N-CSRS 1 primary-document.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM N-CSRS
 
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
 
Investment Company Act file number 811-07288
 
Franklin Strategic Mortgage Portfolio

(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: 9/30
 
Date of reporting period: 3/31/21
 
Item 1. Reports to Stockholders.
 
a.)
 
The following is a copy of the report transmitted to shareholders pursuant to Rule30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30e-1.)


b.)
 
A copy of the notice transmitted to shareholders in reliance on Rule 30e-3 under the 1940 Act that contains disclosures specified by paragraph (c)(3) of that rule is included in the Annual Report. Not Applicable.
 
SEMIANNUAL
REPORT
AND
SHAREHOLDER
LETTER
Franklin
Strategic
Mortgage
Portfolio
March
31,
2021
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report
1
Shareholder
Letter
Dear
Shareholder:
During
the
six
months
ended
March
31,
2021,
the
U.S.
economy
continued
to
recover
from
the
effects
of
the
novel
coronavirus
(COVID-19)
pandemic.
U.S.
gross
domestic
product
(GDP)
reported
in
2020’s
third
and
fourth
quarters
showed
a
substantial
recovery
from
the
contraction
experienced
in
2020’s
first
half,
based
on
increased
business
and
residential
investment
and
consumer
spending.
The
U.S.
economy
also
showed
signs
of
strength
during
2021’s
first
quarter
as
federal
assistance
programs,
the
acceleration
of
COVID-19
vaccinations
and
robust
corporate
earnings
boosted
U.S.
equity
markets.
Before
the
reporting
period,
the
U.S.
Federal
Reserve,
in
its
efforts
to
support
U.S.
economic
activity,
lowered
the
federal
funds
rate
twice
in
March
2020
and
implemented
broad
quantitative
easing
measures
to
support
credit
markets.
During
the
reporting
period,
the
Federal
Reserve
held
its
key
rate
unchanged
at
0.25%,
but
it
continued
quantitative
easing
and
adjusted
its
policy
in
August
2020
to
allow
more
flexibility
to
keep
interest
rates
low,
while
maintaining
a
2%
average
inflation
target.
The
10-year
U.S.
Treasury
yield
was
0.69%
on
September
30,
2020,
and
it
increased
to
1.74%
by
the
end
of
March
2021.
In
this
environment,
investment-grade
bonds,
as
measured
by
the
Bloomberg
Barclays
U.S.
Aggregate
Bond
Index,
posted
a
-2.73%
total
return.
1
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.
Franklin
Strategic
Mortgage
Portfolio’s
semiannual
report
includes
more
detail
about
prevailing
conditions
and
a
discussion
about
investment
decisions
during
the
period.
Please
remember
all
securities
markets
fluctuate,
as
do
mutual
fund
share
prices.
We
thank
you
for
investing
with
Franklin
Templeton,
welcome
your
questions
and
comments,
and
look
forward
to
serving
your
investment
needs
in
the
years
ahead.
Sincerely,
Sonal
Desai,
Ph.D.
Executive
Vice
President,
Chief
Investment
Officer
Franklin
Templeton
Fixed
Income
This
letter
reflects
our
analysis
and
opinions
as
of
March
31,
2021,
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.
1.
Source:
Morningstar.
The
index
is
unmanaged
and
includes
reinvestment
of
any
income
or
distributions.
See
www.franklintempletondatasources.com
for
additional
data
provider
information.
franklintempleton.com
Semiannual
Report
2
Contents
Semiannual
Report
Franklin
Strategic
Mortgage
Portfolio
3
Performance
Summary
6
Your
Fund’s
Expenses
8
Financial
Highlights
and
Statement
of
Investments
9
Financial
Statements
20
Notes
to
Financial
Statements
24
Shareholder
Information
34
Visit
franklintempleton.com
for
fund
updates,
to
access
your
account,
or
to
find
helpful
financial
planning
tools.
3
franklintempleton.com
Semiannual
Report
SEMIANNUAL
REPORT
Franklin
Strategic
Mortgage
Portfolio
This
semiannual
report
for
Franklin
Strategic
Mortgage
Portfolio
covers
the
period
ended
March
31
,
202
1
.
Your
Fund’s
Goal
and
Main
Investments
The
Fund
seeks
high
total
return
(a
combination
of
high
current
income
and
capital
appreciation)
relative
to
the
performance
of
the
general
mortgage
securities
market
by
investing
at
least
80%
of
its
net
assets
in
a
portfolio
of
mortgage
securities.
The
Fund
invests
substantially
in
mortgage
securities
that
are
issued
or
guaranteed
by
the
U.S.
government,
its
agencies
or
instrumentalities,
which
include
mortgage
pass-through
securities
representing
interests
in
“pools”
of
mortgage
loans
issued
or
guaranteed
by
the
Government
National
Mortgage
Association
(Ginnie
Mae),
Fannie
Mae
and
Freddie
Mac.
1
Performance
Overview
For
the
six
months
ended
March
31,
2021,
the
Fund’s
Class
A
shares
posted
a
-0.76%
total
return.
In
comparison,
the
Fund’s
primary
benchmark,
the
Bloomberg
Barclays
U.S.
Mortgage-Backed
Securities
(MBS)
Fixed
Rate
Index,
which
measures
the
performance
of
investment-grade
fixed-rate
mortgage-backed
pass-through
securities
of
Ginnie
Mae,
Fannie
Mae
and
Freddie
Mac,
posted
a
-0.86%
total
return.
2
In
comparison,
the
Fund’s
secondary
benchmark,
the
FTSE
U.S.
Broad
Investment-Grade
Mortgage
Index,
which
tracks
the
performance
of
30-
and
15-year
Ginnie
Mae,
Fannie
Mae
and
Freddie
Mac
securities,
as
well
as
Fannie
Mae
and
Freddie
Mac
balloon
mortgages,
posted
a
-0.88%
total
return.
2
You
can
find
the
Fund’s
long-term
performance
data
in
the
Performance
Summary
beginning
on
page
6.
Performance
data
represent
past
performance,
which
does
not
guarantee
future
results.
Investment
return
and
principal
value
will
fluctuate,
and
you
may
have
a
gain
or
loss
when
you
sell
your
shares.
Current
performance
may
differ
from
figures
shown.
For
most
recent
month-end
performance,
go
to
franklintempleton.com
or
call
(800)
342-5236
.
Economic
and
Market
Overview
The
U.S.
bond
market,
as
measured
by
the
Bloomberg
Barclays
U.S.
Aggregate
Bond
Index,
posted
modestly
negative
total
returns
during
the
six
months
ended
March
31,
2021,
as
continued
economic
recovery
and
additional
government
stimulus
led
to
higher
yields
(which
move
inversely
to
prices)
for
most
bonds.
As
the
period
began,
investors
continued
to
adjust
to
the
disruption
caused
by
the
novel
coronavirus
(COVID-19)
pandemic.
Before
the
period,
investor
flight
to
perceived
safety
had
driven
the
10-year
U.S.
Treasury
yield
to
near
record
lows.
During
the
period,
however,
the
implementation
of
mass
vaccination
programs
alongside
improving
economic
indicators
prompted
investors
to
anticipate
that
increased
inflation
would
lead
to
higher
interest
rates.
The
U.S.
Federal
Reserve
(Fed)
maintained
the
federal
funds
target
rate
at
a
range
of
0.00%–0.25%
and
continued
its
program
of
open-ended
purchasing
of
government-
backed
and
corporate
bonds
as
necessary
to
provide
liquidity
to
bond
markets.
Furthermore,
the
Fed
reiterated
that
interest
rates
would
potentially
remain
low,
even
if
inflation
moderately
exceeded
the
Fed’s
2%
target
for
some
time.
U.S.
Treasury
bonds,
as
measured
by
the
Bloomberg
Barclays
U.S.
Treasury
Index,
posted
negative
total
returns
for
the
period.
The
10-year
U.S.
Treasury
yield
rose
from
near-record
lows
at
the
beginning
of
the
reporting
period
amid
a
significant
U.S.
federal
budget
deficit
and
high
Portfolio
Composition
3/31/21
%
of
Total
Net
Assets
Mortgage-Backed
Securities
78.6%
Residential
Mortgage-Backed
Securities
9.3%
Asset-Backed
Securities
4.8%
Commercial
Mortgage-Backed
Securities
1.6%
Other
1.0%
Short-Term
Investments
&
Other
Net
Assets
4.7%
1.
Guarantees
of
timely
payment
of
principal
and
interest
do
not
apply
to
the
market
prices
and
yield
of
the
security
or
to
the
net
asset
value
or
performance
of
the
Fund.
Ginnie
Mae
pass-through
securities
are
backed
by
the
full
faith
and
credit
of
the
U.S.
government.
Although
U.S.
government-sponsored
entities,
such
as
Fannie
Mae
and
Freddie
Mac,
may
be
chartered
or
sponsored
by
acts
of
Congress,
their
securities
are
neither
insured
nor
guaranteed
by
the
U.S.
Treasury.
Please
refer
to
the
Fund’s
pro-
spectus
for
a
detailed
discussion
regarding
various
levels
of
credit
support
for
government
agency
or
instrumentality
securities.
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
14
.
Franklin
Strategic
Mortgage
Portfolio
4
franklintempleton.com
Semiannual
Report
levels
of
issuance.
The
Fed’s
inflation
policy
also
pressured
Treasuries,
as
renewed
economic
strength
prompted
investors
to
increase
their
inflation
expectations.
Mortgage-
backed
securities
(MBS),
as
measured
by
the
Bloomberg
Barclays
MBS
Index,
posted
marginally
negative
total
returns
for
the
period
despite
Fed
support,
as
low
interest
rates
led
to
accelerated
prepayments
from
mortgage
refinancing.
U.S.
corporate
bond
performance
varied
significantly
based
on
credit
rating,
reflecting
the
recovery
of
credit
markets
following
the
onset
of
the
pandemic.
While
the
strengthening
economy
pressured
corporate
bonds
generally,
it
also
had
the
effect
of
tempering
concerns
about
credit
quality,
which
benefited
lower-quality
bonds.
Consequently,
high-
yield
corporate
bonds,
as
represented
by
the
Bloomberg
Barclays
U.S.
Corporate
High
Yield
Bond
Index,
posted
a
solid
advance,
while
investment-grade
corporate
bonds,
as
represented
by
the
Bloomberg
Barclays
U.S.
Corporate
Bond
Index,
were
down
slightly.
Investment
Strategy
Under
normal
market
conditions,
we
invest
at
least
80%
of
the
Fund’s
net
assets
in
mortgage
securities.
The
Fund
invests
substantially
in
mortgage
securities
that
are
issued
or
guaranteed
by
the
U.S.
government,
its
agencies
or
instrumentalities,
which
include
mortgage
pass-through
securities
representing
interests
in
“pools”
of
mortgage
loans
issued
or
guaranteed
by
Ginnie
Mae,
Fannie
Mae
and
Freddie
Mac.
1
These
securities
may
be
fixed-rate
or
adjustable-rate
mortgage
securities
(ARMS).
The
Fund
may
purchase
or
sell
mortgage
securities
on
a
delayed
delivery
or
forward
commitment
basis
through
the
“to-be-
announced”
(TBA)
market.
We
may
also
invest
in
other
types
of
mortgage
securities
that
may
be
issued
by
private
issuers,
including,
but
not
limited
to,
certain
ARMS,
commercial
mortgage-backed
securities
(CMBS),
non-agency
residential
mortgage-backed
securities
(RMBS),
credit
risk
transfer
securities,
home
equity
loan
asset-backed
securities
(HELs),
manufactured
housing
asset-backed
securities
(MHs)
and
collateralized
mortgage
obligations
(CMOs),
as
well
as
in
other
mortgage-related
asset-backed
securities.
The
Fund
also
may
invest
in
U.S.
Treasury
securities.
The
Fund
may
invest
up
to
15%
of
its
net
assets
in
foreign
securities,
which
may
include
non-U.S.
dollar
denominated
foreign
mortgage
securities.
In
addition,
the
Fund
may
invest
up
to
20%
of
its
net
assets
in
high-yield,
lower-quality
securities
rated,
at
the
time
of
purchase,
below
BBB
by
Standard
&
Poor’s,
or
Baa
by
Moody’s,
respectively,
or,
if
unrated,
deemed
to
be
of
comparable
quality
by
the
investment
manager.
The
Fund
may
also
invest
up
to
33%
of
its
gross
assets
in
mortgage
dollar
rolls.
The
Fund
may
invest
a
small
portion
of
its
assets
directly
in
whole
mortgage
loans.
Manager’s
Discussion
Interest-rates
continued
to
decline
over
the
period,
reaching
a
record
low
in
early
January
2021
as
COVID-19
pandemic
caseloads
increased
and
the
economy
weakened.
However,
by
period-end,
interest-rates
began
to
climb
based
on
the
anticipation
of
rising
inflation
as
the
economy
began
a
slow
recovery,
