UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

FORM N-CSRS

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

               Investment Company Act file number 811-04986 

 

Franklin Investors Securities Trust
(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: 10/31 

 

Date of reporting period: 4/30/14 

 

 

Item 1. Reports to Stockholders.

 

 

 

 

| 1

 

Semiannual Report

Economic and Market Overview

The U.S. economy continued to show signs of recovery during the six-month period ended April 30, 2014. Strong consumer and business spending and rising inventories underpinned economic growth in the fourth quarter of 2013. Despite the abnormally cold weather that suppressed economic activity in the first quarter of 2014, economic indicators were still broadly supportive of recovery at period-end. Manufacturing activity expanded and retail sales rose year-over-year. Home sales declined because of rising mortgage rates and lower inventories as well as the impact of extreme weather in early 2014, but home prices rose in comparison with year-ago figures. The unemployment rate declined to 6.3% in April 2014 from 7.2% in October 2013,¹ and inflation remained below the U.S. Federal Reserve Board’s (Fed’s) 2.0% target.

In January, Congress passed a spending bill to fund the federal government through September 2014. Congress then approved suspension of the debt ceiling until March 2015. Despite speculation that it would start tapering its quantitative easing, the Fed maintained its monthly bond purchases at $85 billion through December 2013, gradually reducing them beginning in January, based on continued positive economic and employment data. Although economic data in early 2014 were soft in part because of severe winter weather, Fed Chair Janet Yellen kept the pace of asset-purchase tapering intact while adopting a more qualitative approach to rate-hike guidance. However, the Fed remained committed to keeping interest rates low for a considerable time even after the asset purchase program ends, depending on inflation and unemployment trends. Despite volatility in U.S. equity markets toward period-end heightened by geopolitical risks from the crisis in Ukraine, markets continued to advance.

Investors’ confidence grew as corporate profits rose and generally favorable economic data indicated continued recovery despite brief sell-offs when markets reacted to the Fed’s statements, political instability in certain emerging markets and China’s slowing economy. U.S. stocks generated strong returns for the six months under review as the Standard & Poor’s 500 Index (S&P 500) and Dow Jones Industrial Average reached all-time highs.²

The 10-year Treasury yield rose from 2.57% at the beginning of the period to a high of 3.04% on December 31, 2013, mainly because of an improved economic environment and market certainty about the Fed’s plans. However, some weakening economic data and increasing political tension in Ukraine contributed to the 10-year U.S. Treasury yield’s decline to 2.67% at period-end.

The foregoing information reflects our analysis and opinions as of April 30, 2014. The information is not a complete analysis of every
aspect of any market, country, industry, security or fund. Statements of fact are from sources considered reliable.

1. Source: Bureau of Labor Statistics.
2. S&P Dow Jones Indices. Copyright © 2014, S&P Dow Jones Indices LLC. All rights reserved. Reproduction of S&P Dow Jones Indices in any
form is prohibited except with the prior written permission of S&P. S&P does not guarantee the accuracy, adequacy, completeness or avail-
ability of any information and is not responsible for any errors or omissions, regardless of the cause or for the results obtained from the use
of such information. S&P DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P be liable for any direct, indirect, special or
consequential damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with
subscriber’s or others’ use of S&P Dow Jones Indices.

Semiannual Report | 3

 

Franklin Balanced Fund

Your Fund’s Goal and Main Investments: Franklin Balanced Fund seeks both income and capital appreciation by investing in a combination of stocks, convertible securities and debt securities. The Fund will normally invest at least 25% of its total assets in equity securities (primarily common and preferred stock) and at least 25% of its total assets in debt securities, including bonds, notes,

debentures and money market securities.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.

This semiannual report for Franklin Balanced Fund covers the period ended April 30, 2014.

Performance Overview

For the six months under review, Franklin Balanced Fund – Class A delivered a +6.03% cumulative total return. The Fund’s equity benchmark, the Standard & Poor’s 500 Index (S&P 500), which is a broad measure of U.S. stock performance, posted a total return of +8.36%.^{1, 2} The Fund’s fixed income benchmark, the Barclays U.S. Aggregate Index, which tracks the U.S. investment-grade, taxable bond market, returned +1.74%.^{1, 3} You can find the Fund’s long-term performance data in the Performance Summary beginning on page 9.

