fund’s respective Expense Group; and (ii) for Class A shares for the Franklin Small Cap Growth Fund and for Class A shares and Class T shares for the other funds in the Fund’s Expense Group. 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 Growth Opportunities Fund included the Fund and 17 other multi-cap growth funds. The Expense Group for the Franklin Small Cap Growth Fund included the Fund and 14 other small-cap growth funds. The Expense Group for the Franklin Small-Mid Cap Growth Fund included the Fund and 17 other mid-cap growth funds. The Board noted that the Management Rates and actual total expense ratios for these Funds were below the medians and in the first quintile (least expensive) 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 FT’s US 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, 2019, 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 FRI and certain FT funds, was engaged by the Manager to 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. As part of this evaluation, the Board considered the initiative currently underway to outsource certain operations, which effort would require considerable up front expenditures by the Manager but, over the long run is expected to result in greater efficiencies. 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 US Securities and Exchange Commission and other regulatory requirements, notably in the area of cybersecurity protections.
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 each 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 FT family of funds as a whole. The Board 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
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SHAREHOLDER INFORMATION
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 U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year as an exhibit to its report on Form N-PORT. Shareholders may view the filed Form N-PORT 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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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.
Annual Report and Shareholder Letter Franklin Strategic Series | ||||||
Investment Manager | Distributor | Shareholder Services | ||||
Franklin Advisers, Inc. | Franklin Templeton Distributors, Inc. (800) DIAL BEN® / 342-5236 franklintempleton.com | (800) 632-2301 | ||||
© 2020 Franklin Templeton Investments. All rights reserved. | FSS1 A 06/20 |
Sign up for electronic delivery at franklintempleton.com/edelivery
Internet Delivery of Fund Reports Unless You Request Paper Copies: Effective January 1, 2021, as permitted by the SEC, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request them from the Fund or your financial intermediary. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. If you have not signed up for electronic delivery, we would encourage you to join fellow shareholders who have. You may elect to receive shareholder reports and other communications electronically from the Fund by calling (800) 632-2301 or by contacting your financial intermediary.
You may elect to continue to receive paper copies of all your future shareholder reports free of charge by contacting your financial intermediary or, if you invest directly with a Fund, calling (800) 632-2301 to let the Fund know of your request. Your election to receive reports in paper will apply to all funds held in your account.
SHAREHOLDER LETTER
Dear Shareholder:
During the 12 months ended April 30, 2020, the U.S. economy showed mixed results, growing moderately through the end of 2019 amid concerns about trade, but contracting in 2020’s first quarter in response to the novel coronavirus (COVID-19) pandemic. The U.S. Federal Reserve (Fed), having lowered the target range for the federal funds rate in October for the third time during 2019, held the rate unchanged through February 2020. However, given larger economic risks posed by the pandemic, the Fed lowered its key rate again by 0.50% on March 3 and further by 1.00% on March 15, resulting in a target range of 0.00%–0.25%. In its efforts to support U.S. economic activity, the Fed also announced broad quantitative easing measures to support credit markets.
U.S. equities advanced strongly during most of the reporting period, aided by steady economic growth, easing trade tensions and supportive monetary policy. However, a sharp selloff began in late February 2020 amid fears of a global economic slowdown due to the COVID-19 pandemic. Concerns about global supply chain disruptions and subdued consumer spending drove many investors to sell equity holdings in favor of perceived safe investments such as government bonds and cash. In this environment, U.S. stocks, as measured by the Standard & Poor’s® 500 Index, posted a marginally positive total return for the 12-month period.
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 Perks, CFA
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2020, 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.
CFA® is a trademark owned by CFA Institute.
Not FDIC Insured | | | May Lose Value | | | No Bank Guarantee |
franklintempleton.com | Not part of the annual report | 1 |
Contents
Annual Report
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools. |
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ANNUAL REPORT
U.S. equities, as measured by the Standard & Poor’s® 500 Index (S&P 500®), posted a modest total return during the 12 months under review. Equities advanced strongly during most of the reporting period, aided by relatively steady economic growth, easing trade tensions and the U.S. Federal Reserve’s (Fed’s) supportive monetary policy. However, a sharp selloff began in late February 2020 amid investor fears of a global economic slowdown due to the novel coronavirus (COVID-19) pandemic. Concerns about global supply chain disruptions and subdued consumer spending drove many investors to sell equity holdings in favor of perceived safe investments such as government bonds and cash.
The Fed lowered the federal funds target rate three times in 2019 to a range of 1.50%–1.75%. The labor market remained strong through February 2020 and supported consumer spending.
However, economic activity contracted considerably as the COVID-19 pandemic spread and many state and local governments issued stay-at-home orders, which included business closures and restrictions. Layoffs in many industries, particularly retail, restaurants and hospitality, led to approximately 30 million workers filing for unemployment benefits in the last six weeks of the reporting period. As a result, the unemployment rate rose from a 50-year low of 3.5% in February 2020 to 14.7% at period-end, the highest level since the Great Depression.1
In an effort to buffer the sharp drop in economic activity, the Fed cut the federal funds target rate twice to a range of 0.00%–0.25% and announced broad quantitative easing measures aimed at ensuring the free flow of credit to borrowers and supporting credit markets with unlimited amounts of bond purchases. Meanwhile, Congress passed the Coronavirus Aid, Relief and Economic Security Act to provide economic relief for individuals and businesses, as well as additional funding for small businesses, while also considering proposals for longer-term economic stimulus. Investor sentiment was bolstered by the fiscal and monetary stimulus measures, anticipated development of COVID-19 treatments and gradual easing of social distancing policies beginning in late April 2020. U.S. stocks, as measured by the S&P 500,
bounced from multi-year lows and finished the reporting period relatively flat.
The foregoing information reflects our analysis and opinions as of April 30, 2020. 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. Bureau of Labor Statistics.
See www.franklintempletondatasources.com for additional data provider information.
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Franklin Biotechnology Discovery Fund
This annual report for Franklin Biotechnology Discovery Fund covers the fiscal year ended April 30, 2020.
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 U.S. and other countries.
Performance Overview
The Fund’s Class A shares posted a +18.52% cumulative total return for the 12 months under review. In comparison, the NASDAQ Biotechnology Index®, which tracks U.S. and international-based biotechnology stocks, posted a +17.41% total return.1 Also in comparison, the Standard & Poor’s 500 Index (S&P 500), which is a broad measure of the U.S. stock market, posted a +0.86% 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, 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 potential earnings growth, business and financial risk, and valuation. Also, in seeking sustainable growth characteristics, we look for companies that we believe can produce sustainable earnings growth and cash flow growth or the potential to generate income. 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
Portfolio Composition
Based on Total Net Assets as of 4/30/20
*Includes common, preferred stocks, escrows and litigation trusts as well as other equity interests.
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.
Manager’s Discussion
During the 12 months under review, the biotechnology industry experienced some volatility. 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 included Array Biopharma (not held at period-end), Iovance Biotherapeutics and Vertex Pharmaceuticals.
Cancer-focused biopharmaceutical company Array BioPharma was acquired by pharmaceuticals firm Pfizer (not a Fund holding) for a significant premium over the preannouncement stock closing price.
Iovance Biotherapeutics’ share price shot up in 2019’s second quarter following promising data from clinical studies of experimental treatments for cervical cancer and melanoma. Some of those gains were reversed in the third quarter as investors moved out of small- and mid-capitalization stocks to large-capitalization stocks, which
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.
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 23.
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
Top 10 Holdings | ||||
4/30/20 | ||||
Company Sector/Industry | % of Total Net Assets | |||
Vertex Pharmaceuticals Inc. Biotechnology | 7.2% | |||
Amgen Inc. Biotechnology | 6.5% | |||
Gilead Sciences Inc. Biotechnology | 5.7% | |||
Regeneron Pharmaceuticals Inc. Biotechnology | 5.7% | |||
Biogen Inc. Biotechnology | 4.8% | |||
Illumina Inc. Life Sciences Tools & Services | 4.8% | |||
Iovance Biotherapeutics Inc. Biotechnology | 3.9% | |||
GW Pharmaceuticals PLC Pharmaceuticals | 3.6% | |||
PTC Therapeutics Inc. Biotechnology | 3.3% | |||
Deciphera Pharmaceuticals Inc. Biotechnology | 2.4% |
were perceived as more defensive. Shares experienced significant volatility in March and April 2020, first surging on takeover rumors before giving those gains back, and finally rising again in anticipation of test results for a particular class of cancer drugs.
Vertex Pharmaceuticals’ share price increase began in October 2019 following the U.S. Food and Drug Administra-tion’s (FDA’s) approval of one of the company’s treatments for cystic fibrosis. The company’s stock price was further supported by a better-than-expected earnings report for 2019.
In contrast, key detractors from the Fund’s absolute performance included Alexion Pharmaceuticals, GW Pharmaceuticals and Sage Therapeutics.
Alexion Pharmaceuticals is a biopharmaceutical company that focuses on developing treatments for rare disorders. The company’s share price fell due to an August 2019 decision by regulators to review patents for Soliris, a blood disorder treatment. We believe that even if generic competitors to Soliris become available, the impact on sales of Ultomiris—the company’s next-generation blood disorder treatment—will be limited, and that the stock is still undervalued at current levels. However, we have reduced our
position in the company as we expect the ongoing intellectual property rights proceedings to remain an overhang on its share price in the near term.
Shares of GW Pharmaceuticals, a cannabinoid-based drug developer, shed much of their value due to concerns about sales figures for its leading epilepsy treatment early in the period. This occurred despite broad regulatory approval and strong sales in Europe, and better-than-expected sales figures for 2019 failed to reverse those losses. We believe the company has suffered from general investor skepticism about new biotechnology products and a mistaken association with the wider cannabis industry, which saw a general selloff in 2019’s third quarter.
Sage Therapeutics’ stock plummeted following the unexpected FDA trial failure of its anti-depressant drug SAGE-217. Despite the setback, we still view Sage as a leading neuro drug developer, and believe the long term chances of SAGE-217 eventually reaching market justifies maintaining our position in the company.
Thank you for your continued participation in Franklin Biotechnology Discovery Fund. We look forward to serving your future investment needs.
Sincerely,
Evan McCulloch, CFA Lead Portfolio Manager | ||
Wendy Lam, Ph.D. Akiva Felt | ||
Portfolio Management Team |
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2020, 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 BIOTECHNOLOGY DISCOVERY FUND
Performance Summary as of April 30, 2020
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 4/30/201
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | |||||||||
A4 | ||||||||||||
1-Year | +18.52% | +12.00% | ||||||||||
5-Year | +8.81% | +0.56% | ||||||||||
10-Year | +292.65% | +14.01% | ||||||||||
Advisor | ||||||||||||
1-Year | +18.82% | +18.82% | ||||||||||
5-Year | +10.17% | +1.96% | ||||||||||
10-Year | +303.20% | +14.96% |
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 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.
Class A (5/1/10–4/30/20)
Advisor Class (5/1/10–4/30/20)
See page 9 for Performance Summary footnotes.
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
PERFORMANCE SUMMARY
Distributions (5/1/19–4/30/20)
Share Class | Long-Term Capital Gain | |||
A | $14.1643 | |||
C | $14.1643 | |||
R6 | $14.1643 | |||
Advisor | $14.1643 |
Total Annual Operating Expenses6
Share Class | With Fee Waiver | Without Fee Waiver | ||||||
A | 1.02% | 1.04% | ||||||
Advisor | 0.77% | 0.79% |
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. Unexpected events and their aftermaths, such as the spread of deadly diseases; natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. 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 8/31/20. Fund investment results reflect the fee waiver; without this reduction, 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns (with sales charges) would have differed. Average annual total returns (with sales charges) have been restated to reflect the current maximum initial sales charge of 5.50%.
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 U.S. 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.
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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 Account Value 11/1/19 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Net Annualized Expense Ratio2 | |||||||||||||||||||||||||||||||||||||||
A | $ | 1,000 | $ | 1,137.60 | $ | 5.26 | $ | 1,019.94 | $ | 4.97 | 0.99 | % | |||||||||||||||||||||||||||||||||
C | $ | 1,000 | $ | 1,133.40 | $ | 9.23 | $ | 1,016.21 | $ | 8.72 | 1.74 | % | |||||||||||||||||||||||||||||||||
R6 | $ | 1,000 | $ | 1,139.70 | $ | 3.35 | $ | 1,021.73 | $ | 3.17 | 0.63 | % | |||||||||||||||||||||||||||||||||
Advisor | $ | 1,000 | $ | 1,139.10 | $ | 3.94 | $ | 1,021.18 | $ | 3.72 | 0.74 | % |
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 182/366 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 Natural Resources Fund
This annual report for Franklin Natural Resources Fund covers the fiscal year ended April 30, 2020.
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 posted a -41.30% 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, posted a -28.20% total return.1 Also in comparison, the Standard & Poor’s 500 Index (S&P 500), which is a broad measure of the U.S. stock market, posted a +0.86% 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 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
Geographic Composition
Based on Total Net Assets as of 4/30/20
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 potential earnings growth, business and financial risk, and valuation. Also, in seeking sustainable growth characteristics, we look for companies that we believe can produce sustainable earnings growth and cash flow growth or the potential to generate income. 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.
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.
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 30.
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FRANKLIN NATURAL RESOURCES FUND
Sector Overview
Global commodity prices generally fell during the 12 months ended April 30, 2020. Even prior to the novel coronavirus (COVID-19) pandemic, raw material prices were declining due to oversupply, global trade disputes and slowing global industrial production. Energy and industrial prices ended the period lower, resulting from the lockdowns governments imposed in an effort to curtail the pandemic, while some precious metals increased as investors sought perceived safe-haven assets.
The COVID-19 pandemic and accompanying economic slowdown wreaked havoc on crude oil prices during the period. Demand destruction and ballooning supplies caused the U.S. and global oil benchmarks—West Texas Intermediate (WTI) and Brent crude oil, respectively—to fall to prices below the break-even point for most oil-producing countries. May 2020 WTI futures contracts reached negative territory in April, the first time oil futures dipped below zero, as many investors feared they would have nowhere to store the oil if they were forced to take physical delivery. Further hurting oil prices was a short but ugly price war between Saudi Arabia and Russia in March, prompted by Russia’s refusal to agree to production cuts. A production cut agreement between the Organization of the Petroleum Exporting Countries and Russia was reached in April.
U.S. natural gas prices also fell during the period, though significantly less so than oil. Natural gas prices hit a multi-decade low in the first quarter of 2020, as the COVID-19 pandemic exacerbated already low demand and existing oversupply due to an unusually warm winter in North America. However, natural gas’ lower prevalence as transportation fuel helped prices to be more resilient than oil. In April, declines in demand and increases in supply proved to be not as dire as predicted, leading to a monthly gain, though prices remained at historical lows.
Precious metals performed significantly better than industrial metals during the period. Gold prices were rising even prior to the COVID-19 pandemic, which caused many investors to favor certain alternative assets over equities and bonds. Record levels of government stimulus, as well as expectation of continued stimulus measures in the future, sparked fears about inflation and further drove up gold prices. Palladium prices also notably increased during the period. The metal, a key component in pollution-control devices for automobiles, benefited from increased demand driven by tighter emissions standards, particularly in China. However, gains were tempered by plummeting car sales following the pandemic. Silver prices ended the period relatively flat, while platinum prices fell. Industrial metals declined during the period.
Portfolio Composition
Based on Total Net Assets as of 4/30/20
Copper prices were pressured in 2019 by slowing global manufacturing and construction. The pandemic drove prices further down, as the metal’s reliance on demand from Chinese manufacturing meant it was one of the first commodities affected by the pandemic. Iron ore also fell during the period, due in part to a decline in Chinese steel production in 2019 due to U.S. tariff threats. Prices were further pressured by the pandemic, though iron ore performed better than other industrial metals due to surprisingly resilient demand from China.
Manager’s Discussion
Natural resources equities declined during the period, hit first by a combination of slowing global economic growth and international trade conflicts in 2019. Improving performance in late 2019 and early this year was sharply reversed by the COVID-19 outbreak, which resulted in severe government measures to contain the virus. These included closing nonessential businesses and issuing stay-at-home orders, which brought the world economy to a near standstill and sent oil prices plummeting. OPEC and Russia’s failure to initially reach a production cut agreement exacerbated the situation. Energy companies were hit particularly hard, but began to stage a recovery in late March from historically low levels. Gold mining companies, on the other hand, benefited
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FRANKLIN NATURAL RESOURCES FUND
from the economic downturn, which drove gold prices up as investors sought alternatives to equity markets and paper currency.
In this environment, an overweight and stock selection in oil and gas equipment and services detracted from relative results. Oil field services companies generally operate with higher operating leverage to commodity prices as they are dependent on producer profitability and spending, which made these companies particularly vulnerable to the drop in oil prices. Significant detractors in the industry included U.K.-based TechnipFMC and U.S.-based Oil States International.
An underweight and stock selection in the well-performing gold industry detracted from relative results. Underweighted holdings in Newmont, a U.S.-based mining company with global operations, and Canada-based Barrick Gold hurt performance, as did a lack of a position in another major Canadian gold miner.
Stock selection in oil and gas storage and transportation also hurt relative performance. U.S.-based Targa Resources was a significant detractor in the industry.
Elsewhere, relative detractors included U.S.-based oil and gas exploration and production (E&P) companies Callon Petroleum and Noble Energy.
Turning to contributors, an overweight in the copper industry and an off-benchmark position in the diversified chemicals industry helped relative results. Both industries detracted from absolute performance, but still performed better than the broader Index.
In copper, off-benchmark holdings in Chile-based Antofagasta and Canada-based Lundin Mining helped relative performance. Both companies benefited from expectations of government stimulus and China reopening its economy, which should drive increased demand. There were no significant individual contributors in diversified chemicals.
Elsewhere, relative contributors included U.S. natural gas E&P company Cabot Oil & Gas, an underweighted position in U.S.-based integrated oil and gas major Exxon Mobil, and Canadian gold miners Alamos Gold (not part of the Index) and B2Gold.
Cash holdings were another relative contributor given the decline in equity values.
Overall, we believe the size of the drop in energy equities is only justifiable if widespread global lockdowns last for more
Top 10 Holdings | ||||
4/30/20 | ||||
Company Sector/Industry | % of Total Net Assets | |||
Concho Resources Inc. Oil & Gas Exploration & Production | | 3.9% | | |
Chevron Corp. Integrated Oil & Gas | | 3.8% | | |
ConocoPhillips Oil & Gas Exploration & Production | | 3.6% | | |
EOG Resources Inc. Oil & Gas Exploration & Production | | 3.4% | | |
Exxon Mobil Corp. Integrated Oil & Gas | | 3.4% | | |
Cabot Oil & Gas Corp. Oil & Gas Exploration & Production | | 3.2% | | |
Diamondback Energy Inc. Oil & Gas Exploration & Production | | 3.2% | | |
Pioneer Natural Resources Co. Oil & Gas Exploration & Production | | 3.1% | | |
BHP Group PLC Diversified Metals & Mining | | 3.1% | | |
Schlumberger Ltd. Oil & Gas Equipment & Services | | 2.7% | |
than a year. We anticipate economies opening earlier, and as a result have been buying companies we view as undervalued with significant purchases of the most severely impacted stocks and what we deemed to be the highest quality companies in mid-March.
franklintempleton.com | Annual Report | 13 |
FRANKLIN NATURAL RESOURCES FUND
Thank you for your continued participation in Franklin Natural Resources Fund. We look forward to serving your future investment needs.
Sincerely,
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, 2020, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
14 | Annual Report | franklintempleton.com |
FRANKLIN NATURAL RESOURCES FUND
Performance Summary as of April 30, 2020
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 4/30/201
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 5.50% and the minimum is 0%. Class A: 5.50% 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 | ||||||
A4 | ||||||||
1-Year | -41.30% | -44.52% | ||||||
5-Year | -53.55% | -15.18% | ||||||
10-Year | -54.22% | -8.04% | ||||||
Advisor | ||||||||
1-Year | -41.15% | -41.15% | ||||||
5-Year | -52.98% | -14.01% | ||||||
10-Year | -52.95% | -7.26% |
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 17 for Performance Summary footnotes.
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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.
Class A (5/1/10–4/30/20)
Advisor Class (5/1/10–4/30/20)
See page 17 for Performance Summary footnotes.
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FRANKLIN NATURAL RESOURCES FUND
PERFORMANCE SUMMARY
Distributions (5/1/19–4/30/20)
Share Class | Net Investment Income | |||
A | $0.3564 | |||
C | $0.0631 | |||
R6 | $0.3749 | |||
Advisor | $0.4298 |
Total Annual Operating Expenses6
Share Class | With Fee Waiver | Without Fee Waiver | ||||||
A | 1.04% | 1.04% | ||||||
Advisor | 0.79% | 0.79% |
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. Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term. 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. Unexpected events and their aftermaths, such as the spread of deadly diseases; natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. 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 8/31/20. 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. Prior to 9/10/18, these shares were offered at a higher initial sales charge of 5.75%, thus actual returns (with sales charges) would have differed. Average annual total returns (with sales charges) have been restated to reflect the current maximum initial sales charge of 5.50%.
5. 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 U.S. 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.
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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 11/1/19 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201,2 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201,2 | Net Annualized Expense Ratio2 | |||||||||||||||||||||||||||||||||||||||
A | $ | 1,000 | $ | 709.50 | $ | 5.27 | $ | 1,018.70 | $ | 6.22 | 1.24 | % | |||||||||||||||||||||||||||||||||
C | $ | 1,000 | $ | 706.70 | $ | 8.44 | $ | 1,014.97 | $ | 9.97 | 1.99 | % | |||||||||||||||||||||||||||||||||
R6 | $ | 1,000 | $ | 711.00 | $ | 2.89 | $ | 1,021.48 | $ | 3.42 | 0.68 | % | |||||||||||||||||||||||||||||||||
Advisor | $ | 1,000 | $ | 710.20 | $ | 4.25 | $ | 1,019.89 | $ | 5.02 | 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 182/366 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
18 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $138.85 | $146.14 | $147.22 | $128.19 | $182.30 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.69 | ) | (0.99 | ) | (0.80 | ) | (0.79 | ) | (0.94 | ) | ||||||||||
Net realized and unrealized gains (losses) | 26.48 | (1.75 | ) | 3.32 | 25.75 | (39.39 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 25.79 | (2.74 | ) | 2.52 | 24.96 | (40.33 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | — | (1.73 | ) | — | ||||||||||||||
Net realized gains | (14.16 | ) | (4.55 | ) | (3.60 | ) | (4.20 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Total distributions | (14.16 | ) | (4.55 | ) | (3.60 | ) | (5.93 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $150.48 | $138.85 | $146.14 | $147.22 | $128.19 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | 18.52% | (1.60)% | 1.69% | 20.02% | (23.55)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.03% | 1.02% | 1.05% | 1.04% | 0.99% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.01% | 1.00% | 1.03% | 1.02% | 0.98% | |||||||||||||||
Net investment income (loss) | (0.49)% | (0.67)% | (0.53)% | (0.58)% | (0.56)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $960,305 | $924,611 | $1,081,883 | $1,176,687 | $1,074,903 | |||||||||||||||
Portfolio turnover rate | 32.92% | 28.62% | 26.95% | 34.12% | 22.13% |
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%.
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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $133.51 | $141.75 | $143.98 | $125.99 | $180.67 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (1.70 | ) | (2.03 | ) | (1.90 | ) | (1.81 | ) | (2.11 | ) | ||||||||||
Net realized and unrealized gains (losses) | 25.35 | (1.66 | ) | 3.27 | 25.29 | (38.79 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 23.65 | (3.69 | ) | 1.37 | 23.48 | (40.90 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | — | (1.29 | ) | — | ||||||||||||||
Net realized gains | (14.16 | ) | (4.55 | ) | (3.60 | ) | (4.20 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Total distributions | (14.16 | ) | (4.55 | ) | (3.60 | ) | (5.49 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $143.00 | $133.51 | $141.75 | $143.98 | $125.99 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | 17.62% | (2.33)% | 0.93% | 19.14% | (24.09)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.78% | 1.77% | 1.80% | 1.79% | 1.71% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.76% | 1.75% | 1.78% | 1.77% | 1.70% | |||||||||||||||
Net investment income (loss) | (1.24)% | (1.42)% | (1.28)% | (1.33)% | (1.28)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $48,363 | $46,508 | $58,433 | $53,935 | $17,562 | |||||||||||||||
Portfolio turnover rate | 32.92% | 28.62% | 26.95% | 34.12% | 22.13% |
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%.
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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $143.83 | $150.65 | $151.03 | $131.37 | $185.75 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.18 | ) | (0.46 | ) | (0.17 | ) | (0.25 | ) | (0.32 | ) | ||||||||||
Net realized and unrealized gains (losses) | 27.50 | (1.81 | ) | 3.39 | 26.41 | (40.28 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 27.32 | (2.27 | ) | 3.22 | 26.16 | (40.60 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | — | (2.30 | ) | — | ||||||||||||||
Net realized gains | (14.16 | ) | (4.55 | ) | (3.60 | ) | (4.20 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Total distributions | (14.16 | ) | (4.55 | ) | (3.60 | ) | (6.50 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $156.99 | $143.83 | $150.65 | $151.03 | $131.37 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 18.95% | (1.24)% | 2.11% | 20.50% | (23.24)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.74% | 0.70% | 0.65% | 0.63% | 0.60% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.64% | 0.63% | 0.61% | 0.61% | 0.59% | |||||||||||||||
Net investment income (loss) | (0.12)% | (0.30)% | (0.11)% | (0.17)% | (0.17)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $9,484 | $6,164 | $8,307 | $8,891 | $5,568 | |||||||||||||||
Portfolio turnover rate | 32.92% | 28.62% | 26.95% | 34.12% | 22.13% |
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%.
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 21 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Biotechnology Discovery Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $142.56 | $149.54 | $150.20 | $130.67 | $185.12 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment income (loss)b | (0.34 | ) | (0.63 | ) | (0.45 | ) | (0.46 | ) | (0.55 | ) | ||||||||||
Net realized and unrealized gains (losses) | 27.24 | (1.80 | ) | 3.39 | 26.27 | (40.12 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 26.90 | (2.43 | ) | 2.94 | 25.81 | (40.67 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | — | — | (2.08 | ) | — | ||||||||||||||
Net realized gains | (14.16 | ) | (4.55 | ) | (3.60 | ) | (4.20 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Total distributions | (14.16 | ) | (4.55 | ) | (3.60 | ) | (6.28 | ) | (13.78 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $155.30 | $142.56 | $149.54 | $150.20 | $130.67 | |||||||||||||||
|
| |||||||||||||||||||
Total return | 18.82% | (1.36)% | 1.94% | 20.32% | (23.36)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.78% | 0.77% | 0.80% | 0.79% | 0.75% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.76% | 0.75% | 0.78% | 0.77% | 0.74% | |||||||||||||||
Net investment income (loss) | (0.24)% | (0.42)% | (0.28)% | (0.33)% | (0.32)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $159,348 | $153,874 | $180,219 | $159,894 | $93,263 | |||||||||||||||
Portfolio turnover rate | 32.92% | 28.62% | 26.95% | 34.12% | 22.13% |
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%.
22 | Annual Report | The accompanying notes are an integral part of these financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2020
Franklin Biotechnology Discovery Fund | ||||||||||||||
Country | Shares | Value | ||||||||||||
Common Stocks 91.2% | ||||||||||||||
Biotechnology 75.8% | ||||||||||||||
a,b | 89bio Inc. | United States | 94,800 | $ | 2,228,748 | |||||||||
a | Acadia Pharmaceuticals Inc. | United States | 294,600 | 14,232,126 | ||||||||||
a | ADMA Biologics Inc. | United States | 437,264 | 1,289,929 | ||||||||||
a | Alector Inc. | United States | 135,600 | 3,352,032 | ||||||||||
a | Alexion Pharmaceuticals Inc. | United States | 260,000 | 27,942,200 | ||||||||||
a | Alnylam Pharmaceuticals Inc. | United States | 52,300 | 6,887,910 | ||||||||||
Amgen Inc. | United States | 318,700 | 76,239,414 | |||||||||||
a | Applied Therapeutics Inc. | United States | 154,857 | 5,536,138 | ||||||||||
a | Arcus Biosciences Inc. | United States | 194,100 | 5,126,181 | ||||||||||
a | Argenx SE, ADR | Netherlands | 168,625 | 24,701,876 | ||||||||||
a | Ascendis Pharma AS, ADR | Denmark | 211,600 | 28,720,468 | ||||||||||
a | Assembly Biosciences Inc. | United States | 256,700 | 4,494,817 | ||||||||||
a,b | Aurinia Pharmaceuticals Inc. | Canada | 536,900 | 9,256,156 | ||||||||||
a | Autolus Therapeutics PLC, ADR | United Kingdom | 232,430 | 2,189,491 | ||||||||||
a,b | Beam Therapeutics Inc. | United States | 127,600 | 2,035,220 | ||||||||||
a | Biogen Inc. | United States | 189,175 | 56,152,815 | ||||||||||
a | BioMarin Pharmaceutical Inc. | United States | 142,456 | 13,108,801 | ||||||||||
a | Black Diamond Therapeutics Inc. | United States | 127,800 | 4,733,712 | ||||||||||
a | Bluebird Bio Inc. | United States | 30,900 | 1,664,892 | ||||||||||
a | Blueprint Medicines Corp. | United States | 42,600 | 2,506,158 | ||||||||||
a | Bridgebio Pharma Inc. | United States | 118,800 | 3,626,964 | ||||||||||
a | Constellation Pharmaceuticals Inc. | United States | 161,800 | 5,821,564 | ||||||||||
a | CRISPR Therapeutics AG | Switzerland | 166,314 | 8,182,649 | ||||||||||
a | Deciphera Pharmaceuticals Inc. | United States | 496,454 | 28,784,403 | ||||||||||
a | Fate Therapeutics Inc. | United States | 490,193 | 13,421,484 | ||||||||||
Gilead Sciences Inc. | United States | 803,200 | 67,468,800 | |||||||||||
a | Global Blood Therapeutics Inc. | United States | 258,300 | 19,765,116 | ||||||||||
a | Gossamer Bio Inc. | United States | 204,900 | 2,667,798 | ||||||||||
a | Heron Therapeutics Inc. | United States | 1,739,677 | 24,807,794 | ||||||||||
a | Homology Medicines Inc. | United States | 138,400 | 1,670,488 | ||||||||||
a | Immunomedics Inc. | United States | 846,100 | 25,704,518 | ||||||||||
a | Insmed Inc. | United States | 675,100 | 15,527,300 | ||||||||||
a,c,d | Intarcia Therapeutics Inc., DD | United States | 80,195 | — | ||||||||||
a | Ionis Pharmaceuticals Inc. | United States | 102,400 | 5,686,272 | ||||||||||
a | Iovance Biotherapeutics Inc. | United States | 1,418,701 | 45,611,237 | ||||||||||
a | KalVista Pharmaceuticals Inc. | United States | 99,100 | 1,081,181 | ||||||||||
a | Kezar Life Sciences Inc. | United States | 853,550 | 4,011,685 | ||||||||||
a | LogicBio Therapeutics Inc. | United States | 280,700 | 1,605,604 | ||||||||||
a | Minerva Neurosciences Inc. | United States | 492,400 | 4,416,828 | ||||||||||
a | Mirati Therapeutics Inc. | United States | 130,651 | 11,110,561 | ||||||||||
a,b | MorphoSys AG, ADR | Germany | 248,700 | 6,488,583 | ||||||||||
a | Neurocrine Biosciences Inc. | United States | 278,400 | 27,322,176 | ||||||||||
a,b | Novavax Inc. | United States | 679,300 | 12,315,709 | ||||||||||
a | ORIC Pharmaceuticals Inc. | United States | 52,500 | 1,388,625 | ||||||||||
a | Pfenex Inc. | United States | 366,013 | 2,104,575 | ||||||||||
a | Precision BioSciences Inc. | United States | 377,397 | 2,596,491 | ||||||||||
a,e | Precision BioSciences Inc., 144A | United States | 73,892 | 508,377 |
franklintempleton.com | Annual Report | 23 |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Biotechnology Discovery Fund (continued)
Country | Shares | Value | ||||||||||||
Common Stocks (continued) | ||||||||||||||
Biotechnology (continued) | ||||||||||||||
a | Principia Biopharma Inc. | United States | 64,400 | $ | 4,004,392 | |||||||||
a | PTC Therapeutics Inc. | United States | 752,100 | 38,296,932 | ||||||||||
a | Regeneron Pharmaceuticals Inc. | United States | 128,009 | 67,317,373 | ||||||||||
a | REVOLUTION Medicines Inc. | United States | 148,900 | 4,656,103 | ||||||||||
a | Rocket Pharmaceuticals Inc. | United States | 153,771 | 2,275,811 | ||||||||||
a | Sage Therapeutics Inc. | United States | 101,070 | 3,939,709 | ||||||||||
a | Sarepta Therapeutics Inc. | United States | 65,400 | 7,709,352 | ||||||||||
a | SpringWorks Therapeutics Inc. | United States | 76,800 | 2,323,968 | ||||||||||
a | Trillium Therapeutics Inc. | Canada | 642,700 | 2,840,734 | ||||||||||
a | Ultragenyx Pharmaceutical Inc. | United States | 162,100 | 9,795,703 | ||||||||||
a | uniQure NV | Netherlands | 182,800 | 11,633,392 | ||||||||||
a | Vertex Pharmaceuticals Inc. | United States | 339,700 | 85,332,640 | ||||||||||
a,b | Viela Bio Inc. | United States | 138,300 | 5,619,129 | ||||||||||
a | Zentalis Pharmaceuticals Inc. | United States | 73,700 | 2,586,870 | ||||||||||
a | Zymeworks Inc. | Canada | 209,220 | 7,642,806 | ||||||||||
|
| |||||||||||||
892,070,780 | ||||||||||||||
|
| |||||||||||||
Life Sciences Tools & Services 4.8% | ||||||||||||||
a | Illumina Inc. | United States | 176,000 | 56,149,280 | ||||||||||
|
| |||||||||||||
Pharmaceuticals 10.6% | ||||||||||||||
a,b | Aerie Pharmaceuticals Inc. | United States | 499,800 | 7,616,952 | ||||||||||
a | Arvinas Inc. | United States | 47,700 | 2,504,250 | ||||||||||
a | Cara Therapeutics Inc. | United States | 227,000 | 3,364,140 | ||||||||||
a | Collegium Pharmaceutical Inc. | United States | 392,050 | 8,107,594 | ||||||||||
a,b | EyePoint Pharmaceuticals Inc. | United States | 1,752,400 | 1,696,148 | ||||||||||
a,b | GW Pharmaceuticals PLC, ADR | United Kingdom | 421,600 | 42,219,024 | ||||||||||
a | Odonate Therapeutics Inc. | United States | 309,782 | 8,720,363 | ||||||||||
a,b | Optinose Inc. | United States | 608,300 | 2,457,532 | ||||||||||
a | Reata Pharmaceuticals Inc. | United States | 174,500 | 27,598,920 | ||||||||||
a,b | Relmada Therapeutics Inc. | United States | 91,266 | 3,829,522 | ||||||||||
a | Revance Therapeutics Inc. | United States | 647,300 | 11,981,523 | ||||||||||
a | Trevi Therapeutics Inc. | United States | 201,964 | 581,656 | ||||||||||
a | Zogenix Inc. | United States | 149,659 | 4,224,874 | ||||||||||
|
| |||||||||||||
124,902,498 | ||||||||||||||
|
| |||||||||||||
Total Common Stocks (Cost $559,807,343) | 1,073,122,558 | |||||||||||||
|
| |||||||||||||
Preferred Stocks (Cost $2,821,056) 0.2% | ||||||||||||||
Biotechnology 0.2% | ||||||||||||||
a,c,d | Metacrine Inc., pfd., C | United States | 1,330,687 | 2,747,737 | ||||||||||
|
| |||||||||||||
Escrows and Litigation Trusts (Cost $2,090,612) 0.1% | ||||||||||||||
a,c | True North Therapeutics Inc., Escrow Account | United States | 759,880 | 958,814 | ||||||||||
|
| |||||||||||||
Total Investments before Short Term Investments (Cost $564,719,011) | 1,076,829,109 | |||||||||||||
|
|
24 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS
Franklin Biotechnology Discovery Fund (continued)
Country | Shares | Value | ||||||||||||
Short Term Investments 12.1% | ||||||||||||||
Money Market Funds (Cost $102,836,782) 8.7% | ||||||||||||||
f,g | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 102,836,782 | $ | 102,836,782 | |||||||||
|
| |||||||||||||
h | Investments from Cash Collateral Received for Loaned Securities 3.4% | |||||||||||||
Money Market Funds (Cost $39,742,135) 3.4% | ||||||||||||||
f,g | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 39,742,135 | 39,742,135 | ||||||||||
|
| |||||||||||||
Total Investments (Cost $707,297,928)103.6% | 1,219,408,026 | |||||||||||||
Other Assets, less Liabilities (3.6)% | (41,908,474 | ) | ||||||||||||
|
| |||||||||||||
Net Assets 100.0% | $ | 1,177,499,552 | ||||||||||||
|
|
See Abbreviations on page 48.
