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)
 
Alison Baur, 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: 3/31/22
 
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,
2022
Sign
up
for
electronic
delivery
at
franklintempleton.com/edelivery
Not
FDIC
Insured
May
Lose
Value
No
Bank
Guarantee
franklintempleton.com
Semiannual
Report
1
Shareholder
Letter
Dear
Shareholder:
During
the
six
months
ended
March
31,
2022,
the
U.S.
economy
continued
to
recover
from
the
COVID-19
pandemic
amid
declining
unemployment,
rising
wages
and
growing
business
confidence.
Although
investors
became
concerned
that
new,
swiftly
spreading
COVID-19
variants
could
hinder
the
economic
recovery,
growth
accelerated
in
2021’s
fourth
quarter
as
the
reopening
of
businesses,
widespread
COVID-19
vaccinations
and
federal
assistance
programs
continued
to
boost
consumer
spending.
Inflation
remained
elevated
during
the
reporting
period,
given
supply
and
demand
imbalances
related
to
the
pandemic,
higher
energy
prices
exacerbated
by
Russia’s
invasion
of
Ukraine,
and
broader
price
pressures.
During
the
reporting
period,
the
U.S.
Federal
Reserve,
in
its
efforts
to
encourage
ongoing
U.S.
economic
activity,
continued
quantitative
easing
measures
to
bolster
credit
markets.
However,
the
Federal
Reserve
decreased
its
monthly
asset
purchases
starting
in
November
2021,
increased
its
tapering
in
subsequent
months
and
ended
purchases
in
March
2022.
In
support
of
its
goal
of
achieving
maximum
employment
and
returning
annual
inflation
to
2%
over
the
long
term,
the
Federal
Reserve
raised
the
federal
funds
rate
by
0.25%,
from
a
level
of
0.25%
to
0.50%
at
its
March
meeting.
The
10-year
U.S.
Treasury
yield
was
1.52%
on
September
30,
2021,
and
it
increased
to
2.32%
by
the
end
of
March
2022.
In
this
environment,
investment-grade
bonds,
as
measured
by
the
Bloomberg
U.S.
Aggregate
Bond
Index,
posted
a
-5.92%
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
professionals
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,
2022,
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
Schedule
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,
2022.
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
significantly
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,
2022,
the
Fund’s
Class
A
shares
posted
a
-5.80%
cumulative
total
return.
In
comparison,
the
Fund’s
primary
benchmark,
the
Bloomberg
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
-5.33%
cumulative
total
return.
2
In
comparison,
the
Fund’s
secondary
benchmark,
the
FTSE
U.S.
Broad
Investment-Grade
(USBIG)
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
-5.45%
cumulative
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
U.S.
Aggregate
Bond
Index,
posted
a
-5.92%
total
return
for
the
six
months
ended
March
31,
2022.
2
Growing
inflation
amid
supply
chain
disruptions
and
increased
consumer
spending
led
to
tighter
monetary
policy,
reducing
the
value
of
most
bonds.
Geopolitical
instability
disrupted
financial
markets
late
in
the
six-month
period
following
Russia’s
invasion
of
Ukraine,
contributing
to
significant
volatility
in
bond
markets.
The
yield
curve
flattened
notably
during
the
period,
reflecting
investors’
expectations
that
short-term
interest
rates
will
continue
to
rise,
while
the
outlook
for
long-term
economic
growth
is
uncertain.
In
an
effort
to
control
inflation,
the
U.S.
Federal
Reserve
(Fed)
raised
the
federal
funds
target
rate
to
a
range
of
0.25%–0.50%,
the
first
such
increase
since
2018.
The
Fed
noted
in
its
March
2022
meeting
that
strength
in
the
U.S.
job
market
and
continued
inflationary
pressure,
exacerbated
by
the
war
in
Ukraine,
meant
it
anticipated
making
further
increases
to
the
federal
funds
target
rate.
Furthermore,
the
Fed
said
it
expected
to
begin
reducing
its
bond
holdings
at
a
future
meeting.
Portfolio
Composition
3/31/22
%
of
Total
Net
Assets
Mortgage-Backed
Securities
78.4%
Residential
Mortgage-Backed
Securities
13.7%
Asset-Backed
Securities
2.6%
Commercial
Mortgage-Backed
Securities
2.4%
Other
1.2%
Short-Term
Investments
&
Other
Net
Assets
1.7%
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.
Treasuries,
if
held
to
maturity,
offer
a
fixed
rate
of
return
and
a
fixed
principal
value;
their
interest
payments
and
principal
are
guaranteed.
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
Schedule
of
Investments
(SOI).
The
SOI
begins
on
page
14
.
Franklin
Strategic
Mortgage
Portfolio
4
franklintempleton.com
Semiannual
Report
U.S.