benefited
by
two
rounds
of
fiscal
stimulus
over
the
period.
The
10-year
Treasury
rose
over
the
six
months,
ending
the
period
at
1.74%.
For
the
Bloomberg
Barclays
indexes
in
which
the
Fund
invests,
all
sectors
posted
negative
total
returns
over
the
six-month
period
but
outperformed
U.S
Treasuries,
with
the
exception
of
GNMA.
Within
the
agency
mortgage-backed
securities
(MBS)
sector,
Fannie
Mae
(FNMA)
and
Freddie
Mac
(FHLMC)
MBS
were
the
best
performers,
while
GNMA
lagged
with
negative
excess
returns.
Conventional
15-
year
MBS
outperformed
their
30-year
counterparts
and
the
conventional
30-year
MBS
sector
outperformed
comparable
30-year
GNMA
MBS
on
an
excess
return
basis.
Across
the
conventional
coupon
stack,
higher
coupon
4.5%
and
5.0%
coupons
were
the
best
performers,
while
lower
coupon
2.0%,
and
2.5%
coupons
lagged.
Fundamentally,
the
U.S.
housing
market
remains
strong
and
housing
activity
firm.
The
rate
selloff
toward
period-end
led
to
a
slight
increase
in
mortgage
rates
from
a
record
low
level
reached
in
January
2021.
However,
mortgage
rates
at
close
to
3.0%
remain
historically
low
and
should
not
materially
impact
housing
affordability
over
the
near-term.
From
a
historical
perspective,
mortgage
rates
only
began
negatively
impacting
housing
affordability
and
housing
activity
prominently
in
the
third
quarter
and
fourth
quarter
of
2018
when
mortgage
rates
approached
5.0%.
Overall
prepayment
activity
in
agency
MBS
remained
elevated
relative
to
past
prepayments
waves
despite
wider
primary
and
secondary
market
spreads
but
forbearance
requests
have
been
declining,
which
could
lead
to
lower
involuntary
prepayments
in
the
coming
months.
After
the
recent
selloff
in
rates,
only
slightly
less
than
half
of
the
agency
MBS
universe
has
an
incentive
to
refinance.
However,
refinance
applications
have
remained
stubbornly
high,
and
we
believe
prepayments
should
remain
elevated
in
the
coming
months.
As
we
progress
through
the
year
and
economic
activity
continues
to
increase,
we
expect
prepayments
to
slow.
At
the
same
time,
however,
Franklin
Strategic
Mortgage
Portfolio
5
franklintempleton.com
Semiannual
Report
quantitative
easing
taper-related
discussions
should
gain
market
focus,
which
could
exert
pressure
on
agency
MBS
spreads.
Through
the
end
of
March
2021,
the
Federal
Reserve
(Fed)
had
purchased
over
$1.84
trillion
of
agency
MBS.
Their
sizable
purchases
of
agency
MBS
should
continue
to
support
the
market,
potentially
limiting
spread
widening
and
keeping
spreads
range
bound,
which
could
benefit
lower
coupons
and
their
mortgage
dollar
rolls.
In
portfolio
sector
allocation,
we
maintained
our
largest
allocations
in
fixed-rate
agency
MBS
but
remained
underweight
the
sector
relative
to
the
benchmark.
The
elevated
prepayment
risk,
combined
with
yield
spreads
below
their
long-term
averages,
led
us
to
retain
our
neutral
view
of
the
asset
class.
While
we
remain
neutral,
we
believe
there
is
room
to
add
MBS
on
market
dips,
and
the
asset
class
continues
to
provide
good
carry
and
can
benefit
from
crossover
buying.
Within
the
agency
MBS
sector,
we
favored
conventional
sectors
over
GNMA
MBS
with
the
largest
allocation
in
FNMA
30-year
securities.
The
portfolio
was
positioned
up
in
the
coupon
holding
an
underweight
allocation
to
1.5%
and
2.0%
coupons
and
an
overweight
in
2.5%,
through
3.5%
and
4.5%
coupons.
The
portfolio
maintained
an
overweight
allocation
to
RMBS,
but
pared
exposure
over
the
period.
Our
exposure
remains
in
securities
that
have
significantly
deleveraged
structures
and
contain
locked-in
home
equity.
Fundamentally,
we
expect
the
U.S.
housing
sector
to
remain
strong
with
firm
activity
over
the
near-term
and
believe
RMBS
should
provide
consistent
risk-adjusted
returns.
We
reduced
allocation
to
CMBS
and
maintained
a
cautious
outlook
on
the
sector
as
downside
risks
outweigh
upside
potential.
We
remain
positioned
higher
in
the
capital
structure
in
transactions
with
solid
credit
fundamentals.
Sector
allocation
to
RMBS
was
the
top
contributor
to
performance,
followed
by
security
selection
in
agency
MBS.
Our
duration
positioning
benefited
returns.
Conversely,
the
underweight
allocation
to
agency
MBS
detracted
from
performance.
Thank
you
for
your
continued
participation
in
Franklin
Strategic
Mortgage
Portfolio.
We
look
forward
to
serving
your
future
investment
needs.
Neil
Dhruv
David
Yuen,
CFA,
FRM
Paul
Varunok
Portfolio
Management
Team
The
foregoing
information
reflects
our
analysis,
opinions
and
portfolio
holdings
as
of
March
31,
2021,
the
end
of
the
reporting
period.
The
way
we
implement
our
main
investment
strategies
and
the
resulting
portfolio
holdings
may
change
depending
on
factors
such
as
market
and
economic
conditions.
These
opinions
may
not
be
relied
upon
as
investment
advice
or
an
offer
for
a
particular
security.
The
information
is
not
a
complete
analysis
of
every
aspect
of
any
market,
country,
industry,
security
or
the
Fund.
Statements
of
fact
are
from
sources
considered
reliable,
but
the
investment
manager
makes
no
representation
or
warranty
as
to
their
completeness
or
accuracy.
Although
historical
performance
is
no
guarantee
of
future
results,
these
insights
may
help
you
understand
our
investment
management
philosophy.
CFA
®
is
a
trademark
owned
by
CFA
Institute.
Performance
Summary
as
of
March
31,
2021
Franklin
Strategic
Mortgage
Portfolio
6
franklintempleton.com
Semiannual
Report
The
performance
tables
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
3/31/21
1
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.
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
.
Share
Class
Cumulative
Total
Return
2
Average
Annual
Total
Return
3
–
A
4,5
6-Month
-0.76%
-4.46%
1-Year
+1.30%
-2.51%
5-Year
+10.71%
+1.28%
10-Year
+33.07%
+2.51%
Advisor
6
6-Month
-0.53%
-0.53%
1-Year
+1.66%
+1.66%
5-Year
+12.22%
+2.33%
10-Year
+36.44%
+3.16%
30-Day
Standardized
Yield
8
Share
Class
Distribution
Rate
7
(with
fee
waiver)
(without
fee
waiver)
A
1.52%
1.36%
1.11%
Advisor
1.83%
1.66%
1.41%
See
page
7
for
Performance
Summary
footnotes.
Franklin
Strategic
Mortgage
Portfolio
Performance
Summary
7
franklintempleton.com
Semiannual
Report
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’s
share
price
and
yield
will
be
affected
by
interest
rate
movements
and
mortgage
prepayments.
During
periods
of
declining
interest
rates,
principal
prepayments
tend
to
increase
as
borrowers
refinance
their
mortgages
at
lower
rates;
therefore
the
Fund
may
be
forced
to
reinvest
returned
principal
at
lower
interest
rates,
reducing
income.
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.
The
Fund
may
be
affected
by
issuers
that
fail
to
make
interest
payments
and
repay
principal
when
due.
Changes
in
the
financial
strength
of
a
bond
issuer
or
in
a
bond’s
credit
rating
may
affect
its
value.
Events
such
as
the
spread
of
deadly
diseases,
disasters,
and
financial,
political
or
social
disruptions,
may
heighten
risks
and
adversely
affect
performance.
The
Fund’s
prospectus
also
includes
a
description
of
the
main
investment
risks.
1.
The
Fund
has
an
expense
reduction
and
a
fee
waiver
associated
with
any
investments
it
makes
in
a
Franklin
Templeton
money
fund
and/or
other
Franklin
Templeton
fund,
contractually
guaranteed
through
1/31/22.
Fund
investment
results
reflect
the
expense
reduction
and
fee
waiver;
without
these
reductions,
the
results
would
have
been
lower.
2.
Cumulative
total
return
represents
the
change
in
value
of
an
investment
over
the
periods
indicated.
3.
Average
annual
total
return
represents
the
average
annual
change
in
value
of
an
investment
over
the
periods
indicated.
Return
for
less
than
one
year,
if
any,
has
not
been
annualized.
4.
Performance
quotations
for
Class
A
shares
reflect
the
following
methods
of
calculation:
(a)
For
periods
prior
to
2/1/12,
a
restated
figure
is
used
based
on
Class
A1
perfor-
mance
and
including
the
Class
A
Rule
12b-1
fee,
and
(b)
for
periods
after
2/1/12,
actual
Class
A
performance
is
used,
reflecting
all
charges
and
fees
applicable
to
that
class.
5.
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%.
6.
Effective
2/1/12,
the
Fund
began
offering
Advisor
Class
shares,
which
do
not
have
sales
charges
or
a
Rule
12b-1
fee.
Performance
quotations
for
this
class
reflect
the
fol-
lowing
methods
of
calculation:
(a)
For
periods
prior
to
2/1/12,
a
restated
figure
is
used
based
on
the
Fund’s
oldest
share
class,
Class
A1,
excluding
the
effect
of
its
maximum
initial
sales
charge;
and
(b)
for
periods
after
2/1/12,
actual
Advisor
Class
performance
is
used,
reflecting
all
charges
and
fees
applicable
to
that
class.
7.
Distribution
rate
is
based
on
an
annualization
of
the
sum
of
distributions
per
share
for
the
31
days
of
March
and
the
maximum
offering
price
(NAV
for
Advisor
Class)
on
3/31/21.
8.
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.
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
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.
Distributions
(10/1/20–3/31/21)
Share
Class
Net
Investment
Income
A
$0.069356
A1
$0.080940
C
$0.050861
R6
$0.086976
Advisor
$0.080987
Total
Annual
Operating
Expenses
9
Share
Class
With
Fee
Waiver
Without
Fee
Waiver
A
1.01%
1.31%
Advisor
0.76%
1.06%
Your
Fund’s
Expenses
Franklin
Strategic
Mortgage
Portfolio
8
franklintempleton.com
Semiannual
Report
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.
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
182/365
to
reflect
the
one-half
year
period.
2.
Reflects
expenses
after
fee
waivers
and
expense
reimbursements.
Does
not
include
acquired
fund
fees
and
expenses.
Actual
(actual
return
after
expenses)
Hypothetical
(5%
annual
return
before
expenses)
Share
Class
Beginning
Account
Value
10/1/20
Ending
Account
Value
3/31/21
Expenses
Paid
During
Period
10/1/20–3/31/21
1,2
Ending
Account
Value
3/31/21
Expenses
Paid
During
Period
10/1/20–3/31/21
1,2
a
Net
Annualized
Expense
Ratio
2
A
$1,000
$992.35
$4.94
$1,019.97
$5.01
0.99%
A1
$1,000
$994.67
$3.71
$1,021.22
$3.76
0.75%
C
$1,000
$990.38
$6.92
$1,017.98
$7.02
1.40%
R6
$1,000
$996.39
$3.08
$1,021.85
$3.12
0.62%
Advisor
$1,000
$994.67
$3.72
$1,021.21
$3.76
0.75%
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
9
a
Six
Months
Ended
March
31,
2021
(unaudited)
Year
Ended
September
30,
2020
2019
2018
2017
2016
Class
A
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.31
$9.25
$8.93
$9.34
$9.57
$9.49
Income
from
investment
operations
a
:
Net
investment
income
..............
0.015
b
0.188
0.267
0.243
b
0.147
0.144
Net
realized
and
unrealized
gains
(losses)
(0.086)
0.090
0.355
(0.359)
(0.106)
0.135
Total
from
investment
operations
........
(0.071)
0.278
0.622
(0.116)
0.041
0.279
Less
distributions
from:
Net
investment
income
..............
(0.069)
(0.218)
(0.302)
(0.294)
(0.267)
(0.199)
Tax
return
of
capital
................
—
—
—
—
(0.004)
—
Total
distributions
...................
(0.069)
(0.218)
(0.302)
(0.294)
(0.271)
(0.199)
Net
asset
value,
end
of
period
..........
$9.17
$9.31
$9.25
$8.93
$9.34
$9.57
Total
return
c
.......................
(0.76)%
3.05%
7.08%
(1.25)%
0.45%
2.98%
Ratios
to
average
net
assets
d
Expenses
before
waiver
and
payments
by
affiliates
..........................
1.21%
1.31%
1.24%
1.21%
1.17%
1.00%
Expenses
net
of
waiver
and
payments
by