aNon-income producing.
bA portion or all of the security is on loan at April 30, 2020. See Note 1(c).
cFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements. dSee Note 9 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. At April 30, 2020, the value of this security was $508,377, 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.
franklintempleton.com | Annual Report | 25 |
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $23.58 | $27.96 | $25.11 | $25.02 | $31.46 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.34 | 0.31 | 0.39c | 0.20 | 0.29 | |||||||||||||||
Net realized and unrealized gains (losses) | (9.96 | ) | (4.20 | ) | 2.77 | 0.17 | (6.55 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (9.62 | ) | (3.89 | ) | 3.16 | 0.37 | (6.26 | ) | ||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | (0.36 | ) | (0.49 | ) | (0.31 | ) | (0.28 | ) | (0.18 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $13.60 | $23.58 | $27.96 | $25.11 | $25.02 | |||||||||||||||
|
| |||||||||||||||||||
Total returnd | (41.30)% | (13.69)% | 12.74% | 1.37% | (19.80)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.17% | 1.03% | 1.13% | 1.06% | 1.14% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.17% | e,f | 1.03% | e,f | 1.13% | e,f | 1.05% | e | 1.13% | |||||||||||
Net investment income | 1.75% | 1.21% | 1.56%c | 0.79% | 1.22% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $123,467 | $247,362 | $344,695 | $398,703 | $461,596 | |||||||||||||||
Portfolio turnover rate | 25.60% | 29.83% | 29.98% | 29.74% | 35.77% |
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 expense reduction rounds to less than 0.01%.
fBenefit of waiver and payments by affiliates 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $22.82 | $27.17 | $24.28 | $24.25 | $30.46 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.19 | 0.11 | 0.20 | c | 0.01 | 0.11 | ||||||||||||||
Net realized and unrealized gains (losses) | (9.70 | ) | (4.07 | ) | 2.69 | 0.15 | (6.31 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (9.51 | ) | (3.96 | ) | 2.89 | 0.16 | (6.20 | ) | ||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | (0.06 | ) | (0.39 | ) | — | (0.13 | ) | (0.01 | ) | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $13.25 | $22.82 | $27.17 | $24.28 | $24.25 | |||||||||||||||
|
| |||||||||||||||||||
Total returnd | (41.71)% | (14.37)% | 11.90% | 0.63% | (20.37)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.92% | 1.78% | 1.88% | 1.81% | 1.87% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 1.92% | e,f | 1.78% | e,f | 1.88% | e,f | 1.80% | e | 1.86% | |||||||||||
Net investment income | 1.00% | 0.46% | 0.81%c | 0.04% | 0.49% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $23,391 | $49,620 | $83,814 | $96,835 | $107,724 | |||||||||||||||
Portfolio turnover rate | 25.60% | 29.83% | 29.98% | 29.74% | 35.77% |
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 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 | 27 |
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 25.22 | $29.79 | $26.87 | $26.73 | $33.62 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.54 | 0.45 | 0.57 | c | 0.47 | 0.51 | ||||||||||||||
Net realized and unrealized gains (losses) | (10.76 | ) | (4.49 | ) | 2.95 | 0.04 | (7.06 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (10.22 | ) | (4.04 | ) | 3.52 | 0.51 | (6.55 | ) | ||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | (0.37 | ) | (0.53 | ) | (0.60 | ) | (0.37 | ) | (0.34 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $ 14.63 | $25.22 | $29.79 | $26.87 | $26.73 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (41.02)% | (13.31)% | 13.37% | 1.89% | (19.31)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.72% | 0.62% | 0.64% | 0.83% | 0.60% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.66% | d | 0.59% | d | 0.57% | d | 0.54% | d | 0.55% | |||||||||||
Net investment income | 2.26% | 1.65% | 2.12% | c | 1.30% | 1.80% | ||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $839 | $15,627 | $15,866 | $218 | $15 | |||||||||||||||
Portfolio turnover rate | 25.60% | 29.83% | 29.98% | 29.74% | 35.77% |
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 1.47%.
dBenefit 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
FINANCIAL HIGHLIGHTS
Franklin Natural Resources Fund (continued)
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 25.20 | $29.80 | $26.81 | $26.71 | $33.63 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.41 | 0.40 | 0.49 | c | 0.29 | 0.36 | ||||||||||||||
Net realized and unrealized gains (losses) | (10.64 | ) | (4.49 | ) | 2.95 | 0.17 | (7.00 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (10.23 | ) | (4.09 | ) | 3.44 | 0.46 | (6.64 | ) | ||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | (0.43 | ) | (0.51 | ) | (0.45 | ) | (0.36 | ) | (0.28 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $ 14.54 | $25.20 | $29.80 | $26.81 | $26.71 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (41.15)% | (13.50)% | 13.04% | 1.64% | �� | (19.60)% | ||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.92% | 0.78% | 0.88% | 0.81% | 0.87% | |||||||||||||||
Expenses net of waiver and payments by affiliates | 0.92% | d,e | 0.78% | d,e | 0.88% | d,e | 0.80% | d | 0.86% | |||||||||||
Net investment income | 2.00% | 1.46% | 1.81%c | 1.04% | 1.49% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $28,334 | $62,639 | $78,443 | $94,070 | $90,185 | |||||||||||||||
Portfolio turnover rate | 25.60% | 29.83% | 29.98% | 29.74% | 35.77% |
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 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 | 29 |
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 2020
Franklin Natural Resources Fund | ||||||||||||||
Country | Shares | Value | ||||||||||||
Common Stocks 95.8% | ||||||||||||||
Application Software 0.3% | ||||||||||||||
a | Aspen Technology Inc. | United States | 5,800 | $ | 593,050 | |||||||||
|
| |||||||||||||
Construction Materials 0.5% | ||||||||||||||
Martin Marietta Materials Inc. | United States | 4,800 | 913,104 | |||||||||||
|
| |||||||||||||
Copper 4.7% | ||||||||||||||
Antofagasta PLC | United Kingdom | 336,400 | 3,444,510 | |||||||||||
First Quantum Minerals Ltd. | Zambia | 121,600 | 742,636 | |||||||||||
Freeport-McMoRan Inc. | United States | 175,500 | 1,549,665 | |||||||||||
a | Imperial Metals Corp. | Canada | 364,500 | 460,928 | ||||||||||
Lundin Mining Corp. | Chile | 424,200 | 2,078,635 | |||||||||||
|
| |||||||||||||
8,276,374 | ||||||||||||||
|
| |||||||||||||
Diversified Metals & Mining 8.0% | ||||||||||||||
Anglo American PLC | United Kingdom | 98,900 | 1,762,768 | |||||||||||
BHP Group PLC, ADR | United Kingdom | 162,400 | 5,430,656 | |||||||||||
Glencore PLC | Switzerland | 915,300 | 1,695,731 | |||||||||||
Rio Tinto PLC, ADR | Australia | 62,500 | 2,886,875 | |||||||||||
Teck Resources Ltd., B | Canada | 263,100 | 2,317,911 | |||||||||||
|
| |||||||||||||
14,093,941 | ||||||||||||||
|
| |||||||||||||
Environmental & Facilities Services 0.4% | ||||||||||||||
US Ecology Inc. | United States | 20,200 | 662,156 | |||||||||||
|
| |||||||||||||
Fertilizers & Agricultural Chemicals 1.0% | ||||||||||||||
Corteva Inc. | United States | 35,900 | 940,221 | |||||||||||
Nutrien Ltd. | Canada | 24,800 | 885,608 | |||||||||||
|
| |||||||||||||
1,825,829 | ||||||||||||||
|
| |||||||||||||
Gold 8.8% | ||||||||||||||
Agnico Eagle Mines Ltd. | Canada | 29,600 | 1,729,680 | |||||||||||
Alamos Gold Inc., A | Canada | 291,000 | 2,343,807 | |||||||||||
B2Gold Corp. | Canada | 429,900 | 2,174,519 | |||||||||||
Barrick Gold Corp. | Canada | 176,491 | 4,539,348 | |||||||||||
b | Newcrest Mining Ltd. | Australia | 35,700 | 618,122 | ||||||||||
Newmont Corp. | United States | 68,315 | 4,063,376 | |||||||||||
|
| |||||||||||||
15,468,852 | ||||||||||||||
|
| |||||||||||||
Industrial Gases 0.4% | ||||||||||||||
Linde PLC | United Kingdom | 3,900 | 717,561 | |||||||||||
|
| |||||||||||||
Integrated Oil & Gas 14.2% | ||||||||||||||
Chevron Corp. | United States | 72,900 | 6,706,800 | |||||||||||
Exxon Mobil Corp. | United States | 128,000 | 5,948,160 | |||||||||||
Occidental Petroleum Corp. | United States | 242,300 | 4,022,180 | |||||||||||
Royal Dutch Shell PLC, A, ADR | United Kingdom | 78,521 | 2,601,401 | |||||||||||
Suncor Energy Inc. | Canada | 227,400 | 4,055,229 | |||||||||||
Total SA, B, ADR | France | 46,410 | 1,631,311 | |||||||||||
|
| |||||||||||||
24,965,081 | ||||||||||||||
|
|
30 | Annual Report | franklintempleton.com |
FRANKLINSTRATEGICSERIES
SCHEDULE OF INVESTMENTS
Franklin Natural Resources Fund (continued) | ||||||||||||||
Country | Shares | Value | ||||||||||||
Common Stocks (continued) | ||||||||||||||
Oil & Gas Drilling 1.2% | ||||||||||||||
Helmerich & Payne Inc. | United States | 45,300 | $ | 895,581 | ||||||||||
Patterson-UTI Energy Inc. | United States | 324,500 | 1,197,405 | |||||||||||
|
| |||||||||||||
2,092,986 | ||||||||||||||
|
| |||||||||||||
Oil & Gas Equipment & Services 12.8% | ||||||||||||||
a | Apergy Corp. | United States | 39,000 | 359,190 | ||||||||||
Baker Hughes Co., A | United States | 232,500 | 3,243,375 | |||||||||||
Cactus Inc. | United States | 64,100 | 1,139,698 | |||||||||||
a | Dril-Quip Inc. | United States | 27,100 | 897,823 | ||||||||||
Halliburton Co. | United States | 244,535 | 2,567,617 | |||||||||||
Liberty Oilfield Services Inc., A | United States | 369,100 | 1,742,152 | |||||||||||
a | NexTier Oilfield Solutions Inc. | United States | 170,560 | 395,699 | ||||||||||
a | Nine Energy Service Inc. | United States | 208,750 | 302,688 | ||||||||||
a | Oceaneering International Inc. | United States | 143,900 | 739,646 | ||||||||||
a | Oil States International Inc. | United States | 176,766 | 608,075 | ||||||||||
a | Ranger Energy Services Inc. | United States | 154,157 | 649,001 | ||||||||||
Schlumberger Ltd. | United States | 287,447 | 4,834,859 | |||||||||||
Schoeller-Bleckmann Oilfield Equipment AG | Austria | 30,600 | 905,267 | |||||||||||
a | Select Energy Services Inc. | United States | 260,342 | 1,249,642 | ||||||||||
TechnipFMC PLC | United Kingdom | 328,800 | 2,929,608 | |||||||||||
|
| |||||||||||||
22,564,340 | ||||||||||||||
|
| |||||||||||||
Oil & Gas Exploration & Production 30.5% | ||||||||||||||
Cabot Oil & Gas Corp., A | United States | 263,900 | 5,705,518 | |||||||||||
a | Cairn Energy PLC | United Kingdom | 1,123,593 | 1,584,922 | ||||||||||
a | Callon Petroleum Co. | United States | 1,078,400 | 1,013,373 | ||||||||||
Canadian Natural Resources Ltd. | Canada | 217,800 | 3,647,735 | |||||||||||
Concho Resources Inc. | United States | 120,200 | 6,817,744 | |||||||||||
ConocoPhillips | United States | 149,192 | 6,280,983 | |||||||||||
Diamondback Energy Inc. | United States | 128,100 | 5,577,474 | |||||||||||
EOG Resources Inc. | United States | 126,300 | 6,000,513 | |||||||||||
Hess Corp. | United States | 73,100 | 3,555,584 | |||||||||||
Noble Energy Inc. | United States | 401,300 | 3,936,753 | |||||||||||
Parsley Energy Inc., A | United States | 187,410 | 1,771,025 | |||||||||||
Pioneer Natural Resources Co. | United States | 62,224 | 5,557,225 | |||||||||||
a | WPX Energy Inc. | United States | 362,400 | 2,221,512 | ||||||||||
|
| |||||||||||||
53,670,361 | ||||||||||||||
|
| |||||||||||||
Oil & Gas Refining & Marketing 5.6% | ||||||||||||||
Marathon Petroleum Corp. | United States | 91,100 | 2,922,488 | |||||||||||
Phillips 66 | United States | 44,300 | 3,241,431 | |||||||||||
Valero Energy Corp. | United States | 57,800 | 3,661,630 | |||||||||||
|
| |||||||||||||
9,825,549 | ||||||||||||||
|
| |||||||||||||
Oil & Gas Storage & Transportation 6.4% | ||||||||||||||
Enbridge Inc. | Canada | 55,447 | 1,701,114 | |||||||||||
Kinder Morgan Inc. | United States | 120,500 | 1,835,215 | |||||||||||
ONEOK Inc. | United States | 30,000 | 897,900 | |||||||||||
Targa Resources Corp. | United States | 110,700 | 1,434,672 | |||||||||||
TC Energy Corp. | Canada | 53,000 | 2,457,080 |
franklintempleton.com | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
SCHEDULE OF INVESTMENTS
Franklin Natural Resources Fund (continued) | ||||||||||||||
Country | Shares | Value | ||||||||||||
Common Stocks (continued) | ||||||||||||||
Oil & Gas Storage & Transportation (continued) | ||||||||||||||
The Williams Cos. Inc. | United States | 152,500 | $ | 2,953,925 | ||||||||||
|
| |||||||||||||
11,279,906 | ||||||||||||||
|
| |||||||||||||
Paper Packaging 0.5% | ||||||||||||||
Packaging Corp. of America | United States | 8,900 | 860,185 | |||||||||||
|
| |||||||||||||
Pharmaceuticals 0.2% | ||||||||||||||
a | Elanco Animal Health Inc. | United States | 17,400 | 429,954 | ||||||||||
|
| |||||||||||||
Trading Companies & Distributors 0.3% | ||||||||||||||
a | Univar Solutions Inc. | United States | 32,700 | 474,804 | ||||||||||
|
| |||||||||||||
Total Common Stocks (Cost $218,708,764) | 168,714,033 | |||||||||||||
|
| |||||||||||||
Short Term Investments (Cost $6,778,486) 3.9% | ||||||||||||||
Money Market Funds 3.9% | ||||||||||||||
c,d | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 6,778,486 | 6,778,486 | ||||||||||
|
| |||||||||||||
Total Investments (Cost $225,487,250)99.7% | 175,492,519 | |||||||||||||
Other Assets, less Liabilities 0.3% | 537,920 | |||||||||||||
|
| |||||||||||||
Net Assets 100.0% | $ | 176,030,439 | ||||||||||||
|
|
See Abbreviations on page 48.
aNon-income producing.
bFair valued using significant unobservable inputs. See Note 11 regarding fair value measurements.
cSee Note 3(f) regarding investments in affiliated management investment companies.
dThe rate shown is the annualized seven-day effective yield at period end.
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
April 30, 2020
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Assets: | ||||||||
Investments in securities: | ||||||||
Cost - Unaffiliated issuers | $ 564,719,011 | $218,708,764 | ||||||
Cost - Non-controlled affiliates (Note 3f) | 142,578,917 | 6,778,486 | ||||||
Value - Unaffiliated issuers+ | $1,076,829,109 | $168,714,033 | ||||||
|
| |||||||
Value - Non-controlled affiliates (Note 3f) | 142,578,917 | 6,778,486 | ||||||
Cash | — | 26,198 | ||||||
Receivables: | ||||||||
Investment securities sold | 8,238 | 926,529 | ||||||
Capital shares sold | 2,578,640 | 1,466,612 | ||||||
Dividends and interest | 43,211 | 204,904 | ||||||
Due from custodian | 41,659,500 | — | ||||||
Other assets | 1,161 | 240 | ||||||
|
| |||||||
Total assets | 1,263,698,776 | 178,117,002 | ||||||
|
| |||||||
Liabilities: | ||||||||
Payables: | ||||||||
Investment securities purchased | 2,396,850 | 1,477,560 | ||||||
Capital shares redeemed | 1,312,900 | 330,874 | ||||||
Management fees | 510,157 | 69,543 | ||||||
Distribution fees | 222,363 | 37,018 | ||||||
Transfer agent fees | 239,608 | 96,923 | ||||||
Payable upon return of securities loaned | 81,401,635 | — | ||||||
Accrued expenses and other liabilities | 115,711 | 74,645 | ||||||
|
| |||||||
Total liabilities | 86,199,224 | 2,086,563 | ||||||
|
| |||||||
Net assets, at value | $1,177,499,552 | $176,030,439 | ||||||
|
| |||||||
Net assets consist of: | ||||||||
Paid-in capital | $619,994,880 | $419,926,597 | ||||||
Total distributable earnings (losses) | 557,504,672 | (243,896,158 | ) | |||||
|
| |||||||
Net assets, at value | $1,177,499,552 | $176,030,439 | ||||||
|
|
+Includes securities loaned | $ | 76,566,859 | $ | — |
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 33 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Assets and Liabilities (continued)
April 30, 2020
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Class A: | ||||||||
Net assets, at value | $960,305,417 | $123,467,453 | ||||||
|
| |||||||
Shares outstanding | 6,381,600 | 9,077,231 | ||||||
|
| |||||||
Net asset value per sharea | $150.48 | $13.60 | ||||||
|
| |||||||
Maximum offering price per share (net asset value per share ÷ 94.50%) | $159.24 | $14.39 | ||||||
|
| |||||||
Class C: | ||||||||
Net assets, at value | $ 48,362,978 | $ 23,390,695 | ||||||
|
| |||||||
Shares outstanding | 338,204 | 1,764,930 | ||||||
|
| |||||||
Net asset value and maximum offering price per sharea | $143.00 | $13.25 | ||||||
|
| |||||||
Class R6: | ||||||||
Net assets, at value | $ 9,483,644 | $ 838,784 | ||||||
|
| |||||||
Shares outstanding | 60,408 | 57,335 | ||||||
|
| |||||||
Net asset value and maximum offering price per share | $156.99 | $14.63 | ||||||
|
| |||||||
Advisor Class: | ||||||||
Net assets, at value | $159,347,513 | $ 28,333,507 | ||||||
|
| |||||||
Shares outstanding | 1,026,074 | 1,948,174 | ||||||
|
| |||||||
Net asset value and maximum offering price per share | $155.30 | $14.54 | ||||||
|
|
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
Statements of Operations
for the year ended April 30, 2020
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Investment income: | ||||||||
Dividends: (net of foreign taxes)* | ||||||||
Unaffiliated issuers | $4,244,204 | $7,549,486 | ||||||
Non-controlled affiliates (Note 3f) | 659,430 | 32,578 | ||||||
Income from securities loaned: | ||||||||
Unaffiliated entities (net of fees and rebates) | 606,980 | 133,905 | ||||||
Non-controlled affiliates (Note 3f) | 330,535 | 2,928 | ||||||
|
| |||||||
Total investment income | 5,841,149 | 7,718,897 | ||||||
|
| |||||||
Expenses: | ||||||||
Management fees (Note 3a) | 6,698,357 | 1,432,558 | ||||||
Distribution fees: (Note 3c) | ||||||||
Class A | 2,300,037 | 453,238 | ||||||
Class C | 454,967 | 348,404 | ||||||
Transfer agent fees: (Note 3e) | ||||||||
Class A | 1,332,293 | 525,039 | ||||||
Class C | 66,048 | 101,605 | ||||||
Class R6 | 7,153 | 5,215 | ||||||
Advisor Class | 221,074 | 124,833 | ||||||
Custodian fees (Note 4) | 12,561 | 5,561 | ||||||
Reports to shareholders | 141,143 | 74,946 | ||||||
Registration and filing fees | 95,670 | 69,597 | ||||||
Professional fees | 62,787 | 65,412 | ||||||
Trustees’ fees and expenses | 14,127 | 3,865 | ||||||
Other | 28,855 | 17,349 | ||||||
|
| |||||||
Total expenses | 11,435,072 | 3,227,622 | ||||||
Expense reductions (Note 4) | (195 | ) | (809 | ) | ||||
Expenses waived/paid by affiliates (Note 3f and 3g) | (259,142 | ) | (12,194 | ) | ||||
|
| |||||||
Net expenses | 11,175,735 | 3,214,619 | ||||||
|
| |||||||
Net investment income (loss) | (5,334,586 | ) | 4,504,278 | |||||
|
| |||||||
Realized and unrealized gains (losses): | ||||||||
Net realized gain (loss) from: | ||||||||
Investments: | ||||||||
Unaffiliated issuers | 96,628,087 | (39,153,827 | ) | |||||
Foreign currency transactions | — | (18,603 | ) | |||||
|
| |||||||
Net realized gain (loss) | 96,628,087 | (39,172,430 | ) | |||||
|
| |||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||
Investments: | ||||||||
Unaffiliated issuers | 98,772,198 | (90,504,138 | ) | |||||
Translation of other assets and liabilities | — | (1,111 | ) | |||||
|
| |||||||
Net change in unrealized appreciation (depreciation) | 98,772,198 | (90,505,249 | ) | |||||
|
| |||||||
Net realized and unrealized gain (loss) | 195,400,285 | (129,677,679 | ) | |||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | $190,065,699 | $(125,173,401 | ) | |||||
|
| |||||||
*Foreign taxes withheld on dividends | $ — | $ 291,917 |
�� | ||||||
franklintempleton.com | The accompanying notes are an integral part of these financial statements. | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||||||||||
Year Ended April 30, | Year Ended April 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Increase (decrease) in net assets: | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | $ (5,334,586 | ) | $ (8,485,404 | ) | $ 4,504,278 | $ 5,068,646 | ||||||||||
Net realized gain (loss) | 96,628,087 | 59,100,885 | (39,172,430 | ) | 3,219,567 | |||||||||||
Net change in unrealized appreciation (depreciation) | 98,772,198 | (69,695,618 | ) | (90,505,249 | ) | (76,614,204 | ) | |||||||||
|
| |||||||||||||||
Net increase (decrease) in net assets resulting from operations. | 190,065,699 | (19,080,137 | ) | (125,173,401 | ) | (68,325,991 | ) | |||||||||
|
| |||||||||||||||
Distributions to shareholders: | ||||||||||||||||
Class A | (85,259,141 | ) | (31,140,117 | ) | (3,164,483 | ) | (5,445,964 | ) | ||||||||
Class C | (4,306,918 | ) | (1,654,793 | ) | (111,347 | ) | (929,534 | ) | ||||||||
Class R6 | (645,173 | ) | (198,908 | ) | (13,751 | ) | (313,292 | ) | ||||||||
Advisor Class | (13,979,384 | ) | (5,381,467 | ) | (833,185 | ) | (1,289,908 | ) | ||||||||
|
| |||||||||||||||
Total distributions to shareholders | (104,190,616 | ) | (38,375,285 | ) | (4,122,766 | ) | (7,978,698 | ) | ||||||||
|
| |||||||||||||||
Capital share transactions: (Note 2) | ||||||||||||||||
Class A | (34,210,659 | ) | (112,026,697 | ) | (34,646,355 | ) | (46,670,690 | ) | ||||||||
Class C | (1,170,193 | ) | (9,069,507 | ) | (9,393,999 | ) | (22,834,504 | ) | ||||||||
Class R6 | 2,793,619 | (1,820,119 | ) | (12,686,535 | ) | 2,159,944 | ||||||||||
Advisor Class | (6,945,668 | ) | (17,313,109 | ) | (13,195,013 | ) | (3,919,165 | ) | ||||||||
|
| |||||||||||||||
Total capital share transactions | (39,532,901 | ) | (140,229,432 | ) | (69,921,902 | ) | (71,264,415 | ) | ||||||||
|
| |||||||||||||||
Net increase (decrease) in net assets | 46,342,182 | (197,684,854 | ) | (199,218,069 | ) | (147,569,104 | ) | |||||||||
Net assets: | ||||||||||||||||
Beginning of year | 1,131,157,370 | 1,328,842,224 | 375,248,508 | 522,817,612 | ||||||||||||
|
| |||||||||||||||
End of year | $1,177,499,552 | $1,131,157,370 | $ 176,030,439 | $ 375,248,508 | ||||||||||||
|
|
36 | 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 ten 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. Class C shares automatically convert to Class A shares after they have been held for 10 years. 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 each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. 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 Funds may 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 Funds primarily employ a market-based approach which may use related or comparable assets or liabilities, recent transac-tions, 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.
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 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.
franklintempleton.com | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies (continued)
a. Financial Instrument Valuation (continued)
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.
38 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
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, 2020, 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 or based on the ratio of
number of shareholders of each Fund to the combined number of shareholders 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.
franklintempleton.com | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
2. Shares of Beneficial Interest
At April 30, 2020, 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, 2020 | ||||||||||||||||||||
Shares solda | 790,060 | $ | 113,642,349 | 2,038,606 | $ | 29,732,882 | ||||||||||||||
Shares issued in reinvestment of distributions | 537,057 | 81,305,070 | 148,428 | 3,105,113 | ||||||||||||||||
Shares redeemed | (1,604,682 | ) | (229,158,078 | ) | (3,601,621 | ) | (67,484,350 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (277,565 | ) | $ | (34,210,659 | ) | (1,414,587 | ) | $ | (34,646,355 | ) | ||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares solda | 721,089 | $ | 106,972,540 | 1,281,103 | $ | 32,532,375 | ||||||||||||||
Shares issued in reinvestment of distributions | 232,391 | 29,692,637 | 256,254 | 5,342,901 | ||||||||||||||||
Shares redeemed | (1,697,525 | ) | (248,691,874 | ) | (3,371,926 | ) | (84,545,966 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (744,045 | ) | $ | (112,026,697 | ) | (1,834,569 | ) | $ | (46,670,690 | ) | ||||||||||
|
| |||||||||||||||||||
Class C Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 66,779 | $ | 9,196,211 | 417,343 | $ | 5,926,617 | ||||||||||||||
Shares issued in reinvestment of distributions | 29,739 | 4,290,371 | 5,386 | 110,099 | ||||||||||||||||
Shares redeemeda | (106,671 | ) | (14,656,775 | ) | (831,954 | ) | (15,430,715 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (10,153 | ) | $ | (1,170,193 | ) | (409,225 | ) | $ | (9,393,999 | ) | ||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 72,561 | $ | 10,442,091 | 324,962 | $ | 7,969,298 | ||||||||||||||
Shares issued in reinvestment of distributions | 13,364 | 1,646,340 | 45,232 | 915,493 | ||||||||||||||||
Shares redeemeda | (149,801 | ) | (21,157,938 | ) | (1,280,715 | ) | (31,719,295 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (63,876 | ) | $ | (9,069,507 | ) | (910,521 | ) | $ | (22,834,504 | ) | ||||||||||
|
| |||||||||||||||||||
Class R6 Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 35,149 | $ | 5,389,737 | 96,853 | $ | 2,098,343 | ||||||||||||||
Shares issued in reinvestment of distributions | 4,090 | 645,154 | 613 | 13,751 | ||||||||||||||||
Shares redeemed | (21,691 | ) | (3,241,272 | ) | (659,867 | ) | (14,798,629 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | 17,548 | $ | 2,793,619 | (562,401 | ) | $ | (12,686,535 | ) | ||||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 14,632 | $ | 2,320,850 | 331,245 | $ | 8,552,092 | ||||||||||||||
Shares issued in reinvestment of distributions | 1,505 | 198,908 | 14,066 | 313,109 | ||||||||||||||||
Shares redeemed | (28,420 | ) | (4,339,877 | ) | (258,140 | ) | (6,705,257 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (12,283 | ) | $ | (1,820,119 | ) | 87,171 | $ | 2,159,944 | ||||||||||||
|
|
40 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||
Advisor Class Shares: | ||||||||||||||||||||
Year ended April 30, 2020 | ||||||||||||||||||||
Shares sold | 256,733 | $ | 38,219,541 | 849,335 | $ | 14,059,870 | ||||||||||||||
Shares issued in reinvestment of distributions | 80,467 | 12,560,088 | 36,902 | 824,379 | ||||||||||||||||
Shares redeemed | (390,486 | ) | (57,725,297 | ) | (1,423,757 | ) | (28,079,262 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (53,286 | ) | $ | (6,945,668 | ) | (537,520 | ) | $ | (13,195,013 | ) | ||||||||||
|
| |||||||||||||||||||
Year ended April 30, 2019 | ||||||||||||||||||||
Shares sold | 338,870 | $ | 52,338,943 | 757,766 | $ | 19,842,560 | ||||||||||||||
Shares issued in reinvestment of distributions | 36,842 | 4,828,793 | 57,021 | 1,269,854 | ||||||||||||||||
Shares redeemed | (501,477 | ) | (74,480,845 | ) | (961,445 | ) | (25,031,579 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (125,765 | ) | $ | (17,313,109 | ) | (146,658 | ) | $ | (3,919,165 | ) | ||||||||||
|
|
aMay include a portion of Class C shares that were automatically converted to Class A.
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton. 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 |
franklintempleton.com | Annual Report | 41 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
a. Management Fees (continued)
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, 2020, 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 | |||||
0.597% | 0.542% |
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:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Reimbursement Plans: | ||||||||
Class A | 0.35% | 0.35% | ||||||
Class C | 1.00% | 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.
42 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
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 | $138,990 | $34,682 | ||||||
CDSC retained | $ 8,678 | $ 1,922 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. 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, 2020, 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 | $621,979 | $303,327 |
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, 2020, investments in affiliated management investment companies were as follows:
Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares Held at End of Year | Investment Income | |||||||||||||||||||||||||
Franklin Biotechnology Discovery Fund |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
Dividends | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $27,393,876 | $397,370,033 | $(321,927,127 | ) | $ — | $ — | $102,836,782 | 102,836,782 | $659,430 |
franklintempleton.com | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
3. Transactions with Affiliates (continued)
f. Investments in Affiliated Management Investment Companies (continued)
Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares Held at End of Year | Investment Income | |||||||||||||||||||||||||
Franklin Biotechnology Discovery Fund (continued) |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates (continued) |
| |||||||||||||||||||||||||||||||
Income from securities loaned | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $27,827,675 | $290,940,752 | $(279,026,292 | ) | $ — | $ — | $ 39,742,135 | 39,742,135 | $330,535 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $55,221,551 | $688,310,785 | $(600,953,419 | ) | $ — | $ — | $142,578,917 | $989,965 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Franklin Natural Resources Fund |
| |||||||||||||||||||||||||||||||
Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
Dividends | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | $788,220 | $72,291,990 | $(66,301,724 | ) | $ — | $ — | $6,778,486 | 6,778,486 | $32,578 | |||||||||||||||||||||||
Income from securities loaned | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | — | 3,665,379 | (3,665,379 | ) | — | — | — | — | 2,928 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $788,220 | $75,957,369 | $(69,967,103 | ) | $ — | $ — | $6,778,486 | $35,506 | ||||||||||||||||||||||||
|
|
|
|
g. Waiver and Expense Reimbursements
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% based on the average net assets of the class until August 31, 2020.