Treasury
(UST)
bonds,
as
measured
by
the
Bloomberg
U.S.
Treasury
Index,
posted
a
-5.41%
total
return
for
the
six-month
period.
2
The
10-year
UST
yield
(which
moves
inversely
to
price)
grew
notably
amid
high
inflation
and
the
Fed’s
less
accommodative
stance.
Yields
rose
more
slowly
on
the
longest-term
(20-year
and
30-year)
USTs,
while
rising
faster
on
USTs
with
terms
between
six
months
and
seven
years.
Consequently,
the
yield
curve
flattened,
reflecting
investors’
concerns
about
long-term
economic
growth.
Mortgage-backed
securities
(MBS),
as
measured
by
the
Bloomberg
U.S.
MBS
Index,
posted
a
-5.33%
total
return
for
the
period.
2
Corporate
bond
prices
also
declined
overall,
constrained
by
inflation
and
rising
interest
rates.
Furthermore,
corporate
yield
spreads,
a
measure
of
the
difference
in
yields
between
corporate
bonds
and
similarly
dated
USTs,
increased,
reflecting
investors’
increasing
risk-off
preferences.
High-
yield
corporate
bonds,
as
represented
by
the
Bloomberg
U.S.
Corporate
High
Yield
Bond
Index,
posted
a
-4.16%
total
return,
while
investment-grade
corporate
bonds,
as
represented
by
the
Bloomberg
U.S.
Corporate
Bond
Index,
posted
a
-7.48%
total
return.
2
Investment
Strategy
Under
normal
market
conditions,
we
invest
at
least
80%
of
the
Fund’s
net
assets
in
mortgage
securities.
The
Fund
invests
significantly
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.
Manager’s
Discussion
During
the
first
half
of
the
reporting
period,
against
the
backdrop
of
surging
COVID-19
Omicron
variant
infections,
the
U.S.
Federal
Reserve’s
(Fed)
accelerated
timeline
of
asset
purchase
tapering
and
upwardly
revised
median
projection
of
interest
rate
hikes
in
2022,
the
U.S.
Treasury
yield
curve
flattened.
The
yield
curve
inverted
during
the
second
half
of
the
period
as
the
Russian-Ukraine
war,
heightened
geopolitical
tensions
and
persistent
inflationary
pressures
increased
expectations
for
a
more
aggressive
Fed.
Volatility,
as
measured
by
the
Merrill
Lynch
Option
Volatility
Estimate
Index,
also
spiked
during
the
period,
due
to
escalation
of
geopolitical
tensions
with
the
Russian
invasion
of
Ukraine.
As
widely
expected,
the
Fed
lifted
their
federal
funds
target
rate
by
25
basis
points
(bps)
at
their
March
2022
meeting
and
signaled
six
more
hikes
ahead
this
year
and
four
more
beyond
that.
Chair
Jerome
Powell’s
urgency
on
beginning
balance
sheet
normalization
suggests
that
the
runoff
could
begin
by
mid-May.
The
maximum
run-off
rate
will
likely
be
phased
in
by
the
middle
of
the
third
quarter
2022,
earlier
than
previously
expected.
For
the
Bloomberg
indexes
in
which
the
Fund
invests,
over
the
six-month
period
RMBS
was
the
only
sector
with
positive
returns,
outpacing
Treasuries
in
both
excess
and
total
returns
with
U.S.
Treasuries
posting
negative
total
returns.
All
other
sectors
posted
both
negative
excess
and
total
returns
for
the
period.
Within
the
MBS
sectors,
Ginnie
Mae
(GNMA)
MBS
was
the
best
performer,
while
Fannie
Mae
(FNMA)
and
Freddie
Mac
(FHLMC)
MBS
lagged.
Conventional
15-year
MBS
performed
better
than
their
30-year
counterparts
and
the
30-year
GNMA
MBS
performed
better
than
the
conventional
30-year
MBS
sector
on
an
excess
return
basis.
Across
the
conventional
coupon
stack,
higher
4.0%
through
5.0%
coupons
were
the
best
performers,
while
2.5%
and
3.0%
coupons
lagged.
The
Fed
reduced
its
net
purchases
of
agency
MBS
securities
from
$20
billion
in
January
2022
to
no
net
additions
in
March.
Since
March
2020,
the
Fed
has
purchased
$3.01
trillion
in
agency
MBS
and
as
of
March
31,
2022,
owned
over
a
quarter
of
the
agency
MBS
market.
Franklin
Strategic
Mortgage
Portfolio
5
franklintempleton.com
Semiannual
Report
Despite
rising
mortgage
interest
rates,
demand
in
the
U.S.
housing
market
continued
to
outstrip
supply,
leading
to
ever
increasing
home
price
appreciation.