affiliates
e
..........................
0.99%
1.00%
1.00%
1.06%
1.16%
0.99%
Net
investment
income
...............
0.32%
1.85%
2.93%
2.67%
1.82%
1.47%
Supplemental
data
Net
assets,
end
of
period
(000’s)
........
$23,767
$24,153
$18,313
$16,303
$21,143
$34,191
Portfolio
turnover
rate
................
157.46%
249.94%
223.36%
243.65%
244.09%
551.77%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
........................
55.46%
187.45%
139.83%
153.69%
111.62%
185.40%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
does
not
reflect
sales
commissions
or
contingent
deferred
sales
charges,
if
applicable,
and
is
not
annualized
for
periods
less
than
one
year.
d
Ratios
are
annualized
for
periods
less
than
one
year.
e
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
f
See
Note
1(e)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
10
a
Six
Months
Ended
March
31,
2021
(unaudited)
Year
Ended
September
30,
2020
2019
2018
2017
2016
Class
A1
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.31
$9.25
$8.94
$9.35
$9.58
$9.49
Income
from
investment
operations
a
:
Net
investment
income
..............
0.026
b
0.191
0.285
0.268
b
0.177
0.160
Net
realized
and
unrealized
gains
(losses)
(0.075)
0.110
0.349
(0.360)
(0.113)
0.153
Total
from
investment
operations
........
(0.049)
0.301
0.634
(0.092)
0.064
0.313
Less
distributions
from:
Net
investment
income
..............
(0.081)
(0.241)
(0.324)
(0.318)
(0.289)
(0.223)
Tax
return
of
capital
................
—
—
—
—
(0.005)
—
Total
distributions
...................
(0.081)
(0.241)
(0.324)
(0.318)
(0.294)
(0.223)
Net
asset
value,
end
of
period
..........
$9.18
$9.31
$9.25
$8.94
$9.35
$9.58
Total
return
c
.......................
(0.53)%
3.30%
7.22%
(1.00)%
0.70%
3.34%
Ratios
to
average
net
assets
d
Expenses
before
waiver
and
payments
by
affiliates
..........................
0.96%
1.05%
0.99%
0.96%
0.92%
0.75%
Expenses
net
of
waiver
and
payments
by
affiliates
e
..........................
0.75%
0.75%
0.75%
0.81%
0.91%
0.74%
Net
investment
income
...............
0.57%
2.14%
3.18%
2.92%
2.07%
1.72%
Supplemental
data
Net
assets,
end
of
period
(000’s)
........
$26,065
$27,530
$29,286
$32,802
$40,844
$53,432
Portfolio
turnover
rate
................
157.46%
249.94%
223.36%
243.65%
244.09%
551.77%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
........................
55.46%
187.45%
139.83%
153.69%
111.62%
185.40%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
does
not
reflect
sales
commissions
or
contingent
deferred
sales
charges,
if
applicable,
and
is
not
annualized
for
periods
less
than
one
year.
d
Ratios
are
annualized
for
periods
less
than
one
year.
e
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
f
See
Note
1(e)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
11
a
Six
Months
Ended
March
31,
2021
(unaudited)
Year
Ended
September
30,
2020
2019
2018
2017
2016
Class
C
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.31
$9.25
$8.93
$9.34
$9.57
$9.49
Income
from
investment
operations
a
:
Net
investment
income
(loss)
.........
(0.004)
b
0.138
0.230
0.207
b
0.112
0.112
Net
realized
and
unrealized
gains
(losses)
(0.085)
0.103
0.355
(0.359)
(0.109)
0.130
Total
from
investment
operations
........
(0.089)
0.241
0.585
(0.152)
0.003
0.242
Less
distributions
from:
Net
investment
income
..............
(0.051)
(0.181)
(0.265)
(0.258)
(0.229)
(0.162)
Tax
return
of
capital
................
—
—
—
—
(0.004)
—
Total
distributions
...................
(0.051)
(0.181)
(0.265)
(0.258)
(0.233)
(0.162)
Net
asset
value,
end
of
period
..........
$9.17
$9.31
$9.25
$8.93
$9.34
$9.57
Total
return
c
.......................
(0.96)%
2.64%
6.65%
(1.64)%
0.06%
2.57%
Ratios
to
average
net
assets
d
Expenses
before
waiver
and
payments
by
affiliates
..........................
1.62%
1.70%
1.64%
1.61%
1.57%
1.40%
Expenses
net
of
waiver
and
payments
by
affiliates
e
..........................
1.40%
1.40%
1.40%
1.46%
1.56%
1.39%
Net
investment
income
(loss)
..........
(0.08)%
1.47%
2.53%
2.27%
1.42%
1.07%
Supplemental
data
Net
assets,
end
of
period
(000’s)
........
$3,591
$3,960
$3,843
$4,513
$6,308
$9,468
Portfolio
turnover
rate
................
157.46%
249.94%
223.36%
243.65%
244.09%
551.77%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
........................
55.46%
187.45%
139.83%
153.69%
111.62%
185.40%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
does
not
reflect
sales
commissions
or
contingent
deferred
sales
charges,
if
applicable,
and
is
not
annualized
for
periods
less
than
one
year.
d
Ratios
are
annualized
for
periods
less
than
one
year.
e
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
f
See
Note
1(e)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
12
a
Six
Months
Ended
March
31,
2021
(unaudited)
Year
Ended
September
30,
Period
Ended
September
30,
2017
a
2020
2019
2018
Class
R6
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.................
$9.29
$9.24
$8.92
$9.33
$9.38
Income
from
investment
operations
b
:
Net
investment
income
..........................
0.033
c
0.222
0.296
0.282
c
0.003
Net
realized
and
unrealized
gains
(losses)
...........
(0.076
)
0.081
0.360
(0.363)
(0.002)
Total
from
investment
operations
....................
(0.043)
0.303
0.656
(0.081)
0.001
Less
distributions
from:
Net
investment
income
..........................
(0.087)
(0.253)
(0.336)
(0.329)
(0.050)
Tax
return
of
capital
............................
—
—
—
—
(0.001)
Total
distributions
...............................
(0.087)
(0.253)
(0.336)
(0.329)
(0.051)
Net
asset
value,
end
of
period
......................
$9.16
$9.29
$9.24
$8.92
$9.33
Total
return
d
...................................
(0.36)%
3.33%
7.49%
(0.87)%
0.01%
Ratios
to
average
net
assets
e
Expenses
before
waiver
and
payments
by
affiliates
......
0.97%
1.07%
1.00%
1.01%
1.83%
Expenses
net
of
waiver
and
payments
by
affiliates
f
......
0.62%
0.62%
0.62%
0.69%
0.75%
Net
investment
income
...........................
0.70%
2.17%
3.31%
3.04%
2.23%
Supplemental
data
Net
assets,
end
of
period
(000’s)
....................
$493
$559
$383
$432
$5
Portfolio
turnover
rate
............................
157.46%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
g
....
55.46%
187.45%
139.83%
153.69%
111.62%
a
For
the
period
August
1,
2017
(effective
date)
to
September
30,
2017.
b
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
c
Based
on
average
daily
shares
outstanding.
d
Total
return
is
not
annualized
for
periods
less
than
one
year.
e
Ratios
are
annualized
for
periods
less
than
one
year,
except
for
non-recurring
expenses,
if
any.
f
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
g
See
Note
1(e)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Financial
Highlights
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
13
a
Six
Months
Ended
March
31,
2021
(unaudited)
Year
Ended
September
30,
2020
2019
2018
2017
2016
Advisor
Class
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.30
$9.24
$8.93
$9.33
$9.57
$9.48
Income
from
investment
operations
a
:
Net
investment
income
..............
0.026
b
0.192
0.284
0.268
b
0.187
0.146
Net
realized
and
unrealized
gains
(losses)
(0.075)
0.109
0.350
(0.351)
(0.133)
0.166
Total
from
investment
operations
........
(0.049)
0.301
0.634
(0.083)
0.054
0.312
Less
distributions
from:
Net
investment
income
..............
(0.081)
(0.241)
(0.324)
(0.317)
(0.289)
(0.222)
Tax
return
of
capital
................
—
—
—
—
(0.005)
—
Total
distributions
...................
(0.081)
(0.241)
(0.324)
(0.317)
(0.294)
(0.222)
Net
asset
value,
end
of
period
..........
$9.17
$9.30
$9.24
$8.93
$9.33
$9.57
Total
return
c
.......................
(0.53)%
3.30%
7.23%
(1.00)%
0.70%
3.34%
Ratios
to
average
net
assets
d
Expenses
before
waiver
and
payments
by
affiliates
..........................
0.97%
1.05%
0.99%
0.96%
0.92%
0.75%
Expenses
net
of
waiver
and
payments
by
affiliates
e
..........................
0.75%
0.75%
0.75%
0.81%
0.91%
0.74%
Net
investment
income
...............
0.57%
2.14%
3.18%
2.92%
2.07%
1.72%
Supplemental
data
Net
assets,
end
of
period
(000’s)
........
$8,701
$9,609
$10,907
$6,574
$7,632
$8,264
Portfolio
turnover
rate
................
157.46%
249.94%
223.36%
243.65%
244.09%
551.77%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
........................
55.46%
187.45%
139.83%
153.69%
111.62%
185.40%
a
The
amount
shown
for
a
share
outstanding
throughout
the
period
may
not
correlate
with
the
Statement
of
Operations
for
the
period
due
to
the
timing
of
sales
and
repurchas-
es
of
the
Fund’s
shares
in
relation
to
income
earned
and/or
fluctuating
fair
value
of
the
investments
of
the
Fund.
b
Based
on
average
daily
shares
outstanding.
c
Total
return
is
not
annualized
for
periods
less
than
one
year.
d
Ratios
are
annualized
for
periods
less
than
one
year.
e
Benefit
of
expense
reduction
rounds
to
less
than
0.01%.
f
See
Note
1(e)
regarding
mortgage
dollar
rolls.
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited),
March
31,
2021
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
14
a
a
Principal
Amount
a
Value
a
a
a
a
a
Corporate
Bonds
0.2%
Equity
Real
Estate
Investment
Trusts
(REITs)
0.2%
American
Homes
4
Rent
LP
,
Senior
Note
,
4.25
%
,
2/15/28
.....................
$
100,000
$
109,765
Insurance
0.0%
†
a,b
Ambac
Assurance
Corp.
,
Sub.
Bond
,
144A,
5.1
%
,
Perpetual
...................
237
326
b,c
Ambac
LSNI
LLC
,
Senior
Note
,
144A,
FRN
,
6
%
,
(
3-month
USD
LIBOR
+
5
%
),
2/12/23
861
864
1,190
Total
Corporate
Bonds
(Cost
$100,689)
........................................
110,955
U.S.
Government
and
Agency
Securities
0.8%
U.S.
Treasury
Bonds
,
4.75%,
2/15/37
...................................................
225,000
307,819
4.25%,
11/15/40
...................................................
131,000
173,378
Total
U.S.
Government
and
Agency
Securities
(Cost
$466,767)
....................
481,197
Asset-Backed
Securities
4.8%
Diversified
Financial
Services
4.5%
b
American
Homes
4
Rent
Trust
,
2015-SFR1
,
A
,
144A,
3.467
%
,
4/17/52
...........
143,512
153,774
b
CF
Hippolyta
LLC
,
2020-1,
A1,
144A,
1.69%,
7/15/60
.....................................
114,525
115,530
2021-1A,
A1,
144A,
1.53%,
3/15/61
....................................
100,000
99,771
d
CWABS,
Inc.
,
2004-1
,
M1
,
FRN
,
0.859
%
,
(
1-month
USD
LIBOR
+
0.75
%
),
3/25/34
..
24,079
24,044
b
FirstKey
Homes
Trust
,
2020-SFR2
,
A
,
144A,
1.266
%
,
10/19/37
.................
149,669
148,415
b,d
Invitation
Homes
Trust
,
2018-SFR4
,
A
,
144A,
FRN
,
1.208
%
,
(
1-month
USD
LIBOR
+
1.1
%
),
1/17/38
....................................................
177,289
178,137
b,e
Mill
City
Mortgage
Loan
Trust
,
2016-1,
A1,
144A,
FRN,
2.5%,
4/25/57
..................................
31,108
31,377
2018-2,
A1,
144A,
FRN,
3.5%,
5/25/58
..................................
116,024
119,556
2018-1,
A1,
144A,
FRN,
3.25%,
5/25/62
.................................
86,533
89,324
2018-4,
A1B,
144A,
FRN,
3.5%,
4/25/66
.................................
155,363
162,794
b
Progress
Residential
Trust
,
2018-SFR2
,
A
,
144A,
3.712
%
,
8/17/35
..............
200,000
201,469
e
RASC
Trust
,
2004-KS8
,
AI6
,
FRN
,
4.79
%
,
9/25/34
...........................
12
12
b
Towd
Point
Mortgage
Trust
,
e
2015-2,
1A12,
144A,
FRN,
2.75%,
11/25/60