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, 2020, these purchase and sale transactions aggregated $1,025,328 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, 2020, 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.
44 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
At April 30, 2020, the capital loss carryforwards were as follows:
Franklin Natural Resources Fund | ||||
Capital loss carryforwards not subject to expiration: | ||||
Short term | $ 15,911,665 | |||
Long term | 174,175,055 | |||
|
| |||
Total capital loss carryforwards | $190,086,720 | |||
|
|
For tax purposes, the Fund may elect to defer any portion of a post-October capital loss or late-year ordinary loss to the first day of the following fiscal year. At April 30, 2020, Franklin Biotechnology Discovery Fund deferred late-year ordinary losses of $ 2,197,521.
The tax character of distributions paid during the years ended April 30, 2020 and 2019, was as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Distributions paid from: | ||||||||||||||||
Ordinary income | $ | — | $ | 19,760,629 | $ | 4,122,766 | $ | 7,978,698 | ||||||||
Long term capital gain | 104,190,616 | 18,614,656 | — | — | ||||||||||||
|
| |||||||||||||||
$ | 104,190,616 | $ | 38,375,285 | $ | 4,122,766 | $ | 7,978,698 | |||||||||
|
|
At April 30, 2020, 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 | $708,621,305 | $233,788,560 | ||||||
|
| |||||||
Unrealized appreciation | $551,890,054 | $ 25,017,531 | ||||||
Unrealized depreciation | (41,103,333 | ) | (83,313,572 | ) | ||||
|
| |||||||
Net unrealized appreciation (depreciation) | $510,786,721 | $ (58,296,041 | ) | |||||
|
| |||||||
Distributable earnings: | ||||||||
Undistributed ordinary income | $ — | $ 4,485,533 | ||||||
Undistributed long term capital gains | 47,552,047 | — | ||||||
|
| |||||||
Total distributable earnings | $ 47,552,047 | $ 4,485,533 | ||||||
|
|
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.
franklintempleton.com | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2020, were as follows:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||||
Purchases | $351,885,632 | $ 67,270,242 | ||||||
Sales | $575,377,106 | $138,840,790 |
At April 30, 2020, in connection with securities lending transactions, certain or all Funds loaned investments and received cash collateral as follows:
Franklin Biotechnology Discovery Fund | ||||
Securities lending transactionsa: | ||||
Equity Investmentsb | $81,401,635 |
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, regional and global economic, political and social conditions, which may result in greater market volatility. Current political and financial uncertainty surrounding the European Union may increase market volatility and the economic risk of investing in securities in Europe. In addition, certain foreign securities may not be as liquid as U.S. securities.
8. Novel Coronavirus Pandemic
The global outbreak of the novel coronavirus disease, known as COVID-19, has caused adverse effects on many companies, sectors, nations, regions and the markets in general, and may continue for an unpredictable duration. The effects of this pandemic may materially impact the value and performance of the Funds, their ability to buy and sell fund investments at appropriate valuations and their ability to achieve their investment objectives.
9. 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.
46 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
At April 30, 2020, investments in restricted securities, excluding securities exempt from registration under the 1933 Act, were as follows:
Issuer | Acquisition Date | Cost | Value | |||||||||||||
Franklin Biotechnology Discovery Fund | ||||||||||||||||
80,195 | Intarcia Therapeutics Inc., DD | 3/26/14 | $ | 2,597,516 | $ | — | ||||||||||
1,330,687 | Metacrine Inc., pfd., C | 6/04/18 | 2,821,056 | 2,747,737 | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 0.2% of Net Assets) | $ | 5,418,572 | $ | 2,747,737 | ||||||||||||
|
|
10. Credit Facility
The Funds, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 5, 2021. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon 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, 2020, 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.
franklintempleton.com | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
11. Fair Value Measurements (continued)
A summary of inputs used as of April 30, 2020, 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 | $ | 892,070,780 | $ | — | $ | 2,747,737 | $ | 894,818,517 | ||||||||
All Other Equity Investments | 181,051,778 | — | — | 181,051,778 | ||||||||||||
Escrows and Litigation Trusts | — | �� | — | 958,814 | 958,814 | |||||||||||
Short Term Investments | 142,578,917 | — | — | 142,578,917 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 1,215,701,475 | $ | — | $ | 3,706,551 | $ | 1,219,408,026 | ||||||||
|
| |||||||||||||||
Franklin Natural Resources Fund | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities:a | ||||||||||||||||
Equity Investments: | ||||||||||||||||
Gold | $ | 14,850,730 | $ | — | $ | 618,122 | $ | 15,468,852 | ||||||||
All Other Equity Investments | 153,245,181 | — | — | 153,245,181 | ||||||||||||
Short Term Investments | 6,778,486 | — | — | 6,778,486 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 174,874,397 | $ | — | $ | 618,122 | $ | 175,492,519 | ||||||||
|
|
aFor detailed categories, see the accompanying Statement of Investments.
bIncludes common and preferred stocks as well as other equity interests.
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.
12. New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provides optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management is currently evaluating the impact, if any, of applying this ASU.
13. 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 |
48 | 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 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 (two of the funds constituting Franklin Strategic Series, hereafter collectively referred to as the “Funds”) as of April 30, 2020, the related statements of operations for the year ended April 30, 2020, the statements of changes in net assets for each of the two years in the period ended April 30, 2020, including the related notes, and the financial highlights for each of the five years in the period ended April 30, 2020 (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, 2020, 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, 2020 and each of the financial highlights for each of the five years in the period ended April 30, 2020 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, 2020 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 17, 2020
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 | 49 |
FRANKLIN STRATEGIC SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code, Franklin Biotechnology Discovery Fund hereby reports the maximum amount allowable but no less than $104,190,616 as long term capital gain dividends for the fiscal year ended April 30, 2020.
Under Section 854(b)(1)(A) of the Internal Revenue 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, 2020:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||
0.00% | 98.51% |
Under Section 854(b)(1)(B) of the Internal Revenue 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 Internal Revenue Code for the fiscal year ended April 30, 2020:
Franklin Biotechnology Discovery Fund | Franklin Natural Resources Fund | |||||
$4,244,132 | $7,333,911 |
Distributions, including qualified dividend income, paid during calendar year 2020 will be reported to shareholders on Form 1099-DIV by mid-February 2021. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.
50 | Annual Report | franklintempleton.com |
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 U.S. registered portfolios overseen in the Franklin Templeton 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 | 129 | 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 2017 | 110 | 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 | Trustee | Since 2014 | 129 | 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 | Lead Independent Trustee | Trustee since 1998 and Lead Independent Trustee since 2019 | 129 | 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); formerly, 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).
|
franklintempleton.com | Annual Report | 51 |
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 | ||||
J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2009 | 129 | Boeing Capital Corporation (aircraft financing) (2006-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Private investor; and formerly, Counselor and Senior Advisor to the Chairman, CEO, and Board of Directors, of The Boeing Company (aerospace company), and member of the Executive Council (May 2019-January 1, 2020); Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (2006-2019); and Federal Appeals Court Judge, United States Court of Appeals for the Fourth Circuit (1991-2006).
| ||||||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 129 | 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).
|
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 | 140 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Executive Chairman, Chairman of the Board and Director, 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 39 of the investment companies in Franklin Templeton; Vice Chairman, Investment Company Institute; and formerly, Chief Executive Officer (2013-2020) and President (1994-2015), Franklin Resources, Inc.
| ||||||||
**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 | 129 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director (Vice Chairman), Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 37 of the investment companies in Franklin Templeton.
| ||||||||
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; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton.
|
52 | Annual Report | franklintempleton.com |
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 | ||||
Breda M. Beckerle (1958) New York, NY 10017 | Interim Chief Compliance Officer | Since January 2020 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chief Compliance Officer, Fiduciary Investment Management International, Inc., Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC; and officer of 41 of the investment companies in Franklin Templeton.
| ||||||||
Sonal Desai, Ph.D. (1963) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2018 | 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 17 of the investment companies in Franklin Templeton.
| ||||||||
Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 | Treasurer, Chief Financial Officer and Chief Accounting Officer | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting and officer of 24 of the investment companies in Franklin Templeton.
| ||||||||
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President and Co- Secretary | Vice President since 2009 and Co-Secretary since 2019 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 41 of the investment companies in Franklin Templeton.
| ||||||||
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 41 of the investment companies in Franklin Templeton; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton (2009-2017).
| ||||||||
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 41 of the investment companies in Franklin Templeton.
| ||||||||
Since 2013 |
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 | ||||
Edward D. Perks (1970) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive Officer – Investment Management | Since 2018 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton (since December 2018).
| ||||||||
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 and officer of 41 of the investment companies in Franklin Templeton.
| ||||||||
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 41 of the investment companies in Franklin Templeton.
| ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President and Co-Secretary | Vice President since 2011 and Co-Secretary since 2019 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 41 of the investment companies in Franklin Templeton.
|
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton 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 an 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 Mary C. Choksi as its audit committee financial expert. The Board believes that Ms. Choksi qualifies as such an expert in view of her extensive business background and experience. She currently serves as a director of Avis Budget Group, Inc. (2007-present) and formerly, Founder and Senior Advisor, Strategic Investment Group (1987 to 2017). Ms. Choksi has been a Member of the Fund’s Audit Committee since 2014. As a result of such background and experience, the Board believes that Ms. Choksi 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. Ms. Choksi 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 SERIES
Board Approval of Investment Management Agreements
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Franklin Natural Resources Fund
(each a Fund)
At a meeting held on April 7, 2020 (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 and, in some cases, requested additional information from the Manager relating to the contract. 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, as well as information on succession planning where appropriate; 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 and shareholder services; 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 US 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 (FT) or the Funds to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements, which included discussion of the changing distribution landscape for the Funds. 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 reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the FT 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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investments relating to the services provided to the Funds by the FT organization. The Board specifically noted FT’s commitment to enhancing services and controlling costs, as reflected in its plan to outsource certain administrative functions, and growth opportunities, as evidenced by its upcoming acquisition of the Legg Mason companies. The Board acknowledged the change in leadership at FRI and the opportunity to hear from Jennifer Johnson, President and Chief Executive Officer of FRI, about goals she has for the company that will benefit the Funds.
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, 2020. 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 the Fund included the Fund and all retail and institutional health/biotechnology funds. The Board noted that the Fund’s annualized total return for the three- and five-year periods was below the median and in the 5th quintile (worst) of its Performance Universe, but for the one-and 10-year periods was above the median of its Performance Universe. The Board further noted that the Fund focuses on biotechnology only, while the peer group includes broader healthcare subsector funds, and that the biotechnology sector had dramatically underperformed the healthcare sector over the past five years. The Board also noted that the Fund had performed in line with or ahead of the NSADAQ Biotechnology Index for the one-, three-, and five-year periods. In addition, management reviewed with the Board the enhancements to the Fund’s portfolio management team that had been made in the preceding 18
months. The Board concluded that the Fund’s performance was satisfactory.
Franklin Natural Resources Fund - The Performance Universe for the 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, five- and 10-year periods was below the median of its Performance Universe. The Board discussed this performance with management and management explained that, while the Fund was positioned more conservatively than in previous cycles with a greater number of holdings in larger, financially robust companies, extreme volatility related to trade disputes and tariffs later joined by COVID-19 concerns led to significant weakness in historically stable stocks. Management further explained actions being taken to address the Fund’s underperformance, including the portfolio management team’s greater focus on company-specific risk factors and the addition of some non-energy holdings in the Fund’s portfolio. The Board concluded that Fund’s Management Agreement should be continued for an additional one-year period, and management’s efforts should continue to be monitored.
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 FT to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers, if any (Management Rate) 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 to 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
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SHAREHOLDER INFORMATION
Management Rate includes administrative charges, and the actual total expense ratio, for comparative consistency, was shown for Class A shares for each Fund and for each of the funds in each Fund’s respective Expense Group. 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 nine other health/biotechnology funds. The Expense Group for the Franklin Natural Resources Fund included the Fund and nine other global natural resources funds. The Board noted that the Management Rates and actual total expense ratios for the Funds were below the medians and in the first quintile (least expensive) of their respective Expense Groups. The Board concluded that the Management Rates charged to the 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 FT’s US 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, 2019, 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 FRI and certain FT funds, was engaged by the Manager to 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. As part of this evaluation, the Board considered the initiative currently underway to outsource certain operations, which effort would require considerable
up-front expenditures by the Manager but, over the long run is expected to result in greater efficiencies. 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 US Securities and Exchange Commission and other regulatory requirements, notably in the area of cybersecurity protections.
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 each 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 FT family of funds as a whole. The Board noted that the Franklin Natural Resources Fund had experienced a decrease in assets and would not be expected to demonstrate additional economies of scale in the near term, 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
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SHAREHOLDER INFORMATION
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 U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year as an exhibit to its report on Form N-PORT. Shareholders may view the filed Form N-PORT 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 “house-holding,” 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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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.
Annual Report and Shareholder Letter Franklin Strategic Series | ||||||
Investment Manager | Distributor | Shareholder Services | ||||
Franklin Advisers, Inc. | Franklin Templeton Distributors, Inc. (800) DIAL BEN®/342-5236 franklintempleton.com | (800) 632-2301 | ||||
© 2020 Franklin Templeton Investments. All rights reserved. | FSS2 A 06/20 |
Sign up for electronic delivery at franklintempleton.com/edelivery
Internet Delivery of Fund Reports Unless You Request Paper Copies: Effective January 1, 2021, as permitted by the SEC, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request them from the Fund or your financial intermediary. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. If you have not signed up for electronic delivery, we would encourage you to join fellow shareholders who have. You may elect to receive shareholder reports and other communications electronically from the Fund by calling (800) 632-2301 or by contacting your financial intermediary.
You may elect to continue to receive paper copies of all your future shareholder reports free of charge by contacting your financial intermediary or, if you invest directly with a Fund, calling (800) 632-2301 to let the Fund know of your request. Your election to receive reports in paper will apply to all funds held in your account.
SHAREHOLDER LETTER
Dear Shareholder:
During the 12 months ended April 30, 2020, the U.S. economy showed mixed results, growing moderately through the end of 2019 amid concerns about trade, but contracting in 2020’s first quarter in response to the novel coronavirus (COVID-19) pandemic. The U.S. Federal Reserve (Fed), having lowered the target range for the federal funds rate in October for the third time during 2019, held the rate unchanged through February 2020. However, given larger economic risks posed by the pandemic, the Fed lowered its key rate again by 0.50% on March 3 and further by 1.00% on March 15, resulting in a target range of 0.00%–0.25%. In its efforts to support U.S. economic activity, the Fed also announced broad quantitative easing measures to support credit markets.
U.S. equities advanced strongly during most of the reporting period, aided by steady economic growth, easing trade tensions and supportive monetary policy. However, a sharp selloff began in late February 2020 amid fears of a global economic slowdown due to the COVID-19 pandemic. Concerns about global supply chain disruptions and subdued consumer spending drove many investors to sell equity holdings in favor of perceived safe investments such as government bonds and cash. In this environment, investment-grade bonds, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, posted a double-digit positive total return for the 12-month period.
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 Perks, CFA
President and Chief Executive Officer –
Investment Management
Franklin Strategic Series
This letter reflects our analysis and opinions as of April 30, 2020, 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.
CFA® is a trademark owned by CFA Institute.
Not FDIC Insured | | | May Lose Value | | | No Bank Guarantee |
franklintempleton.com | Not part of the annual report | 1 |
Contents
Annual Report
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools. |
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ANNUAL REPORT
Franklin Strategic Income Fund
This annual report for Franklin Strategic Income Fund covers the fiscal year ended April 30, 2020.
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 U.S. 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, U.S. 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 posted a -5.72% cumulative total return for the 12 months under review. In comparison, the Bloomberg Barclays U.S. Aggregate Bond Index, which represents the U.S. investment-grade fixed rate taxable bond market, posted a +10.84% 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, posted a +3.99% 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 U.S. bond market’s performance during the 12-month period, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, was defined by two phases: before and during the outbreak of the novel coronavirus (COVID-19). Until late February 2020, prices for most U.S. bonds rose, and their yields declined, driven by low inflation, interest-rate cuts and strong demand for yield. In late February, as more countries adopted social distancing and lockdown measures to slow the global pandemic, the U.S. bond market began pricing in the adverse impact on economic activity. Higher-quality, longer-term bonds rallied, while riskier, lower-rated corporate bonds declined sharply, reflecting a reversal in many investors’ risk appetite.
After reducing the federal funds target rate three times in 2019 to a range of 1.50%–1.75%, the U.S. Federal Reserve (Fed) enacted two emergency rate cuts in March 2020 in response to the COVID-19 pandemic, further lowering the federal funds target rate to a range of 0.00%–0.25%. In addition, the Fed announced unlimited, open-ended purchasing of government-backed and corporate bonds to help keep markets functioning, significantly expanding its balance sheet. Meanwhile, Congress passed the Coronavirus Aid, Relief, and Economic Security Act to provide economic relief, which will likely lead to a sizable amount of U.S. Treasury debt issuance in 2020, according to the Congressional Budget Office.
U.S. Treasury bonds, as measured by the Bloomberg Barclays U.S. Treasury Index, rose significantly during the reporting period. Bond purchasing by the Fed and robust demand for investments perceived as safe drove the U.S. Treasury market higher despite the widening budget deficit and the massive increase in issuance. The yield on 10-year U.S. Treasury bonds declined to historic lows near period-end, while some short-term U.S. Treasury yields briefly dropped below zero. Mortgage-backed securities (MBS), as measured by the Bloomberg Barclays MBS Index,
1. Source: Morningstar.
2. Source: Lipper, a Thomson Reuters Company. For the 12-month period ended 4/30/20, this category consisted of 332 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.
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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also posted positive returns, aided by the Fed’s decision to purchase agency MBS.
U.S. corporate bond performance was hampered by investor concerns about the pandemic-related economic disruption and the potential credit downgrades of many companies amid high levels of indebtedness. However, investment-grade corporate bonds, as represented by the Bloomberg Barclays U.S. Corporate Bond Index, rebounded near period-end to post solid returns overall as the Fed supported the corporate bond market by facilitating new bond issuance and buying bonds from investors. In contrast, high-yield corporate bonds, as represented by the Bloomberg Barclays U.S. Corporate High Yield Bond Index, posted negative returns due to investor concerns about a potential increase in credit defaults.
Portfolio Composition*
Based on Consolidated Net Assets
4/30/20 | ||||
Interest-Rate Derivatives | 27.8% | |||
High-Yield Corporate Bonds | 22.1% | |||
Mortgage-Backed Securities | 21.8% | |||
Investment-Grade Corporate Bonds | 14.7% | |||
Non-Local Currency Emerging Market Bonds | 13.8% | |||
Floating-Rate Loans | 9.4% | |||
Treasury Inflation-Protected Securities | 9.1% | |||
Collateralized Loan Obligations | 7.6% | |||
Municipal Bonds | 5.2% | |||
Non-U.S. Developed Bonds | 3.1% | |||
Asset-Backed Securities | 2.7% | |||
Marketplace Loans | 2.5% | |||
Local Currency Emerging Market Bonds | 2.4% | |||
U.S. Treasuries | 1.0% | |||
Other | 0.8% | |||
Covered Bonds | 0.1% | |||
Commercial Mortgage-Backed Securities | 0.1% | |||
Currency Derivatives | -0.1% | |||
Short-Term Investments & Other Net Assets | 0.6% |
*Notional exposure figures are intended to estimate the portfolio’s exposure, including any hedged or increased exposure through certain derivatives held in the portfolio (or their underlying reference assets). Portfolio breakdown percentages may not total 100% and 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.
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 is a futures contract?
A futures contract is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
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.
Manager’s Discussion
For most of the 12-month period, fixed income markets experienced rising prices and declining yields due to low inflation, interest-rate cuts and strong demand for yield. However, after the COVID-19 outbreak in late February, markets became volatile and investors became risk averse. In an effort to support the U.S. economy, the Federal Reserve (Fed) issued emergency interest rate cuts and began large-scale purchases of government-backed and
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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.
corporate bonds. Outside the U.S., many major economies lowered their interest rates.
In this environment, most fixed income sectors could not keep up with the strong performance of similar maturity U.S. Treasuries.
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* | ||||||||||||||||||||
5/1/19–4/30/20 | ||||||||||||||||||||
Dividend per Share (cents) | ||||||||||||||||||||
Month | Class A | Class C | Class R | Class R6 | Advisor Class | |||||||||||||||
May | 3.50 | 3.13 | 3.27 | 3.85 | 3.72 | |||||||||||||||
June | 3.50 | 3.21 | 3.32 | 3.78 | 3.68 | |||||||||||||||
July | 3.50 | 3.18 | 3.30 | 3.80 | 3.69 | |||||||||||||||
August | 3.39 | 3.02 | 3.16 | 3.74 | 3.61 | |||||||||||||||
September | 3.40 | 3.07 | 3.21 | 3.69 | 3.59 | |||||||||||||||
October | 3.35 | 3.03 | 3.15 | 3.67 | 3.56 | |||||||||||||||
November | 3.35 | 3.01 | 3.14 | 3.62 | 3.55 | |||||||||||||||
December** | 4.76 | 4.37 | 4.53 | 5.11 | 5.00 | |||||||||||||||
January | 3.35 | 3.05 | 3.17 | 3.62 | 3.53 | |||||||||||||||
February | 3.35 | 3.05 | 3.17 | 3.62 | 3.54 | |||||||||||||||
March | 3.14 | 2.84 | 2.95 | 3.41 | 3.33 | |||||||||||||||
April | 3.13 | 2.83 | 2.94 | 3.37 | 3.33 | |||||||||||||||
Total | 41.72 | 37.79 | 39.31 | 45.28 | 44.13 |
*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 1.41 cent per share distribution to meet excise tax requirements.
Portfolio performance was challenged during the period, particularly from the Fund’s focus on credit spread sectors including investment-grade (IG) and below investment-grade
corporate credit, senior secured bank loans and collateralized loan obligations (CLOs), which all underperformed U.S. government bonds with similar maturities.
We are seeing what we consider opportunities in higher quality sectors. We increased exposure over the quarter to IG corporate credit, particularly in the last few months as IG spreads widened, while decreasing CLOs and senior secured floating rate loans. We are focusing on fundamentals and maintaining liquidity in the portfolio.
The portfolio’s largest allocation is in high yield corporate credit which was a major detractor from performance over the period, primarily from sector underperformance in the first quarter of 2020. The dual shocks of the COVID-19 pandemic and the collapse in oil prices precipitated a sharp decline in the high yield market, with spreads briefly reaching their highest level since the global financial crisis. We believe that what we consider attractive opportunities can still be found in the asset class, but careful research and security selection are more important than ever. Sovereign emerging market debt also had a large negative impact on returns as the sector experienced significant stress due to demand, supply and oil price shocks. Central banks across the globe have made emergency interest-rate cuts to near zero, leaving some fixed income investors searching for yield. While uncertainty remains, in this environment of low interest rates, the yields on emerging market debt and other risk-asset classes can look attractive to us and in the medium term we still see what we consider some good opportunities within the asset class.
Our non-agency residential mortgage-backed securities (RMBS) allocation was also a significant detractor from performance. We maintained a sizeable allocation to RMBS to take advantage of the strong housing market in the U.S. In our RMBS exposures, we remain allocated to the seasoned credit risk transfer (CRT) securities, which have strong principal protection. The sector experienced significant spread widening and price volatility, which moved in tandem with broader credit markets.
Exposure to U.S. inflation detracted from results as did an allocation to taxable municipal bonds and, to a smaller degree, agency mortgage-backed securities.
Our foreign-currency exposure detracted from results. Performance gains came mainly from short positions in the euro, New Zealand dollar, Canadian dollar and Australian dollar that were offset by negative returns mainly from our long Norwegian krone, South African rand, Japanese yen, Indonesian rupiah, Uruguayan peso, Colombian peso and Mexican peso positions. We added to our long Japanese yen
franklintempleton.com | Annual Report | 5 |
FRANKLIN STRATEGIC INCOME FUND
position while reducing our Norwegian krone positions and increasing our short position in the Australian dollar.
Thank you for your continued participation in Franklin Strategic Income Fund. We look forward to serving your future investment needs.
Sonal Desai, Ph.D. Co-Lead Portfolio Manager |
Patricia O’Connor, CFA Co-Lead Portfolio Manager | ||
William Chong, CFA, FRM | ||
Co-Lead Portfolio Manager | ||
David Yuen, CFA, FRM Co-Lead Portfolio Manager | ||
The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2020, 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.
6 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC INCOME FUND
Performance Summary as of April 30, 2020
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 4/30/201
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 3.75% and the minimum is 0%. Class A: 3.75% 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 | ||||||
A4 | ||||||||
1-Year | -5.72% | -9.21% | ||||||
5-Year | +3.27% | -0.12% | ||||||
10-Year | +33.64% | +2.55% | ||||||
Advisor | ||||||||
1-Year | -5.47% | -5.47% | ||||||
5-Year | +4.57% | +0.90% | ||||||
10-Year | +36.98% | +3.20% |
Share Class | Distribution Rate5 | 30-Day Standardized Yield6 | ||||||||||
(with fee waiver) | (without fee waiver) | |||||||||||
A | 4.63% | 4.38% | 4.37% | |||||||||
Advisor | 5.08% | 4.82% | 4.79% |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 9 for Performance Summary footnotes.
franklintempleton.com | Annual Report | 7 |
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.
Class A (5/1/10–4/30/20)
Advisor Class (5/1/10–4/30/20)
See page 9 for Performance Summary footnotes.
8 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC INCOME FUND
PERFORMANCE SUMMARY
Distributions (5/1/19–4/30/20)
Share Class | Net Investment Income | |||
A | $0.4172 | |||
C | $0.3779 | |||
R | $0.3931 | |||
R6 | $0.4528 | |||
Advisor | $0.4413 |
Total Annual Operating Expenses9
Share Class | With Fee Waiver | Without Fee Waiver | ||||||
A | 0.89% | 0.94% | ||||||
Advisor | 0.64% | 0.69% |
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. Unexpected events and their aftermaths, such as the spread of deadly diseases; natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. 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 8/31/20. 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. Prior to 3/1/19, these shares were offered at a higher initial sales charge of 4.25%, thus actual returns (with sales charges) would have differed. Average annual total returns (with sales charges) have been restated to reflect the current maximum initial sales charge of 3.75%.
5. 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 4/30/20.
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: Morningstar. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC-registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity, and must be rated investment grade (Baa3/BBB-/BBB- or above) using the middle rating of Moody’s, Standard & Poor’s and Fitch, respectively.
8. 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 Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the 12-month period ended 4/30/20, there were 332 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.
9. 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 11/1/19 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Ending Account Value 4/30/20 | Expenses Paid During Period 11/1/19–4/30/201, 2 | Net Annualized Expense Ratio2 | |||||||||||||||||||||||||||||||||||||||
A | $ | 1,000 | $ | 926.70 | $ | 4.12 | $ | 1,020.59 | $ | 4.32 | 0.86 | % | |||||||||||||||||||||||||||||||||
C | $ | 1,000 | $ | 924.80 | $ | 6.03 | $ | 1,018.60 | $ | 6.32 | 1.26 | % | |||||||||||||||||||||||||||||||||
R | $ | 1,000 | $ | 925.20 | $ | 5.31 | $ | 1,019.34 | $ | 5.57 | 1.11 | % | |||||||||||||||||||||||||||||||||
R6 | $ | 1,000 | $ | 927.50 | $ | 2.40 | $ | 1,022.38 | $ | 2.51 | 0.50 | % | |||||||||||||||||||||||||||||||||
Advisor | $ | 1,000 | $ | 928.00 | $ | 2.92 | $ | 1,021.83 | $ | 3.07 | 0.61 | % |
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 182/366 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class A | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.61 | $ 9.61 | $ 9.84 | $ 9.32 | $10.04 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.38 | 0.42 | 0.39 | 0.39 | 0.42 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.90 | ) | — | c | (0.32 | ) | 0.30 | (0.74 | ) | |||||||||||
|
| |||||||||||||||||||
Total from investment operations | (0.52 | ) | 0.42 | 0.07 | 0.69 | (0.32 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.42 | ) | (0.42 | ) | (0.30 | ) | (0.17 | ) | (0.40 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $ 8.67 | $ 9.61 | $ 9.61 | $ 9.84 | $ 9.32 | |||||||||||||||
|
| |||||||||||||||||||
Total returnd | (5.72)% | 4.52% | 0.64% | 7.50% | (3.14)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.88% | 0.89% | 0.90% | 0.88% | 0.88% | |||||||||||||||
Expenses net of waiver and payments by affiliatese | 0.86% | 0.84% | 0.85% | 0.82% | 0.84% | |||||||||||||||
Net investment income | 4.01% | 4.39% | 3.93% | 4.08% | 4.44% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $2,686,523 | $3,131,799 | $3,291,002 | $3,833,786 | $4,500,752 | |||||||||||||||
Portfolio turnover rate | 118.64% | 116.21% | f | 115.94% | 140.83% | 88.04% | ||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsg | 86.69% | 39.01% | f | 47.40% | 87.33% | 48.33% |
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.
cAmount rounds to less than $0.01 per share.
dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio activity as a result of in-kind transactions.
gSee 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class C | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.61 | $ 9.60 | $ 9.84 | $ 9.31 | $10.04 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.34 | 0.38 | 0.35 | 0.35 | 0.38 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.90 | ) | 0.01 | (0.33 | ) | 0.31 | (0.75 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations. | (0.56 | ) | 0.39 | 0.02 | 0.66 | (0.37 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.38 | ) | (0.38 | ) | (0.26 | ) | �� | (0.13 | ) | (0.36 | ) | |||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $ 8.67 | $ 9.61 | $ 9.60 | $ 9.84 | $ 9.31 | |||||||||||||||
|
| |||||||||||||||||||
Total returnc | (6.11)% | 4.19% | 0.14% | 7.19% | (3.64)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.28% | 1.29% | 1.30% | 1.28% | 1.28% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 1.26% | 1.24% | 1.25% | 1.22% | 1.24% | |||||||||||||||
Net investment income. | 3.61% | 3.99% | 3.53% | 3.68% | 4.04% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $518,795 | $716,327 | $1,078,890 | $1,385,981 | $1,645,852 | |||||||||||||||
Portfolio turnover rate | 118.64% | 116.21% | e | 115.94% | 140.83% | 88.04% | ||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 86.69% | 39.01% | e | 47.40% | 87.33% | 48.33% |
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%.
eExcludes the value of portfolio activity as a result of in-kind transactions.
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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.57 | $ 9.57 | $ 9.81 | $ 9.28 | $10.01 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.36 | 0.39 | 0.36 | 0.37 | 0.39 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.91 | ) | 0.01 | (0.33 | ) | 0.31 | (0.74 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (0.55 | ) | 0.40 | 0.03 | 0.68 | (0.35 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.39 | ) | (0.40 | ) | (0.27 | ) | (0.15 | ) | (0.38 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $ 8.63 | $ 9.57 | $ 9.57 | $ 9.81 | $ 9.28 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (5.98)% | 4.28% | 0.29% | 7.38% | (3.50)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.13% | 1.14% | 1.15% | 1.13% | 1.13% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 1.11% | 1.09% | 1.10% | 1.07% | 1.09% | |||||||||||||||
Net investment income | 3.76% | 4.14% | 3.68% | 3.83% | 4.19% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $62,063 | $85,458 | $105,692 | $146,552 | $181,671 | |||||||||||||||
Portfolio turnover rate | 118.64% | 116.21% | d | 115.94% | 140.83% | 88.04% | ||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollse | 86.69% | 39.01% | d | 47.40% | 87.33% | 48.33% |
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%.
dExcludes the value of portfolio activity as a result of in-kind transactions.