The
Primary
Mortgage
Market
Survey
rate
moved
back
to
pre-COVID-19
levels,
leaving
only
a
very
small
amount
of
the
universe
with
an
economic
incentive
to
refinance,
in
our
view,
compared
to
a
much
larger
portion
in
2020
and
even
at
the
beginning
of
the
2022.
We
believe,
as
rates
are
expected
to
rise
further,
this
will
contribute
to
declining
prepayment
levels.
In
terms
of
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
held
an
underweight
allocation
to
1.5%
through
2.5%
coupons
and
an
overweight
in
3.0%,
through
4.5%
coupons.
The
portfolio
maintained
an
overweight
allocation
to
RMBS,
but
pared
exposure
over
the
period
on
strength
in
sector
performance.
We
believe
the
fundamental
backdrop
for
mortgage
credit
remains
positive
and
should
bode
well
for
the
RMBS
sector
over
the
near
to
intermediate
terms.
We
increased
allocation
to
CMBS
and
remain
positioned
higher
in
the
capital
structure
in
transactions
with
solid
credit
fundamentals.
The
Fund’s
underweight
allocation
to
MBS
and
overweight
allocation
to
RMBS
were
significant
contributors
to
performance.
CMBS
exposure
was
neutral
for
returns,
while
our
security
selection
in
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,
2022,
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.
FRM
®
is
a
trademark
owned
by
Global
Association
of
Risk
Professionals
(GARP).
Performance
Summary
as
of
March
31,
2022
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
3/31/22
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
-5.80%
-9.38%
1-Year
-5.47%
-9.04%
5-Year
+4.04%
+0.03%
10-Year
+18.94%
+1.36%
Advisor
6-Month
-5.69%
-5.69%
1-Year
-5.34%
-5.34%
5-Year
+5.23%
+1.02%
10-Year
+21.80%
+1.99%
30-Day
Standardized
Yield
7
Share
Class
Distribution
Rate
6
(with
fee
waiver)
(without
fee
waiver)
A
1.41%
0.73%
0.43%
Advisor
1.72%
1.02%
0.70%
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.
Russia’s
military
invasion
of
Ukraine
in
February
2022,
the
resulting
responses
by
the
United
States
and
other
countries,
and
the
potential
for
wider
conflict
could
increase
volatility
and
uncertainty
in
the
financial
markets
and
adversely
affect
regional
and
global
economies.
The
United
States
and
other
countries
have
im-
posed
broad-ranging
economic
sanctions
on
Russia
and
certain
Russian
individuals,
banking
entities
and
corporations
as
a
response
to
its
invasion
of
Ukraine.
The
United
States
and
other
countries
have
also
imposed
economic
sanctions
on
Belarus
and
may
impose
sanctions
on
other
countries
that
support
Russia’s
military
invasion.
These
sanctions,
as
well
as
any
other
economic
consequences
related
to
the
invasion,
such
as
additional
sanctions,
boycotts
or
changes
in
consumer
or
purchaser
preferences
or
cyberattacks
on
governments,
companies
or
individuals,
may
further
decrease
the
value
and
liquidity
of
certain
Russian
securities
and
securities
of
issuers
in
other
countries
that
are
subject
to
economic
sanctions
related
to
the
invasion.
1.
The
Fund
has
an
expense
reduction
contractually
guaranteed
through
1/31/23.
Fund
investment
results
reflect
the
expense
reduction;
without
this
reduction,
the
results
would
have
been
lower.
2.
Cumulative
total
return
represents
the
change
in
value
of
an
investment
over
the
periods
indicated.
3.
Average
annual
total
return
represents
the
average
annual
change
in
value
of
an
investment
over
the
periods
indicated.
Return
for
less
than
one
year,
if
any,
has
not
been
annualized.
4.
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.
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
3/31/22.
7.
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.
8.
Figures
are
as
stated
in
the
Fund’s
current
prospectus
and
may
differ
from
the
expense
ratios
disclosed
in
the
Your
Fund’s
Expenses
and
Financial
Highlights
sections
in
this
report.
In
periods
of
market
volatility,
assets
may
decline
significantly,
causing
total
annual
Fund
operating
expenses
to
become
higher
than
the
figures
shown.
See
www.franklintempletondatasources.com
for
additional
data
provider
information.