..............................
37,551
37,622
e
2016-1,
A1,
144A,
FRN,
3.5%,
2/25/55
..................................
36,597
36,906
e
2016-3,
A1,
144A,
FRN,
2.25%,
4/25/56
.................................
60,542
61,051
e
2016-4,
A1,
144A,
FRN,
2.25%,
7/25/56
.................................
87,333
88,156
e
2016-5,
A1,
144A,
FRN,
2.5%,
10/25/56
.................................
195,005
198,891
e
2017-1,
A1,
144A,
FRN,
2.75%,
10/25/56
................................
142,416
144,918
d
2017-5,
A1,
144A,
FRN,
0.709%,
(1-month
USD
LIBOR
+
0.6%),
2/25/57
........
42,069
42,090
e
2017-2,
A1,
144A,
FRN,
2.75%,
4/25/57
.................................
38,250
38,870
e
2017-4,
A1,
144A,
FRN,
2.75%,
6/25/57
.................................
186,025
192,093
e
2018-1,
A1,
144A,
FRN,
3%,
1/25/58
...................................
49,937
51,491
e
2018-2,
A1,
144A,
FRN,
3.25%,
3/25/58
.................................
112,902
117,855
e
2019-1,
A1,
144A,
FRN,
3.735%,
3/25/58
................................
198,169
210,240
e
2018-6,
A1A,
144A,
FRN,
3.75%,
3/25/58
................................
90,089
93,675
e
2015-3,
A1B,
144A,
FRN,
3%,
3/25/54
..................................
2,309
2,311
e
2017-1,
A2,
144A,
FRN,
3.5%,
10/25/56
.................................
165,000
175,117
2,815,489
a
a
a
a
a
Thrifts
&
Mortgage
Finance
0.3%
e
Conseco
Finance
Corp.
,
1998-4,
A7,
FRN,
6.87%,
4/01/30
......................................
14,238
14,495
1998-6,
A8,
FRN,
6.66%,
6/01/30
......................................
12,392
12,471
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
15
a
a
Principal
Amount
a
Value
a
a
a
a
a
Asset-Backed
Securities
(continued)
Thrifts
&
Mortgage
Finance
(continued)
e
Conseco
Finance
Securitizations
Corp.
,
2002-2
,
M1
,
FRN
,
7.424
%
,
3/01/33
.......
$
182,418
$
192,258
219,224
a
a
a
a
a
Total
Asset-Backed
Securities
(Cost
$2,970,641)
................................
3,034,713
Commercial
Mortgage-Backed
Securities
1.6%
Diversified
Financial
Services
1.5%
b,f
Anthracite
Ltd.
,
2004-HY1A
,
E
,
144A,
7.147
%
,
6/20/41
.......................
1,598,000
24
b,d
BX
Commercial
Mortgage
Trust
,
2020-FOX,
A,
144A,
FRN,
1.106%,
(1-month
USD
LIBOR
+
1%),
11/15/32
.......
165,000
165,525
2018-IND,
A,
144A,
FRN,
0.856%,
(1-month
USD
LIBOR
+
0.75%),
11/15/35
.....
45,740
45,796
2019-XL,
A,
144A,
FRN,
1.026%,
(1-month
USD
LIBOR
+
0.92%),
10/15/36
......
159,887
160,182
2020-BXLP,
A,
144A,
FRN,
0.906%,
(1-month
USD
LIBOR
+
0.8%),
12/15/36
.....
199,595
199,924
b,d
Cold
Storage
Trust
,
2020-ICE5
,
A
,
144A,
FRN
,
1.006
%
,
(
1-month
USD
LIBOR
+
0.9
%
),
11/15/37
........................................................
324,387
325,340
e
Commercial
Mortgage
Trust
,
2006-GG7
,
AJ
,
FRN
,
5.61
%
,
7/10/38
...............
39,434
35,501
932,292
a
a
a
a
a
Thrifts
&
Mortgage
Finance
0.1%
d
FNMA
,
2007-1
,
NF
,
FRN
,
0.359
%
,
(
1-month
USD
LIBOR
+
0.25
%
),
2/25/37
........
53,713
53,811
Total
Commercial
Mortgage-Backed
Securities
(Cost
$1,032,362)
.................
986,103
Mortgage-Backed
Securities
78.6%
Federal
Home
Loan
Mortgage
Corp.
(FHLMC)
Fixed
Rate
14.8%
FHLMC
Gold
Pools,
30
Year,
4.5%,
4/01/40
................................
309,459
347,438
FHLMC
Gold
Pools,
30
Year,
4.5%,
1/01/49
................................
584,693
654,195
FHLMC
Gold
Pools,
30
Year,
5%,
10/01/33
-
2/01/39
.........................
208,231
240,251
FHLMC
Gold
Pools,
30
Year,
5.5%,
9/01/33
................................
21,090
24,410
FHLMC
Gold
Pools,
30
Year,
6%,
7/01/28
-
11/01/36
.........................
62,530
72,998
FHLMC
Gold
Pools,
30
Year,
6.5%,
11/01/27
-
7/01/32
........................
31,957
35,926
FHLMC
Gold
Pools,
30
Year,
7.5%,
1/01/26
-
3/01/32
........................
54,795
57,729
FHLMC
Gold
Pools,
30
Year,
8%,
7/01/24
-
5/01/30
..........................
78,095
82,031
FHLMC
Gold
Pools,
30
Year,
9%,
9/01/30
.................................
6,447
6,475
FHLMC
Gold
Pools,
30
Year,
9.5%,
8/01/21
................................
11
10
FHLMC
Pool,
30
Year,
2.5%,
10/01/50
....................................
2,050,494
2,112,824
FHLMC
Pool,
30
Year,
3%,
2/01/50
......................................
462,277
488,999
FHLMC
Pool,
30
Year,
3%,
5/01/50
......................................
1,209,915
1,279,882
FHLMC
Pool,
30
Year,
3%,
8/01/50
......................................
883,621
940,386
FHLMC
Pool,
30
Year,
3.5%,
7/01/49
.....................................
1,674,554
1,797,082
FHLMC
Pool,
30
Year,
4%,
5/01/50
......................................
139,496
152,346
FHLMC
Pool,
30
Year,
4.5%,
10/01/48
....................................
892,376
988,270
9,281,252
g
Federal
National
Mortgage
Association
(FNMA)
Adjustable
Rate
0.9%
FNMA,
1.367%
-
4.75%,
(6-month
USD
LIBOR
+/-
MBS
Margin),
3/01/22
-
7/01/38
..
587,463
590,400
590,400
Federal
National
Mortgage
Association
(FNMA)
Fixed
Rate
56.7%
FNMA,
3.5%,
7/01/56
................................................
765,508
840,217
FNMA,
15
Year,
2.5%,
3/01/29
.........................................
423,248
441,597
FNMA,
30
Year,
2.5%,
9/01/50
.........................................
2,167,495
2,234,492
FNMA,
30
Year,
2.5%,
9/01/50
.........................................
2,148,635
2,223,184
FNMA,
30
Year,
2.5%,
10/01/50
.........................................
876,832
902,740
FNMA,
30
Year,
3%,
11/01/48
..........................................
2,391,730
2,514,164
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
16
a
a
Principal
Amount
a
Value
a
a
a
a
a
Mortgage-Backed
Securities
(continued)
Federal
National
Mortgage
Association
(FNMA)
Fixed
Rate
(continued)
FNMA,
30
Year,
3%,
9/01/49
...........................................
$
402,869
$
424,937
FNMA,
30
Year,
3%,
9/01/49
...........................................
416,757
439,195
FNMA,
30
Year,
3%,
3/01/50
...........................................
569,492
598,806
FNMA,
30
Year,
3%,
7/01/50
...........................................
596,876
627,324
FNMA,
30
Year,
3%,
7/01/50
...........................................
1,240,466
1,317,932
FNMA,
30
Year,
3%,
8/01/50
...........................................
736,978
780,220
FNMA,
30
Year,
3%,
9/01/50
...........................................
725,408
766,641
FNMA,
30
Year,
3%,
9/01/50
...........................................
713,931
757,083
FNMA,
30
Year,
3.5%,
11/01/46
.........................................
560,623
608,227
FNMA,
30
Year,
3.5%,
8/01/49
.........................................
1,856,872
1,988,971
FNMA,
30
Year,
3.5%,
8/01/49
.........................................
605,402
649,234
FNMA,
30
Year,
3.5%,
9/01/49
.........................................
1,714,392
1,823,843
FNMA,
30
Year,
3.5%,
1/01/50
.........................................
424,223
456,301
FNMA,
30
Year,
3.5%,
2/01/50
.........................................
396,636
425,311
FNMA,
30
Year,
3.5%,
4/01/50
.........................................
540,791
583,028
FNMA,
30
Year,
3.5%,
11/01/50
.........................................
369,911
397,991
FNMA,
30
Year,
4%,
11/01/45
..........................................
3,118,285
3,426,302
h
FNMA,
30
Year,
4%,
9/01/49
...........................................
1,051,364
1,147,616
FNMA,
30
Year,
4.5%,
11/01/47
.........................................
844,146
935,226
FNMA,
30
Year,
5%,
4/01/34
...........................................
71,262
79,644
FNMA,
30
Year,
5.5%,
9/01/33
-
11/01/35
.................................
610,829
697,102
FNMA,
30
Year,
6%,
10/01/34
..........................................
268,657
321,193
FNMA,
30
Year,
6%,
12/01/23
-
8/01/35
...................................
390,445
453,294
FNMA,
30
Year,
6.5%,
12/01/27
-
8/01/32
.................................
294,151
333,023
FNMA,
30
Year,
7.5%,
8/01/25
-
5/01/32
..................................
12,742
14,932
FNMA,
30
Year,
8%,
1/01/25
-
7/01/31
....................................
19,993
23,133
FNMA,
30
Year,
8.5%,
11/01/28
.........................................
2,594
2,605
FNMA,
30
Year,
9%,
8/01/24
-
4/01/25
....................................
613
665
FNMA,
30
Year,
9.5%,
11/01/21
-
4/01/30
.................................
23,045
23,519
h,i
FNMA,
Single-family,
15
Year,
2%,
4/25/36
................................
4,656,000
4,778,688
h,i
FNMA,
Single-family,
30
Year,
2%,
4/25/51
................................
1,400,000
1,397,484
35,435,864
Government
National
Mortgage
Association
(GNMA)
Fixed
Rate
6.2%
GNMA
I,
30
Year,
7%,
11/15/29
.........................................
1,841
2,166
GNMA
I,
30
Year,
8%,
11/15/25
-
12/15/26
.................................
6,525
7,097
GNMA
I,
Single-family,
30
Year,
6.5%,
1/15/24
-
9/15/32
......................
60,915
68,075
GNMA
I,
Single-family,
30
Year,
7%,
6/15/23
-
2/15/32
........................
13,555
13,956
GNMA
I,
Single-family,
30
Year,
7.5%,
10/15/23
-
10/15/29
.....................
18,147
19,013
GNMA
I,
Single-family,
30
Year,
8%,
1/15/22
-
9/15/27
........................
3,479
3,562
GNMA
I,
Single-family,
30
Year,
8.5%,
7/15/24
..............................
49
49
h,i
GNMA
II,
Single-family,
30
Year,
2%,
4/15/51
...............................
1,098,000
1,108,723
GNMA
II,
Single-family,
30
Year,
2.5%,
10/20/50
............................
981,356
1,013,569
h,i
GNMA
II,
Single-family,
30
Year,
2.5%,
4/15/51
.............................
1,441,000
1,486,932
GNMA
II,
Single-family,
30
Year,
6.5%,
1/20/26
-
1/20/33
......................
91,250
106,206
GNMA
II,
Single-family,
30
Year,
7.5%,
11/20/22
-
7/20/32
.....................
51,218
59,701
GNMA
II,
Single-family,
30
Year,
8%,
8/20/26
...............................
43
48
GNMA
II,
Single-family,
30
Year,
9%,
12/20/21
-
3/20/25
......................
232
237
3,889,334
Total
Mortgage-Backed
Securities
(Cost
$48,766,297)
............................
49,196,850
Residential
Mortgage-Backed
Securities
9.3%
Capital
Markets
0.1%
d
Merrill
Lynch
Mortgage
Investors
Trust
,
2003-A
,
1A
,
FRN
,
0.849
%
,
(
1-month
USD
LIBOR
+
0.74
%
),
3/25/28
............................................
55,402
54,781
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
17
a
a
Principal
Amount
a
Value
a
a
a
a
a
Residential
Mortgage-Backed
Securities
(continued)
Diversified
Financial
Services
1.8%
d
American
Home
Mortgage
Investment
Trust
,
2005-1
,
6A
,
FRN
,
2.204
%
,
(
6-month
USD
LIBOR
+
2
%
),
6/25/45
..............................................
$
53,109
$
54,669
b
BRAVO
Residential
Funding
Trust
,
2019-1,
A1C,
144A,
3.5%,
3/25/58
.....................................
68,993
71,057
e
2019-2,
A3,
144A,
FRN,
3.5%,
10/25/44
.................................
95,499
99,803
b
CIM
Trust
,
e
2019-INV1,
A1,
144A,
FRN,
4%,
2/25/49
................................
61,166
62,370
d
2019-INV2,
A11,
144A,
FRN,
1.068%,
(1-month
USD
LIBOR
+
0.95%),
5/25/49
...
156,129
156,282
e
2019-INV2,
A3,
144A,
FRN,
4%,
5/25/49
................................
98,361
100,961
e
2018-INV1,
A4,
144A,
FRN,
4%,
8/25/48
................................
59,384
60,856
b,e
Citigroup
Mortgage
Loan
Trust
,
2013-A
,
A
,
144A,
FRN
,
3
%
,
5/25/42
.............
8,043
8,095
b,e
CSMC
Trust
,
2014-OAK1
,
1A1
,
144A,
FRN
,
3
%
,
11/25/29
.....................
57,618
58,982
b,e
Flagstar
Mortgage