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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Class R6 | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.63 | $ 9.62 | $ 9.86 | $ 9.33 | $10.05 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.43 | 0.45 | 0.43 | 0.43 | 0.46 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.93 | ) | 0.02 | (0.34 | ) | 0.31 | (0.74 | ) | ||||||||||||
|
| |||||||||||||||||||
Total from investment operations | (0.50 | ) | 0.47 | 0.09 | 0.74 | (0.28 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.45 | ) | (0.46 | ) | (0.33 | ) | (0.21 | ) | (0.44 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year | $ 8.68 | $ 9.63 | $ 9.62 | $ 9.86 | $ 9.33 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (5.46)% | 5.03% | 0.95% | 8.03% | (2.76)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.52% | 0.51% | 0.50% | 0.48% | 0.49% | |||||||||||||||
Expenses net of waiver and payments by affiliatesc | 0.49% | 0.45% | 0.45% | 0.42% | 0.45% | |||||||||||||||
Net investment income | 4.38% | 4.78% | 4.33% | 4.48% | 4.83% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $133,575 | $307,287 | $433,068 | $369,106 | $286,503 | |||||||||||||||
Portfolio turnover rate | 118.64% | 116.21% | d | 115.94% | 140.83% | 88.04% | ||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollse | 86.69% | 39.01% | d | 47.40% | 87.33% | 48.33% |
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%.
dExcludes the value of portfolio activity as a result of in-kind transactions.
eSee 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, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Advisor Class | ||||||||||||||||||||
Per share operating performance (for a share outstanding throughout the year) | ||||||||||||||||||||
Net asset value, beginning of year | $ 9.62 | $ 9.62 | $ 9.85 | $ 9.33 | $10.05 | |||||||||||||||
|
| |||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||
Net investment incomeb | 0.40 | 0.44 | 0.41 | 0.42 | 0.44 | |||||||||||||||
Net realized and unrealized gains (losses) | (0.90 | ) | — | c | (0.32 | ) | 0.30 | (0.74 | ) | |||||||||||
|
| |||||||||||||||||||
Total from investment operations | (0.50 | ) | 0.44 | 0.09 | 0.72 | (0.30 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income and net foreign currency gains | (0.44 | ) | (0.44 | ) | (0.32 | ) | (0.20 | ) | (0.42 | ) | ||||||||||
|
| |||||||||||||||||||
Net asset value, end of year. | $ 8.68 | $ 9.62 | $ 9.62 | $ 9.85 | $ 9.33 | |||||||||||||||
|
| |||||||||||||||||||
Total return | (5.47)% | 4.88% | 0.79% | 7.76% | (2.89)% | |||||||||||||||
Ratios to average net assets | ||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.63% | 0.64% | 0.65% | 0.63% | 0.63% | |||||||||||||||
Expenses net of waiver and payments by affiliatesd | 0.61% | 0.59% | 0.60% | 0.57% | 0.59% | |||||||||||||||
Net investment income | 4.26% | 4.64% | 4.18% | 4.33% | 4.69% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of year (000’s) | $517,522 | $608,317 | $933,747 | $1,070,103 | $904,899 | |||||||||||||||
Portfolio turnover rate | 118.64% | 116.21% | e | 115.94% | 140.83% | 88.04% | ||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 86.69% | 39.01%e | 47.40% | 87.33% | 48.33% |
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.
cAmount rounds to less than $0.01 per share.
dBenefit of expense reduction rounds to less than 0.01%.
eExcludes the value of portfolio activity as a result of in-kind transactions.
fSee 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, 2020
Franklin Strategic Income Fund | ||||||||||||||
Country/ Organization | Shares/ Warrants | Value | ||||||||||||
Common Stocks and Other Equity Interests 0.3% | ||||||||||||||
Commercial & Professional Services 0.0%† | ||||||||||||||
a,aa | Remington Outdoor Co. Inc. | United States | 1,322,439 | $ | 661,219 | |||||||||
|
| |||||||||||||
Consumer Services 0.0%† | ||||||||||||||
a,ab,b | Turtle Bay Resort | United States | 5,579,939 | 122,759 | ||||||||||
|
| |||||||||||||
Energy 0.1% | ||||||||||||||
Amplify Energy Corp. | United States | 5,288 | 6,980 | |||||||||||
a | Battalion Oil Corp. | United States | 2,215 | 10,854 | ||||||||||
a,b | Battalion Oil Corp., wts., A, 10/08/22 | United States | 10,639 | 31,517 | ||||||||||
a,b | Battalion Oil Corp., wts., B, 10/08/22 | United States | 13,300 | 38,945 | ||||||||||
a,b | Battalion Oil Corp., wts., C, 10/08/22 | United States | 17,100 | 49,343 | ||||||||||
a,b | Birch Permian Holdings Inc. | United States | 46,176 | 230,880 | ||||||||||
a,b | Birch Permian Holdings Inc. | United States | 359,948 | 1,754,746 | ||||||||||
a | Chaparral Energy Inc., A | United States | 94,305 | 46,172 | ||||||||||
a,c | Chaparral Energy Inc., A, 144A | United States | 3,418 | 1,673 | ||||||||||
Riviera Resources Inc. | United States | 84,462 | 233,115 | |||||||||||
a | Weatherford International PLC | United States | 151,545 | 681,953 | ||||||||||
|
| |||||||||||||
3,086,178 | ||||||||||||||
|
| |||||||||||||
Materials 0.2% | ||||||||||||||
a,b,d | Appvion Operations Inc. | United States | 331,326 | 6,144,820 | ||||||||||
a | Verso Corp., A | United States | 38,905 | 540,390 | ||||||||||
a | Verso Corp., wts., 7/25/23 | United States | 4,095 | 6,143 | ||||||||||
|
| |||||||||||||
6,691,353 | ||||||||||||||
|
| |||||||||||||
Media & Entertainment 0.0%† | ||||||||||||||
a | Clear Channel Outdoor Holdings Inc. | United States | 285,564 | 275,512 | ||||||||||
a | iHeartMedia Inc., A | United States | 115,084 | 807,890 | ||||||||||
a,b | iHeartMedia Inc., B | United States | 1,941 | 11,582 | ||||||||||
a | iHeartMedia Inc., wts., A, 5/01/39 | United States | 1 | 7 | ||||||||||
|
| |||||||||||||
1,094,991 | ||||||||||||||
|
| |||||||||||||
Retailing 0.0% | ||||||||||||||
a,b,d | K2016470219 South Africa Ltd., A | South Africa | 125,940,079 | — | ||||||||||
a,b,d | K2016470219 South Africa Ltd., B | South Africa | 12,532,821 | — | ||||||||||
|
| |||||||||||||
— | ||||||||||||||
|
| |||||||||||||
Software & Services 0.0%† | ||||||||||||||
a,b | WorkCapital BSD SARL, wts., 2/13/26 | Brazil | 6,000,000 | 750,000 | ||||||||||
|
| |||||||||||||
Total Common Stocks and Other Equity Interests | 12,406,500 | |||||||||||||
|
| |||||||||||||
Management Investment Companies | ||||||||||||||
Diversified Financials 2.8% | ||||||||||||||
e | Franklin Floating Rate Income Fund | United States | 15,243,688 | 108,077,744 | ||||||||||
|
|
16 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued) | ||||||||||||||||||
Country/ Organization | Principal Amount* | Value | ||||||||||||||||
Corporate Bonds 37.4% | ||||||||||||||||||
Automobiles & Components 0.0%† | ||||||||||||||||||
c | Allison Transmission Inc., senior bond, 144A, 5.875%, 6/01/29 | United States | 2,000,000 | $ | 1,950,660 | |||||||||||||
|
| |||||||||||||||||
Banks 2.7% | ||||||||||||||||||
c | Akbank T.A.S., senior note, 144A, 5.125%, 3/31/25 | Turkey | 12,400,000 | 11,379,467 | ||||||||||||||
Bank of America Corp., | ||||||||||||||||||
senior bond, 3.248%, 10/21/27 | United States | 5,000,000 | 5,352,694 | |||||||||||||||
senior note, 3.50%, 4/19/26 | United States | 29,800,000 | 32,440,705 | |||||||||||||||
f | BDO Unibank Inc., senior note, Reg S, 2.95%, 3/06/23 | Philippines | 1,550,000 | 1,542,085 | ||||||||||||||
f | China Construction Bank Corp., sub. note, Reg S, 4.25% to 2/26/24, FRN thereafter, 2/27/29 | China | 8,000,000 | 8,396,227 | ||||||||||||||
Fifth Third Bancorp, senior note, 2.55%, 5/05/27 | United States | 5,100,000 | 5,089,953 | |||||||||||||||
Industrial & Commercial Bank of China Ltd., senior note, 3.538%, 11/08/27 | China | 8,500,000 | 9,240,798 | |||||||||||||||
JPMorgan Chase & Co., | ||||||||||||||||||
senior bond, 2.522% to 4/22/30, FRN thereafter, 4/22/31 | United States | 9,400,000 | 9,616,217 | |||||||||||||||
sub. note, 3.875%, 9/10/24 | United States | 10,000,000 | 10,771,469 | |||||||||||||||
Lloyds Banking Group PLC, senior note, 3.87%, 7/09/25 | United Kingdom | 1,600,000 | 1,685,197 | |||||||||||||||
f | Turkiye Vakiflar Bankasi TAO, secured note, Reg S, 2.375%, 11/04/22 | Turkey | 3,900,000 | EUR | 4,186,693 | |||||||||||||
Wells Fargo & Co., senior note, 2.188% to 4/30/25, FRN thereafter, 4/30/26 | United States | 7,700,000 | 7,748,724 | |||||||||||||||
|
| |||||||||||||||||
107,450,229 | ||||||||||||||||||
|
| |||||||||||||||||
Capital Goods 1.4% | ||||||||||||||||||
c | Beacon Roofing Supply Inc., senior note, 144A, 4.875%, 11/01/25 | United States | 12,000,000 | 10,667,400 | ||||||||||||||
CNH Industrial NV, senior bond, 3.85%, 11/15/27 | United Kingdom | 6,600,000 | 6,596,748 | |||||||||||||||
Emerson Electric Co., senior bond, 2.75%, 10/15/50 | United States | 1,800,000 | 1,754,770 | |||||||||||||||
General Electric Co., senior note, 3.45%, 5/01/27 | United States | 2,200,000 | 2,240,490 | |||||||||||||||
c | Herc Holdings Inc., senior note, 144A, 5.50%, 7/15/27 | United States | 5,300,000 | 5,001,610 | ||||||||||||||
c | The Manitowoc Co. Inc., secured note, second lien, 144A, 9.00%, 4/01/26 | United States | 7,000,000 | 6,341,650 | ||||||||||||||
c | Navistar International Corp., senior secured note, 144A, 9.50%, 5/01/25 | United States | 3,300,000 | 3,473,250 | ||||||||||||||
c | NCI Building Systems Inc., senior secured note, 144A, 8.00%, 4/15/26 | United States | 9,000,000 | 7,704,090 | ||||||||||||||
b,g | Onsite Rental Group Operations Pty. Ltd., secured note, PIK, 6.10%, 10/26/23 | Australia | 4,655,176 | 3,404,098 | ||||||||||||||
c | Resideo Funding Inc., senior note, 144A, 6.125%, 11/01/26 | United States | 9,000,000 | 7,931,700 | ||||||||||||||
c | Rutas 2 and 7 Finance Ltd., senior secured bond, first lien, 144A, zero cpn., 9/30/36 | United States | 1,200,000 | 745,320 | ||||||||||||||
|
| |||||||||||||||||
55,861,126 | ||||||||||||||||||
|
| |||||||||||||||||
Commercial & Professional Services 0.6% | ||||||||||||||||||
c | Intrado Corp., senior note, 144A, 8.50%, 10/15/25 | United States | 9,400,000 | 6,628,410 | ||||||||||||||
United Rentals North America Inc., senior bond, 5.875%, 9/15/26 | United States | 16,000,000 | 16,540,800 | |||||||||||||||
|
| |||||||||||||||||
23,169,210 | ||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 17 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||||||
Corporate Bonds (continued) | ||||||||||||||||||
Consumer Durables & Apparel 0.7% | ||||||||||||||||||
c | Hanesbrands Inc., senior bond, 144A, 4.875%, 5/15/26 | United States | 15,000,000 | $ | 15,165,750 | |||||||||||||
KB Home, | ||||||||||||||||||
senior bond, 7.50%, 9/15/22 | United States | 5,000,000 | 5,385,250 | |||||||||||||||
senior note, 7.00%, 12/15/21 | United States | 8,000,000 | 8,338,000 | |||||||||||||||
|
| |||||||||||||||||
28,889,000 | ||||||||||||||||||
|
| |||||||||||||||||
Consumer Services 1.2% | ||||||||||||||||||
c | 1011778 BC ULC/New Red Finance Inc., | |||||||||||||||||
secured note, second lien, 144A, 5.00%, 10/15/25 | Canada | 11,500,000 | 11,617,300 | |||||||||||||||
senior secured note, first lien, 144A, 4.25%, 5/15/24 | Canada | 2,000,000 | 2,009,780 | |||||||||||||||
c | Golden Nugget Inc., senior note, 144A, 6.75%, 10/15/24 | United States | 13,200,000 | 10,378,500 | ||||||||||||||
c | KFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of | |||||||||||||||||
America LLC, | ||||||||||||||||||
senior note, 144A, 5.00%, 6/01/24 | United States | 6,000,000 | 6,213,480 | |||||||||||||||
senior note, 144A, 5.25%, 6/01/26 | United States | 9,100,000 | 9,362,080 | |||||||||||||||
c | Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp., senior bond, 144A, 5.50%, 3/01/25 | United States | 9,800,000 | 8,782,760 | ||||||||||||||
|
| |||||||||||||||||
48,363,900 | ||||||||||||||||||
|
| |||||||||||||||||
Diversified Financials 2.9% | ||||||||||||||||||
Capital One Financial Corp., senior note, 3.20%, 2/05/25 | United States | 11,900,000 | 12,151,801 | |||||||||||||||
h | Cia Securitizadora de Creditos Financeiros Vert-Fintech, senior secured note, FRN, 5.96%, (BZDIOVRA + 5.75%), 2/14/24 | Brazil | 11,513i | BRL | 2,294,819 | |||||||||||||
The Goldman Sachs Group Inc., | ||||||||||||||||||
senior note, 3.50%, 1/23/25 | United States | 23,000,000 | 24,366,670 | |||||||||||||||
senior note, 3.75%, 2/25/26 | United States | 15,000,000 | 16,181,894 | |||||||||||||||
Morgan Stanley, | ||||||||||||||||||
senior bond, 3.591% to 7/22/27, FRN thereafter, 7/22/28 | United States | 10,000,000 | 10,833,344 | |||||||||||||||
senior note, 3.875%, 1/27/26 | United States | 32,300,000 | 35,559,873 | |||||||||||||||
Springleaf Finance Corp., | ||||||||||||||||||
senior bond, 5.375%, 11/15/29 | United States | 3,300,000 | 2,754,972 | |||||||||||||||
senior note, 6.625%, 1/15/28 | United States | 5,700,000 | 5,056,755 | |||||||||||||||
f TNB Global Ventures Capital Bhd., senior note, Reg S, 3.244%, 10/19/26 | Malaysia | 3,775,000 | 3,850,633 | |||||||||||||||
|
| |||||||||||||||||
113,050,761 | ||||||||||||||||||
|
| |||||||||||||||||
Energy 2.1% | ||||||||||||||||||
c | Aker BP ASA, senior note, 144A, 4.75%, 6/15/24 | Norway | 5,900,000 | 5,473,365 | ||||||||||||||
Baker Hughes a GE Co. LLC/Baker Hughes Co-Obligor Inc., senior note, 4.486%, 5/01/30 | United States | 700,000 | 720,090 | |||||||||||||||
Cheniere Corpus Christi Holdings LLC, senior secured note, first lien, 5.875%, 3/31/25 | United States | 6,400,000 | 6,638,686 | |||||||||||||||
Cheniere Energy Partners LP, senior secured note, first lien, 5.25%, 10/01/25 | United States | 11,900,000 | 11,433,520 | |||||||||||||||
CONSOL Energy Inc., senior note, 5.875%, 4/15/22 | United States | 11,076,000 | 10,965,240 | |||||||||||||||
Ecopetrol SA, senior bond, 4.125%, 1/16/25 | Colombia | 8,200,000 | 7,863,800 | |||||||||||||||
Energy Transfer Operating LP, senior bond, 4.05%, 3/15/25 | United States | 1,300,000 | 1,277,534 | |||||||||||||||
EnLink Midstream LLC, senior bond, 5.375%, 6/01/29 | United States | 2,900,000 | 1,814,820 | |||||||||||||||
c,g | EnQuest PLC, senior note, 144A, PIK, 7.00%, 10/15/23 | United Kingdom | 10,303,551 | 3,546,442 |
18 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued) | ||||||||||||||
Country/ Organization | Principal Amount* | Value | ||||||||||||
Corporate Bonds (continued) | ||||||||||||||
Energy (continued) | ||||||||||||||
Enterprise Products Operating LLC, senior bond, 4.80%, 2/01/49 | United States | 1,200,000 | $ | 1,302,645 | ||||||||||
EOG Resources Inc., senior bond, 4.375%, 4/15/30 | United States | 1,000,000 | 1,117,637 | |||||||||||
Exxon Mobil Corp., senior bond, 2.61%, 10/15/30 | United States | 4,700,000 | 4,905,019 | |||||||||||
Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, 7.25%, 2/15/21 | United States | 19,000,000 | 7,737,750 | |||||||||||
c | Nabors Industries Ltd., senior note, 144A, 7.25%, 1/15/26 | United States | 6,000,000 | 2,317,500 | ||||||||||
Oceaneering International Inc., senior note, 4.65%, 11/15/24 | United States | 2,100,000 | 1,099,875 | |||||||||||
j | Sanchez Energy Corp., senior note, 6.125%, 1/15/23 | United States | 6,000,000 | 45,000 | ||||||||||
c | Schlumberger Holdings Corp., senior note, 144A, 3.90%, 5/17/28 | United States | 3,800,000 | 3,656,309 | ||||||||||
Sunoco LP/Sunoco Finance Corp., senior note, 4.875%, 1/15/23 | United States | 5,900,000 | 5,780,820 | |||||||||||
c | Weatherford International Ltd., senior note, 144A, 11.00%, 12/01/24 | United States | 4,591,000 | 3,380,124 | ||||||||||
|
| |||||||||||||
81,076,176 | ||||||||||||||
|
| |||||||||||||
Food & Staples Retailing 0.9% | ||||||||||||||
c | Cencosud SA, senior note, 144A, 4.375%, 7/17/27 | Chile | 7,500,000 | 7,054,442 | ||||||||||
Costco Wholesale Corp., senior bond, 1.75%, 4/20/32 | United States | 2,000,000 | 1,994,313 | |||||||||||
The Kroger Co., senior bond, 4.45%, 2/01/47 | United States | 1,200,000 | 1,416,164 | |||||||||||
Walgreens Boots Alliance Inc., senior note, 3.80%, 11/18/24 | United States | 21,900,000 | 23,375,222 | |||||||||||
|
| |||||||||||||
33,840,141 | ||||||||||||||
|
| |||||||||||||
Food, Beverage & Tobacco 1.2% | ||||||||||||||
Anheuser-Busch InBev Worldwide Inc., senior bond, 3.50%, 6/01/30 | Belgium | 8,400,000 | 8,978,215 | |||||||||||
B&G Foods Inc., senior note, 5.25%, 9/15/27 | United States | 9,000,000 | 9,128,070 | |||||||||||
BAT Capital Corp., senior bond, 4.54%, 8/15/47 | United Kingdom | 600,000 | 625,903 | |||||||||||
Bunge Ltd. Finance Corp., senior note, 3.25%, 8/15/26 | United States | 2,000,000 | 1,985,836 | |||||||||||
f | China Mengniu Dairy Co. Ltd., senior note, Reg S, 4.25%, 8/07/23 | China | 392,000 | 420,428 | ||||||||||
Diageo Capital PLC., senior note, 2.00%, 4/29/30 | United Kingdom | 7,300,000 | 7,282,401 | |||||||||||
c | Imperial Brands Finance PLC, senior bond, 144A, 3.875%, 7/26/29 | United Kingdom | 2,200,000 | 2,212,877 | ||||||||||
c | MHP Lux SA, senior note, 144A, 6.95%, 4/03/26 | Ukraine | 8,000,000 | 7,462,720 | ||||||||||
c | Post Holdings Inc., senior bond, 144A, 4.625%, 4/15/30 | United States | 6,700,000 | 6,607,808 | ||||||||||
Reynolds American Inc., senior note, 4.45%, 6/12/25 | United Kingdom | 1,900,000 | 2,067,996 | |||||||||||
|
| |||||||||||||
46,772,254 | ||||||||||||||
|
| |||||||||||||
Health Care Equipment & Services 1.9% | ||||||||||||||
Anthem Inc., | ||||||||||||||
senior bond, 2.25%, 5/15/30 | United States | 3,650,000 | 3,636,313 | |||||||||||
senior bond, 3.70%, 9/15/49 | United States | 1,400,000 | 1,525,025 | |||||||||||
Centene Corp., | ||||||||||||||
c senior bond, 144A, 4.625%, 12/15/29 | United States | 2,300,000 | 2,529,195 | |||||||||||
c senior bond, 144A, 3.375%, 2/15/30 | United States | 1,400,000 | 1,416,590 | |||||||||||
senior note, 4.75%, 5/15/22 | United States | 2,000,000 | 2,028,900 | |||||||||||
c senior note, 144A, 5.375%, 6/01/26 | United States | 7,600,000 | 8,087,996 | |||||||||||
c senior note, 144A, 4.25%, 12/15/27 | United States | 3,000,000 | 3,152,700 |
franklintempleton.com | Annual Report | 19 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Corporate Bonds (continued) | ||||||||||||||
Health Care Equipment & Services (continued) | ||||||||||||||
CHS/Community Health Systems Inc., | ||||||||||||||
senior note, 6.875%, 2/01/22 | United States | 7,223,000 | $ | 5,390,164 | ||||||||||
senior secured note, first lien, 6.25%, 3/31/23 | United States | 3,900,000 | 3,651,375 | |||||||||||
Cigna Corp., senior bond, 4.90%, 12/15/48 | United States | 1,200,000 | 1,550,597 | |||||||||||
CVS Health Corp., senior bond, 4.30%, 3/25/28 | United States | 5,800,000 | 6,546,096 | |||||||||||
DaVita Inc., | ||||||||||||||
senior bond, 5.125%, 7/15/24 | United States | 8,000,000 | 8,161,600 | |||||||||||
senior bond, 5.00%, 5/01/25 | United States | 6,000,000 | 6,101,250 | |||||||||||
HCA Inc., senior bond, 5.875%, 2/15/26 | United States | 3,000,000 | 3,345,000 | |||||||||||
c | MEDNAX Inc., senior note, 144A, 6.25%, 1/15/27 | United States | 11,300,000 | 10,302,662 | ||||||||||
c | MPH Acquisition Holdings LLC, senior note, 144A, 7.125%, 6/01/24 | United States | 8,000,000 | 7,179,760 | ||||||||||
|
| |||||||||||||
74,605,223 | ||||||||||||||
|
| |||||||||||||
Materials 5.1% | ||||||||||||||
Air Products and Chemicals Inc., senior bond, 2.05%, 5/15/30 | United States | 3,700,000 | 3,770,639 | |||||||||||
c | Alpek SAB de CV, senior note, 144A, 4.25%, 9/18/29 | Mexico | 16,000,000 | 13,957,600 | ||||||||||
c | Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., senior note, 144A, 6.00%, 2/15/25 | Luxembourg | 11,500,000 | 11,581,880 | ||||||||||
c | Braskem Netherlands Finance BV, senior bond, 144A, 4.50%, 1/31/30 | Brazil | 10,000,000 | 8,125,000 | ||||||||||
c | Cemex SAB de CV, | |||||||||||||
senior secured bond, first lien, 144A, 5.70%, 1/11/25 | Mexico | 13,000,000 | 11,711,700 | |||||||||||
senior secured bond, first lien, 144A, 6.125%, 5/05/25 | Mexico | 2,000,000 | 1,810,400 | |||||||||||
f | CNAC HK Finbridge Co. Ltd., senior note, Reg S, 4.875%, 3/14/25 | China | 7,800,000 | 8,356,764 | ||||||||||
Crown Americas LLC/Crown Americas Capital Corp. VI, senior note, 4.75%, 2/01/26 | United States | 7,100,000 | 7,345,660 | |||||||||||
c | FMG Resources (August 2006) Pty. Ltd., | |||||||||||||
senior note, 144A, 5.125%, 3/15/23 | Australia | 3,600,000 | 3,656,340 | |||||||||||
senior note, 144A, 5.125%, 5/15/24 | Australia | 7,700,000 | 7,853,229 | |||||||||||
Freeport-McMoRan Inc., senior note, 4.55%, 11/14/24 | United States | 13,000,000 | 13,083,850 | |||||||||||
c | Gates Global LLC / Gates Corp., senior note, 144A, 6.25%, 1/15/26 | United States | 1,000,000 | 914,710 | ||||||||||
c | Glencore Funding LLC, | |||||||||||||
senior note, 144A, 4.125%, 5/30/23 | Switzerland | 5,000,000 | 5,064,139 | |||||||||||
senior note, 144A, 4.625%, 4/29/24 | Switzerland | 2,500,000 | 2,621,362 | |||||||||||
c | Mauser Packaging Solutions Holding Co., senior note, 144A, 7.25%, 4/15/25 | United States | 15,000,000 | 11,831,250 | ||||||||||
c | Neon Holdings Inc., senior note, 144A, 10.125%, 4/01/26 | United States | 5,000,000 | 4,529,750 | ||||||||||
c | Novelis Corp., senior bond, 144A, 5.875%, 9/30/26 | United States | 14,000,000 | 13,682,200 | ||||||||||
c | Owens-Brockway Glass Container Inc., | |||||||||||||
senior note, 144A, 5.00%, 1/15/22 | United States | 6,000,000 | 6,086,700 | |||||||||||
senior note, 144A, 5.875%, 8/15/23 | United States | 10,000,000 | 10,152,000 | |||||||||||
c | Reynolds Group Issuer Inc./Reynolds Group Issuer LLC/ Reynolds Group Issuer Luxembourg SA, | |||||||||||||
senior secured note, first lien, 144A, 5.125%, 7/15/23 | United States | 5,900,000 | 5,960,180 | |||||||||||
h senior secured note, first lien, 144A, FRN, 4.719%, (3-month USD LIBOR + 3.50%), 7/15/21 | United States | 6,500,000 | 6,439,225 |
20 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Corporate Bonds (continued) | ||||||||||||||
Materials (continued) | ||||||||||||||
c | SABIC Capital II BV, senior note, 144A, 4.50%, 10/10/28 | Saudi Arabia | 5,500,000 | $ | 5,885,237 | |||||||||
c | Sealed Air Corp., | |||||||||||||
senior bond, 144A, 5.125%, 12/01/24 | United States | 11,300,000 | 11,737,875 | |||||||||||
senior note, 144A, 4.875%, 12/01/22 | United States | 4,000,000 | 4,128,200 | |||||||||||
c | Sociedad Quimica y Minera de Chile SA, senior note, 144A, 3.625%, 4/03/23 | Chile | 1,500,000 | 1,489,800 | ||||||||||
c | SunCoke Energy Partners LP/SunCoke Energy Partners Finance Corp., senior note, 144A, 7.50%, 6/15/25 | United States | 12,000,000 | 9,225,000 | ||||||||||
c | TPC Group Inc., secured note, 144A, 10.50%, 8/01/24 | United States | 11,000,000 | 9,049,700 | ||||||||||
|
| |||||||||||||
200,050,390 | ||||||||||||||
|
| |||||||||||||
Media & Entertainment 3.1% | ||||||||||||||
c | Altice Financing SA, secured bond, 144A, 7.50%, 5/15/26 | Luxembourg | 4,000,000 | 4,198,600 | ||||||||||
AMC Entertainment Holdings Inc., senior sub. bond, 5.75%, 6/15/25 | United States | 6,500,000 | 1,511,250 | |||||||||||
c | CCO Holdings LLC/CCO Holdings Capital Corp., | |||||||||||||
senior bond, 144A, 5.375%, 5/01/25 | United States | 13,000,000 | 13,398,288 | |||||||||||
senior bond, 144A, 4.50%, 8/15/30 | United States | 2,000,000 | 2,019,400 | |||||||||||
Charter Communications Operating LLC/Charter | ||||||||||||||
Communications Operating Capital, senior bond, 2.80%, 4/01/31 | United States | 3,300,000 | 3,326,335 | |||||||||||
c | Clear Channel Worldwide Holdings Inc., | |||||||||||||
senior secured note, first lien, 144A, 5.125%, 8/15/27 | United States | 6,400,000 | 6,043,200 | |||||||||||
senior sub. note, 144A, 9.25%, 2/15/24 | United States | 1,362,000 | 1,140,947 | |||||||||||
Comcast Corp., senior bond, 4.75%, 3/01/44 | United States | 1,400,000 | 1,822,001 | |||||||||||
c | CSC Holdings LLC, senior secured note, first lien, 144A, 5.50%, 5/15/26 | United States | 16,000,000 | 16,652,800 | ||||||||||
c | Diamond Sports Group LLC/Diamond Sports Finance Co., | |||||||||||||
first lien, 144A, 5.375%, 8/15/26 | United States | 4,300,000 | 3,288,210 | |||||||||||
senior note, 144A, 6.625%, 8/15/27 | United States | 4,500,000 | 2,484,675 | |||||||||||
DISH DBS Corp., | ||||||||||||||
senior bond, 5.00%, 3/15/23 | United States | 6,000,000 | 5,752,500 | |||||||||||
senior note, 5.875%, 11/15/24 | United States | 8,000,000 | 7,736,320 | |||||||||||
Fox Corp, senior bond, 3.50%, 4/08/30 | United States | 4,000,000 | 4,312,035 | |||||||||||
iHeartCommunications Inc., | ||||||||||||||
secured note, 6.375%, 5/01/26 | United States | 661,721 | 628,436 | |||||||||||
senior note, 8.375%, 5/01/27 | United States | 1,199,371 | 1,007,052 | |||||||||||
c | Live Nation Entertainment Inc., senior note, 144A, 4.75%, 10/15/27 | United States | 4,400,000 | 3,782,416 | ||||||||||
Netflix Inc., senior bond, 4.375%, 11/15/26 | United States | 11,800,000 | 12,439,560 | |||||||||||
c | Nexstar Broadcasting Inc., senior note, 144A, 5.625%, 8/01/24 | United States | 15,000,000 | 14,665,500 | ||||||||||
c | Univision Communications Inc., senior secured note, first lien, 144A, 5.125%, 2/15/25 | United States | 16,000,000 | 14,140,000 | ||||||||||
|
| |||||||||||||
120,349,525 | ||||||||||||||
|
|
franklintempleton.com | .Annual Report | 21 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Corporate Bonds (continued) | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 2.1% | ||||||||||||||
c | AbbVie Inc., senior note, 144A, 2.95%, 11/21/26 | United States | 5,900,000 | $ | 6,255,566 | |||||||||
Allergan Funding SCS, senior bond, 3.80%, 3/15/25 | United States | 25,000,000 | 26,712,831 | |||||||||||
c | Bausch Health Cos. Inc., senior bond, 144A, 6.125%, 4/15/25 | United States | 3,100,000 | 3,149,058 | ||||||||||
senior note, 144A, 8.50%, 1/31/27 | United States | 5,000,000 | 5,535,250 | |||||||||||
senior note, 144A, 5.00%, 1/30/28 | United States | 3,000,000 | 2,886,900 | |||||||||||
senior note, first lien, 144A, 7.00%, 3/15/24 | United States | 2,100,000 | 2,190,069 | |||||||||||
c | Bayer U.S. Finance II LLC, senior bond, 144A, 4.375%, 12/15/28 . | Germany | 11,700,000 | 13,229,641 | ||||||||||
Biogen Inc., senior bond, 2.25%, 5/01/30 | United States | 2,700,000 | 2,690,376 | |||||||||||
c | Endo DAC/Endo Finance LLC/Endo Finco Inc., | |||||||||||||
senior bond, 144A, 6.00%, 2/01/25 | United States | 11,000,000 | 7,942,000 | |||||||||||
senior note, 144A, 6.00%, 7/15/23 | United States | 1,637,000 | 1,237,326 | |||||||||||
c | Jaguar Holding Co. II/Pharmaceutical Product Development LLC, senior note, 144A, 6.375%, 8/01/23 | United States | 10,000,000 | 10,187,500 | ||||||||||
|
| |||||||||||||
82,016,517 | ||||||||||||||
|
| |||||||||||||
Real Estate 0.8% | ||||||||||||||
f | China Overseas Finance Cayman VI Ltd., senior note, Reg S, 5.95%, 5/08/24 | China | 7,500,000 | 8,451,000 | ||||||||||
c | Five Point Operating Co. LP/Five Point Capital Corp., senior note, 144A, 7.875%, 11/15/25 | United States | 8,000,000 | 7,790,000 | ||||||||||
MPT Operating Partnership LP/MPT Finance Corp., | ||||||||||||||
senior bond, 5.25%, 8/01/26 | United States | 4,200,000 | 4,266,360 | |||||||||||
senior bond, 5.00%, 10/15/27 | United States | 5,700,000 | 5,849,910 | |||||||||||
c | VICI Properties LP/VICI Note Co. Inc., | |||||||||||||
senior bond, 144A, 4.125%, 8/15/30 | United States | 1,300,000 | 1,189,110 | |||||||||||
senior note, 144A, 3.75%, 2/15/27 | United States | 2,500,000 | 2,336,750 | |||||||||||
|
| |||||||||||||
29,883,130 | ||||||||||||||
|
| |||||||||||||
Retailing 0.0%† | ||||||||||||||
b,c,g | K2016470219 South Africa Ltd., senior secured note, 144A, PIK, 3.00%, 12/31/22 | South Africa | 10,131,263 | 12,538 | ||||||||||