Distributions
(10/1/21–3/31/22)
Share
Class
Net
Investment
Income
A
$0.062434
A1
$0.073558
C
$0.044876
R6
$0.081080
Advisor
$0.073587
Total
Annual
Operating
Expenses
8
Share
Class
With
Fee
Waiver
Without
Fee
Waiver
A
1.00%
1.28%
Advisor
0.75%
1.03%
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
10/1/21
Ending
Account
Value
3/31/22
Expenses
Paid
During
Period
10/1/21–3/31/22
1,2
Ending
Account
Value
3/31/22
Expenses
Paid
During
Period
10/1/21–3/31/22
1,2
a
Net
Annualized
Expense
Ratio
2
A
$1,000
$942.00
$4.84
$1,019.94
$5.04
1.00%
A1
$1,000
$943.10
$3.64
$1,021.19
$3.78
0.75%
C
$1,000
$940.10
$6.77
$1,017.95
$7.04
1.40%
R6
$1,000
$942.80
$2.95
$1,021.89
$3.07
0.61%
Advisor
$1,000
$943.10
$3.63
$1,021.19
$3.78
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,
2022
(unaudited)
Year
Ended
September
30,
2021
2020
2019
2018
2017
Class
A
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.13
$9.31
$9.25
$8.93
$9.34
$9.57
Income
from
investment
operations
a
:
Net
investment
income
..............
0.010
b
0.025
b
0.188
0.267
0.243
b
0.147
Net
realized
and
unrealized
gains
(losses)
(0.538)
(0.063)
0.090
0.355
(0.359)
(0.106)
Total
from
investment
operations
........
(0.528)
(0.038)
0.278
0.622
(0.116)
0.041
Less
distributions
from:
Net
investment
income
..............
(0.062)
(0.142)
(0.218)
(0.302)
(0.294)
(0.267)
Tax
return
of
capital
................
(0.004)
Total
distributions
...................
(0.062)
(0.142)
(0.218)
(0.302)
(0.294)
(0.271)
Net
asset
value,
end
of
period
..........
$8.54
$9.13
$9.31
$9.25
$8.93
$9.34
Total
return
c
.......................
(5.80)%
(0.41)%
3.05%
7.08%
(1.25)%
0.45%
Ratios
to
average
net
assets
d
Expenses
before
waiver
and
payments
by
affiliates
..........................
1.20%
1.27%
1.31%
1.24%
1.21%
1.17%
Expenses
net
of
waiver
and
payments
by
affiliates
e
..........................
1.00%
0.99%
1.00%
1.00%
1.06%
1.16%
Net
investment
income
...............
0.23%
0.27%
1.85%
2.93%
2.67%
1.82%
Supplemental
data
Net
assets,
end
of
period
(000’s)
........
$17,586
$21,801
$24,153
$18,313
$16,303
$21,143
Portfolio
turnover
rate
................
253.65%
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
........................
88.69%
85.26%
187.45%
139.83%
153.69%
111.62%
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,
2022
(unaudited)
Year
Ended
September
30,
2021
2020
2019
2018
2017
Class
A1
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.13
$9.31
$9.25
$8.94
$9.35
$9.58
Income
from
investment
operations
a
:
Net
investment
income
..............
0.022
b
0.048
b
0.191
0.285
0.268
b
0.177
Net
realized
and
unrealized
gains
(losses)
(0.538)
(0.063)
0.110
0.349
(0.360)
(0.113)
Total
from
investment
operations
........
(0.516)
(0.015)
0.301
0.634
(0.092)
0.064
Less
distributions
from:
Net
investment
income
..............
(0.074)
(0.165)
(0.241)
(0.324)
(0.318)
(0.289)
Tax
return
of
capital
................
(0.005)
Total
distributions
...................
(0.074)
(0.165)
(0.241)
(0.324)
(0.318)
(0.294)
Net
asset
value,
end
of
period
..........
$8.54
$9.13
$9.31
$9.25
$8.94
$9.35
Total
return
c
.......................
(5.69)%
(0.16)%
3.30%
7.22%
(1.00)%
0.70%
Ratios
to
average
net
assets
d
Expenses
before
waiver
and
payments
by
affiliates
..........................
0.96%
1.02%
1.05%
0.99%
0.96%
0.92%
Expenses
net
of
waiver
and
payments
by
affiliates
e
..........................
0.75%
0.74%
0.75%
0.75%
0.81%
0.91%
Net
investment
income
...............
0.48%
0.52%
2.14%
3.18%
2.92%
2.07%
Supplemental
data
Net
assets,
end
of
period
(000’s)
........
$21,055
$24,192
$27,530
$29,286
$32,802
$40,844
Portfolio
turnover
rate
................
253.65%
278.91%
249.94%
223.36%
243.65%
244.09%
Portfolio
turnover
rate
excluding
mortgage
dollar
rolls
f
........................
88.69%
85.26%
187.45%
139.83%
153.69%
111.62%
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,
2022
(unaudited)
Year
Ended
September
30,
2021
2020
2019
2018
2017
Class
C
Per
share
operating
performance
(for
a
share
outstanding
throughout
the
period)
Net
asset
value,
beginning
of
period
.....
$9.13
$9.31
$9.25
$8.93
$9.34
$9.57
Income
from
investment
operations
a
:
Net
investment
income
(loss)
.........
(0.007)
b
(0.013)
b
0.138
0.230
0.207
b
0.112
Net
realized
and
unrealized
gains