Investment Strategy

We apply a bottom-up approach to investing in individual securities. We will assess the market price of a company’s securities relative to our evaluation of the company’s long-term earnings, asset value and cash flow potential. We also consider a company’s price/earnings ratio, profit margins and liquidation value. In determining an optimal mix of equity and fixed income investments for the Fund, we assess changing economic, market and industry conditions. We may sell securities for a number of possible reasons, including the achievement of certain stock prices or credit spreads, changes in the fundamental outlook or risk/reward profile of a security, less attractive values relative to market peers, or broad economic conditions affecting certain fixed income sectors.

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 53.

4 | Semiannual Report

 

 

*All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative
of future trends.

 

Manager’s Discussion

During the six months under review, the Fund’s equity and fixed income components continued to contribute to absolute performance. The majority of the Fund’s equity sector positions delivered positive results, led by materials, information technology and industrials. In contrast, the telecommunication services sector detracted from performance. All of the Fund’s fixed income sectors contributed to performance, but strong corporate bond performance was the main driver of results. The U.S. corporate bond market benefited from low default rates, improved credit quality and investor demand for income.

Although the Fund remained well diversified, we decreased the Fund’s overall equity weighting from 69.1% to 66.8% of total net assets, particularly with reductions to the consumer staples and energy sectors. In contrast, we added to the Fund’s equity sector weightings in consumer discretionary, health care and information technology during the period, seeking to take advantage of what we considered were strong dividend growth and attractive valuations. The Fund’s fixed income exposure slightly increased from 27.4% to 27.9% of total net assets. The Fund’s cash position increased during the period from 3.5% to 5.3% of total net assets.

Most of our materials sector equity positions performed well, particularly chemical conglomerates such as The Dow Chemical Co. and LyondellBasell Industries. Prices for a wide variety of raw materials, including U.S. crude oil and natural gas, precious metals and agricultural products, rose during the period from their 2013 lows, and these higher price levels supported results across the materials and energy sectors. Shares of The Williams Cos., an energy infrastructure company, also benefited from this favorable pricing environment and improved cash

Semiannual Report | 5

 

 

flow. Overall, the Fund’s information technology positions performed well. Strong product sales helped technology leader Apple and several semiconductor companies deliver positive performance. Diversified equipment manufacturer Caterpillar led our industrials positions, and its share price rose in tandem with an increase in construction activity that could drive margins and profitability higher. Defense-related companies such as Raytheon performed well amid increased political turmoil in several regions around the world during the period. Utilities including NextEra Energy and The Southern Co. generally outperformed broader equity markets, supported by factors including investors’ continued attraction to yield-oriented investments, relatively stable interest rates and a modest decline in the benchmark 10-year Treasury yield. Eli Lilly & Co. was a major contributor among health care holdings.

In contrast, Cobalt International Energy was a major equity detractor.⁴ The energy company’s shares declined after a number of exploration projects failed to meet the high end of expectations. Also in the energy sector, shares of Diamond Offshore Drilling⁴ and Kinder Morgan suffered after releasing disappointing performance results. In the materials sector, the common stock of Freeport-McMoRan Copper & Gold declined as copper prices fell to a multi-year low during the period. General Motors, in consumer discretionary, lost value after the discovery of a faulty product design that raised the possibility of higher costs associated with a recall effort for thousands of cars. In the telecommunication services sector, Verizon Communications’ share price declined because of falling prices and higher competition in the wireless industry that hurt results.

During a challenging period, in which the 10-year Treasury yield reached a high of 3.04%, the fixed income portion of the Fund’s portfolio produced positive results and outperformed its fixed income benchmark, largely though sector and security selection.

Among the benchmark Barclays U.S. Aggregate Index’s major components, corporate credit continued to outperform Treasuries, agencies and mortgage-backed securities during the period. Our significant overweighting in corporate credit relative to these other sectors supported the Fund’s fixed income performance.

Last year’s bond sell-off allowed us to purchase fixed income securities with higher yields and add to positions that we favored in the communications and banking sectors at prices we considered attractive.⁵ Communications companies Verizon Communications, Sprint and DISH performed well for the period. Verizon, which completed one of the largest investment-grade transactions between two companies ever recorded, was a key contributor. In the banking

6 | Semiannual Report

 

sector, we continued to move down the capital structure by purchasing subordinated bonds and saw fundamental improvement. Bank of America, PNC Financial Services Group, Citigroup and JPMorgan Chase & Co. contributed to total returns. In addition, energy sector holdings Ecopetrol, Sandridge Energy and Weatherford International aided performance.