b,c,g | K2016470260 South Africa Ltd., senior secured note, 144A, PIK, 25.00%, 12/31/22 | South Africa | 2,667,975 | 12,314 | ||||||||||
c | Party City Holdings Inc., senior note, 144A, 6.625%, 8/01/26 | United States | 5,300,000 | 549,875 | ||||||||||
|
| |||||||||||||
574,727 | ||||||||||||||
|
| |||||||||||||
Semiconductors & Semiconductor Equipment 0.1% | ||||||||||||||
Maxim Integrated Products Inc., senior note, 3.375%, 3/15/23 | United States | 1,800,000 | 1,856,570 | |||||||||||
Qorvo Inc., senior note, 5.50%, 7/15/26 | United States | 900,000 | 949,230 | |||||||||||
|
| |||||||||||||
2,805,800 | ||||||||||||||
|
| |||||||||||||
Software & Services 0.2% | ||||||||||||||
c | NortonLifeLock Inc., senior note, 144A, 5.00%, 4/15/25 | United States | 9,500,000 | 9,606,875 | ||||||||||
|
|
22 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Corporate Bonds (continued) | ||||||||||||||
Technology Hardware & Equipment 0.6% | ||||||||||||||
c | Blackboard Inc., secured note, second lien, 144A, 10.375%, 11/15/24 | United States | 3,200,000 | $ | 3,028,000 | |||||||||
c | CommScope Technologies LLC, senior bond, 144A, 6.00%, 6/15/25 | United States | 14,600,000 | 13,083,790 | ||||||||||
c | Dell International LLC/EMC Corp., senior note, 144A, 7.125%, 6/15/24 | United States | 7,000,000 | 7,275,450 | ||||||||||
|
| |||||||||||||
23,387,240 | ||||||||||||||
|
| |||||||||||||
Telecommunication Services 2.1% | ||||||||||||||
c | Altice France Holding SA, senior note, 144A, 6.00%, 2/15/28 | Luxembourg | 6,100,000 | 5,612,000 | ||||||||||
c | Altice France SA/France, senior secured note, 144A, 5.50%, 1/15/28 | France | 2,500,000 | 2,536,375 | ||||||||||
AT&T Inc., senior note, 2.95%, 7/15/26 | United States | 14,800,000 | 15,290,844 | |||||||||||
Bell Canada Inc., senior bond, 4.464%, 4/01/48 | Canada | 1,400,000 | 1,746,168 | |||||||||||
c,j | Digicel Group Two Ltd., b senior note, 144A, 8.25%, 9/30/22 | Bermuda | 2,427,000 | 121,350 | ||||||||||
g | senior note, 144A, PIK, 9.125%, 4/01/24 | Bermuda | 3,042,961 | 167,093 | ||||||||||
Hughes Satellite Systems Corp., senior bond, 6.625%, 8/01/26 | United States | 5,200,000 | 5,600,920 | |||||||||||
Sprint Communications Inc., senior note, 6.00%, 11/15/22 | United States | 10,000,000 | 10,620,600 | |||||||||||
Telefonica Emisiones SA, senior bond, 4.895%, 3/06/48 | Spain | 1,000,000 | 1,159,238 | |||||||||||
TELUS Corp., senior bond, 4.60%, 11/16/48 | Canada | 1,000,000 | 1,183,000 | |||||||||||
T-Mobile USA Inc., | ||||||||||||||
senior bond, 6.50%, 1/15/24 | United States | 3,000,000 | 3,085,950 | |||||||||||
senior bond, 6.375%, 3/01/25 | United States | 13,000,000 | 13,408,850 | |||||||||||
senior note, 5.125%, 4/15/25 | United States | 6,000,000 | 6,112,500 | |||||||||||
c senior secured bond, 144A, 3.875%, 4/15/30 | United States | 13,400,000 | 14,724,590 | |||||||||||
|
| |||||||||||||
81,369,478 | ||||||||||||||
|
| |||||||||||||
Transportation 2.9% | ||||||||||||||
CSX Corp., senior bond, 4.10%, 3/15/44 | United States | 1,600,000 | 1,855,406 | |||||||||||
c | DAE Funding LLC, | |||||||||||||
senior note, 144A, 4.50%, 8/01/22 | United Arab Emirates | 2,000,000 | 1,792,500 | |||||||||||
senior note, 144A, 5.00%, 8/01/24 | United Arab Emirates | 14,000,000 | 12,477,500 | |||||||||||
FedEx Corp., | ||||||||||||||
senior bond, 4.05%, 2/15/48 | United States | 1,200,000 | 1,189,811 | |||||||||||
senior note, 3.80%, 5/15/25 | United States | 14,300,000 | 15,298,568 | |||||||||||
f | ICTSI Treasury BV, senior note, Reg S, 4.625%, 1/16/23 | Philippines | 12,000,000 | 12,234,600 | ||||||||||
c | Kazakhstan Temir Zholy Finance BV, senior bond, 144A, 6.95%, 7/10/42 | Kazakhstan | 18,100,000 | 20,883,327 | ||||||||||
c | Mexico City Airport Trust, senior secured bond, first lien, 144A, 5.50%, 7/31/47 | Mexico | 12,718,000 | 10,665,315 | ||||||||||
f,k | RZD Capital PLC, (Russian Railways), loan participation, senior bond, Reg S, 5.70%, 4/05/22 | Russia | 17,600,000 | 18,534,560 | ||||||||||
United Parcel Service Inc., senior bond, 5.30%, 4/01/50 | United States | 13,400,000 | 19,179,784 | |||||||||||
|
| |||||||||||||
114,111,371 | ||||||||||||||
|
|
franklintempleton.com | Annual Report | 23 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Corporate Bonds (continued) | ||||||||||||||
Utilities 4.8% | ||||||||||||||
Calpine Corp., | ||||||||||||||
senior bond, 5.75%, 1/15/25 | United States | 9,000,000 | $ | 9,010,890 | ||||||||||
c senior note, 144A, 5.125%, 3/15/28 | United States | 4,000,000 | 3,925,000 | |||||||||||
f | CGNPC International Ltd., senior note, Reg S, 3.75%, 12/11/27 | China | 3,289,000 | 3,563,190 | ||||||||||
Clearway Energy Operating LLC, senior note, 5.75%, 10/15/25 | United States | 12,800,000 | 13,249,280 | |||||||||||
c | Colbun SA, | |||||||||||||
senior note, 144A, 3.95%, 10/11/27 | Chile | 7,500,000 | 7,943,250 | |||||||||||
senior note, 144A, 3.15%, 3/06/30 | Chile | 2,900,000 | 2,780,375 | |||||||||||
Dominion Energy Inc., senior note, 3.375%, 4/01/30 | United States | 8,500,000 | 9,247,112 | |||||||||||
Duke Energy Corp., senior bond, 3.75%, 9/01/46 | United States | 1,600,000 | 1,822,929 | |||||||||||
c,l | EDF SA, | |||||||||||||
junior sub. bond, 144A, 5.625% to 1/22/24, FRN thereafter, Perpetual. | France | 5,000,000 | 4,953,475 | |||||||||||
junior sub. note, 144A, 5.25% to 1/29/23, FRN thereafter, Perpetual. | France | 25,000,000 | 24,574,750 | |||||||||||
Exelon Corp., | ||||||||||||||
senior bond, 4.05%, 4/15/30 | United States | 13,400,000 | 15,311,188 | |||||||||||
senior bond, 4.45%, 4/15/46 | United States | 1,400,000 | 1,673,771 | |||||||||||
c | InterGen NV, secured bond, 144A, 7.00%, 6/30/23 | Netherlands | 8,600,000 | 7,675,500 | ||||||||||
c | Israel Electric Corp. Ltd., secured bond, 144A, 4.25%, 8/14/28 | Israel | 9,200,000 | 9,750,942 | ||||||||||
The Southern Co., senior bond, 3.25%, 7/01/26 | United States | 24,200,000 | 25,885,216 | |||||||||||
c | State Grid Overseas Investment 2016 Ltd., senior note, 144A, 3.50%, 5/04/27 | China | 15,800,000 | 17,259,313 | ||||||||||
c | Talen Energy Supply LLC, | |||||||||||||
senior note, 144A, 10.50%, 1/15/26 | United States | 3,000,000 | 2,492,610 | |||||||||||
senior secured note, 144A, 7.25%, 5/15/27 | United States | 10,800,000 | 10,742,220 | |||||||||||
c | Three Gorges Finance I Cayman Islands Ltd., senior note, 144A, 3.15%, 6/02/26 | China | 12,800,000 | 13,685,760 | ||||||||||
Virginia Electric & Power Co., senior bond, 6.35%, 11/30/37 | United States | 820,000 | 1,160,194 | |||||||||||
|
| |||||||||||||
186,706,965 | ||||||||||||||
|
| |||||||||||||
Total Corporate Bonds (Cost $1,554,351,111) | 1,465,890,698 | |||||||||||||
|
| |||||||||||||
h,m | Senior Floating Rate Interests 4.9% | |||||||||||||
Automobiles & Components 0.2% | ||||||||||||||
Adient U.S. LLC, Initial Term Loans, 5.45% - 5.742%, (3-month USD LIBOR + 4.00%), 5/06/24 | United States | 4,704,550 | 4,270,847 | |||||||||||
Thor Industries Inc., Initial USD Term Loans, 4.625% - 4.75%, (1-month USD LIBOR + 3.75%), 2/01/26 | United States | 1,799,397 | 1,656,195 | |||||||||||
|
| |||||||||||||
5,927,042 | ||||||||||||||
|
| |||||||||||||
Capital Goods 0.2% | ||||||||||||||
g | Alloy Finco Ltd., Term Loan B, PIK, 14.00%, 3/06/25 | United States | 2,746,714 | 1,339,023 | ||||||||||
Altra Industrial Motion Corp., Term Loan, 2.404%, (1-month USD LIBOR + 2.00%), 10/01/25 | United States | 2,331,005 | 2,217,369 | |||||||||||
Navistar Inc., Tranche B Term Loan, 4.22%, (1-month USD LIBOR + 3.50%), 11/06/24 | United States | 1,504,723 | 1,374,313 |
24 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
h,m | Senior Floating Rate Interests (continued) | |||||||||||||
Capital Goods (continued) | ||||||||||||||
Onsite Rental Group Operations Pty. Ltd., Term Loan, 5.50%, (1-month USD LIBOR + 4.50%), 10/25/22 | Australia | 3,404,855 | $ | 2,809,006 | ||||||||||
|
| |||||||||||||
7,739,711 | ||||||||||||||
|
| |||||||||||||
Commercial & Professional Services 0.2% | ||||||||||||||
Harsco Corp., Term Loan B-2, 2.688%, (1-month USD LIBOR + 2.25%), 12/10/24 | United States | 2,040,990 | 1,989,965 | |||||||||||
Pitney Bowes Inc., Incremental Tranche Term B Loans, 5.91%, (1-month USD LIBOR + 5.50%), 1/07/25 | United States | 2,700,000 | 2,340,001 | |||||||||||
Prime Security Services Borrower LLC, Term B-1, 4.266%, (1-month USD LIBOR + 3.25%), 9/12/26 | United States | 932,813 | 893,362 | |||||||||||
United Rentals North America Inc., Initial Term Loans, 2.154%, (1-month USD LIBOR + 1.75%), 10/31/25 | United States | 992,443 | 954,075 | |||||||||||
Ventia Pty. Ltd., Term B Loans, 4.95%, (3-month USD LIBOR + 3.50%), 5/21/26 | Australia | 825,792 | 759,729 | |||||||||||
|
| |||||||||||||
6,937,132 | ||||||||||||||
|
| |||||||||||||
Consumer Durables & Apparel 0.0%† | ||||||||||||||
Champ Acquisition Corp., Initial Term Loan, 6.572%, (3-month USD LIBOR + 5.50%), 12/21/25 | United States | 705,483 | 633,171 | |||||||||||
|
| |||||||||||||
Consumer Services 0.2% | ||||||||||||||
Aristocrat Technologies Inc., Term B-3 Loans, 2.859%, (3-month USD LIBOR + 1.75%), 10/19/24 | United States | 1,371,348 | 1,307,352 | |||||||||||
Caesars Resort Collection LLC, Term B Loans, 3.154%, (1-month USD LIBOR + 2.75%), 12/22/24 | United States | 2,992,347 | 2,529,781 | |||||||||||
Eldorado Resorts Inc., Initial Term Loan, 3.25%, (3-month USD LIBOR + 2.25%), 4/17/24 | United States | 1,792,284 | 1,715,739 | |||||||||||
NASCAR Holdings Inc., Initial Term Loans, 3.375%, (1-month USD LIBOR + 2.75%), 10/18/26 | United States | 4,000,000 | 3,758,216 | |||||||||||
|
| |||||||||||||
9,311,088 | ||||||||||||||
|
| |||||||||||||
Diversified Financials 0.0%† | ||||||||||||||
Russell Investments US Institutional Holdco Inc., Term Loan B, 3.822%, (3-month USD LIBOR + 2.75%), 6/01/23 | United States | 630,769 | 580,938 | |||||||||||
|
| |||||||||||||
Energy 0.3% | ||||||||||||||
Buckeye Partners LP, Initial Term Loans, 3.766%, (1-month USD LIBOR + 2.75%), 11/01/26 | United States | 1,569,434 | 1,481,153 | |||||||||||
n | Centurion Pipeline Co. LLC, Initial Term Loans, 3.654%, (1-month USD LIBOR + 3.25%), 9/28/25 | United States | 940,000 | 829,550 | ||||||||||
j | Fieldwood Energy LLC, Closing Date Loans, 6.25%, (3-month USD LIBOR + 5.25%), 4/11/22 | United States | 32,439,645 | 8,272,110 | ||||||||||
Utex Industries Inc., | ||||||||||||||
Initial Term Loan (First Lien), 5.311%, (3-month USD LIBOR + 4.00%), 5/21/21 | United States | 2,138,577 | 591,673 | |||||||||||
Second Lien Initial Term Loan, 8.561%, (3-month USD LIBOR + 7.25%), 5/20/22 | United States | 955,410 | 132,165 | |||||||||||
|
| |||||||||||||
11,306,651 | ||||||||||||||
|
| |||||||||||||
Food & Staples Retailing 0.1% | ||||||||||||||
Aramark Corp., U.S. Term B-4 Loan, 2.154%, (1-month USD LIBOR + 1.75%), 1/15/27 | United States | 3,900,000 | 3,689,767 | |||||||||||
|
|
franklintempleton.com | Annual Report | 25 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
h,m | Senior Floating Rate Interests (continued) | |||||||||||||
Food, Beverage & Tobacco 0.4% | ||||||||||||||
B&G Foods Inc., Tranche B-4 Term Loan, 2.904%, (1-month USD LIBOR + 2.50%), 10/10/26 | United States | 2,053,845 | $ | 2,002,926 | ||||||||||
CSM Bakery Supplies LLC, Second Lien Term Loan, 9.10%, (3-month USD LIBOR + 7.75%), 7/03/21 | United States | 13,621,246 | 10,442,960 | |||||||||||
JBS USA Lux SA, New Term Loans, 3.072%, (3-month USD LIBOR + 2.00%), 5/01/26 | United States | 2,254,515 | 2,187,937 | |||||||||||
|
| |||||||||||||
14,633,823 | ||||||||||||||
|
| |||||||||||||
Health Care Equipment & Services 0.2% | ||||||||||||||
Catalent Pharma Solutions Inc., Dollar Term B-2 Loan, 3.25%, (1-month USD LIBOR + 2.25%), 5/17/26 | United States | 5,286,650 | 5,220,567 | |||||||||||
DaVita Inc., Tranche B-1 Term Loan, 2.154%, (1-month USD LIBOR + 1.75%), 8/12/26 | United States | 1,995,000 | 1,948,554 | |||||||||||
National Mentor Holdings Inc., | ||||||||||||||
Initial Term C Loans, 5.71%, (3-month USD LIBOR + 4.25%), 3/08/26 | United States | 5,603 | 5,350 | |||||||||||
Initial Term Loans, 4.66%, (1-month USD LIBOR + 4.25%), 3/08/26 | United States | 88,521 | 84,538 | |||||||||||
Initial Term Loans, 5.71%, (3-month USD LIBOR + 4.25%), 3/08/26 | United States | 34,840 | 33,272 | |||||||||||
|
| |||||||||||||
7,292,281 | ||||||||||||||
|
| |||||||||||||
Household & Personal Products 1.1% | ||||||||||||||
b | FGI Operating Co. LLC (Freedom Group), | |||||||||||||
g Term Loan, PIK, 12.00%, (3-month USD LIBOR + 10.00%), 5/15/22 | United States | 15,104,489 | 13,194,791 | |||||||||||
Term Loan FILO, 9.50%, (3-month USD LIBOR + 7.50%), 5/15/21 | United States | 28,662,305 | 28,533,902 | |||||||||||
Knowlton Development Corp., Initial Term Loan, 4.154%, (1-month USD LIBOR + 3.75%), 12/21/25 | United States | 600,775 | 542,199 | |||||||||||
|
| |||||||||||||
42,270,892 | ||||||||||||||
|
| |||||||||||||
Materials 0.4% | ||||||||||||||
Appvion Operations Inc., | ||||||||||||||
Term Loan, 7.00%, (3-month USD LIBOR + 6.00%), 6/15/26 | United States | 4,803,277 | 4,707,211 | |||||||||||
Term Loan, 8.25%, (Prime + 5.00%), 6/15/26 | United States | 20,020 | 19,620 | |||||||||||
n | Arconic Corp., Initial Term Loans, 3.24%, (1-month USD LIBOR + 2.75%), 2/04/27 | United States | 5,930,000 | 5,900,350 | ||||||||||
Axalta Coating Systems U.S. Holdings Inc. (DuPont Performance Coatings), Term B-3 Dollar Loan, 3.20%, (3-month USD LIBOR + 1.75%), 6/01/24 | United States | 1,898,314 | 1,853,703 | |||||||||||
Berry Global Inc., Term Y Loans, 2.829%, (1-month USD LIBOR + 2.00%), 7/01/26 | United States | 2,992,462 | 2,869,230 | |||||||||||
|
| |||||||||||||
15,350,114 | ||||||||||||||
|
| |||||||||||||
Media & Entertainment 0.2% | ||||||||||||||
Charter Communications Operating LLC, Term A-2 Loan, 1.91%, (1-month USD LIBOR + 1.50%), 3/31/23 | United States | 2,878,378 | 2,820,811 | |||||||||||
CSC Holdings LLC, March 2017 Incremental Term Loans, 3.064%, (1-month USD LIBOR + 2.25%), 7/17/25 | United States | 992,328 | 953,130 | |||||||||||
Diamond Sports Group LLC, Term Loan, 3.82%, (1-month USD LIBOR + 3.25%), 8/24/26 | United States | 2,985,000 | 2,449,566 |
26 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
h,m | Senior Floating Rate Interests (continued) | |||||||||||||
Media & Entertainment (continued) | ||||||||||||||
Gray Television Inc., Term C Loan, 3.493%, (1-month USD LIBOR + 2.50%), 1/02/26 | United States | 339,690 | $ | 322,069 | ||||||||||
Lions Gate Capital Holdings LLC, Term A Loan, 2.154%, (1-month USD LIBOR + 1.75%), 3/22/23 | Canada | 2,414,577 | 2,275,739 | |||||||||||
Nexstar Broadcasting Inc., Term B-4 Loan, 3.735%, (1-month USD LIBOR + 2.75%), 9/19/26 | United States | 958,344 | 904,676 | |||||||||||
|
| |||||||||||||
9,725,991 | ||||||||||||||
|
| |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 0.1% | ||||||||||||||
Grifols Worldwide Operations USA Inc., Dollar Tranche B Term Loan, 2.137%, (1-week USD LIBOR + 2.00%), 11/15/27 | United States | 4,251,465 | 4,200,600 | |||||||||||
Syneos Health Inc. (INC Research LLC), Initial Term B Loans, 2.154%, (1-month USD LIBOR + 1.75%), 8/01/24 | United States | 1,352,135 | 1,318,332 | |||||||||||
|
| |||||||||||||
5,518,932 | ||||||||||||||
|
| |||||||||||||
Real Estate 0.1% | ||||||||||||||
Cushman & Wakefield U.S. Borrower LLC, Replacement Term Loan, 3.154%, (1-month USD LIBOR + 2.75%), 8/21/25 | United States | 3,181,257 | 2,961,976 | |||||||||||
|
| |||||||||||||
Retailing 0.1% | ||||||||||||||
Bass Pro Group LLC, Initial Term Loans, 6.072%, (3-month USD LIBOR + 5.00%), 9/25/24 | United States | 2,241,065 | 1,875,771 | |||||||||||
Harbor Freight Tools USA Inc., Refinancing Loans, 3.25%, (1-month USD LIBOR + 2.50%), 8/19/23 | United States | 1,525,435 | 1,452,977 | |||||||||||
Staples Inc., 2019 Refinancing Term B-1 Loans, 6.016%, (1-month USD LIBOR + 5.00%), 4/12/26 | United States | 535,237 | 430,197 | |||||||||||
|
| |||||||||||||
3,758,945 | ||||||||||||||
|
| |||||||||||||
Semiconductors & Semiconductor Equipment 0.0%† | ||||||||||||||
ON Semiconductor Corp., 2019 Replacement Term B-4 Loans, 2.404%, (1-month USD LIBOR + 2.00%), 9/18/26 | United States | 1,990,000 | 1,920,350 | |||||||||||
|
| |||||||||||||
Software & Services 0.6% | ||||||||||||||
Infor (U.S.) Inc. (Lawson), Tranche B-6 Term Loan, 3.75%, (1-month USD LIBOR + 2.75%), 2/01/22 | United States | 994,872 | 980,777 | |||||||||||
Surf Holdings LLC (Sophos), Dollar Tranche Term Loan, 4.814%, (3-month USD LIBOR + 3.50%), 3/05/27 | United States | 754,770 | 696,276 | |||||||||||
WEX Inc., Term B-3 Loan, 2.654%, (1-month USD LIBOR + 2.25%), 5/17/26 | United States | 4,129,021 | 3,913,536 | |||||||||||
b | WorkCapital BSD SARL, Loan, 17.707%, (3-month USD LIBOR + 16.00%), 2/11/22 | Luxembourg | 20,000,000 | 19,604,573 | ||||||||||
|
| |||||||||||||
25,195,162 | ||||||||||||||
|
| |||||||||||||
Technology Hardware & Equipment 0.1% | ||||||||||||||
CommScope Inc., Initial Term Loans, 3.654%, (1-month USD LIBOR + 3.25%), 4/04/26 | United States | 2,194,486 | 2,084,213 | |||||||||||
|
|
franklintempleton.com | Annual Report | 27 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
h,m | Senior Floating Rate Interests (continued) | |||||||||||||
Telecommunication Services 0.2% | ||||||||||||||
Aventiv Technologies LLC, | ||||||||||||||
Initial Term Loan, 5.50%, (2-month USD LIBOR + 4.50%), 11/01/24 | United States | 6,329 | $ | 5,316 | ||||||||||
Initial Term Loan, 5.50%, (3-month USD LIBOR + 4.50%), 11/01/24 | United States | 2,468,354 | 2,073,417 | |||||||||||
Second Lien Initial Loan, 9.25%, (3-month USD LIBOR + 8.25%), 11/01/25 | United States | 7,588,688 | 4,742,930 | |||||||||||
Global Tel*Link Corp., | ||||||||||||||
First Lien Term Loan, 5.70%, (3-month USD LIBOR + 4.25%), 11/29/25 | United States | 992,463 | 870,128 | |||||||||||
Second Lien Term Loan, 9.70%, (3-month USD LIBOR + 8.25%), 11/29/26 | United States | 545,755 | 441,152 | |||||||||||
|
| |||||||||||||
8,132,943 | ||||||||||||||
|
| |||||||||||||
Transportation 0.2% | ||||||||||||||
Air Canada, Term Loans, 2.468%, (1-month USD LIBOR + 1.75%), 10/06/23 | Canada | 404,661 | 369,253 | |||||||||||
Allegiant Travel Co., Class B Term Loan, 4.707%, (3-month USD LIBOR + 3.00%), 2/05/24. | United States | 5,571,985 | 4,457,588 | |||||||||||
Avis Budget Car Rental LLC, Tranche B Term Loans, 2.66%, (1-month USD LIBOR + 2.25%), 8/06/27 | United States | 1,674,795 | 1,169,007 | |||||||||||
Westjet Airlines Ltd., Initial Term Loan, 4.00%, (1-month USD LIBOR + 3.00%), 12/11/26 | Canada | 2,094,750 | 1,719,790 | |||||||||||
|
| |||||||||||||
7,715,638 | ||||||||||||||
|
| |||||||||||||
Utilities 0.0%† | ||||||||||||||
EFS Cogen Holdings I LLC (Linden), | ||||||||||||||
Term B Advance, 4.25%, (1-month USD LIBOR + 3.25%), 6/28/23 | United States | 282,435 | 273,565 | |||||||||||
Term B Advance, 4.71%, (3-month USD LIBOR + 3.25%), 6/28/23 | United States | 680,785 | 659,404 | |||||||||||
|
| |||||||||||||
932,969 | ||||||||||||||
|
| |||||||||||||
Total Senior Floating Rate Interests (Cost $242,699,738) | 193,619,729 | |||||||||||||
|
| |||||||||||||
o | Marketplace Loans 0.2% | |||||||||||||
Diversified Financials 0.2% | ||||||||||||||
b | Lending Club LCX, 6.46% - 28.80%, 5/31/22 - 3/03/25 | United States | 4,135,119 | 3,814,713 | ||||||||||
b | Upgrade, 14.19% - 30.51%, 11/05/22 - 2/20/25 | United States | 2,877,150 | 2,574,341 | ||||||||||
|
| |||||||||||||
Total Marketplace Loans (Cost $6,876,562) | 6,389,054 | |||||||||||||
|
| |||||||||||||
Foreign Government and Agency Securities 11.1% | ||||||||||||||
c | The African Export-Import Bank, senior bond, 144A, 3.994%, 9/21/29 | Supranational | p | 16,100,000 | 14,626,206 | |||||||||
c | Angolan Government International Bond, senior note, 144A, 8.25%, 5/09/28 | Angola | 30,800,000 | 13,706,585 | ||||||||||
f | Banque Centrale de Tunisie International Bond, senior note, Reg S, 5.625%, 2/17/24 | Tunisia | 25,700,000 | EUR | 23,454,602 |
28 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Foreign Government and Agency Securities (continued) | ||||||||||||||
c | Banque Ouest Africaine de Developpement, senior note, 144A, 5.00%, 7/27/27 | Supranationalp | 15,800,000 | $ | 14,754,514 | |||||||||
q | Brazil Notas do Tesouro Nacional, Index Linked, 6.00%, 5/15/23 | Brazil | 19,500 | i BRL | 13,130,748 | |||||||||
c | Dominican Republic, senior note, 144A, 8.90%, 2/15/23 | Dominican Republic | 838,300,000 | DOP | 13,695,381 | |||||||||
c | The Export-Import Bank of India, senior note, 144A, 3.875%, 2/01/28 | India | 16,000,000 | 15,886,047 | ||||||||||
c | Government of Belarus International Bond, | |||||||||||||
senior bond, 144A, 6.20%, 2/28/30 | Belarus | 12,300,000 | 11,121,623 | |||||||||||
senior note, 144A, 7.625%, 6/29/27 | Belarus | 11,400,000 | 11,304,297 | |||||||||||
Government of Colombia, | ||||||||||||||
senior bond, 3.875%, 4/25/27 | Colombia | 14,000,000 | 13,895,000 | |||||||||||
senior bond, 9.85%, 6/28/27 | Colombia | 55,750,000,000 | COP | 16,136,676 | ||||||||||
senior bond, 4.50%, 3/15/29 | Colombia | 2,800,000 | 2,842,028 | |||||||||||
senior bond, 5.00%, 6/15/45 | Colombia | 20,700,000 | 20,855,250 | |||||||||||
c | Government of Gabon, | |||||||||||||
144A, 6.375%, 12/12/24 | Gabon | 11,143,918 | 8,077,335 | |||||||||||
senior note, 144A, 6.625%, 2/06/31 | Gabon | 17,150,000 | 12,232,830 | |||||||||||
Government of Indonesia, | ||||||||||||||
c senior bond, 144A, 4.35%, 1/08/27 | Indonesia | 8,100,000 | 8,606,027 | |||||||||||
senior bond, FR34, 12.80%, 6/15/21 | Indonesia | 129,210,000,000 | IDR | 9,358,280 | ||||||||||
senior bond, FR39, 11.75%, 8/15/23 | Indonesia | 29,150,000,000 | IDR | 2,226,570 | ||||||||||
senior bond, FR44, 10.00%, 9/15/24 | Indonesia | 8,340,000,000 | IDR | 610,908 | ||||||||||
senior bond, FR56, 8.375%, 9/15/26 | Indonesia | 363,988,000,000 | IDR | 25,154,919 | ||||||||||
c | Government of Iraq, 144A, 5.80%, 1/15/28 | Iraq | 29,000,000 | 21,315,000 | ||||||||||
c | Government of Kazakhstan, senior bond, 144A, 4.875%, 10/14/44 | Kazakhstan | 19,300,000 | 21,992,215 | ||||||||||
Government of Mexico, senior note, 4.15%, 3/28/27 | Mexico | 32,700,000 | 32,822,625 | |||||||||||
Government of Peru, senior bond, 6.55%, 3/14/37 | Peru | 11,400,000 | 16,428,654 | |||||||||||
c | Government of Russia, senior note, 144A, 4.875%, 9/16/23 | Russia | 8,600,000 | 9,394,984 | ||||||||||
Government of South Africa, senior bond, 7.00%, 2/28/31 | South Africa | 365,000,000 | ZAR | 15,253,746 | ||||||||||
c | Government of Ukraine, | |||||||||||||
144A, 7.75%, 9/01/22 | Ukraine | 2,200,000 | 2,105,972 | |||||||||||
144A, 7.75%, 9/01/23 | Ukraine | 4,355,000 | 4,149,588 | |||||||||||
144A, 7.75%, 9/01/24 | Ukraine | 4,355,000 | 4,125,134 | |||||||||||
a,r 144A, VRI, GDP Linked Security, 5/31/40 | Ukraine | 9,990,000 | 7,432,730 | |||||||||||
senior bond, 144A, 7.375%, 9/25/32 | Ukraine | 6,000,000 | 5,341,380 | |||||||||||
Government of Uruguay, | ||||||||||||||
senior bond, 4.375%, 1/23/31 | Uruguay | 8,000,000 | 8,855,280 | |||||||||||
s senior bond, Index Linked, 3.70%, 6/26/37 | Uruguay | 878,180,123 | UYU | 19,114,768 | ||||||||||
Nota do Tesouro Nacional, 10.00%, 1/01/23 | Brazil | 34,402 | i BRL | 7,102,123 | ||||||||||
c | Panama Notas del Tesoro, senior note, 144A, 3.75%, 4/17/26 | Panama | 8,200,000 | 8,351,290 | ||||||||||
|
| |||||||||||||
Total Foreign Government and Agency Securities | 435,461,315 | |||||||||||||
|
|
franklintempleton.com | Annual Report | 29 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
U.S. Government and Agency Securities 4.7% | ||||||||||||||
U.S. Treasury Bond, | ||||||||||||||
7.125%, 2/15/23 | United States | 3,000,000 | $ | 3,578,086 | ||||||||||
6.25%, 8/15/23 | United States | 4,000,000 | 4,788,750 | |||||||||||
6.875%, 8/15/25 | United States | 1,000,000 | 1,341,484 | |||||||||||
U.S. Treasury Note, | ||||||||||||||
1.50%, 11/30/21 | United States | 30,000,000 | 30,624,024 | |||||||||||
s Index Linked, 0.625%, 1/15/24 | United States | 25,440,811 | 26,129,946 | |||||||||||
s Index Linked, 0.125%, 7/15/24 | United States | 61,590,110 | 62,618,322 | |||||||||||
s Index Linked, 0.375%, 7/15/25 | United States | 34,575,438 | 35,937,051 | |||||||||||
s Index Linked, 0.375%, 7/15/27 | United States | 18,937,664 | 20,046,486 | |||||||||||
|
| |||||||||||||
Total U.S. Government and Agency Securities (Cost $179,360,989) | 185,064,149 | |||||||||||||
|
| |||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities 25.0% | ||||||||||||||
Banks 0.1% | ||||||||||||||
t | Commercial Mortgage Trust, 2006-GG7, AJ, FRN, 5.807%, 7/10/38 | United States | 5,333,000 | 3,253,130 | ||||||||||
t | CWABS Asset-Backed Certificates Trust, 2005-11, AF4, FRN, 5.21%, 3/25/34 | United States | 1,185,427 | 1,186,441 | ||||||||||
u | Merrill Lynch Mortgage Investors Trust, 2005-A6, 2A3, FRN, 0.867%, (1-month USD LIBOR + 0.38%), 8/25/35 | United States | 546,624 | 539,612 | ||||||||||
|
| |||||||||||||
4,979,183 | ||||||||||||||
|
| |||||||||||||
Diversified Financials 24.9% | ||||||||||||||
u | American Express Credit Account Master Trust, 2017-2, A, FRN, 1.264%, (1-month USD LIBOR + 0.45%), 9/16/24 | United States | 9,170,000 | 9,187,354 | ||||||||||
c,u | AMMC CLO XI Ltd., | |||||||||||||
2012-11A, BR2, 144A, FRN, 2.36%, (3-month USD LIBOR + 1.60%), 4/30/31 | United States | 3,000,000 | 2,756,139 | |||||||||||
2012-11A, CR2, 144A, FRN, 2.66%, (3-month USD LIBOR + 1.90%), 4/30/31 | United States | 1,000,000 | 876,225 | |||||||||||
c,u | Antares CLO Ltd., 2018-1A, B, 144A, FRN, 2.785%, (3-month USD LIBOR + 1.65%), 4/20/31 | United States | 17,500,000 | 16,315,553 | ||||||||||
c,t | ARES L CLO Ltd., 2018-50A, B, 144A, FRN, 2.919%, 1/15/32 | United States | 15,700,000 | 14,909,902 | ||||||||||
c,t | ARES LII CLO Ltd., | |||||||||||||
2019-52A, A2, 144A, FRN, 2.748%, 4/22/31 | United States | 2,522,358 | 2,245,211 | |||||||||||
2019-52A, B, 144A, FRN, 2.948%, 4/22/31 | United States | 3,500,000 | 3,350,786 | |||||||||||
2019-52A, C, 144A, FRN, 3.778%, 4/22/31 | United States | 1,000,000 | 934,312 | |||||||||||
c,t | BCC Middle Market CLO LLC, 2018-1A, A2, 144A, FRN, 3.285%, 10/20/30 | United States | 6,300,000 | 5,777,330 | ||||||||||
c,t | BlueMountain CLO Ltd., | |||||||||||||
2012-2A, BR2, 144A, FRN, 3.145%, 11/20/28 | United States | 6,710,000 | 6,388,635 | |||||||||||
2012-2A, CR2, 144A, FRN, 3.695%, 11/20/28 | United States | 2,730,000 | 2,497,292 | |||||||||||
2014-2A, CR2, 144A, FRN, 3.335%, 10/20/30 | United States | 3,800,000 | 3,425,309 | |||||||||||
2018-1A, D, 144A, FRN, 3.81%, 7/30/30 | United States | 5,000,000 | 3,963,593 | |||||||||||
c,t | Bluemountain Fuji Eur CLO V DAC, | |||||||||||||
5A, A, 144A, FRN, 0.91%, 1/15/33 | Ireland | 20,900,000 | EUR | 21,932,773 | ||||||||||
5A, B, 144A, FRN, 1.55%, 1/15/33 | Ireland | 6,200,000 | EUR | 6,291,704 |
30 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||
Diversified Financials (continued) | ||||||||||||||
c,u | BlueMountain Fuji U.S. CLO III Ltd., 2017-3A, C, 144A, FRN, 2.919%, (3-month USD LIBOR + 1.70%), 1/15/30 | United States | 600,000 | $ | 531,782 | |||||||||
c | BRAVO Residential Funding Trust, | |||||||||||||
2019-1, A1C, 144A, 3.50%, 3/25/58 | United States | 9,158,796 | 9,280,155 | |||||||||||
t 2019-2, A3, 144A, FRN, 3.50%, 10/25/44 | United States | 9,882,700 | 10,098,785 | |||||||||||
c,t | Burnham Park CLO Ltd., 2016-1A, BR, 144A, FRN, 2.635%, 10/20/29 | United States | 3,500,000 | 3,347,720 | ||||||||||
c,t | Buttermilk Park CLO Ltd., 2018-1A, C, 144A, FRN, 3.319%, 10/15/31 | United States | 9,730,950 | 8,813,822 | ||||||||||
u | Capital One Multi-Asset Execution Trust, | |||||||||||||