Trust
,
2018-6RR
,
1A3
,
144A,
FRN
,
4
%
,
10/25/48
.............
15,509
15,554
b,e
J.P.
Morgan
Mortgage
Trust
,
2013-3
,
A3
,
144A,
FRN
,
3.384
%
,
7/25/43
...........
102,592
105,518
b,d
OBX
Trust
,
2018-1
,
A2
,
144A,
FRN
,
0.759
%
,
(
1-month
USD
LIBOR
+
0.65
%
),
6/25/57
56,652
56,836
b,e
Provident
Funding
Mortgage
Trust
,
2019-1,
A3,
144A,
FRN,
3%,
12/25/49
..................................
16,372
16,434
2020-1,
A3,
144A,
FRN,
3%,
2/25/50
...................................
26,302
26,414
b,e
Sequoia
Mortgage
Trust
,
2021-1,
A1,
144A,
FRN,
2.5%,
3/25/51
..................................
200,555
203,201
2016-2,
A4,
144A,
FRN,
3.5%,
8/25/46
..................................
46,725
46,865
b,e
Wells
Fargo
Mortgage
Backed
Securities
Trust
,
2018-1
,
A3
,
144A,
FRN
,
3.5
%
,
7/25/47
18,741
18,819
1,162,716
a
a
a
a
a
Thrifts
&
Mortgage
Finance
7.4%
d
FHLMC
Structured
Agency
Credit
Risk
Debt
Notes
,
2013-DN2,
M2,
FRN,
4.359%,
(1-month
USD
LIBOR
+
4.25%),
11/25/23
........
140,886
141,002
2017-DNA1,
M2,
FRN,
3.359%,
(1-month
USD
LIBOR
+
3.25%),
7/25/29
........
237,953
245,518
2017-HQA1,
M2,
FRN,
3.659%,
(1-month
USD
LIBOR
+
3.55%),
8/25/29
........
211,083
217,405
2017-DNA2,
M2,
FRN,
3.559%,
(1-month
USD
LIBOR
+
3.45%),
10/25/29
.......
250,000
260,223
2017-DNA3,
M2,
FRN,
2.609%,
(1-month
USD
LIBOR
+
2.5%),
3/25/30
.........
250,000
255,865
2017-HQA3,
M2,
FRN,
2.459%,
(1-month
USD
LIBOR
+
2.35%),
4/25/30
........
180,893
183,983
2014-DN2,
M3,
FRN,
3.709%,
(1-month
USD
LIBOR
+
3.6%),
4/25/24
..........
213,729
213,475
2014-DN3,
M3,
FRN,
4.109%,
(1-month
USD
LIBOR
+
4%),
8/25/24
...........
85,817
87,424
2014-HQ1,
M3,
FRN,
4.209%,
(1-month
USD
LIBOR
+
4.1%),
8/25/24
..........
66,927
67,888
2014-DN4,
M3,
FRN,
4.659%,
(1-month
USD
LIBOR
+
4.55%),
10/25/24
........
153,834
157,194
2014-HQ3,
M3,
FRN,
4.859%,
(1-month
USD
LIBOR
+
4.75%),
10/25/24
........
46,751
47,418
2015-DN1,
M3,
FRN,
4.259%,
(1-month
USD
LIBOR
+
4.15%),
1/25/25
.........
11,847
11,853
2015-HQ2,
M3,
FRN,
3.359%,
(1-month
USD
LIBOR
+
3.25%),
5/25/25
.........
191,051
194,645
2016-DNA2,
M3,
FRN,
4.759%,
(1-month
USD
LIBOR
+
4.65%),
10/25/28
.......
172,541
181,289
2016-HQA2,
M3,
FRN,
5.259%,
(1-month
USD
LIBOR
+
5.15%),
11/25/28
.......
212,876
222,659
2016-DNA4,
M3,
FRN,
3.909%,
(1-month
USD
LIBOR
+
3.8%),
3/25/29
.........
236,395
246,679
d
FNMA
Connecticut
Avenue
Securities
,
2014-C04,
1M2,
FRN,
5.009%,
(1-month
USD
LIBOR
+
4.9%),
11/25/24
.........
140,977
145,775
2015-C01,
1M2,
FRN,
4.409%,
(1-month
USD
LIBOR
+
4.3%),
2/25/25
.........
189,362
192,347
2016-C04,
1M2,
FRN,
4.359%,
(1-month
USD
LIBOR
+
4.25%),
1/25/29
........
205,092
214,199
2017-C05,
1M2,
FRN,
2.309%,
(1-month
USD
LIBOR
+
2.2%),
1/25/30
.........
180,527
183,010
2017-C06,
1M2,
FRN,
2.759%,
(1-month
USD
LIBOR
+
2.65%),
2/25/30
........
184,368
186,666
2014-C02,
2M2,
FRN,
2.709%,
(1-month
USD
LIBOR
+
2.6%),
5/25/24
.........
164,568
166,149
2014-C03,
2M2,
FRN,
3.009%,
(1-month
USD
LIBOR
+
2.9%),
7/25/24
.........
78,224
79,175
2015-C01,
2M2,
FRN,
4.659%,
(1-month
USD
LIBOR
+
4.55%),
2/25/25
........
26,944
27,047
2016-C05,
2M2,
FRN,
4.559%,
(1-month
USD
LIBOR
+
4.45%),
1/25/29
........
97,632
101,956
2017-C02,
2M2,
FRN,
3.759%,
(1-month
USD
LIBOR
+
3.65%),
9/25/29
........
185,968
191,714
2013-C01,
M2,
FRN,
5.359%,
(1-month
USD
LIBOR
+
5.25%),
10/25/23
........
151,040
156,050
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
18
a
a
Principal
Amount
a
Value
a
a
a
a
a
Residential
Mortgage-Backed
Securities
(continued)
Thrifts
&
Mortgage
Finance
(continued)
d
FNMA
Connecticut
Avenue
Securities,
(continued)
2014-C01,
M2,
FRN,
4.509%,
(1-month
USD
LIBOR
+
4.4%),
1/25/24
..........
$
148,406
$
152,261
b
Virginia
Housing
Development
Authority
,
2020-A
,
A
,
144A,
2.85
%
,
12/25/49
........
84,134
86,852
4,617,721
a
a
a
a
a
Total
Residential
Mortgage-Backed
Securities
(Cost
$5,914,291)
..................
5,835,218
Total
Long
Term
Investments
(Cost
$59,251,047)
................................
59,645,036
a
a
a
a
a
Short
Term
Investments
20.6%
U.S.
Government
and
Agency
Securities
3.7%
j
U.S.
Treasury
Bills,
4/29/21
............................................
2,300,000
2,299,991
Total
U.S.
Government
and
Agency
Securities
(Cost
$2,299,905)
..................
2,299,991
Shares
a
Money
Market
Funds
5.0%
k,l
Institutional
Fiduciary
Trust
-
Money
Market
Portfolio,
0.01%
...................
3,128,452
3,128,452
Total
Money
Market
Funds
(Cost
$3,128,452)
...................................
3,128,452
Principal
Amount
Repurchase
Agreements
11.9%
m
Joint
Repurchase
Agreement,
0.004%,
4/01/21
(Maturity
Value
$7,442,185)
BNP
Paribas
Securities
Corp.
(Maturity
Value
$4,339,389)
Deutsche
Bank
Securities,
Inc.
(Maturity
Value
$1,041,534)
HSBC
Securities
(USA),
Inc.
(Maturity
Value
$2,061,262)
Collateralized
by
U.S.
Government
Agency
Securities,
2.25%
-
5%,
9/20/42
-
3/15/56;
U.S.
Treasury
Bonds,
6.25%
-
8.13%,
5/15/21
-
2/15/25;
and
U.S.
Treasury
Note,
1.63%,
11/15/22
(valued
at
$7,594,584)
.................................
7,442,184
7,442,184
Total
Repurchase
Agreements
(Cost
$7,442,184)
................................
7,442,184
Total
Short
Term
Investments
(Cost
$12,870,541
)
................................
12,870,627
a
Total
Investments
(Cost
$72,121,588)
115.9%
...................................
$72,515,663
Other
Assets,
less
Liabilities
(15.9)%
..........................................
(9,898,792)
Net
Assets
100.0%
...........................................................
$62,616,871
†
Rounds
to
less
than
0.1%
of
net
assets.
a
Perpetual
security
with
no
stated
maturity
date.
b
Security
was
purchased
pursuant
to
Rule
144A
or
Regulation
S
under
the
Securities
Act
of
1933.
144A
securities
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.
Regulation
S
securities
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
March
31,
2021,
the
aggregate
value
of
these
securities
was
$4,884,313,
representing
7.7%
of
net
assets.
c
The
coupon
rate
shown
represents
the
rate
at
period
end.
d
The
coupon
rate
shown
represents
the
rate
inclusive
of
any
caps
or
floors,
if
applicable,
in
effect
at
period
end.
e
Adjustable
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.
f
See
Note
7
regarding
defaulted
securities.
g
Adjustable
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).
Franklin
Strategic
Mortgage
Portfolio
Statement
of
Investments
(unaudited)
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
19
At
March
31,
2021,
the
Fund
had
the
following futures
contracts
outstanding.
See
Note
1(d). 
See
Abbreviations
on
page
33
.
h
A
portion
or
all
of
the
security
purchased
on
a
delayed
delivery
basis.
See
Note
1(c).
i
Security
purchased
on
a
to-be-announced
(TBA)
basis.
See
Note
1(c).
j
The
security
was
issued
on
a
discount
basis
with
no
stated
coupon
rate.
k
See
Note
3(f)
regarding
investments
in
affiliated
management
investment
companies.
l
The
rate
shown
is
the
annualized
seven-day
effective
yield
at
period
end.
m
See
Note
1(b)
regarding
joint
repurchase
agreement.
Futures
Contracts
Description
Type
Number
of
Contracts
Notional
Amount
*
Expiration
Date
Value/
Unrealized
Appreciation
(Depreciation)
Interest
rate
contracts
U.S.
Treasury
10
Year
Notes
....................
Short
15
$
1,964,062
6/21/21
$
44,933
U.S.
Treasury
10
Year
Ultra
Notes
................
Long
8
1,149,500
6/21/21
(40,089)
U.S.
Treasury
2
Year
Notes
.....................
Long
7
1,545,086
6/30/21
(1,336)
U.S.
Treasury
5
Year
Notes
.....................
Long
23
2,838,164
6/30/21
(25,216)
U.S.
Treasury
Long
Bonds
.....................
Long
4
618,375
6/21/21
(8,881)
U.S.
Treasury
Ultra
Bonds
......................
Short
2
362,438
6/21/21
15,153
Total
Futures
Contracts
......................................................................
$(15,436)
*
As
of
period
end.
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statement
of
Assets
and
Liabilities
March
31,
2021
(unaudited)
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
20
Franklin
Strategic
Mortgage
Portfolio
Assets:
Investments
in
securities:
Cost
-
Unaffiliated
issuers
...................................................................
$61,550,952
Cost
-
Non-controlled
affiliates
(Note
3
f
)
........................................................
3,128,452
Cost
-
Unaffiliated
repurchase
agreements
......................................................
7,442,184
Value
-
Unaffiliated
issuers
..................................................................
$61,945,027
Value
-
Non-controlled
affiliates
(Note
3
f
)
........................................................
3,128,452
Value
-
Unaffiliated
repurchase
agreements
......................................................
7,442,184
Receivables:
Capital
shares
sold
........................................................................
68,958
Interest
.................................................................................
121,970
Deposits
with
brokers
for:
Futures
contracts
........................................................................
31,426
Total
assets
..........................................................................
72,738,017
Liabilities:
Payables:
Investment
securities
purchased
..............................................................
9,949,427
Capital
shares
redeemed
...................................................................
76,413
Management
fees
.........................................................................
15,754
Distribution
fees
..........................................................................
7,120
Transfer
agent
fees
........................................................................
14,008
Distributions
to
shareholders
.................................................................
5,104
Variation
margin
on
futures
contracts
...........................................................
2,329
Accrued
expenses
and
other
liabilities
...........................................................
50,991
Total
liabilities
.........................................................................
10,121,146
Net
assets,
at
value
.................................................................
$62,616,871
Net
assets
consist
of:
Paid-in
capital
.............................................................................
$65,952,659
Total
distributable
earnings
(losses)
.............................................................
(3,335,788)
Net
assets,
at
value
.................................................................
$62,616,871
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statement
of
Assets
and
Liabilities
(continued)
March
31,
2021
(unaudited)
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
21
Franklin
Strategic
Mortgage
Portfolio
Class
A:
Net
assets,
at
value
.......................................................................
$23,766,908
Shares
outstanding
........................................................................
2,590,760
Net
asset
value
per
share
a
..................................................................
$9.17
Maximum
offering
price
per
share
(net
asset
value
per
share
÷
96.25%)
................................
$9.53
Class
A1:
Net
assets,
at
value