2016-A2, A2, FRN, 1.444%, (1-month USD LIBOR + 0.63%), 2/15/24 | United States | 44,033,000 | 44,134,932 | |||||||||||
2016-A7, A7, FRN, 1.324%, (1-month USD LIBOR + 0.51%), 9/16/24 | United States | 4,400,000 | 4,398,031 | |||||||||||
c,u | Carlyle Global Market Strategies CLO Ltd., 2014-4RA, C, 144A, FRN, 4.119%, (3-month USD LIBOR + 2.90%), 7/15/30 | United States | 3,000,000 | 2,083,346 | ||||||||||
c,t | Carlyle GMS Finance MM CLO LLC, 2015-1A, A2R, 144A, FRN, 3.419%, 10/15/31 | United States | 12,000,000 | 10,916,539 | ||||||||||
c,u | Catamaran CLO Ltd., 2014-2A, BR, 144A, FRN, 4.085%, (3-month USD LIBOR + 2.95%), 10/18/26 | United States | 11,770,000 | 11,483,883 | ||||||||||
c,t | CIM Trust, | |||||||||||||
2019-INV1, A1, 144A, FRN, 4.00%, 2/25/49 | United States | 10,739,467 | 10,932,669 | |||||||||||
2019-INV2, A3, 144A, FRN, 4.00%, 5/25/49 | United States | 13,778,730 | 14,110,632 | |||||||||||
t | Citibank Credit Card Issuance Trust, | |||||||||||||
2016-A3, A3, FRN, 1.475%, 12/07/23 | United States | 4,800,000 | 4,800,661 | |||||||||||
2017-A7, A7, FRN, 1.291%, 8/08/24 | United States | 36,060,000 | 35,950,598 | |||||||||||
c,t | Cole Park CLO Ltd., 2015-1A, BR, 144A, FRN, 2.735%, 10/20/28 | United States | 3,530,000 | 3,397,051 | ||||||||||
c,t | Consumer Loan Underlying Bond CLUB Certificate Issuer Trust I, | |||||||||||||
2018-14, PT, 144A, FRN, 9.461%, 9/16/41 | United States | 3,222,346 | 2,920,730 | |||||||||||
2018-29, PT, 144A, FRN, 28.366%, 12/15/43 | United States | 1,722,639 | 1,272,714 | |||||||||||
2019-26, PT, 144A, FRN, 19.324%, 8/15/44 | United States | 6,453,622 | 5,132,284 | |||||||||||
2019-31, PT, 144A, FRN, 22.58%, 9/15/44 | United States | 5,925,596 | 4,688,246 | |||||||||||
2019-37, PT, 144A, FRN, 21.925%, 10/17/44 | United States | 6,026,931 | 4,902,598 | |||||||||||
2019-42, PT, 144A, FRN, 20.897%, 11/15/44 | United States | 6,417,553 | 5,125,779 | |||||||||||
2019-51, PT, 144A, FRN, 17.718%, 1/15/45 | United States | 6,842,591 | 5,715,967 | |||||||||||
2019-52, PT, 144A, FRN, 17.151%, 1/15/45 | United States | 6,627,669 | 5,610,558 | |||||||||||
2019-S1, PT, 144A, FRN, 16.345%, 4/15/44 | United States | 5,077,078 | 3,997,420 | |||||||||||
2019-S2, PT, 144A, FRN, 13.40%, 5/16/44 | United States | 3,788,796 | 3,001,480 | |||||||||||
2019-S3, PT, 144A, FRN, 14.312%, 6/15/44 | United States | 4,632,729 | 3,622,926 | |||||||||||
2019-S4, PT, 144A, FRN, 13.259%, 8/15/44 | United States | 5,382,565 | 4,287,501 | |||||||||||
2019-S5, PT, 144A, FRN, 18.85%, 9/15/44 | United States | 5,042,008 | 4,066,929 | |||||||||||
2019-S6, PT, 144A, FRN, 12.849%, 10/17/44 | United States | 4,813,001 | 3,895,597 | |||||||||||
2019-S7, PT, 144A, FRN, 11.521%, 12/15/44 | United States | 4,144,156 | 3,351,316 | |||||||||||
2019-S8, PT, 144A, FRN, 11.622%, 1/15/45 | United States | 5,160,366 | 4,204,373 | |||||||||||
2020-2, PT, 144A, FRN, 15.85%, 3/15/45 | United States | 6,616,670 | 5,637,161 | |||||||||||
2020-7, PT, 144A, FRN, 14.159%, 4/17/45 | United States | 4,169,349 | 3,594,205 |
franklintempleton.com | Annual Report | 31 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||
Diversified Financials (continued) | ||||||||||||||
t | Discover Card Execution Note Trust, 2017-A7, A7, FRN, 1.174%, 4/15/25 | United States | 5,360,000 | $ | 5,322,793 | |||||||||
c,t | Dryden 38 Senior Loan Fund, 2015-38A, CR, 144A, FRN, 3.219%, 7/15/30 | United States | 7,186,000 | 6,472,966 | ||||||||||
c,u | Dryden 42 Senior Loan Fund, 2016-42A, DR, 144A, FRN, 4.149%, (3-month USD LIBOR + 2.93%), 7/15/30 | United States | 8,400,000 | 6,639,575 | ||||||||||
c,u | Dryden 55 CLO Ltd., 2018-55A, D, 144A, FRN, 4.069%, (3-month USD LIBOR + 2.85%), 4/15/31 | United States | 3,000,000 | 2,371,126 | ||||||||||
c,t | Eaton Vance CLO Ltd., 2014-1RA, C, 144A, FRN, 3.319%, 7/15/30 | United States | 1,972,575 | 1,838,815 | ||||||||||
FHLMC Structured Agency Credit Risk Debt Notes, | ||||||||||||||
u 2013-DN2, M2, FRN, 4.737%, (1-month USD LIBOR + 4.25%), 11/25/23 | United States | 11,134,728 | 9,648,379 | |||||||||||
u 2014-DN1, M2, FRN, 2.687%, (1-month USD LIBOR + 2.20%), 2/25/24 | United States | 4,184,927 | 4,013,785 | |||||||||||
u 2014-DN2, M3, FRN, 4.087%, (1-month USD LIBOR + 3.60%), 4/25/24 | United States | 21,379,000 | 14,666,486 | |||||||||||
u 2014-DN3, M3, FRN, 4.487%, (1-month USD LIBOR + 4.00%), 8/25/24 | United States | 917,035 | 745,884 | |||||||||||
u 2014-DN4, M3, FRN, 5.037%, (1-month USD LIBOR + 4.55%), 10/25/24 | United States | 11,859,300 | 10,011,556 | |||||||||||
u 2014-HQ1, M3, FRN, 4.587%, (1-month USD LIBOR + 4.10%), 8/25/24 | United States | 2,546,802 | 2,197,642 | |||||||||||
u 2014-HQ2, M2, FRN, 2.687%, (1-month USD LIBOR + 2.20%), 9/25/24 | United States | 4,939,705 | 4,697,549 | |||||||||||
u 2014-HQ3, M3, FRN, 5.237%, (1-month USD LIBOR + 4.75%), 10/25/24 | United States | 4,923,319 | 4,329,737 | |||||||||||
u 2015-DNA1, M3, FRN, 3.787%, (1-month USD LIBOR + 3.30%), 10/25/27 | United States | 2,830,000 | 2,834,359 | |||||||||||
u 2015-DNA3, M3, FRN, 5.187%, (1-month USD LIBOR + 4.70%), 4/25/28 | United States | 18,411,581 | 18,643,031 | |||||||||||
u 2015-HQ1, M3, FRN, 4.287%, (1-month USD LIBOR + 3.80%), 3/25/25 | United States | 5,167,450 | 4,758,352 | |||||||||||
u 2015-HQA1, M3, FRN, 5.187%, (1-month USD LIBOR + 4.70%), 3/25/28 | United States | 17,579,820 | 17,620,689 | |||||||||||
u 2016-DNA2, M3, FRN, 5.137%, (1-month USD LIBOR + 4.65%), 10/25/28 | United States | 14,997,874 | 14,936,515 | |||||||||||
t 2017-DNA1, M2, FRN, 3.737%, 7/25/29 | United States | 7,300,000 | 7,044,787 | |||||||||||
t 2017-DNA2, M2, FRN, 3.937%, 10/25/29 | United States | 5,868,312 | 5,706,672 | |||||||||||
u 2017-DNA3, M2, FRN, 2.987%, (1-month USD LIBOR + 2.50%), 3/25/30 | United States | 26,312,269 | 25,082,989 | |||||||||||
t 2017-HQA1, M2, FRN, 4.037%, 8/25/29 | United States | 27,283,882 | 25,451,979 | |||||||||||
t 2017-HQA2, M2, FRN, 3.137%, 12/25/29 | United States | 2,885,000 | 2,592,356 |
32 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||
Diversified Financials (continued) | ||||||||||||||
c,u | Flagship CLO VIII Ltd., 2014-8A, ARR, 144A, FRN, 2.026%, (3-month USD LIBOR + 0.85%), 1/16/26 | United States | 2,820,106 | $ | 2,802,766 | |||||||||
FNMA Connecticut Avenue Securities, | ||||||||||||||
u 2013-C01, M2, FRN, 5.737%, (1-month USD LIBOR + 5.25%), 10/25/23 | United States | 13,462,334 | 11,662,843 | |||||||||||
u 2014-C01, M2, FRN, 4.887%, (1-month USD LIBOR + 4.40%), 1/25/24 | United States | 15,697,826 | 12,642,767 | |||||||||||
u 2014-C02, 1M2, FRN, 3.087%, (1-month USD LIBOR + 2.60%), 5/25/24 | United States | 12,725,890 | 9,734,343 | |||||||||||
u 2014-C03, 1M2, FRN, 3.487%, (1-month USD LIBOR + 3.00%), 7/25/24 | United States | 27,936,243 | 21,806,358 | |||||||||||
u 2014-C03, 2M2, FRN, 3.387%, (1-month USD LIBOR + 2.90%), 7/25/24 | United States | 3,461,858 | 2,723,526 | |||||||||||
u 2015-C01, 1M2, FRN, 4.787%, (1-month USD LIBOR + 4.30%), 2/25/25 | United States | 6,798,376 | 5,518,932 | |||||||||||
u 2015-C01, 2M2, FRN, 5.037%, (1-month USD LIBOR + 4.55%), 2/25/25 | United States | 7,419,841 | 6,529,664 | |||||||||||
u 2015-C02, 1M2, FRN, 4.487%, (1-month USD LIBOR + 4.00%), 5/25/25 | United States | 19,742,597 | 16,389,412 | |||||||||||
u 2015-C02, 2M2, FRN, 4.487%, (1-month USD LIBOR + 4.00%), 5/25/25 | United States | 8,907,677 | 7,776,436 | |||||||||||
u 2015-C03, 1M2, FRN, 5.487%, (1-month USD LIBOR + 5.00%), 7/25/25 | United States | 24,185,087 | 18,262,268 | |||||||||||
b,u 2015-C03, 2M2, FRN, 5.487%, (1-month USD LIBOR + 5.00%), 7/25/25 | United States | 11,172,098 | 8,697,031 | |||||||||||
t 2016-C02, 1M2, FRN, 6.487%, 9/25/28 | United States | 8,454,810 | 8,685,929 | |||||||||||
t 2016-C04, 1M2, FRN, 4.737%, 1/25/29 | United States | 8,959,385 | 8,890,458 | |||||||||||
t 2016-C05, 2M2, FRN, 4.937%, 1/25/29 | United States | 5,427,001 | 5,380,774 | |||||||||||
t 2016-C06, 1M2, FRN, 4.737%, 4/25/29 | United States | 2,220,000 | 2,191,781 | |||||||||||
t 2016-C07, 2M2, FRN, 4.837%, 5/25/29 | United States | 3,393,709 | 3,361,827 | |||||||||||
u 2017-C01, 1M2, FRN, 4.037%, (1-month USD LIBOR + 3.55%), 7/25/29 | United States | 22,194,857 | 21,525,649 | |||||||||||
t 2017-C03, 1M2, FRN, 3.487%, 10/25/29 | United States | 24,932,535 | 23,898,471 | |||||||||||
t 2017-C03, 2M2, FRN, 3.337%, 11/25/29 | United States | 7,075,499 | 6,565,832 | |||||||||||
t 2017-C05, 1M2, FRN, 2.687%, 1/25/30 | United States | 19,497,805 | 18,255,105 | |||||||||||
c,u | Galaxy XVIII CLO Ltd., 2018-28A, C, 144A, FRN, 3.169%, (3-month USD LIBOR + 1.95%), 7/15/31 | United States | 3,070,000 | 2,716,092 | ||||||||||
c,u | Galaxy XXVII CLO Ltd., 2018-27A, C, 144A, FRN, 3.492%, (3-month USD LIBOR + 1.80%), 5/16/31 | United States | 3,600,000 | 3,179,694 | ||||||||||
c,t | HPS Loan Management Ltd., 2013A-18, C, 144A, FRN, 3.369%, 10/15/30 | United States | 4,950,000 | 4,320,609 | ||||||||||
c,t | LCM XVI LP, 2016A, BR2, 144A, FRN, 2.969%, 10/15/31 | United States | 13,525,832 | 12,543,386 | ||||||||||
c,t | LCM XVII LP, | |||||||||||||
2017A, BRR, 144A, FRN, 2.819%, 10/15/31 | United States | 4,590,000 | 4,257,756 | |||||||||||
2017A, CRR, 144A, FRN, 3.319%, 10/15/31 | United States | 4,240,000 | 3,652,383 |
franklintempleton.com | Annual Report | 33 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||
Diversified Financials (continued) | ||||||||||||||
c,u | LCM XVIII LP, 2018A, DR, 144A, FRN, 3.935%, (3-month USD LIBOR + 2.80%), 4/20/31 | United States | 6,860,000 | $ | 4,954,130 | |||||||||
c,t | Madison Park Euro Funding VIII DAC, 8A, BRN, 144A, FRN, 1.70%, 4/15/32 | Ireland | 4,100,000 | EUR | 4,190,997 | |||||||||
c,t | Madison Park Euro Funding XIV DAC, 2014A, A1N, 144A, FRN, 1.12%, 7/15/32 | Ireland | 9,800,000 | EUR | 10,525,929 | |||||||||
c,u | Madison Park Funding XXIII Ltd., 2017-23A, B, 144A, FRN, 2.691%, (3-month USD LIBOR + 1.70%), 7/27/30 | United States | 2,400,000 | 2,310,529 | ||||||||||
c,t | Mill City Mortgage Loan Trust, 2018-4, A1B, 144A, FRN, 3.50%, 4/25/66 | United States | 16,583,183 | 16,980,207 | ||||||||||
u | MortgageIT Trust, | |||||||||||||
2004-1, A2, FRN, 1.387%, (1-month USD LIBOR + 0.90%), 11/25/34 | United States | 1,445,887 | 1,379,989 | |||||||||||
2005-5, A1, FRN, 1.007%, (1-month USD LIBOR + 0.26%), 12/25/35 | United States | 1,312,964 | 1,204,020 | |||||||||||
c,t | Mountain View Funding CLO XIV Ltd., 2019-1A, C, 144A, FRN, 4.119%, 4/15/29 | United States | 4,500,000 | 4,214,420 | ||||||||||
c,t | Neuberger Berman CLO XVIII Ltd., 2014-18A, CR2, 144A, FRN, 4.109%, 10/21/30 | United States | 500,000 | 401,708 | ||||||||||
c,t | Neuberger Berman CLO XXII Ltd., 2016-22A, CR, 144A, FRN, 3.335%, 10/17/30 | United States | 2,129,630 | 1,921,323 | ||||||||||
c,u | NZCG Funding Ltd., 2015-1A, A2R, 144A, FRN, 3.197%, (3-month USD LIBOR + 1.55%), 2/26/31 | United States | 15,500,000 | 14,507,761 | ||||||||||
c,t | Octagon Investment Partners 24 Ltd., 2015-1A, BS, 144A, FRN, 3.009%, 4/21/31 | United States | 4,485,000 | 4,315,741 | ||||||||||
c,t | Octagon Investment Partners 28 Ltd., | |||||||||||||
2016-1A, A2R, 144A, FRN, 2.47%, 10/24/30 | United States | 5,000,000 | 4,680,612 | |||||||||||
2016-1A, BR, 144A, FRN, 2.82%, 10/24/30 | United States | 3,914,730 | 3,737,410 | |||||||||||
c,u | Octagon Investment Partners 36 Ltd., 2018-1A, A1, 144A, FRN, 2.189%, (3-month USD LIBOR + 0.97%), 4/15/31 | United States | 7,475,000 | 7,102,621 | ||||||||||
c,u | Octagon Investment Partners 37 Ltd., 2018-2A, C, 144A, FRN, 3.841%, (3-month USD LIBOR + 2.85%), 7/25/30 | United States | 4,000,000 | 3,161,039 | ||||||||||
c,t | Octagon Investment Partners 38 Ltd., 2018-1A, C, 144A, FRN, 4.085%, 7/20/30 | United States | 5,000,000 | 3,993,104 | ||||||||||
c,u | Octagon Investment Partners XVI Ltd., 2013-1A, DR, 144A, FRN, 4.135%, (3-month USD LIBOR + 3.00%), 7/17/30 | United States | 6,000,000 | 4,798,700 | ||||||||||
c,u | Octagon Investment Partners XXIII Ltd., 2015-1A, BR, 144A, FRN, 2.419%, (3-month USD LIBOR + 1.20%), 7/15/27 | United States | 4,590,000 | 4,393,207 | ||||||||||
u | Opteum Mortgage Acceptance Corp. Trust, 2005-4, 1APT, FRN, 0.797%, (1-month USD LIBOR + 0.31%), 11/25/35 | United States | 1,405,169 | 1,381,402 | ||||||||||
c,t | Prosper Pass-Thru Trust III, | |||||||||||||
2020-PT1, A, 144A, FRN, 8.796%, 3/15/26 | United States | 4,292,165 | 4,129,223 | |||||||||||
2020-PT2, A, 144A, FRN, 9.444%, 4/15/26 | United States | 4,670,270 | 4,547,771 | |||||||||||
2020-PT3, A, 144A, FRN, 7.183%, 5/15/26 | United States | 1,304,418 | 1,325,764 | |||||||||||
c,t | Provident Funding Mortgage Trust, | |||||||||||||
2019-1, A2, 144A, FRN, 3.00%, 12/25/49 | United States | 9,570,871 | 9,900,077 | |||||||||||
2020-1, A3, 144A, FRN, 3.00%, 2/25/50 | United States | 10,457,206 | 10,716,042 |
34 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||||||
Diversified Financials (continued) | ||||||||||||||
c,t | Strata CLO I Ltd., 2018-1A, B, 144A, FRN, 3.419%, 1/15/31 | United States | 14,100,000 | $ | 11,924,469 | |||||||||
u | Structured Asset Securities Corp., 2005-2XS, 2A2, FRN, 2.485%, (1-month USD LIBOR + 1.50%), 2/25/35 | United States | 1,586,298 | 1,511,372 | ||||||||||
t | Thornburg Mortgage Securities Trust, 2005-1, A3, FRN, 3.648%, 4/25/45 | United States | 1,794,005 | 1,640,724 | ||||||||||
b,c,t | Upgrade Master Pass-Thru Trust, | |||||||||||||
2019-PT1, A, 144A, FRN, 10.739%, 6/15/25 | United States | 2,807,805 | 2,132,024 | |||||||||||
2019-PT2, A, 144A, FRN, 12.57%, 2/15/26 | United States | 3,713,513 | 3,453,199 | |||||||||||
c | Voya CLO Ltd., | |||||||||||||
t 2013-2A, A2AR, 144A, FRN, 2.391%, 4/25/31 | United States | 2,200,000 | 2,027,334 | |||||||||||
u 2013-2A, BR, 144A, FRN, 2.841%, (3-month USD LIBOR + 1.85%), 4/25/31 | United States | 5,770,000 | 5,118,242 | |||||||||||
u 2014-1A, CR2, 144A, FRN, 3.935%, (3-month USD LIBOR + 2.80%), 4/18/31 | United States | 8,000,000 | 6,262,651 | |||||||||||
t 2015-2A, BR, 144A, FRN, 2.543%, 7/23/27 | United States | 9,290,000 | 8,917,608 | |||||||||||
|
| |||||||||||||
975,521,971 | ||||||||||||||
|
| |||||||||||||
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $1,115,274,214) | 980,501,154 | |||||||||||||
|
| |||||||||||||
Mortgage-Backed Securities 9.3% | ||||||||||||||
v | Federal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%† | |||||||||||||
FHLMC, 3.848%, (US 1 Year CMT T-Note +/- MBS Margin), 1/01/33 | United States | 10,877 | 10,947 | |||||||||||
|
| |||||||||||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 7.9% | ||||||||||||||
FHLMC 30 Year, 2.50%, 10/01/49 | United States | 2,806,395 | 2,926,830 | |||||||||||
w | FHLMC 30 Year, 2.50%, 5/01/50 | United States | 13,500,000 | 14,058,457 | ||||||||||
w | FHLMC 30 Year, 3.00%, 5/01/50 | United States | 274,394,000 | 289,678,605 | ||||||||||
FHLMC Gold 15 Year, 5.00%, 7/01/22 | United States | 24,481 | 25,723 | |||||||||||
FHLMC Gold 30 Year, 4.50%, 10/01/40 | United States | 118,118 | 131,118 | |||||||||||
FHLMC Gold 30 Year, 5.00%, 5/01/27 - 2/01/38 | United States | 956,310 | 1,073,884 | |||||||||||
FHLMC Gold 30 Year, 5.50%, 6/01/33 - 6/01/36 | United States | 652,672 | 734,664 | |||||||||||
FHLMC Gold 30 Year, 6.00%, 6/01/33 - 6/01/37 | United States | 249,499 | 281,875 | |||||||||||
FHLMC Gold 30 Year, 6.50%, 10/01/21 - 6/01/36 | United States | 90,643 | 104,909 | |||||||||||
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 8/01/32 | United States | 16,146 | 17,108 | |||||||||||
FHLMC Gold 30 Year, 7.50%, 1/01/26 - 1/01/31 | United States | 4,416 | 5,322 | |||||||||||
FHLMC Gold 30 Year, 8.00%, 11/01/25 - 1/01/26 | United States | 62 | 62 | |||||||||||
FHLMC Gold 30 Year, 9.00%, 12/01/24 | United States | 46 | 51 | |||||||||||
|
| |||||||||||||
309,038,608 | ||||||||||||||
|
| |||||||||||||
v | Federal National Mortgage Association (FNMA) Adjustable Rate 0.0%† | |||||||||||||
FNMA, 4.042%, (US 1 Year CMT T-Note +/- MBS Margin), 12/01/34 | United States | 101,873 | 105,059 | |||||||||||
|
|
franklintempleton.com | Annual Report | 35 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Mortgage-Backed Securities (continued) | ||||||||||||||
Federal National Mortgage Association (FNMA) Fixed Rate 1.4% | ||||||||||||||
FNMA 15 Year, 2.50%, 7/01/27 - 12/01/34 | United States | 9,830,737 | $ | 10,296,601 | ||||||||||
FNMA 15 Year, 5.50%, 3/01/21 - 4/01/22 | United States | 12,537 | 12,662 | |||||||||||
FNMA 30 Year, 3.00%, 9/01/48 | United States | 35,832,327 | 38,126,691 | |||||||||||
FNMA 30 Year, 4.50%, 3/01/28 - 2/01/41 | United States | 362,783 | 401,639 | |||||||||||
FNMA 30 Year, 5.00%, 9/01/23 - 10/01/35 | United States | 970,517 | 1,091,406 | |||||||||||
FNMA 30 Year, 5.50%, 9/01/33 - 12/01/35 | United States | 908,122 | 1,029,380 | |||||||||||
FNMA 30 Year, 6.00%, 6/01/34 - 5/01/38 | United States | 2,070,847 | 2,361,514 | |||||||||||
FNMA 30 Year, 6.50%, 3/01/28 - 10/01/37 | United States | 261,170 | 305,809 | |||||||||||
FNMA 30 Year, 7.50%, 10/01/29 | United States | 4,496 | 5,338 | |||||||||||
FNMA 30 Year, 8.00%, 1/01/25 - 5/01/26 | United States | 2,089 | 2,362 | |||||||||||
|
| |||||||||||||
53,633,402 | ||||||||||||||
|
| |||||||||||||
Government National Mortgage Association (GNMA) Fixed Rate 0.0%† | ||||||||||||||
GNMA I SF 30 Year, 5.00%, 6/15/34 - 7/15/34 | United States | 110,712 | 123,994 | |||||||||||
GNMA I SF 30 Year, 5.50%, 2/15/33 - 6/15/36 | United States | 291,745 | 324,661 | |||||||||||
GNMA I SF 30 Year, 6.00%, 8/15/36 | United States | 19,372 | 22,140 | |||||||||||
GNMA I SF 30 Year, 6.50%, 2/15/29 - 3/15/32 | United States | 36,713 | 40,250 | |||||||||||
GNMA I SF 30 Year, 7.00%, 11/15/27 - 5/15/28 | United States | 8,543 | 8,844 | |||||||||||
GNMA I SF 30 Year, 7.50%, 9/15/23 - 5/15/27 | United States | 582 | 605 | |||||||||||
GNMA I SF 30 Year, 8.00%, 2/15/25 - 9/15/27 | United States | 2,827 | 2,953 | |||||||||||
GNMA I SF 30 Year, 8.50%, 8/15/24 | United States | 40 | 42 | |||||||||||
GNMA I SF 30 Year, 9.00%, 1/15/25 | United States | 161 | 162 | |||||||||||
GNMA I SF 30 Year, 9.50%, 6/15/25 | United States | 340 | 342 | |||||||||||
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 | United States | 167,968 | 189,087 | |||||||||||
GNMA II SF 30 Year, 5.50%, 6/20/34 | United States | 87,496 | 99,251 | |||||||||||
GNMA II SF 30 Year, 6.00%, 11/20/34 | United States | 85,343 | 98,708 | |||||||||||
GNMA II SF 30 Year, 6.50%, 7/20/28 - 12/20/31 | United States | 48,450 | 56,759 | |||||||||||
GNMA II SF 30 Year, 7.50%, 4/20/32 | United States | 15,168 | 17,650 | |||||||||||
|
| |||||||||||||
985,448 | ||||||||||||||
|
| |||||||||||||
Total Mortgage-Backed Securities | 363,773,464 | |||||||||||||
|
| |||||||||||||
Municipal Bonds 4.6% | ||||||||||||||
Birmingham Water Works Board Revenue, Senior, Refunding, 3.573%, 1/01/45 | United States | 11,790,000 | 12,335,759 | |||||||||||
Broward County Airport System Revenue, Refunding, Series C, 3.477%, 10/01/43 | United States | 3,160,000 | 3,103,436 | |||||||||||
California Health Facilities Financing Authority Revenue, | ||||||||||||||
Senior, No Place Like Home Program, 2.934%, 6/01/32 | United States | 3,010,000 | 2,950,372 | |||||||||||
Senior, No Place Like Home Program, 2.984%, 6/01/33 | United States | 2,600,000 | 2,537,678 | |||||||||||
Senior, No Place Like Home Program, 3.034%, 6/01/34 | United States | 1,965,000 | 1,911,139 |
36 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Municipal Bonds (continued) | ||||||||||||||
City of Austin Electric Utility System Revenue, Travis and Williamson Counties, Refunding, 6.262%, 11/15/32 | United States | 5,955,000 | $ | 7,590,958 | ||||||||||
Foothill/Eastern Transportation Corridor Agency Toll Road Revenue, Refunding, Series A, 4.094%, 1/15/49 | United States | 1,540,000 | 1,552,505 | |||||||||||
Gilroy USD, GO, Santa Clara County, Refunding, 3.364%, 8/01/47 | United States | 6,485,000 | 6,427,932 | |||||||||||
Greenville City School District GO, County of Darke, School Improvement, Refunding, 3.541%, 1/01/51 | United States | 7,335,000 | 7,339,841 | |||||||||||
Honolulu City and County Wastewater System Revenue, Second Bond Resolution, Refunding, Junior Series B, 2.585%, 7/01/28 | United States | 1,180,000 | 1,232,923 | |||||||||||
Massachusetts State College Building Authority Revenue, Refunding, Series C, 3.373%, 5/01/43 | United States | 5,140,000 | 5,140,308 | |||||||||||
Massachusetts State School Building Authority Dedicated Sales Tax Revenue, Subordinated, Refunding, Series B, 3.395%, 10/15/40 | United States | 5,895,000 | 6,088,651 | |||||||||||
Metro Wastewater Reclamation District Sewer Revenue, Refunding, Series B, 3.158%, 4/01/41 | United States | 4,880,000 | 5,087,742 | |||||||||||
Metropolitan St. Louis Sewer District Wastewater System Revenue, Refunding, Series C, 3.259%, 5/01/45 | United States | 14,150,000 | 14,499,222 | |||||||||||
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System, Series B, 4.131%, 6/15/42 | United States | 3,535,000 | 3,443,444 | |||||||||||
New York State Dormitory Authority Revenues, Non State Supported Debt, State University of New York Dormitory Facilities, Series B, 3.142%, 7/01/43 | United States | 3,145,000 | 3,092,887 | |||||||||||
New York State GO, Refunding, Series B, 3.20%, 2/15/39 | United States | 11,740,000 | 12,014,012 | |||||||||||
New York State Urban Development Corp. Sales Tax Revenue, Bidding Group 2, Series B, 2.97%, 3/15/34 | United States | 19,210,000 | 20,119,209 | |||||||||||
Ohio State Hospital Facility Revenue, Cleveland Clinic Health System Obligated Group, Refunding, Series G, 3.276%, 1/01/42 | United States | 1,975,000 | 2,066,225 | |||||||||||
Oregon State Department of Transportation Highway User Tax Revenue, senior lien, Refunding, Series B, 3.168%, 11/15/38 | United States | 3,930,000 | 4,040,826 | |||||||||||
Orlando Health Obligated Group, 3.777%, 10/01/28 | United States | 3,870,000 | 4,108,226 | |||||||||||
Pennsylvania State Turnpike Commission Turnpike Revenue, Motor License Fund-Enhanced, Subordinate, Refunding, First Series, 3.579%, 12/01/43 | United States | 9,825,000 | 9,900,849 | |||||||||||
Regional Transportation District Sales Tax Revenue, FasTracks Project, Refunding, Series A, 3.258%, 11/01/38 | United States | 3,145,000 | 3,241,300 | |||||||||||
RWJ Barnabas Health Inc., 3.477%, 7/01/49 | United States | 2,650,000 | 2,695,193 | |||||||||||
Salt Lake City Sales and Excise Tax Revenue, Refunding, Series B, 3.102%, 4/01/38 | United States | 2,750,000 | 2,768,838 | |||||||||||
San Bernardino Community College District GO, San Bernadino and Riverside Counties, Election of 2018, Series A-1, 3.271%, 8/01/39 | United States | 2,160,000 | 2,234,822 | |||||||||||
San Diego County Regional Transportation Commission Sales Tax Revenue, Limited Tax, Refunding, Series A, 3.248%, 4/01/48 | United States | 2,360,000 | 2,458,766 | |||||||||||
San Francisco City and County Public Utilities Commission Water Revenue, Green Bonds, Refunding, Sub-Series A, 3.473%, 11/01/43 | United States | 2,310,000 | 2,422,982 | |||||||||||
San Jose RDA Successor Agency Tax Allocation, Senior, Refunding, Series A-T, 3.25%, 8/01/29 | United States | 5,675,000 | 5,924,586 |
franklintempleton.com | Annual Report | 37 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Country/ Organization | Principal Amount* | Value | ||||||||||||
Municipal Bonds (continued) | ||||||||||||||
Texas State GO, Transportation Commission, Highway Improvement, Refunding, 3.211%, 4/01/44 | United States | 5,895,000 | $ | 6,293,266 | ||||||||||
Texas State University System Financing Revenue, | ||||||||||||||
Refunding, Series B, 2.938%, 3/15/33 | United States | 2,315,000 | 2,361,092 | |||||||||||
Refunding, Serise B, 3.289%, 3/15/40 | United States | 1,965,000 | 2,005,322 | |||||||||||
University of Pittsburgh of the Commonwealth System of Higher Education Revenue, Refunding, Series C, 3.005%, 9/15/41 | United States | 5,500,000 | 5,571,280 | |||||||||||
Utah Transit Authority Sales Tax Revenue, Refunding, Series B, 3.443%, 12/15/42 | United States | 3,930,000 | 4,145,364 | |||||||||||
|
| |||||||||||||
Total Municipal Bonds (Cost $174,004,493) | 178,706,955 | |||||||||||||
|
| |||||||||||||
Shares/ Units | ||||||||||||||
Escrows and Litigation Trusts 0.0%† | ||||||||||||||
a,b | Millennium Corporate Claim Trust, Escrow Account | United States | 8,736,451 | — | ||||||||||
a,b | Millennium Lender Claim Trust, Escrow Account | United States | 8,736,450 | — | ||||||||||
a,aa,b,d | Remington Outdoor Co. Inc., Litigation Units | United States | 124,500 | — | ||||||||||
a | Vistra Energy Corp., Escrow Account | United States | 30,000,000 | 60,000 | ||||||||||
|
| |||||||||||||
Total Escrows and Litigation Trusts (Cost $869,132) | 60,000 | |||||||||||||
|
| |||||||||||||
Total Investments before Short Term Investments (Cost $4,378,138,964) | 3,929,950,762 | |||||||||||||
|
| |||||||||||||
Shares | ||||||||||||||
Short Term Investments 5.0% | ||||||||||||||
Money Market Funds (Cost $51,021,802) 1.3% | ||||||||||||||
e,x | Institutional Fiduciary Trust Money Market Portfolio, 0.01% | United States | 51,021,802 | 51,021,802 | ||||||||||
|
| |||||||||||||
Principal Amount* | ||||||||||||||
Repurchase Agreements (Cost $146,368,405) 3.7% | ||||||||||||||
y | Joint Repurchase Agreement, 0.028%, 5/01/20 (Maturity Value $146,368,518) | United States | 146,368,405 | 146,368,405 | ||||||||||
|
| |||||||||||||
Total Investments (Cost $4,575,529,171) 105.3% | 4,127,340,969 | |||||||||||||
Other Assets, less Liabilities (5.3)% | (208,862,777 | ) | ||||||||||||
|
| |||||||||||||
Net Assets 100.0% | $ | 3,918,478,192 | ||||||||||||
|
|
38 | Annual Report | franklintempleton.com |
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.
aaSee Note 11 regarding holdings of 5% voting securities.
abThe security is owned by FT Holdings Corporation ll, a wholly-owned subsidiary of the Fund. See Note 1(g).
bFair valued using significant unobservable inputs. See Note 13 regarding fair value measurements.
cSecurity 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. At April 30, 2020, the aggregate value of these securities was $1,398,651,220, representing 35.7% of net assets.
dSee Note 9 regarding restricted securities.
eSee Note 3(f) regarding investments in affiliated management investment companies.
fSecurity 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. At April 30, 2020, the aggregate value of these securities was $92,990,782, representing 2.4% of net assets.
gIncome may be received in additional securities and/or cash.
hThe coupon rate shown represents the rate at period end.
iPrincipal amount is stated in 1,000 Brazilian Real Units.
jSee Note 7 regarding defaulted securities.
kSee Note 1(f) regarding loan participation notes.
lPerpetual security with no stated maturity date.
mSee Note 1(i) regarding senior floating rate interests.
nA portion or all of the security purchased on a delayed delivery basis. See Note 1(d).
oSee Note 1(j) regarding Marketplace lending.
pA supranational organization is an entity formed by two or more central governments through international treaties.
qRedemption price at maturity and coupon payment are adjusted for inflation. See Note 1(l).
rThe principal represents the notional amount. See Note 1(e) regarding value recovery instruments.
sPrincipal amount of security is adjusted for inflation. See Note 1(l).
tAdjustable 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.
uThe coupon rate shown represents the rate inclusive of any caps or floors, if applicable, in effect at period end.