.......................................................................
$26,065,371
Shares
outstanding
........................................................................
2,839,818
Net
asset
value
per
share
a
..................................................................
$9.18
Maximum
offering
price
per
share
(net
asset
value
per
share
÷
96.25%)
................................
$9.54
Class
C:
Net
assets,
at
value
.......................................................................
$3,590,670
Shares
outstanding
........................................................................
391,391
Net
asset
value
and
maximum
offering
price
per
share
a
.............................................
$9.17
Class
R6:
Net
assets,
at
value
.......................................................................
$493,010
Shares
outstanding
........................................................................
53,821
Net
asset
value
and
maximum
offering
price
per
share
.............................................
$9.16
Advisor
Class:
Net
assets,
at
value
.......................................................................
$8,700,912
Shares
outstanding
........................................................................
949,221
Net
asset
value
and
maximum
offering
price
per
share
.............................................
$9.17
a
Redemption
price
is
equal
to
net
asset
value
less
contingent
deferred
sales
charges,
if
applicable.
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statement
of
Operations
for
the
six
months
ended
March
31,
2021
(unaudited)
franklintempleton.com
Semiannual
Report
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
22
Franklin
Strategic
Mortgage
Portfolio
Investment
income:
Dividends:
Non-controlled
affiliates
(Note
3
f
)
.............................................................
$25
Interest:
Unaffiliated
issuers:
Paydown
gain
(loss)
.....................................................................
(339,468)
Paid
in
cash
............................................................................
762,416
Total
investment
income
...................................................................
422,973
Expenses:
Management
fees
(Note
3
a
)
...................................................................
128,485
Distribution
fees:
(Note
3c
)
    Class
A
................................................................................
30,792
    Class
C
................................................................................
12,700
Transfer
agent
fees:
(Note
3e
)
    Class
A
................................................................................
19,524
    Class
A1
...............................................................................
21,054
    Class
C
................................................................................
3,103
    Class
R6
...............................................................................
433
    Advisor
Class
............................................................................
6,831
Custodian
fees
(Note
4
)
......................................................................
408
Reports
to
shareholders
......................................................................
11,744
Registration
and
filing
fees
....................................................................
48,633
Professional
fees
...........................................................................
53,085
Trustees'
fees
and
expenses
..................................................................
550
Other
....................................................................................
15,806
Total
expenses
.........................................................................
353,148
Expense
reductions
(Note
4
)
...............................................................
(1)
Expenses
waived/paid
by
affiliates
(Note
3
f
and
3
g
)
..............................................
(70,661)
Net
expenses
.........................................................................
282,486
Net
investment
income
................................................................
140,487
Realized
and
unrealized
gains
(losses):
Net
realized
gain
(loss)
from:
Investments:
Unaffiliated
issuers
......................................................................
(168,743)
Futures
contracts
.........................................................................
195,166
TBA
sale
commitments
.....................................................................
49,656
Net
realized
gain
(loss)
..................................................................
76,079
Net
change
in
unrealized
appreciation
(depreciation)
on:
Investments:
Unaffiliated
issuers
......................................................................
(596,301)
Futures
contracts
.........................................................................
(10,013)
Net
change
in
unrealized
appreciation
(depreciation)
............................................
(606,314)
Net
realized
and
unrealized
gain
(loss)
............................................................
(530,235)
Net
increase
(decrease)
in
net
assets
resulting
from
operations
..........................................
$(389,748)
Franklin
Strategic
Mortgage
Portfolio
Financial
Statements
Statements
of
Changes
in
Net
Assets
franklintempleton.com
The
accompanying
notes
are
an
integral
part
of
these
financial
statements.
Semiannual
Report
23
Franklin
Strategic
Mortgage
Portfolio
Six
Months
Ended
March
31,
2021
(unaudited)
Year
Ended
September
30,
2020
Increase
(decrease)
in
net
assets:
Operations:
Net
investment
income
.................................................
$140,487
$1,465,728
Net
realized
gain
(loss)
.................................................
76,079
628,981
Net
change
in
unrealized
appreciation
(depreciation)
...........................
(606,314)
(186,481)
Net
increase
(decrease)
in
net
assets
resulting
from
operations
................
(389,748)
1,908,228
Distributions
to
shareholders:
Class
A
.............................................................
(184,500)
(467,449)
Class
A1
............................................................
(231,704)
(733,773)
Class
C
.............................................................
(21,409)
(76,504)
Class
R6
............................................................
(4,962)
(14,155)
Advisor
Class
........................................................
(74,943)
(264,418)
Total
distributions
to
shareholders
..........................................
(517,518)
(1,556,299)
Capital
share
transactions:
(Note
2
)
Class
A
.............................................................
(38,536)
5,713,303
Class
A1
............................................................
(1,086,862)
(1,919,968)
Class
C
.............................................................
(316,200)
91,588
Class
R6
............................................................
(58,542)
167,731
Advisor
Class
........................................................
(785,872)
(1,326,727)
Total
capital
share
transactions
............................................
(2,286,012)
2,725,927
Net
increase
(decrease)
in
net
assets
...................................
(3,193,278)
3,077,856
Net
assets:
Beginning
of
period
.....................................................
65,810,149
62,732,293
End
of
period
..........................................................
$62,616,871
$65,810,149
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
24
franklintempleton.com
Semiannual
Report
1.
Organization
and
Significant
Accounting
Policies
Franklin
Strategic
Mortgage
Portfolio (Trust)
is
registered
under
the
Investment
Company
Act
of
1940
(1940
Act)
as
an
open-end
management
investment
company,
consisting
of
one
fund,
Franklin
Strategic
Mortgage
Portfolio
(Fund)
and
applies
the
specialized
accounting
and
reporting
guidance
in
U.S.
Generally
Accepted
Accounting
Principles
(U.S.
GAAP).
The
Fund
offers
five
classes
of
shares:
Class
A,
Class
A1,
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 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
Fund'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. 
Debt
securities
generally
trade
in
the
over-the-counter
(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.
Derivative
financial
instruments
listed
on
an
exchange
are
valued
at
the
official
closing
price
of
the
day.
Investments
in open-end mutual
funds
are
valued
at
the
closing
NAV.
Investments
in
repurchase
agreements
are
valued
at
cost,
which
approximates
fair
value.
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
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.
b.
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-
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
25
franklintempleton.com
Semiannual
Report
defaulting
party
to
net
and
close-out
all
transactions,
if
any,
traded
under
such
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
period
end,
as
indicated
in
the
Statement
of
Investments,
had
been
entered
into
on
March
31,
2021.
c.
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.
d.
Derivative
Financial
Instruments
The
Fund invested
in
derivative
financial
instruments
in
order
to
manage
risk
or
gain
exposure
to
various
other
investments
or
markets.
Derivatives
are
financial
contracts
based
on
an
underlying
or
notional
amount,
require
no
initial
investment
or
an
initial
net
investment
that
is
smaller
than
would
normally
be
required
to
have
a
similar
response
to
changes
in
market
factors,
and
require
or
permit
net
settlement.
Derivatives
contain
various
risks
including
the
potential
inability
of
the
counterparty
to
fulfill
their
obligations
under
the
terms
of
the
contract,
the
potential
for
an
illiquid
secondary
market,
and/or
the
potential
for
market
movements
which
expose
the
Fund
to
gains
or
losses
in
excess
of
the
amounts
shown
in
the
Statement
of
Assets
and
Liabilities.
Realized
gain
and
loss
and
unrealized
appreciation
and
depreciation
on
these
contracts
for
the
period
are
included
in
the
Statement
of
Operations.
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.
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
Statement
of
Assets
and
Liabilities.
See
Note
9 regarding
other
derivative
information.
e.
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.
f.
Income
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.
1.
Organization
and
Significant
Accounting
Policies
(continued)
b.
Joint
Repurchase
Agreement
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
26
franklintempleton.com
Semiannual
Report
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
March
31,
2021,
the
Fund
has
determined
that
no
tax
liability
is
required
in
its
financial
statements
related
to
uncertain
tax
positions
for
any
open
tax
years
(or
expected
to
be
taken
in
future
tax
years).
Open
tax
years
are
those
that
remain
subject
to
examination
and
are
based
on
the
statute
of
limitations
in
each
jurisdiction
in
which
the
Fund
invests. 
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.
Amortization
of
premium
and
accretion
of
discount
on
debt
securities
are
included
in
interest
income.
Paydown
gains
and
losses
are
recorded
separately
in
the
Statement
of
Operations.
Dividends
from
net
investment
income
are
normally
declared
daily;
these
dividends
may
be
reinvested
or
paid
monthly
to
shareholders.
Distributions
from realized
capital
gains
and
other
distributions,
if
any,
are
recorded
on
the
ex-dividend
date.
Distributable
earnings
are
determined
according
to
income
tax
regulations
(tax
basis)
and
may
differ
from
earnings
recorded
in
accordance
with
U.S.
GAAP.
These
differences
may
be
permanent
or
temporary.
Permanent
differences
are
reclassified
among
capital
accounts
to
reflect
their
tax
character.
These
reclassifications
have
no
impact
on
net
assets
or
the
results
of
operations.
Temporary
differences
are
not
reclassified,
as
they
may
reverse
in
subsequent
periods.
Net
investment
income,
excluding
class
specific
expenses,
is
allocated
daily
to
each
class
of
shares
based
upon
the
relative
value
of
the
settled
shares
of
each
class.
Realized
and
unrealized
gains
and
losses
are
allocated
daily
to
each
class
of
shares
based
upon
the
relative
proportion
of
net
assets
of
each
class.
Differences
in
per
share
distributions
by
class
are
generally
due
to
differences
in
class
specific
expenses.
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.
1.
Organization
and
Significant
Accounting
Policies
(continued)
f.
Income
Taxes
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
27
franklintempleton.com
Semiannual
Report
i.
Guarantees
and
Indemnifications
Under
the
Fund's
organizational
documents,
its
officers
and
trustees
are
indemnified
by
the
Fund
against
certain
liabilities
arising
out
of
the
performance
of
their
duties
to
the
Fund.
Additionally,
in
the
normal
course
of
business,
the
Fund enters
into
contracts
with
service
providers
that
contain
general
indemnification
clauses.
The
Fund's
maximum
exposure
under
these
arrangements
is
unknown
as
this
would
involve
future
claims
that
may
be
made
against
the
Fund
that
have
not
yet
occurred.
Currently,
the
Fund
expects
the
risk
of
loss
to
be
remote.
2.
Shares
of
Beneficial
Interest
At
March
31,
2021,
there
were
an
unlimited
number
of
shares
authorized
(without
par
value).
Transactions
in
the
Fund’s
shares
were
as
follows:
Six
Months
Ended
March
31,
2021
Year
Ended
September
30,
2020
Shares
Amount
Shares
Amount
Class
A
Shares:
Shares
sold
a
...................................
476,204
$4,424,423
1,217,338
$11,282,025
Shares
issued
in
reinvestment
of
distributions
..........
19,208
178,084
48,077
445,344
Shares
redeemed
...............................
(499,870)
(4,641,043)
(650,222)
(6,014,066)
Net
increase
(decrease)
..........................
(4,458)
$(38,536)
615,193
$5,713,303
Class
A1
Shares:
Shares
sold
...................................
143,329
$1,330,979
227,011
$2,109,187
Shares
issued
in
reinvestment
of
distributions
..........
23,606
218,980
74,833
693,377
Shares
redeemed
...............................
(283,613)
(2,636,821)
(510,027)
(4,722,532)
Net
increase
(decrease)
..........................
(116,678)
$(1,086,862)
(208,183)
$(1,919,968)
Class
C
Shares:
Shares
sold
...................................
51,786
$481,512
178,031
$1,646,733
Shares
issued
in
reinvestment
of
distributions
..........
2,279
21,133
7,919
73,342
Shares
redeemed
a
..............................
(88,094)
(818,845)
(176,057)
(1,628,487)
Net
increase
(decrease)
..........................
(34,029)
$(316,200)
9,893
$91,588
Class
R6
Shares:
Shares
sold
...................................
5,408
$50,218
54,969
$504,354
Shares
issued
in
reinvestment
of
distributions
..........
536
4,962
1,529
14,153
Shares
redeemed
...............................
(12,240)
(113,722)
(37,825)
(350,776)
Net
increase
(decrease)
..........................
(6,296)
$(58,542)
18,673
$167,731
Advisor
Class
Shares:
Shares
sold
...................................
129,786
$1,200,724
494,956
$4,579,523
Shares
issued
in
reinvestment
of
distributions
..........
7,247
67,142
27,704
256,284
Shares
redeemed
...............................
(221,049)
(2,053,738)
(669,850)
(6,162,534)
Net
increase
(decrease)
..........................
(84,016)
$(785,872)
(147,190)
$(1,326,727)
a
May
include
a
portion
of
Class
C
shares
that
were
automatically
converted
to
Class
A.
1.
Organization
and
Significant
Accounting
Policies
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
28
franklintempleton.com
Semiannual
Report
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
Fund
are
also
officers
and/or
directors
of
the
following
subsidiaries:
a.
Management
Fees
The
Fund
pays
an
investment
management
fee
to
Advisers
based
on
the
average
daily
net
assets
of
the
Fund
as
follows:
For
the
period
ended
March
31,
2021,
the
annualized
gross
effective
investment
management
fee
rate
was
0.400%
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
Class
A
and
Class
C
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
compensation
distribution
plan,
the
Fund
pays
Distributors
for
costs
incurred
in
connection
with
the
servicing,
sale
and
distribution
of
the
Fund's
shares
up
to
the
maximum
annual
plan
rate.
The
plan
year,
for
purposes
of
monitoring
compliance
with
the
maximum
annual
plan
rates,
is
February
1
through
January
31.
The
maximum
annual
plan
rates,
based
on
the
average
daily
net
assets,
for
each
class,
are
as
follows:
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
period:
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
Annualized
Fee
Rate
Net
Assets
0.400%
First
$250
million
0.380%
Over
$250
million,
up
to
and
including
$500
million
0.360%
In
excess
of
$500
million
Class  A
...................................................................................
0.25%
Class  C
...................................................................................
0.65%
Sales
charges
retained
net
of
commissions
paid
to
unaffiliated
brokers/dealers
..............................
$617
CDSC
retained
..............................................................................
$200
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
29
franklintempleton.com
Semiannual
Report
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
period
ended
March
31,
2021,
the
Fund
paid
transfer
agent
fees
of
$50,945,
of
which $28,771
was
retained
by
Investor
Services.
f.
Investments
in
Affiliated
Management
Investment
Companies
The
Fund
invests
in
one
or
more
affiliated
management
investment
companies.
As
defined
in
the
1940
Act,
an
investment
is
deemed
to
be
a
“Controlled
Affiliate”
of
a
fund
when
a
fund
owns,
either
directly
or
indirectly,
25%
or
more
of
the
affiliated
fund’s
outstanding
shares
or
has
the
power
to
exercise
control
over
management
or
policies
of
such
fund.
The
Funds
do
not
invest
for
purposes
of
exercising
a
controlling
influence
over
the
management
or
policies.
Management
fees
paid
by
the
Fund
are
waived
on
assets
invested
in
the
affiliated
management
investment
companies,
as
noted
in
the
Statement
of
Operations,
in
an
amount
not
to
exceed
the
management
and
administrative
fees
paid
directly
or
indirectly
by
each
affiliate.
During
the
period
ended
March
31,
2021,
the
Fund
held
investments
in
affiliated
management
investment
companies
as
follows:
g.
Waiver
and
Expense
Reimbursements
Advisers
contractually
agreed
in
advance
to
waive
or
limit
its
fees
and
to
assume
as
its
own
expense
certain
expenses
otherwise
payable
by
the
Fund
so
that
the
operating
expenses
(excluding
distribution
fees,
acquired
fund
fees
and
expenses,
and
certain
non-routine
expenses
or
costs,
including
those
relating
to
litigation,
indemnification,
reorganizations,
and
liquidations)
for
each
Class
of
the
Fund
does
not
exceed
0.75%
based
on
the
average
net
assets
of
each
class
until
January
31,
2022.
Total
expenses
waived
or
paid
are
not
subject
to
recapture
subsequent
to
the
Fund's
fiscal
year
end.
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
January
31,
2022.
Investor
Services
may
discontinue
this
waiver
in
the
future.
4.
Expense
Offset
Arrangement
The Fund has
entered
into
an
arrangement
with
its
custodian
whereby
credits
realized
as
a
result
of
uninvested
cash
balances
are
used
to
reduce
a
portion
of
the
Fund's
custodian
expenses.
During
the
period
ended
March
31,
2021,
the
custodian
fees
were
reduced
as
noted
in
the
Statement
of
Operations. 
    aa
Value
at
Beginning
of
Period
Purchases
Sales
Realized
Gain
(Loss)
Net
Change
in
Unrealized
Appreciation
(Depreciation)
Value
at
End
of
Period
Number
of
Shares
Held
at
End
of
Period
Investment
Income
a      
a  
a  
a  
a  
a  
a  
a  
Franklin
Strategic
Mortgage
Portfolio
Non-Controlled
Affiliates
Dividends
Institutional
Fiduciary
Trust
-
Money
Market
Portfolio,
0.01%
.......
$2,589,379
$7,457,661
$(6,918,588)
$—
$—
$3,128,452
3,128,452
$25
Total
Affiliated
Securities
....
$2,589,379
$7,457,661
$(6,918,588)
$—
$—
$3,128,452
$25
3.
Transactions
with
Affiliates
(continued)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
30
franklintempleton.com
Semiannual
Report
5.
Income
Taxes
For
tax
purposes,
capital
losses
may
be
carried
over
to
offset
future
capital
gains.
At
September
30,
2020,
the
capital
loss
carryforwards
were
as
follows:
At
March
31,
2021,
the
cost
of
investments
and
net
unrealized
appreciation
(depreciation)
for
income
tax
purposes
were
as
follows:
Differences
between
income
and/or
capital
gains
as
determined
on
a
book
basis
and
a
tax
basis
are
primarily
due
to
differing
treatment
of
amortization.
6.
Investment
Transactions
Purchases
and
sales
of
investments
(excluding
short
term
securities)
for
the
period
ended
March
31,
2021,
aggregated
$98,585,695
and
$108,877,050,
respectively.
7.
Defaulted
Securities
The
Fund
held
a
defaulted
security
and/or
other
securities
for
which
the
income
has
been
deemed
uncollectible.
At
March
31,
2021,
the
value
of
this
security
represents
less
than
0.1%
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
security
has
been
identified
in
the
accompanying
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.
Capital
loss
carryforwards
not
subject
to
expiration:
Short
term
................................................................................
$2,301,829
Long
term
................................................................................
1,063,922
Total
capital
loss
carryforwards
...............................................................
$3,365,751
Cost
of
investments
..........................................................................
$72,167,633
Unrealized
appreciation
........................................................................
$1,054,808
Unrealized
depreciation
........................................................................
(722,214)
Net
unrealized
appreciation
(depreciation)
..........................................................
$332,594
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
31
franklintempleton.com
Semiannual
Report
9.
Other
Derivative
Information
At
March
31,
2021,
the
Fund's
investments
in
derivative
contracts
are
reflected
in
the
Statement of
Assets
and
Liabilities
as
follows:
For
the
period
ended
March
31,
2021,
the
effect
of
derivative
contracts
in
the
Statement
of
Operations
was
as
follows:
For
the
period
ended
March
31,
2021,
the
average
month
end
notional
amount
of
futures
contracts
represented
$8,450,682.