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(d).
xThe rate shown is the annualized seven-day effective yield at period end.
ySee Note 1(c) regarding joint repurchase agreement.
zThe security was issued on a discount basis with no stated coupon rate.
franklintempleton.com | Annual Report | 39 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
At April 30, 2020, the Fund had the following futures contracts outstanding. See Note 1(e).
Futures Contracts | ||||||||||||||||||||
Description | Type | Number of Contracts | Notional Amount* | Expiration Date | Value/ Unrealized Appreciation (Depreciation) | |||||||||||||||
Interest Rate Contracts | ||||||||||||||||||||
Australian 3 Yr. Bond | Long | 1,173 | $ | 89,566,705 | 6/15/20 | $ 535,053 | ||||||||||||||
Australian 10 Yr. Bond | Long | 261 | 25,316,282 | 6/15/20 | 183,642 | |||||||||||||||
Canada 10 Yr. Bond | Long | 114 | 12,236,284 | 6/19/20 | 734,556 | |||||||||||||||
CME Ultra Long Term U.S. Treasury Bond | Long | 60 | 13,486,875 | 6/19/20 | 17,162 | |||||||||||||||
Euro-BTP | Long | 427 | 64,845,935 | 6/08/20 | (3,789,330 | ) | ||||||||||||||
Euro-Bund | Long | 138 | 26,374,967 | 6/08/20 | (234,486 | ) | ||||||||||||||
Euro-OAT | Long | 558 | 103,222,760 | 6/08/20 | 1,255,258 | |||||||||||||||
U.S. Treasury 2 Yr. Note | Long | 767 | 169,069,570 | 6/30/20 | 2,405,668 | |||||||||||||||
U.S. Treasury 5 Yr. Note | Long | 1,430 | 179,442,656 | 6/30/20 | 193,914 | |||||||||||||||
U.S. Treasury 10 Yr. Note | Long | 1,939 | 269,642,187 | 6/19/20 | 1,799,837 | |||||||||||||||
Ultra 10 Yr. U.S. Treasury Note | Long | 355 | 55,746,094 | 6/19/20 | 115,577 | |||||||||||||||
|
| |||||||||||||||||||
Total Futures Contracts | $ 3,216,851 | |||||||||||||||||||
|
|
*As of period end.
At April 30, 2020, the Fund had the following forward exchange contracts outstanding. See Note 1(e).
Forward Exchange Contracts | ||||||||||||||||||||||||||||
Currency | Counterpartya | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
OTC Forward Exchange Contracts |
| |||||||||||||||||||||||||||
Australian Dollar | JPHQ | Sell | 10,000,000 | $ | 6,745,200 | 5/11/20 | $ | 228,443 | $ | — | ||||||||||||||||||
Norwegian Krone | JPHQ | Buy | 185,000,000 | 20,037,649 | 5/11/20 | — | (1,980,417 | ) | ||||||||||||||||||||
Norwegian Krone | JPHQ | Sell | 185,000,000 | 18,172,352 | 5/11/20 | 115,120 | — | |||||||||||||||||||||
Brazilian Real | JPHQ | Sell | 3,778,007 | 839,714 | 5/13/20 | 145,629 | — | |||||||||||||||||||||
South African Rand | JPHQ | Buy | 200,000,000 | 13,252,493 | 5/18/20 | — | (2,484,521 | ) | ||||||||||||||||||||
Brazilian Real | JPHQ | Sell | 119,495,000 | 26,917,532 | 6/02/20 | 4,992,447 | — | |||||||||||||||||||||
Indonesian Rupiah | JPHQ | Sell | 190,000,000,000 | 13,356,766 | 6/03/20 | 872,426 | — | |||||||||||||||||||||
New Zealand Dollar | JPHQ | Buy | 30,600,000 | 18,260,856 | 6/17/20 | 500,090 | — | |||||||||||||||||||||
New Zealand Dollar | JPHQ | Sell | 30,600,000 | 18,393,660 | 6/17/20 | — | (367,285 | ) | ||||||||||||||||||||
Turkish Lira | JPHQ | Buy | 62,000,000 | 8,999,202 | 7/14/20 | — | (318,325 | ) | ||||||||||||||||||||
Canadian Dollar | JPHQ | Sell | 8,500,000 | 6,086,275 | 7/15/20 | — | (20,666 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Buy | 5,660,032,700 | 52,700,000 | 7/16/20 | 98,779 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 5,660,032,700 | 52,677,193 | 7/16/20 | — | (121,586 | ) | ||||||||||||||||||||
Euro | JPHQ | Buy | 24,251,524 | 26,334,609 | 7/23/20 | 285,303 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 54,746,949 | 60,905,644 | 7/23/20 | 812,144 | — | |||||||||||||||||||||
Norwegian Krone | JPHQ | Buy | 257,400,000 | 28,461,094 | 7/23/20 | — | (3,326,417 | ) | ||||||||||||||||||||
Norwegian Krone | JPHQ | Sell | 257,400,000 | 25,255,102 | 7/23/20 | 120,425 | — | |||||||||||||||||||||
Australian Dollar | DBAB | Sell | 3,000,000 | 1,883,700 | 7/27/20 | — | (71,607 | ) | ||||||||||||||||||||
Australian Dollar | JPHQ | Sell | 54,000,000 | 33,931,850 | 7/27/20 | — | (1,263,673 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Buy | 6,130,000,000 | 57,003,901 | 7/27/20 | 190,215 | — | |||||||||||||||||||||
Canadian Dollar | JPHQ | Sell | 23,800,000 | 16,769,007 | 7/28/20 | — | (330,888 | ) |
40 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
Forward Exchange Contracts (continued) | ||||||||||||||||||||||||||||
Currency | Counterpartya | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
OTC Forward Exchange Contracts (continued) |
| |||||||||||||||||||||||||||
Mexican Peso | JPHQ | Buy | 297,700,000 | $ | 12,011,506 | 7/28/20 | $ 170,384 | $ | — | |||||||||||||||||||
Euro | JPHQ | Sell | 23,300,000 | 26,234,635 | 8/05/20 | 651,735 | — | |||||||||||||||||||||
Australian Dollar | JPHQ | Sell | 29,000,000 | 17,523,540 | 8/06/20 | — | (1,377,647 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Buy | 10,580,000,000 | 101,212,214 | 8/13/20 | — | (2,465,379 | ) | ||||||||||||||||||||
Singapore Dollar | JPHQ | Sell | 119,400,000 | 85,623,622 | 8/13/20 | 921,074 | — | |||||||||||||||||||||
Chinese Yuan Renminbi | JPHQ | Buy | 182,400,000 | 26,134,426 | 8/21/20 | — | (432,717 | ) | ||||||||||||||||||||
Chinese Yuan Renminbi | JPHQ | Sell | 182,400,000 | 25,906,883 | 8/21/20 | 205,174 | — | |||||||||||||||||||||
Australian Dollar | JPHQ | Sell | 35,100,000 | 21,388,711 | 9/08/20 | — | (1,487,598 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Buy | 4,000,000,000 | 38,266,343 | 9/14/20 | — | (908,902 | ) | ||||||||||||||||||||
Canadian Dollar | JPHQ | Sell | 29,000,000 | 20,941,652 | 9/15/20 | 102,771 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 136,206,321 | 153,218,490 | 9/15/20 | 3,525,082 | — | |||||||||||||||||||||
Norwegian Krone | JPHQ | Buy | 417,400,000 | 41,327,551 | 9/15/20 | — | (565,386 | ) | ||||||||||||||||||||
Norwegian Krone | JPHQ | Sell | 417,400,000 | 40,921,569 | 9/15/20 | 159,404 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total Forward Exchange Contracts |
| $ 14,096,645 | $ | (17,523,014 | ) | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (3,426,369 | ) | ||||||||||||||||||||||||
|
|
aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.
At April 30, 2020, the Fund had the following credit default swap contracts outstanding. See Note 1(e).
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.31 | 1.00% | Quarterly | 6/20/24 | $ | 48,700,000 | $ | (4,442,536 | ) | $ | (1,059,892 | ) | $ | (3,382,644 | ) | | Investment Grade | | |||||||||||||||||||
CDX.EM.32 | 1.00% | Quarterly | 12/20/24 | 29,400,000 | (2,709,838 | ) | (1,124,397 | ) | (1,585,441 | ) | | Investment Grade | | |||||||||||||||||||||||
CDX.NA.HY.33 | 5.00% | Quarterly | 12/20/24 | 61,250,000 | (3,102,042 | ) | 87,434 | (3,189,476 | ) | | Non- Investment | | ||||||||||||||||||||||||
CDX.NA.IG.33 | 1.00% | Quarterly | 12/20/24 | 68,700,000 | 576,516 | 992,953 | (416,437 | ) | | Investment Grade | | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Total Centrally Cleared Swap Contracts |
| $ | (9,677,900 | ) | $ | (1,103,902 | ) | $ | (8,573,998 | ) | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
OTC Swap Contracts | ||||||||||||||||||||||||||||||||||||
Contracts to Buy Protectionc | ||||||||||||||||||||||||||||||||||||
Single Name | ||||||||||||||||||||||||||||||||||||
Ally Financial Inc | (5.00)% | Quarterly | JPHQ | 12/20/24 | $ | 19,800,000 | $ | (2,657,416 | ) | $ | (3,434,870 | ) | $ | 777,454 | ||||||||||||||||||||||
Chesapeake Energy Corp | (5.00)% | Quarterly | CITI | 6/20/20 | 910,000 | 601,915 | 82,410 | 519,505 |
franklintempleton.com | Annual Report | 41 |
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 Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||||
OTC Swap Contracts (continued) | ||||||||||||||||||||||||||||||||||||
Contracts to Buy Protectionc (continued) | ||||||||||||||||||||||||||||||||||||
Single Name (continued) | ||||||||||||||||||||||||||||||||||||
Chesapeake Energy Corp | (5.00)% | Quarterly | JPHQ | 6/20/20 | $ | 3,650,000 | $ | 2,414,273 | $ | 368,788 | $ | 2,045,485 | ||||||||||||||||||||||||
Government of Italy | (1.00)% | Quarterly | BZWS | 6/20/23 | 14,200,000 | 357,073 | 97,080 | 259,993 | ||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d | ||||||||||||||||||||||||||||||||||||
Single Name | ||||||||||||||||||||||||||||||||||||
Government of Argentina | 5.00% | Quarterly | CITI | 12/20/21 | 48,600,000 | (35,901,882 | ) | (20,941,789 | ) | (14,960,093 | ) | CC | ||||||||||||||||||||||||
Government of Indonesia | 1.00% | Quarterly | CITI | 12/20/24 | 24,700,000 | (967,478 | ) | 150,031 | (1,117,509 | ) | NR | |||||||||||||||||||||||||
Government of Italy | 1.00% | Quarterly | BZWS | 6/20/23 | 14,200,000 | (357,073 | ) | (425,711 | ) | 68,638 | NR | |||||||||||||||||||||||||
Government of Russia | 1.00% | Quarterly | CITI | 12/20/24 | 13,500,000 | (332,093 | ) | 124,219 | (456,312 | ) | BBB- | |||||||||||||||||||||||||
Traded Index | ||||||||||||||||||||||||||||||||||||
eBNP Paribas Bespoke Bordeaux Index, Mezzanine Tranche 7-10% | 2.10% | Quarterly | BNDP | 6/20/20 | 6,850,000 | (161,232 | ) | — | (161,232 | ) | | Non- Investment | | |||||||||||||||||||||||
eBNP Paribas Bespoke Rodez2 Index, Mezzanine Tranche 5-7% | 3.20% | Quarterly | BNDP | 12/20/20 | 3,300,000 | (620,274 | ) | — | (620,274 | ) | | Non- Investment | | |||||||||||||||||||||||
eCitibank Bespoke Bogota Index, Mezzanine Tranche 7-10% | 1.35% | Quarterly | CITI | 6/20/20 | 7,000,000 | (149,537 | ) | — | (149,537 | ) | | Non- Investment | | |||||||||||||||||||||||
eCitibank Bespoke Palma Index, Mezzanine Tranche 5-7% | 2.30% | Quarterly | CITI | 6/20/21 | 6,700,000 | (1,450,066 | ) | — | (1,450,066 | ) | | Non- Investment | | |||||||||||||||||||||||
eCitibank Bespoke Phoenix Index, Mezzanine Tranche 5-7% | 2.90% | Quarterly | CITI | 12/20/21 | 8,500,000 | (2,313,711 | ) | — | (2,313,711 | ) | | Non- Investment | | |||||||||||||||||||||||
eCitibank Bespoke Singapore Index, Equity Tranche 0-3% | 0.00% | Quarterly | CITI | 6/20/20 | 7,000,000 | (2,210,802 | ) | (136,475 | ) | (2,074,327 | ) | | Non- Investment | |
42 | 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 Amounta | Value | Unamortized Upfront Payments (Receipts) | Unrealized Appreciation (Depreciation) | Ratingb | |||||||||||||||||||||||||||
OTC Swap Contracts (continued) | ||||||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc,d (continued) | ||||||||||||||||||||||||||||||||||||
Traded Index (continued) | ||||||||||||||||||||||||||||||||||||
e,fCitibank Bespoke Sydney Index, Equity Tranche 0-3% | 0.00% | Quarterly | CITI | 6/20/20 | $ | 4,394,022 | $ | (1,948,968 | ) | $ | (97,801 | ) | $ | (1,851,167 | ) | | Non- Investment Grade | | ||||||||||||||||||
eMCDX.NA.31 | 1.00% | Quarterly | CITI | 12/20/23 | 23,060,000 | (28,447 | ) | 169,986 | (198,433 | ) | | Investment Grade | | |||||||||||||||||||||||
eMorgan Stanley Bespoke Pecan Index, Mezzanine Tranche 5-10% | 3.98% | Quarterly | MSCO | 12/20/21 | 9,000,000 | (4,666,892 | ) | — | (4,666,892 | ) | | Non- Investment Grade | | |||||||||||||||||||||||
eMorgan Stanley Bespoke Pecan Index, Mezzanine Tranche 5-10% | 4.10% | Quarterly | MSCO | 12/20/21 | 9,000,000 | (4,180,766 | ) | — | (4,180,766 | ) | | Non- Investment Grade | | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Total OTC Swap Contracts |
| $ | (54,573,376 | ) | $ | (24,044,132 | ) | $ | (30,529,244 | ) | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Total Credit Default Swap Contracts |
| $ | (64,251,276 | ) | $ | (25,148,034 | ) | $ | (39,103,242 | ) | ||||||||||||||||||||||||||
|
|
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.
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.
fFair valued using significant unobservable inputs. See Note 13 regarding fair value measurements.
At April 30, 2020, the Fund had the following cross-currency swap contracts outstanding. See Note 1(e).
Cross-Currency Swap Contracts | ||||||||||||||||||||
Description | Payment Frequency | Coun- terparty | Maturity Date | Notional Amount | Value/ Unrealized Appreciation (Depreciation) | |||||||||||||||
OTC Swap Contracts | ||||||||||||||||||||
Receive Floating 3-month USD LIBOR + 2.87% | Quarterly | 3,834,600 | USD | |||||||||||||||||
Pay Fixed 2.50% | Annual | CITI | 5/04/21 | 3,300,000 | EUR | $182,814 | ||||||||||||||
Receive Floating 3-month USD LIBOR + 1.334% | Quarterly | 10,976,000 | USD | |||||||||||||||||
Pay Floating 3-month EUR LIBOR + 1.12% | Quarterly | CITI | 7/10/21 | 9,800,000 | EUR | 280,491 | ||||||||||||||
|
| |||||||||||||||||||
Total Cross Currency Swap Contracts | $463,305 | |||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 43 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED STATEMENT OF INVESTMENTS
Franklin Strategic Income Fund (continued)
At April 30, 2020, the Fund had the following interest rate swap contracts outstanding. See Note 1(e).
Interest Rate Swap Contracts | ||||||||||||||||
Description | Payment Frequency | Maturity Date | Notional Amount* | Value/ Unrealized Appreciation (Depreciation) | ||||||||||||
Centrally Cleared Swap Contracts | ||||||||||||||||
Receive Fixed 1.956% | Semi-Annual | |||||||||||||||
Pay Floating 3-month CAD CABA | Semi-Annual | 7/17/29 | 55,000,000 | CAD | $3,468,731 | |||||||||||
Receive Fixed 1.232% | Semi-Annual | |||||||||||||||
Pay Floating 3-month AUD BBSW | Semi-Annual | 9/06/29 | 55,000,000 | AUD | 1,207,808 | |||||||||||
|
| |||||||||||||||
Total Interest Rate Swap Contracts |
| $4,676,539 | ||||||||||||||
|
|
*In U.S. dollars unless otherwise indicated.
At April 30, 2020, the Fund had the following inflation index swap contracts outstanding. See Note 1(e).
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 1.913% | At maturity | 1/14/29 | $ | 44,600,000 | $ (2,982,571 | ) | ||||||||||
Receive variable change in USA-CPI-U | At maturity | |||||||||||||||
Pay Fixed 1.943% | At maturity | 1/15/29 | 154,400,000 | (10,771,426 | ) | |||||||||||
|
| |||||||||||||||
Total Inflation Index Swap Contracts |
| $(13,753,997 | ) | |||||||||||||
|
|
At April 30, 2020, the Fund had the following total return swap contracts outstanding. See Note 1(e).
Total Return Swap Contracts | ||||||||||||||||||||||||
Underlying Instruments | Financing Rate | Payment Frequency | Counter- party | Maturity Date | Notional Value | Value/ Unrealized Appreciation (Depreciation) | ||||||||||||||||||
OTC Swap Contracts | ||||||||||||||||||||||||
Longa | ||||||||||||||||||||||||
Markit iBoxx USD Liquid Leveraged Loan Index | 3-month USD LIBOR | Quarterly | BZWS | 6/20/20 | $ | 61,400,000 | $(1,571,248 | ) | ||||||||||||||||
Markit iBoxx USD Liquid Leveraged Loan Index | 3-month USD LIBOR | Quarterly | GSCO | 9/20/20 | 23,600,000 | (2,459,765 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total Return Swap Contracts |
| $(4,031,013 | ) | |||||||||||||||||||||
|
|
aThe Fund receives the total return on the underlying instrument and pays a variable financing rate.
See Note 10 regarding other derivative information.
See Abbreviations on page 70.
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 Assets and Liabilities
April 30, 2020
Franklin Strategic Income Fund
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 4,224,235,436 | ||
Cost - Controlled affiliates (Note 3f and 11) | 152,217,419 | |||
Cost - Non-controlled affiliates (Note 3f and 11) | 52,707,911 | |||
Cost - Unaffiliated repurchase agreements | 146,368,405 | |||
|
| |||
Value - Unaffiliated issuers | $ | 3,821,211,799 | ||
Value - Controlled affiliates (Note 3f and 11) | 108,077,744 | |||
Value - Non-controlled affiliates (Note 3f and 11) | 51,683,021 | |||
Value - Unaffiliated repurchase agreements | 146,368,405 | |||
Cash | 22,132,861 | |||
Receivables: | ||||
Investment securities sold | 13,827,164 | |||
Capital shares sold | 2,858,895 | |||
Dividends and interest | 34,165,349 | |||
Deposits with brokers for: | ||||
OTC derivative contracts | 59,850,000 | |||
TBA transactions | 280,000 | |||
Futures contracts | 15,138,143 | |||
Centrally cleared swap contracts | 36,354,180 | |||
Variation margin on futures contracts | 1,139,807 | |||
OTC swap contracts (upfront payments $1,632,626) | 992,514 | |||
Unrealized appreciation on OTC forward exchange contracts | 14,096,645 | |||
Unrealized appreciation on OTC swap contracts | 4,134,380 | |||
FT Subsidiary deferred tax benefit (Note 1g) | 402,876 | |||
Other assets | 4,947 | |||
|
| |||
Total assets | 4,332,718,730 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 319,656,711 | |||
Capital shares redeemed | 9,102,961 | |||
Management fees | 1,405,288 | |||
Distribution fees | 856,730 | |||
Transfer agent fees | 907,610 | |||
Distributions to shareholders | 781,601 | |||
Variation margin on centrally cleared swap contracts | 200,340 | |||
OTC swap contracts (upfront receipts $34,912,634) | 25,036,646 | |||
Unrealized depreciation on OTC forward exchange contracts | 17,523,014 | |||
Unrealized depreciation on OTC swap contracts | 38,231,332 | |||
Deferred tax | 29,654 | |||
Accrued expenses and other liabilities | 508,651 | |||
|
| |||
Total liabilities | 414,240,538 | |||
|
| |||
Net assets, at value | $ | 3,918,478,192 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 4,973,120,950 | ||
Total distributable earnings (losses) | (1,054,642,758 | ) | ||
|
| |||
Net assets, at value | $ | 3,918,478,192 | ||
|
|
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | Annual Report | 45 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Assets and Liabilities (continued)
April 30, 2020
Franklin Strategic Income Fund
Class A: | ||||
Net assets, at value | $ | 2,686,522,868 | ||
|
| |||
Shares outstanding | 309,912,387 | |||
|
| |||
Net asset value per sharea | $8.67 | |||
|
| |||
Maximum offering price per share (net asset value per share ÷ 96.25%) | $9.01 | |||
|
| |||
Class C: | ||||
Net assets, at value | $ | 518,795,070 | ||
|
| |||
Shares outstanding | 59,845,950 | |||
|
| |||
Net asset value and maximum offering price per sharea | $8.67 | |||
|
| |||
Class R: | ||||
Net assets, at value | $ | 62,062,761 | ||
|
| |||
Shares outstanding | 7,189,195 | |||
|
| |||
Net asset value and maximum offering price per share | $8.63 | |||
|
| |||
Class R6: | ||||
Net assets, at value | $ | 133,575,031 | ||
|
| |||
Shares outstanding | 15,384,645 | |||
|
| |||
Net asset value and maximum offering price per share | $8.68 | |||
|
| |||
Advisor Class: | ||||
Net assets, at value | $ | 517,522,462 | ||
|
| |||
Shares outstanding | 59,628,404 | |||
|
| |||
Net asset value and maximum offering price per share | $8.68 | |||
|
|
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
46 | 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
for the year ended April 30, 2020
Franklin Strategic Income Fund
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | 361,575 | ||
Controlled affiliates (Note 3f and 11) | 10,090,520 | |||
Non-controlled affiliates (Note 3f and 11) | 873,446 | |||
Interest: (net of foreign taxes)~ | ||||
Unaffiliated issuers | 210,966,706 | |||
|
| |||
Total investment income | 222,292,247 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 20,820,947 | |||
Distribution fees: (Note 3c) | ||||
Class A | 7,655,580 | |||
Class C | 4,149,146 | |||
Class R | 384,075 | |||
Transfer agent fees: (Note 3e) | ||||
Class A | 4,549,109 | |||
Class C | 948,256 | |||
Class R | 114,350 | |||
Class R6 | 83,076 | |||
Advisor Class | 867,419 | |||
Custodian fees (Note 4) | 131,446 | |||
Reports to shareholders | 523,812 | |||
Registration and filing fees | 167,665 | |||
Professional fees | 113,545 | |||
Trustees’ fees and expenses | 59,280 | |||
Marketplace lending fees (Note 1j) | 62,839 | |||
Other | 249,757 | |||
|
| |||
Total expenses | 40,880,302 | |||
Expense reductions (Note 4) | (118,120 | ) | ||
Expenses waived/paid by affiliates (Note 3f and 3g) | (1,097,213 | ) | ||
|
| |||
Net expenses | 39,664,969 | |||
|
| |||
Net investment income | 182,627,278 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments:# | ||||
Unaffiliated issuers | (15,141,215 | ) | ||
Controlled affiliates (Note 3f and 11) | (10,939,400 | ) | ||
Written options | (5,329,687 | ) | ||
Foreign currency transactions. | (702,107 | ) | ||
Forward exchange contracts. | 6,879,987 | |||
Futures contracts | 8,794,656 | |||
Swap contracts | (26,112,477 | ) | ||
|
| |||
Net realized gain (loss) | (42,550,243 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments: | ||||
Unaffiliated issuers | (306,293,367 | ) | ||
Controlled affiliates (Note 3f and 11) | (20,123,738 | ) | ||
Non-controlled affiliates (Note 3f and 11) | (2,248,147 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | (252,966 | ) | ||
Forward exchange contracts. | (6,744,936 | ) |
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | Annual Report | 47 |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Operations (continued)
for the year ended April 30, 2020
Franklin Strategic Income Fund
Futures contracts | (628,709 | ) | ||
Swap contracts | (46,376,083 | ) | ||
Change in FT Subsidiary deferred tax benefit (Note 1g) | (129,138 | ) | ||
Change in deferred taxes on unrealized appreciation | 50,711 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (382,746,373 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (425,296,616 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | (242,669,338 | ) | |
|
|
~Foreign taxes withheld on interest | $ | 456,930 | ||
#Net of foreign taxes | $ | 20,349 |
48 | Annual Report | The accompanying notes are an integral part of these consolidated financial statements. | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Changes in Net Assets
Franklin Strategic Income Fund
Year Ended April 30, | ||||||||
2020 | 2019 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 182,627,278 | $ | 235,418,024 | ||||
Net realized gain (loss) | (42,550,243 | ) | (61,378,232 | ) | ||||
Net change in unrealized appreciation (depreciation) | (382,746,373 | ) | 53,626,529 | |||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | (242,669,338 | ) | 227,666,321 | |||||
|
| |||||||
Distributions to shareholders: | ||||||||
Class A | (133,707,047 | ) | (138,743,800 | ) | ||||
Class C | (25,071,873 | ) | (34,243,715 | ) | ||||
Class R | (3,171,248 | ) | (3,918,092 | ) | ||||
Class R6 | (9,963,217 | ) | (18,669,569 | ) | ||||
Advisor Class | (26,896,542 | ) | (38,939,889 | ) | ||||
|
| |||||||
Total distributions to shareholders | (198,809,927 | ) | (234,515,065 | ) | ||||
|
| |||||||
Capital share transactions: (Note 2) | ||||||||
Class A | (141,906,067 | ) | (160,333,285 | ) | ||||
Class C | (138,604,206 | ) | (360,085,250 | ) | ||||
Class R | (16,035,134 | ) | (19,998,642 | ) | ||||
Class R6 | (159,106,633 | ) | (123,669,688 | ) | ||||
Advisor Class | (33,579,296 | ) | (322,273,887 | ) | ||||
|
| |||||||
Total capital share transactions | (489,231,336 | ) | (986,360,752 | ) | ||||
|
| |||||||
Net increase (decrease) in net assets | (930,710,601 | ) | (993,209,496 | ) | ||||
Net assets: | ||||||||
Beginning of year | 4,849,188,793 | 5,842,398,289 | ||||||
|
| |||||||
End of year | $ | 3,918,478,192 | $ | 4,849,188,793 | ||||
|
|
franklintempleton.com | The accompanying notes are an integral part of these consolidated financial statements. | Annual Report | 49 |
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 ten 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. Class C shares automatically convert to Class A shares after they have been held for 10 years. 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 each business day as of 4 p.m. Eastern time or the regularly scheduled close of the New York Stock Exchange (NYSE), whichever is earlier. 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 Fund may 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. Investments in repurchase agreements are valued at cost, which approximates fair value.
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 Fund 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
50 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
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.
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. Joint Repurchase Agreement
The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such
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)
c. Joint Repurchase Agreement (continued)
agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at year end, as indicated in the Consolidated Statement of Investments, had been entered into on April 30, 2020.
d. Securities Purchased on a Delayed Delivery and TBA Basis
The Fund purchases securities on a delayed delivery and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities and collateral has been pledged and/or received for open TBA trades.
e. 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 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 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
52 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
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 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 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 Consolidated 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 Consolidated Statement of Operations.
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
franklintempleton.com | Annual Report | 53 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting Policies (continued)
e. Derivative Financial Instruments (continued)
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 Consolidated 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. 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.
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 10 regarding other derivative information.
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, 2020, 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.
54 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
At April 30, 2020, FT Subsidiary, which is a tax paying entity, recognized an unrealized loss on its Turtle Bay investment. An estimated deferred tax asset based on such unrealized loss is reflected as FT Subsidiary deferred tax benefit in the Consolidated Statement of Assets and Liabilities. The estimated benefit was calculated using a federal rate of 21%. When the Turtle Bay investment liquidates, the FT Subsidiary will recognize a capital loss. This loss may be carried back to offset prior year capital gains, subject to carryback limitation rules. If there are no limitations, the carryback will result in a tax refund which will relieve the deferred tax asset.
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, 2020, the net assets of FT Subsidiary were $18,478,737, 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. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced its intention to cease sustaining LIBOR after 2021. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments that use or may use a floating rate based on LIBOR cannot yet be determined.
j. Marketplace Lending
The Fund invests in loans obtained through marketplace lending. Marketplace lending, sometimes referred to as peer-to-peer lending, is a method of financing in which a platform facilitates the borrowing and lending of money. It is considered an alternative to more traditional forms of debt financing. Prospective borrowers are required to provide certain financial information to the platform, including, but not limited to, the intended purpose of the loan, income, employment information, credit score, debt-to-income ratio, credit history (including defaults and delinquencies) and home ownership status. Based on this and other information, the platform assigns its own credit rating to the borrower and sets the interest rate for the requested loan. The platform then posts the borrowing requests online, giving investors the opportunity to purchase the loans based on factors such as the interest rates and expected yields of the loans, the borrower background data, and the credit rating assigned by the platform.
When the Fund invests in these loans, it usually purchase all rights, title and interest in the loans pursuant to a loan purchase agreement directly from the platform. The platform or a third-party servicer typically continues to service the loans, collecting payments and distributing them to the Fund, less any servicing fees assessed. The servicer is typically responsible for taking actions against a borrower in the event of a default on the loan. Servicing fees, along with other administration fees, are included in marketplace lending fees in the Consolidated Statement of Operations. The Fund, as an investor in a loan, would be entitled to receive payment only from the borrower and would not be able to recover any
franklintempleton.com | Annual Report | 55 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
1. Organization and Significant Accounting Policies (continued)
j. Marketplace Lending (continued)
deficiency from the platform, except under very narrow circumstances. The loans in which the Fund may invest are unsecured.
k. 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, 2020, the Fund has determined that no tax liability is required in its consolidated 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.
l. 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.
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 or based on the ratio of number of shareholders of each Fund to the combined number of shareholders 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.
m. Accounting Estimates
The preparation of consolidated 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.