See
Note
1(c)
regarding
derivative
financial
instruments.
10.
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
$2.675
billion
(Global
Credit
Facility)
which
matures
on
February
4,
2022.
This
Global
Credit
Facility
provides
a
source
of
funds
to
the
Borrowers
for
temporary
and
emergency
purposes,
including
the
ability
to
meet
future
unanticipated
or
unusually
large
redemption
requests. 
Under
the
terms
of
the
Global
Credit
Facility,
the
Fund
shall,
in
addition
to
interest
charged
on
any
borrowings
made
by
the
Fund
and
other
costs
incurred
by
the
Fund,
pay
its
share
of
fees
and
expenses
incurred
in
connection
with
the
implementation
and
maintenance
of
the
Global
Credit
Facility,
based
upon
its
relative
share
of
the
aggregate
net
assets
of
all
of
the
Borrowers,
including
an
annual
commitment
fee
of
0.15%
based
upon
the
unused
portion
of
the
Global
Credit
Facility.
These
fees
are
reflected
in
other
expenses
in
the
Statement
of
Operations.
During
the
period
ended
March
31,
2021,
the Fund
did
not
use
the
Global
Credit
Facility.
Asset
Derivatives
Liability
Derivatives
Derivative
Contracts
Not
Accounted
for
as
Hedging
Instruments
Statement
of
Assets
and
Liabilities
Location
Fair
Value
Statement
of
Assets
and
Liabilities
Location
Fair
Value
Franklin
Strategic
Mortgage
Portfolio
Interest
rate
contracts
.......
Variation
margin
on
futures
contracts
$
60,086
a
Variation
margin
on
futures
contracts
$
75,522
a
Total
....................
$60,086
$75,522
a
This
amount
reflects
the
cumulative
appreciation
(depreciation)
of
futures
contracts
as
reported
in
the
Statement
of
Investments.
Only
the
variation
margin
receivable/
payable
at
period
end
is
separately
reported
within
the
Statement
of
Assets
and
Liabilities.
Prior
variation
margin
movements
were
recorded
to
cash
upon
receipt
or
payment.
Derivative
Contracts
Not
Accounted
for
as
Hedging
Instruments
Statement
of
Operations
Location
Net
Realized
Gain
(Loss)
for
the
Period
Statement
of
Operations
Location
Net
Change
in
Unrealized
Appreciation
(Depreciation)
for
the
Period
Franklin
Strategic
Mortgage
Portfolio
Net
realized
gain
(loss)
from:
Net
change
in
unrealized
  appreciation
(depreciation)
on:
Interest
rate
contracts
.......
Futures
contracts
$195,166
Futures
contracts
$(10,013)
Total
....................
$195,166
$(10,013)
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
32
franklintempleton.com
Semiannual
Report
11.
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.
A
summary
of
inputs
used
as
of
March
31,
2021,
in
valuing
the
Fund's
assets
and
liabilities
carried
at
fair
value,
is
as
follows:
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
has
reviewed
the
requirements
and
believes
the
adoption
of
this
ASU
will
not
have
a
material
impact
on
the
financial
statements.
13.
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.
Level
1
Level
2
Level
3
Total
Franklin
Strategic
Mortgage
Portfolio
Assets:
Investments
in
Securities:
a
Corporate
Bonds
........................
$
—
$
110,955
$
—
$
110,955
U.S.
Government
and
Agency
Securities
.......
—
481,197
—
481,197
Asset-Backed
Securities
..................
—
3,034,713
—
3,034,713
Commercial
Mortgage-Backed
Securities
......
—
986,103
—
986,103
Mortgage-Backed
Securities
................
—
49,196,850
—
49,196,850
Residential
Mortgage-Backed
Securities
......
—
5,835,218
—
5,835,218
Short
Term
Investments
...................
5,428,443
7,442,184
—
12,870,627
Total
Investments
in
Securities
...........
$5,428,443
$67,087,220
$—
$72,515,663
Other
Financial
Instruments:
Futures
contracts
........................
$
60,086
$
—
$
—
$
60,086
Total
Other
Financial
Instruments
.........
$60,086
$—
$—
$60,086
Liabilities:
Other
Financial
Instruments:
Futures
contracts
........................
$
75,522
$
—
$
—
$
75,522
$—
$—
$—
$—
a
For
detailed
categories,
see
the
accompanying
Statement
of
Investments.
Franklin
Strategic
Mortgage
Portfolio
Notes
to
Financial
Statements
(unaudited)
33
franklintempleton.com
Semiannual
Report
Abbreviations
Cu
r
rency
USD
United
States
Dollar
Selected
Portfolio
FHLMC
Federal
Home
Loan
Mortgage
Corp.
FNMA
Federal
National
Mortgage
Association
FRN
Floating
Rate
Note
GNMA
Government
National
Mortgage
Association
LIBOR
London
Inter-Bank
Offered
Rate
MBS
Mortgage-Backed
Security
Franklin
Strategic
Mortgage
Portfolio
Shareholder
Information
34
franklintempleton.com
Semiannual
Report
Board
Approval
of
Investment
Management
Agreements
FRANKLIN
STRATEGIC
MORTGAGE
PORTFOLIO
(Fund)
At
a
meeting
held
on
February
23,
2021
(Meeting),
the
Board
of
Trustees
(Board)
of
the
Fund,
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
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
best
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
in
the
current
work-from-home
environment
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
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
outsourcing
of
certain
administrative
functions,
and
growth
opportunities,
Franklin
Strategic
Mortgage
Portfolio
Shareholder
Information
35
franklintempleton.com
Semiannual
Report
as
evidenced
by
its
recent
acquisition
of
the
Legg
Mason
companies.
The
Board
also
noted
FT’s
attention
focused
on
expanding
the
distribution
opportunities
for
all
funds
in
the
FT
family
of
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
Fund
and
its
shareholders.
Fund
Performance
The
Board
reviewed
and
considered
the
performance
results
of
the
Fund
over
various
time
periods
ended
November
30,
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
US
mortgage
funds.
The
Board
noted
that
the
Fund’s
annualized
income
return
for
the
three-,
five-
and
10-year
periods
was
above
the
median
of
its
Performance
Universe,
but
for
the
one-year
period
was
below
the
median
of
the
Performance
Universe.
The
Board
also
noted
that
the
Fund’s
annualized
total
return
for
the
one-,
three-
and
five-year
periods
was
below
the
median
of
its
Performance
Universe,
but
for
the
10-year
period
was
above
the
median
of
its
Performance
Universe.
The
Board
discussed
this
performance
with
management
and
noted
management’s
explanation
that
the
Fund,
consistent
with
its
principal
investment
strategies,
has
a
greater
exposure
to
conventional
mortgage-backed
securities
in
comparison
to
its
peers,
which
contributed
to
the
Fund’s
shorter-term
underperformance.
The
Board
further
noted
management’s
steps
to
address
the
underperformance
of
the
Fund,
including
changes
to
the
Fund’s
exposure
to
certain
holdings
and
enhancements
to
the
securities
selection
process.
The
Board
also
noted
that,
while
below
the
median,
the
Fund’s
one-,
three-
five-
and
10-year
annualized
total
return
was
3.25%,
3.20%,
2.74%
and
3.50%,
respectively.
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
closely
monitored.
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
A1
shares
for
the
Fund
and
for
Class
A
shares
for
the
other
funds
in
the
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
nine
other
US
mortgage
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
noted
that
the
actual
total
expense
ratio
for
the
Fund
reflected
a
fee
waiver
from
management.
For
these
reasons,
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
Franklin
Strategic
Mortgage
Portfolio
Shareholder
Information
36
franklintempleton.com
Semiannual
Report
September
30,
2020,
being
the
most
recent
fiscal
year-
end
for
FRI.
The
Board
noted
that
although
management
continually
makes
refinements
to
its
methodologies
used
in
calculating
profitability
in
response
to
organizational
and
product-related
changes,
the
overall
methodology
has
remained
consistent
with
that
used
in
the
Fund’s
profitability
report
presentations
from
prior
years.
The
Board
further
noted
management’s
representation
that
the
profitability
analysis
excluded
the
impact
of
the
recent
acquisition
of
the
Legg
Mason
companies
and
that
management
expects
to
incorporate
the
legacy
Legg
Mason
companies
into
the
profitability
analysis
beginning
next
year.
Additionally,
PricewaterhouseCoopers
LLP,
auditor
to
FRI
and
certain
FT
funds,
has
been
engaged
by
the
Manager
to
periodically
review
and
assess
the
allocation
methodologies
to
be
used
solely
by
the
Fund’s
Board
with
respect
to
the
profitability
analysis.
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
management’s
outsourcing
certain
operations,
which
effort
has
required
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.
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
does
not
have
an
asset
size
that
would
likely
enable
the
Fund
to
achieve
economies
of
scale,
but
concluded
that
to
the
extent
economies
of
scale
may
be
realized
by
the
Manager
and
its
affiliates,
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
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.
Franklin
Strategic
Mortgage
Portfolio
Shareholder
Information
37
franklintempleton.com
Semiannual
Report
Householding
of
Reports
and
Prospectuses
You
will
receive,
or
receive
notice
of
the
availability
of,
the
Fund’s
financial
reports
every
six
months.
In
addition,
you
will
receive
an
annual
updated
summary
prospectus
(detail
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
(to
the
extent
received
by
mail)
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.
357
S
05/21
©
2021
Franklin
Templeton
Investments.
All
rights
reserved.
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.
Semiannual
Report
and
Shareholder
Letter
Franklin
Strategic
Mortgage
Portfolio
Investment
Manager
Distributor
Shareholder
Services
Franklin
Advisers,
Inc.
Franklin
Templeton
Distributors,
Inc.
(800)
DIAL
BEN
®
/
342-5236
franklintempleton.com
(800)
632-2301
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.
                                            
N/A
 
 
Item 5. Audit Committee
 
of Listed Registrants.                   N/A
 
 
Item 6. Schedule of Investments.                                  N/A
 
 
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.                    N/A
 
 
Item 8. Portfolio Managers of Closed-End Management Investment Companies.                                              N/A
 
 
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and
Affiliated Purchasers.             N/A
 
 
Item 10. Submission of Matters to a Vote of Security Holders.
 
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.
 
 
Item 11. Controls and Procedures.
 
(a) Evaluation of Disclosure Controls and Procedures
. The Registrant maintains disclosure controls and procedures that are designed to 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.
 
(a) (1) Code of Ethics
 
 
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
Matthew T. Hinkle
, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer
 
 
(b)   Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Matthew T. Hinkle
, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer
 
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
 
 
 
By __S\Matthew T. Hinkle    ___
      Matthew T. Hinkle  
      Chief Executive Officer - Finance and Administration
Date  May 26, 2021
 
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  May 26, 2021
 
 
 
 
By __S\Robert G. Kubilis _____
      Chief Financial Officer
and Chief Accounting Officer
Date  May 26, 2021