56 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
n. 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, 2020, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
Year Ended April 30, | ||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||
Class A Shares: | ||||||||||||||||||||
Shares solda | 51,808,122 | $ 493,501,422 | 50,096,209 | $ | 476,428,245 | |||||||||||||||
Shares issued in reinvestment of distributions | 13,278,919 | 125,575,767 | 13,459,738 | 127,947,689 | ||||||||||||||||
Shares redeemed | (80,974,998 | ) | (760,983,256 | ) | (80,356,291 | ) | (764,709,219 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (15,887,957 | ) | $(141,906,067 | ) | (16,800,344 | ) | $ | (160,333,285 | ) | |||||||||||
|
| |||||||||||||||||||
Class C Shares: | ||||||||||||||||||||
Shares sold | 7,181,894 | $ 68,377,407 | 4,597,179 | $ | 43,711,512 | |||||||||||||||
Shares issued in reinvestment of distributions | 2,436,459 | 23,072,271 | 3,342,536 | 31,796,374 | ||||||||||||||||
Shares redeemeda | (24,298,180 | ) | (230,053,884 | ) | (45,752,627 | ) | (435,593,136 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (14,679,827 | ) | $(138,604,206 | ) | (37,812,912 | ) | $ | (360,085,250 | ) | |||||||||||
|
| |||||||||||||||||||
Class R Shares: | ||||||||||||||||||||
Shares sold | 1,421,183 | $ 13,393,410 | 1,437,455 | $ | 13,630,121 | |||||||||||||||
Shares issued in reinvestment of distributions | 332,487 | 3,136,111 | 405,340 | 3,838,586 | ||||||||||||||||
Shares redeemed | (3,490,157 | ) | (32,564,655 | ) | (3,962,132 | ) | (37,467,349 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (1,736,487 | ) | $ (16,035,134 | ) | (2,119,337 | ) | $ | (19,998,642 | ) | |||||||||||
|
| |||||||||||||||||||
Class R6 Shares: | ||||||||||||||||||||
Shares sold | 5,527,397 | $ 52,655,227 | 10,323,576 | $ | 98,464,071 | |||||||||||||||
Shares issued in reinvestment of distributions | 958,906 | 9,140,302 | 1,882,797 | 17,913,831 | ||||||||||||||||
Shares redeemed | (23,024,591 | ) | (220,902,162 | ) | (25,303,121 | ) | (240,047,590 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (16,538,288 | ) | $(159,106,633 | ) | (13,096,748 | ) | $ | (123,669,688 | ) | |||||||||||
|
| |||||||||||||||||||
Advisor Class Shares: | ||||||||||||||||||||
Shares sold | 16,576,637 | $ 155,346,108 | 18,952,628 | $ | 180,567,542 | |||||||||||||||
Shares issued in reinvestment of distributions | 2,676,518 | 25,356,333 | 3,899,671 | 37,096,165 | ||||||||||||||||
Shares redeemed | (22,833,202 | ) | (214,281,737 | ) | (56,752,457 | ) | (539,937,594 | ) | ||||||||||||
|
| |||||||||||||||||||
Net increase (decrease) | (3,580,047 | ) | $ (33,579,296 | ) | (33,900,158 | ) | $ | (322,273,887 | ) | |||||||||||
|
|
aMay include a portion of Class C shares that were automatically converted to Class A.
franklintempleton.com | Annual Report | 57 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton. 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, 2020, the gross effective investment management fee rate was 0.456% of the Fund’s average daily net assets.
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.
58 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
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 | $ | 131,891 | ||
CDSC retained | $ | 69,879 |
e. Transfer Agent Fees
Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations. The fees are based on an annualized asset based fee of 0.02% plus a transaction based fee. 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, 2020, the Fund paid transfer agent fees of $6,562,210, of which $2,860,813 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 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, 2020, the Fund held investments in affiliated management investment companies as follows:
Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares Held at End of Year | Dividend Income | |||||||||||||||||||||||||
Controlled Affiliates | ||||||||||||||||||||||||||||||||
Franklin Floating Rate Income Funda | $194,101,482 | $ | — | $ | (54,960,600 | ) | $ | (10,939,400 | ) | $ | (20,123,738 | ) | $ | 108,077,744 | 15,243,688 | $ | 10,090,520 | |||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||||||
Institutional Fiduciary Trust Money Market Portfolio, 0.01% | 63,183,777 | 81,001,417 | (93,163,392 | ) | — | — | 51,021,802 | 51,021,802 | 873,446 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $257,285,259 | $ | 81,001,417 | $ | (148,123,992 | ) | $ | (10,939,400 | ) | $ | (20,123,738 | ) | $ | 159,099,546 | $ | 10,963,966 | ||||||||||||||||
|
|
|
|
aEffective May 31, 2019, Franklin Middle Tier Floating Rate Fund was renamed Franklin Floating Rate Income Fund.
franklintempleton.com | Annual Report | 59 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
3. Transactions with Affiliates (continued)
g. Waiver and Expense Reimbursements
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% based on the average net assets of the class until August 31, 2020.
Prior to September 1, 2019, Investor Services had voluntarily agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees did not exceed 0.02% based on the average net assets of the class.
h. 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, 2020, these purchase and sale transactions aggregated $1,252,875 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, 2020, the custodian fees were reduced as noted in the Consolidated Statement of Operations.
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains.
At April 30, 2020, the capital loss carryforwards were as follows:
Capital loss carryforwards not subject to expiration: | ||||
Short term | $ | 52,700,821 | ||
Long term | 513,263,033 | |||
|
| |||
Total capital loss carryforwards | $ | 565,963,854 | ||
|
|
The tax character of distributions paid during the years ended April 30, 2020 and 2019, was as follows:
2020 | 2019 | |||||||
|
| |||||||
Distributions paid from ordinary income | $ | 198,809,927 | $ | 234,515,065 | ||||
|
|
At April 30, 2020, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:
Cost of investments | $ | 4,570,074,349 | ||
|
| |||
Unrealized appreciation | $ | 97,752,197 | ||
Unrealized depreciation | (618,691,053) | |||
|
| |||
Net unrealized appreciation (depreciation) | $ | (520,938,856) | ||
|
| |||
Distributable earnings: | ||||
Undistributed ordinary income | $ | 10,416,941 | ||
|
|
60 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
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, paydown losses, bond discounts and premiums and swaps.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended April 30, 2020, aggregated $5,455,797,045 and $6,110,383,078, respectively.
7. Credit Risk and Defaulted Securities
At April 30, 2020, the Fund had 32.0% of its portfolio invested in high yield, senior secured floating rate loans, 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, 2020, the aggregate value of these securities was $8,605,553, representing 0.2% 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.
8. Novel Coronavirus Pandemic
The global outbreak of the novel coronavirus disease, known as COVID-19, has caused adverse effects on many companies, sectors, nations, regions and the markets in general, and may continue for an unpredictable duration. The effects of this pandemic may materially impact the value and performance of the Fund, its ability to buy and sell fund investments at appropriate valuations and its ability to achieve its investment objectives.
9. 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, 2020, investments in restricted securities, excluding securities exempt from registration under the 1933 Act, were as follows:
Shares/ Units | Issuer | Acquisition Date | Cost | Value | ||||||||||||
331,326 | a Appvion Operations Inc. | 4/12/19 | $ | 4,481,262 | $ | 6,144,820 | ||||||||||
125,940,079 | b K2016470219 South Africa Ltd., A | 2/08/13 - 2/01/17 | 977,122 | — | ||||||||||||
12,532,821 | b K2016470219 South Africa Ltd., B | 2/01/17 | 9,305 | — | ||||||||||||
124,500 | c Remington Outdoor Co. Inc., Litigation Units | 4/12/19 | — | — | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 0.2% of Net Assets) |
| $ | 5,467,689 | $ | 6,144,820 | |||||||||||
|
|
franklintempleton.com | Annual Report | 61 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
9. Restricted Securities (continued)
aThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $4,726,831 as of April 30, 2020.
bThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $12,538 as of April 30, 2020.
cThe Fund also invests in unrestricted securities or other investments in the issuer, valued at $661,219 as of April 30, 2020.
10. Other Derivative Information
At April 30, 2020, 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 | | $ 7,240,667 | a | Variation margin on futures contracts | | $ 4,023,816 | a | ||||
Variation margin on centrally cleared swap contracts | 4,676,539 | a | Variation margin on centrally cleared swap contracts | — | ||||||||
Unrealized appreciation on OTC swap contracts | 463,305 | Unrealized depreciation on OTC swap contracts | 4,031,013 | |||||||||
Foreign exchange contracts | Unrealized appreciation on OTC forward exchange contracts | 14,096,645 | Unrealized depreciation on OTC forward exchange contracts | 17,523,014 | ||||||||
Credit contracts | Variation margin on centrally cleared swap contracts | — | Variation margin on centrally cleared swap contracts | 8,573,998 | a | |||||||
OTC swap contracts (upfront payments) | 992,514 | OTC swap contracts (upfront receipts) | 25,036,646 | |||||||||
Unrealized appreciation on OTC swap contracts | 3,671,075 | Unrealized depreciation on OTC swap contracts | 34,200,319 | |||||||||
Inflation contracts | Variation margin on centrally cleared swap contracts | — | Variation margin on centrally cleared swap contracts | 13,753,997 | a | |||||||
Value recovery instruments | Investments in securities, at value | 7,432,730 | b | |||||||||
|
|
|
| |||||||||
Totals | $38,573,475 | $107,142,803 | ||||||||||
|
|
|
|
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 in securities, at value in the Consolidated Statement of Assets and Liabilities.
62 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
For the year ended April 30, 2020, the effect of derivative contracts in the 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 | Investments | $ (4,838,041 | )a | Investments | $ — | |||||||
Written options | 1,942,153 | Written options | — | |||||||||
Futures contracts | 8,794,656 | Futures contracts | (628,709 | ) | ||||||||
Swap contracts | 7,949,479 | Swap contracts | (9,313,527 | ) | ||||||||
Foreign exchange contracts | Investments | 875,498 | a | Investments | — | |||||||
Forward exchange contracts | 6,879,987 | Forward exchange contracts | (6,744,936 | ) | ||||||||
Credit contracts | Written options | (7,271,840 | ) | Written options | — | |||||||
Swap contracts | (34,061,943 | ) | Swap contracts | (23,308,559 | ) | |||||||
Inflation contracts | Swap contracts | (13 | ) | Swap contracts | (13,753,997 | ) | ||||||
Value recovery instruments | Investments | — | Investments | 1,026,692 | a | |||||||
|
|
|
| |||||||||
Totals | $(19,730,064 | ) | $(52,723,036 | ) | ||||||||
|
|
|
|
aPurchased option contracts and VRI are included in net realized gain (loss) from investments and net change in unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations.
For the year ended April 30, 2020, the average month end notional amount of futures contracts, swap contracts and options, the average month end contract value for forward exchange contracts and average month end fair value of VRI were as follows:
Futures Contracts | $ | 1,003,989,000 | ||
Swap contracts | $ | 641,451,992 | ||
Forward exchange contracts | $ | 796,705,466 | ||
VRI | $ | 8,414,444 | ||
Options | $ | 39,507,692 |
At April 30, 2020, 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 | $14,096,645 | $17,523,014 | ||||||
Swap contracts | 5,126,894 | 63,267,978 | ||||||
|
| |||||||
Total | $19,223,539 | $80,790,992 | ||||||
|
|
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.
franklintempleton.com | Annual Report | 63 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
10. Other Derivative Information (continued)
At April 30, 2020, OTC derivative assets, which may be offset against 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 the Consolidated Statement of Assets and Liabilities | Financial Instruments Available for Offset | Financial Instruments Collateral Received | Cash Collateral Received | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BNDP | $ — | $ — | $ — | $ — | $ — | |||||||||||||||
BZWS | 425,711 | (425,711 | ) | — | — | — | ||||||||||||||
CITI | 1,608,235 | (1,608,235 | ) | — | — | — | ||||||||||||||
DBAB | — | — | — | — | — | |||||||||||||||
GSCO | — | — | — | — | — | |||||||||||||||
JPHQ | 17,189,593 | (17,189,593 | ) | — | — | — | ||||||||||||||
MSCO | — | — | — | — | — | |||||||||||||||
|
| |||||||||||||||||||
Total | $19,223,539 | $(19,223,539 | ) | $ — | $ — | $ — | ||||||||||||||
|
| |||||||||||||||||||
At April 30, 2020, OTC derivative liabilities, which may be offset against 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 Liabilities Presented in the Consolidated Statement of Assets and Liabilities | Financial Instruments Available for Offset | Financial Instruments Collateral Pledged | Cash Collateral Pledgeda | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BNDP | $ 781,506 | $ — | $ — | $ (780,000 | ) | $ 1,506 | ||||||||||||||
BZWS | 1,996,959 | (425,711 | ) | — | (1,571,248 | ) | — | |||||||||||||
CITI | 45,868,806 | (1,608,235 | ) | — | (44,060,000 | ) | 200,571 | |||||||||||||
DBAB | 71,607 | — | — | — | 71,607 | |||||||||||||||
GSCO | 2,459,765 | — | — | (2,459,765 | ) | — | ||||||||||||||
JPHQ | 20,764,691 | (17,189,593 | ) | — | (1,430,000 | ) | 2,145,098 | |||||||||||||
MSCO | 8,847,658 | — | — | (8,847,658 | ) | — | ||||||||||||||
|
| |||||||||||||||||||
Total | $80,790,992 | $(19,223,539 | ) | $ — | $(59,148,671 | ) | $2,418,782 | |||||||||||||
|
|
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(e) regarding derivative financial instruments.
See Abbreviations on page 70.
64 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
11. 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, 2020, investments in “affiliated companies” were as follows:
Name of Issuer | Value at Beginning of Year | Purchases | Sales | Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Value at End of Year | Number of Shares/Units Held at End of Year | Dividend Income | ||||||||||||||||||||||||
Non-Controlled Affiliates |
| |||||||||||||||||||||||||||||||
Remington Outdoor Co. Inc. | $2,909,366 | $ — | $ — | $ — | $(2,248,147 | ) | $661,219 | 1,322,439 | $ — | |||||||||||||||||||||||
Remington Outdoor Co. Inc., Litigation Units | — | — | — | — | — | — | 124,500 | — | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Affiliated Securities | $2,909,366 | $ — | $ — | $ — | $(2,248,147 | ) | $661,219 | $ — | ||||||||||||||||||||||||
|
|
|
|
†Rounds to less than 0.1% of net assets.
12. Credit Facility
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 5, 2021. 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, 2020, the Fund did not use the Global Credit Facility.
13. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s 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.
franklintempleton.com | Annual Report | 65 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
13. Fair Value Measurements (continued)
A summary of inputs used as of April 30, 2020, 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 | ||||||||||||||||
Commercial & Professional Services | $ | — | $ | 661,219 | $ | — | $ | 661,219 | ||||||||
Consumer Services | — | — | 122,759 | 122,759 | ||||||||||||
Energy | 980,747 | — | 2,105,431 | 3,086,178 | ||||||||||||
Materials | 546,533 | — | 6,144,820 | 6,691,353 | ||||||||||||
Media & Entertainment | 1,083,409 | — | 11,582 | 1,094,991 | ||||||||||||
Software & Services | — | — | 750,000 | 750,000 | ||||||||||||
All Other Equity Investments | 108,077,744 | — | — | c | 108,077,744 | |||||||||||
Corporate Bonds: | ||||||||||||||||
Capital Goods | — | 52,457,028 | 3,404,098 | 55,861,126 | ||||||||||||
Retailing | — | 549,875 | 24,852 | 574,727 | ||||||||||||
Telecommunication Services | — | 81,248,128 | 121,350 | 81,369,478 | ||||||||||||
All Other Corporate Bonds | — | 1,328,085,367 | — | 1,328,085,367 | ||||||||||||
Senior Floating Rate Interests: | ||||||||||||||||
Household & Personal Products | — | 542,199 | 41,728,693 | 42,270,892 | ||||||||||||
Software & Services | — | 5,590,589 | 19,604,573 | 25,195,162 | ||||||||||||
All Other Senior Floating Rate Interests | — | 126,153,675 | — | 126,153,675 | ||||||||||||
Marketplace Loans | — | — | 6,389,054 | 6,389,054 | ||||||||||||
Foreign Government and Agency Securities | — | 435,461,315 | — | 435,461,315 | ||||||||||||
U.S. Government and Agency Securities | — | 185,064,149 | — | 185,064,149 | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities: | ||||||||||||||||
Diversified Financials | — | 961,239,717 | 14,282,254 | 975,521,971 | ||||||||||||
All Other Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 4,979,183 | — | 4,979,183 | ||||||||||||
Mortgage-Backed Securities | — | 363,773,464 | — | 363,773,464 | ||||||||||||
Municipal Bonds | — | 178,706,955 | — | 178,706,955 | ||||||||||||
Escrows and Litigation Trusts | — | 60,000 | — | c | 60,000 | |||||||||||
Short Term Investments | 51,021,802 | 146,368,405 | — | 197,390,207 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 161,710,235 | $ | 3,870,941,268 | $ | 94,689,466 | $ | 4,127,340,969 | ||||||||
|
| |||||||||||||||
Other Financial Instruments: | ||||||||||||||||
Futures Contracts | $ | 7,240,667 | $ | — | $ | — | $ | 7,240,667 | ||||||||
Forward Exchange Contracts | — | 14,096,645 | — | 14,096,645 | ||||||||||||
Swap Contracts | — | 8,810,919 | — | 8,810,919 | ||||||||||||
|
| |||||||||||||||
Total Other Financial Instruments | $ | 7,240,667 | $ | 22,907,564 | $ | — | $ | 30,148,231 | ||||||||
|
|
66 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities: | ||||||||||||||||
Other Financial Instruments: | ||||||||||||||||
Futures Contracts | $ | 4,023,816 | $ | — | $ | — | $ | 4,023,816 | ||||||||
Forward Exchange Contracts | — | 17,523,014 | — | 17,523,014 | ||||||||||||
Swap Contracts | — | 58,708,160 | 1,851,167 | 60,559,327 | ||||||||||||
|
| |||||||||||||||
Total Other Financial Instruments | $ | 4,023,816 | $ | 76,231,174 | $ | 1,851,167 | $ | 82,106,157 | ||||||||
|
|
aFor detailed categories, see the accompanying Consolidated Statement of Investments.
bIncludes common stocks and management investment companies as well as other equity interests.
cIncludes securities determined to have no value at April 30, 2020.
A reconciliation in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 assets and/or liabilities at the beginning and/or end of the year. At April 30, 2020, the reconciliation is as follows:
Balance at Beginning of Year | Purchases | Sales | Transfer Into Level 3a | Transfer Out of Level 3 | Cost Basis Adjustmentsb | 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 | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Investments in Securities: |
| |||||||||||||||||||||||||||||||||||||||
Equity Investments:c | ||||||||||||||||||||||||||||||||||||||||
Consumer Services | $ 122,759 | $ — | $ — | $ — | $ — | $ — | $ — | $ — | $ 122,759 | $ — | ||||||||||||||||||||||||||||||
Energy | 2 | — | — | 1,985,626 | — | — | — | 119,803 | 2,105,431 | 119,803 | ||||||||||||||||||||||||||||||
Materials | 4,615,489 | — | — | — | — | — | — | 1,529,331 | 6,144,820 | 1,529,331 | ||||||||||||||||||||||||||||||
Media & Entertainment | — | 24,605 | — | — | — | — | — | (13,023 | ) | 11,582 | (13,023 | ) | ||||||||||||||||||||||||||||
Retailing | 96,878 | — | — | — | — | — | — | (96,878 | ) | — | d | (96,878 | ) | |||||||||||||||||||||||||||
Software & Services | 750,000 | — | — | — | — | — | — | — | 750,000 | — | ||||||||||||||||||||||||||||||
Corporate Bonds: | ||||||||||||||||||||||||||||||||||||||||
Capital Goods | — | — | — | 3,884,162 | — | 22,408 | — | (502,472 | ) | 3,404,098 | (502,472 | ) | ||||||||||||||||||||||||||||
Retailing | 90,006 | — | — | — | — | (1,638,145 | ) | — | 1,572,991 | 24,852 | 1,572,991 | |||||||||||||||||||||||||||||
Telecommunication Services | — | — | — | 121,350 | — | — | — | — | 121,350 | — | ||||||||||||||||||||||||||||||
Senior Floating Rate Interests: | ||||||||||||||||||||||||||||||||||||||||
Household & Personal Products | 42,108,964 | — | — | — | — | 1,328,875 | — | (1,709,146 | ) | 41,728,693 | (1,709,146 | ) | ||||||||||||||||||||||||||||
Software & Services | 19,883,394 | — | — | — | — | 235,015 | — | (513,836 | ) | 19,604,573 | (513,836 | ) | ||||||||||||||||||||||||||||
Marketplace Loans | — | 6,876,562 | — | — | — | — | — | (487,508 | ) | 6,389,054 | (487,508 | ) | ||||||||||||||||||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities: | ||||||||||||||||||||||||||||||||||||||||
Diversified Financials | — | — | — | 14,282,254 | — | — | — | — | 14,282,254 | — | ||||||||||||||||||||||||||||||
Escrows and Litigation Trusts | — | d | — | — | — | — | — | — | — | — | d | — | ||||||||||||||||||||||||||||
|
|
franklintempleton.com | Annual Report | 67 |
FRANKLIN STRATEGIC SERIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
13. Fair Value Measurements (continued)
Balance at Beginning of Year | Purchases | Sales | Transfer Into Level 3a | Transfer Out of Level 3 | Cost Basis Adjustmentsb | 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 | |||||||||||||||||||||||||||||||
Total Investments in Securities | $67,667,492 | $6,901,167 | $ — | $20,273,392 | $ — | $ (51,847 | ) | $ — | $ (100,738 | ) | $94,689,466 | $ (100,738 | ) | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Other Financial Instruments: | ||||||||||||||||||||||||||||||||||||||||
Swap Contracts | $ — | $ — | $ — | $ (1,851,167 | ) | $ — | $ — | $ — | $ — | $ (1,851,167 | ) | $ — | ||||||||||||||||||||||||||||
|
|
aTransferred into Level 3 as a result of the unavailability of a quoted market price in an active market for identical securities and other significant observable valuation inputs.
bMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.
cIncludes common and preferred stocks as well as other equity interests.
dIncludes securities determined to have no value.
Significant unobservable valuation inputs for material Level 3 assets and/or liabilities and impact to fair value as a result of changes in unobservable valuation inputs as of April 30, 2020, are as follows:
Description | Fair Value at End of Year | Valuation Technique | Unobservable Inputs | Amount/ Range (Weighted Averagea) | Impact to Fair Value if Input Increasesb | |||||||||||||||
Assets: | ||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||
Equity Investments: | ||||||||||||||||||||
Materials | $ 6,144,820 | Discounted cash flow | | Weighted average cost of capital | | 16.8% | Decrease | c | ||||||||||||
|
| |||||||||||||||||||
| Unlevered free cashflows | | $188.4 mil | Increase | ||||||||||||||||
|
| |||||||||||||||||||
| Discount for lack of marketability | | 20.0% | Decrease | c | |||||||||||||||
|
| |||||||||||||||||||
Long term growth rate | 0.0% | Increase | ||||||||||||||||||
| ||||||||||||||||||||
Senior Floating Rate Interests: | ||||||||||||||||||||
Household & Personal Products
|
| 41,728,693
|
|
| Discounted cash flow
|
|
| Discount rate
|
| | 10.2% - 20.8% (13.5% | ) | Decrease | c | ||||||
|
| |||||||||||||||||||
Free cash flow | | $19.5 - $32.1 mil ($28.1 mil | ) | Increase | d | |||||||||||||||
| ||||||||||||||||||||
Software & Services | 19,604,573 | Discounted cash flow | Discount rate | 19.7% | Decrease | c | ||||||||||||||
|
| |||||||||||||||||||
Free cash flow | $24.5 mil | Increase | d | |||||||||||||||||
| ||||||||||||||||||||
All other investmentse | 27,211,380 | f | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||
Other Financial Instruments: | ||||||||||||||||||||
Credit Defaults Swap Contractse | 1,851,167 | |||||||||||||||||||
|
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
aWeighted based on the relative fair value of the financial instruments.
bRepresents the directional change in the fair value 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.
cRepresents a significant impact to fair value but not net assets.
dRepresents a significant impact to fair value and net assets.
eIncludes fair value of immaterial financial instruments developed using various valuation techniques and unobservable inputs. May also include values derived using private transaction prices or non-public third party pricing information which is unobservable.
fIncludes securities determined to have no value at April 30, 2020.
14. New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provides optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management is currently evaluating the impact, if any, of applying this ASU.
15. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franklin Strategic Income Fund (continued)
Abbreviations
Counterparty | Currency | Selected Portfolio | ||||||||
BNDP | BNP Paribas | AUD | Australian Dollar | ARM | Adjustable Rate Mortgage | |||||
BZWS | Barclays Bank PLC | BRL | Brazilian Real | BBSW | Bank Bill Swap Rate | |||||
CITI | Citigroup, Inc. | CAD | Canadian Dollar | BTP | Buoni del Tesoro Poliennali | |||||
DBAB | Deutsche Bank AG | COP | Colombian Peso | BZDIOVRA | Brazil Cetip DI Interbank Deposit Rate | |||||
GSCO | The Goldman Sachs Group, Inc. | DOP | Dominican Peso | CABA | Canada Banker’s Acceptance | |||||
JPHQ | JP Morgan Chase & Co. | EUR | Euro | CLO | Collateralized Loan Obligation | |||||
MSCO | Morgan Stanley | IDR | Indonesian Rupiah | CME | Chicago Mercantile Exchange | |||||
USD | United States Dollar | CMT | Constant Maturity Treasury Index | |||||||
UYU | Uruguayan Peso | CPI | Consumer Price Index | |||||||
ZAR | South African Rand | FRN | Floating Rate Note | |||||||
GDP | Gross Domestic Product | |||||||||
GO | General Obligation | |||||||||
LIBOR | London InterBank Offered Rate | |||||||||
MBS | Mortgage-Backed Security | |||||||||
OAT | Obligation Assumable by the Treasurer | |||||||||
PIK | Payment-In-Kind | |||||||||
RDA | Redevelopment Agency/Authority | |||||||||
SF | Single Family | |||||||||
T-Note | Treasury Note | |||||||||
VRI | Value Recovery Instruments |
Index Abbreviation | ||||||||||
CDX.EM.Series number | CDX Emerging Markets Index | |||||||||
CDX.NA.HY.Series number | CDX North America High Yield Index | |||||||||
CDX.NA.IG.Series number | CDX North America Investment Grade Index | |||||||||
MCDX.NA.Series number | MCDX North America Index |
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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 (one of the funds constituting Franklin Strategic Series, referred to hereafter as the “Fund”) as of April 30, 2020, the related consolidated statements of operations for the year ended April 30, 2020, the consolidated statement of changes in net assets for each of the two years in the period ended April 30, 2020, including the related notes, and the consolidated financial highlights for each of the five years in the period ended April 30, 2020 (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, 2020, 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, 2020 and the consolidated financial highlights for each of the five years in the period ended April 30, 2020 indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated 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, 2020 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 17, 2020
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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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 U.S. registered portfolios overseen in the Franklin Templeton 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 | 129 | 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 2017 | 110 | 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 | 129 | 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 | Lead Independent Trustee | Trustee since 1998 and Lead Independent Trustee since 2019 | 129 | 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); formerly, 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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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 | ||||
J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2009 | 129 | Boeing Capital Corporation (aircraft financing) (2006-2010). | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Private investor; and formerly, Counselor and Senior Advisor to the Chairman, CEO, and Board of Directors, of The Boeing Company (aerospace company), and member of the Executive Council (May 2019-January 1, 2020); Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (2006-2019); and Federal Appeals Court Judge, United States Court of Appeals for the Fourth Circuit (1991-2006). | ||||||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2007 | 129 | 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). |
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 | 140 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Executive Chairman, Chairman of the Board and Director, 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 39 of the investment companies in Franklin Templeton; Vice Chairman, Investment Company Institute; and formerly, Chief Executive Officer (2013-2020) and President (1994-2015), Franklin Resources, Inc. | ||||||||
**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 | 129 | None | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Director (Vice Chairman), Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 37 of the investment companies in Franklin Templeton. | ||||||||
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; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton. |
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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 Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Breda M. Beckerle (1958) 280 Park Avenue New York, NY 10017 | Interim Chief Compliance Officer | Since January 2020 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Chief Compliance Officer, Fiduciary Investment Management International, Inc., Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC; and officer of 41 of the investment companies in Franklin Templeton. | ||||||||
Sonal Desai, Ph.D. (1963) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since 2018 | 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 17 of the investment companies in Franklin Templeton. | ||||||||
Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 | Treasurer, Chief Financial Officer and Chief Accounting Officer | Since 2009 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Treasurer, U.S. Fund Administration & Reporting and officer of 24 of the investment companies in Franklin Templeton. | ||||||||
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President and Co- Secretary | Vice President since 2009 and Co-Secretary since 2019 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 41 of the investment companies in Franklin Templeton. | ||||||||
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 41 of the investment companies in Franklin Templeton; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton (2009-2017). | ||||||||
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 41 of the investment companies in Franklin Templeton. | ||||||||
Since 2013 |
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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 Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
Edward D. Perks (1970) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive Officer – Investment Management | Since 2018 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
President and Director, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton (since December 2018). | ||||||||
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 and officer of 41 of the investment companies in Franklin Templeton. | ||||||||
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 41 of the investment companies in Franklin Templeton. | ||||||||
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Vice President and Co-Secretary | Vice President since 2011 and Co-Secretary since 2019 | Not Applicable | Not Applicable | ||||
Principal Occupation During at Least the Past 5 Years: | ||||||||
Senior Associate General Counsel, Franklin Templeton; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 41 of the investment companies in Franklin Templeton. |
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton 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 an 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 Mary C. Choksi as its audit committee financial expert. The Board believes that Ms. Choksi qualifies as such an expert in view of her extensive business background and experience. She currently serves as a director of Avis Budget Group, Inc. (2007-present) and formerly, Founder and Senior Advisor, Strategic Investment Group (1987 to 2017). Ms. Choksi has been a Member of the Fund’s Audit Committee since 2014. As a result of such background and experience, the Board believes that Ms. Choksi 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. Ms. Choksi 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 Strategic Income Fund
(Fund)
At a meeting held on April 7, 2020 (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 and, in some cases, requested additional information from the Manager relating to the contract. 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, as well as information on succession planning where appropriate; 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 and shareholder services; 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 US 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 (FT) or the Fund to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements, which included discussion of the changing distribution landscape for the Fund. 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 reviewed and considered the benefits provided to Fund shareholders of investing in a fund that is part of the FT 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 FT organization. The Board specifically noted FT’s commitment to enhancing services and controlling costs, as reflected in its plan to outsource certain administrative functions, and growth opportunities, as evidenced by its upcoming acquisition of the Legg Mason companies. The Board acknowledged the change in leadership at FRI and the opportunity to hear from Jennifer Johnson, President and
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SHAREHOLDER INFORMATION
Chief Executive Officer of FRI, about goals she has for the company that will benefit the Fund.
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 Fund and its shareholders.
Fund Performance
The Board reviewed and considered the performance results of the Fund over various time periods ended January 31, 2020. 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 three- and five-year periods was below the median of its Performance Universe, but for the one- 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. The Board discussed this performance with management and management explained that the Fund’s relative underperformance was due, in part, to a shorter duration profile of its portfolio holdings and a reduced exposure to credit risk. The Board also noted management’s continued enhancements to the Fund’s investment process, which includes a greater role for macroeconomics and incorporates more quantitative techniques to assist with portfolio construction. Given the Fund’s income-oriented investment objective and the considerations noted above, the Board concluded that the Fund’s performance was satisfactory.
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 FT to financial intermediaries. The Board considered the actual total expense ratio and, separately, the contractual management fee rate, without the effect of fee waivers, if any (Management Rate) 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 to 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 the Fund and Class A shares for each other fund in its Expense Group. 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 10 other multi-sector income funds. The Board noted that the Management Rate and actual total expense ratio for the Fund were below the medians and in the first quintile (least expensive) 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 FT’s US 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, 2019, 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
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SHAREHOLDER INFORMATION
report presentations from prior years. Additionally, PricewaterhouseCoopers LLP, auditor to FRI and certain FT funds, was engaged by the Manager to 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 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. As part of this evaluation, the Board considered the initiative currently underway to outsource certain operations, which effort would require considerable up-front expenditures by the Manager but, over the long run is expected to result in greater efficiencies. 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 US Securities and Exchange Commission and other regulatory requirements, notably in the area of cybersecurity protections.
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 the 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 FT 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, but concluded that to the extent economies of scale may be realized by the Manager and its affiliates, the 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 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 U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust, on behalf of the Fund, files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year as an exhibit to its report on Form N-PORT. Shareholders may view the filed Form N-PORT 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.
78 | Annual Report | franklintempleton.com |
FRANKLIN STRATEGIC SERIES
FRANKLIN STRATEGIC INCOME FUND
SHAREHOLDER INFORMATION
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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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.
Annual Report and Shareholder Letter Franklin Strategic Income Fund | ||||||
Investment Manager | Distributor | Shareholder Services | ||||
Franklin Advisers, Inc. | Franklin Templeton Distributors, Inc. (800) DIAL BEN® / 342-5236 franklintempleton.com | (800) 632-2301 | ||||
© 2020 Franklin Templeton Investments. All rights reserved. | 194 A 06/20 |
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 13(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 Mary C. Choksi and she 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 $337,873 for the fiscal year ended April 30, 2020 and $407,481 for the fiscal year ended April 30, 2019.
(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 $232,351 for the fiscal year ended April 30, 2020 and $204,500 for the fiscal year ended April 30, 2019. The services for which these fees were paid included tax compliance services related to year-end, professional fees in connection with tax treatment of equipment lease transactions, professional fees in connection with an Indonesia withholding tax refund claim and tax consulting services related to the operating agreement and term sheet for the launch of a new fund.
(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 $6,311 for the fiscal year ended April 30, 2020 and $0 for the fiscal year ended April 30, 2019. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing
services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $194,566 for the fiscal year ended April 30, 2020 and $36,500 for the fiscal year ended April 30, 2019. The services for which these fees were paid included compliance examination for Investment Advisor Act rule 204-2 and 206-4(2), professional fees in connection with determining the feasibility of a U.S. direct lending structure, for the issuance of an Auditor’s Certificate for South Korean regulatory shareholders disclosures, valuation services related to a fair value engagement, benchmarking services in connection with the ICI TA survey, account maintenance project and assets under management certification.
(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 $433,228 for the fiscal year ended April 30, 2020 and $241,000 for the fiscal year ended April 30, 2019.
(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 provide reasonable assurance that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934, as amended, 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 control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect the internal control over financial reporting.
Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Company. N/A |
Item 13. | Exhibits. |
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 30, 2020 |
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 30, 2020 |
By | S\GASTON GARDEY | |
Gaston Gardey | ||
Chief Financial Officer and Chief Accounting Officer | ||
Date June 30, 2020 |