Among the Fund’s fixed income detractors, Russia-based, global energy company Gazprom was likely affected by tensions between Russia and Ukraine.⁶ Our bonds of International Game Technology also declined.⁴

The Fund utilized derivative instruments during the period, such as equity options. The goal of these instruments is to enhance Fund returns and more efficiently enter and exit stock positions at prices the Fund deems attractive. None of these positions had a material impact on performance.

Thank you for your continued participation in Franklin Balanced Fund.

We look forward to serving your future investment needs.

CFA^® is a trademark owned by CFA Institute.

Semiannual Report | 7

 

The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2014, 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.

The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index,
and an index is not representative of the Fund’s portfolio.

1. Source: © 2014 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or
timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of
this information.
2. S&P 500: Copyright © 2014, S&P Dow Jones Indices LLC. All rights reserved. Reproduction of S&P U.S. Index data in
any form is prohibited except with the prior written permission of S&P. S&P does not guarantee the accuracy, adequacy,
completeness or availability of any information and is not responsible for any errors or omissions, regardless of the cause
or for the results obtained from the use of such information. S&P DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WAR-
RANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE. In no event shall S&P be liable for any direct, indirect, special or consequential damages, costs,
expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with subscriber’s
or others’ use of S&P U.S. Index data.
3. Source: Barclays Global Family of Indices. © 2014 Barclays Capital Inc. Used with permission.
4. No longer held at period-end.
5. Communications holdings are in consumer discretionary, information technology and telecommunication services in
the SOI. Banking holdings are in financials in the SOI.
6. Listed as Gaz Capital SA in the SOI.

8 | Semiannual Report

 

Performance Summary as of 4/30/14

Franklin Balanced Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does 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.

 

Semiannual Report | 9

 

Performance Summary (continued)

Performance as of 4/30/14¹

Cumulative total return excludes sales charges. Average annual total returns and value of $10,000 investment include maximum sales charges.
Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only; Class R/R6/Advisor Class: no sales
charges.

 

 

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.

10 | Semiannual Report

 

Performance Summary (continued)

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors
affecting individual companies, particular industries or sectors, or general market conditions. The Fund’s share price and yield will be affected
by interest rate movements. Bond prices generally move in the opposite direction of interest rates. As prices of bonds in the Fund adjust to a
rise in interest rates, the Fund’s share price may decline. The Fund is actively managed but there is no guarantee that the manager’s invest-
ment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

 

1. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current
fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; 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. Six-month return has not
been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
6. Figures are as stated in the Fund’s current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund
operating expenses to become higher than the figures shown.
7. Performance shown is not annualized.
8. Distribution rate is based on an annualization of the respective class’s April dividend and the maximum offering price (NAV for Classes C, R, R6
and Advisor) per share on 4/30/14.
9. The 30-day standardized yield for the 30 days ended 4/30/14 reflects an estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution
rate (which reflects the Fund’s past dividends paid to shareholders) or the income reported in the Fund’s financial statements.

Semiannual Report | 11

 

Your Fund’s Expenses

Franklin Balanced Fund

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases; and
• Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

12 | Semiannual Report

 

Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

 

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 1.08%; C: 1.78%;
R: 1.28%; R6: 0.68%; and Advisor: 0.78%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half
year period.

Semiannual Report | 13

 

Franklin Convertible Securities Fund

Your Fund’s Goal and Main Investments: Franklin Convertible Securities Fund seeks to maximize total return consistent with reasonable risk by seeking to optimize capital appreciation and high current income under varying market conditions and investing at least 80% of its net assets in convertible securities.

This semiannual report for Franklin Convertible Securities Fund covers the period ended April 30, 2014.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.

Performance Overview

For the six months under review, Franklin Convertible Securities Fund –Class A delivered a +6.03% cumulative total return. In comparison, the Fund’s benchmark, the BofA Merrill Lynch (BofAML) All Total Return Alternatives U.S. Convertibles Index, which tracks the domestic convertible securities market, posted a +7.17% total return.^{1, 2} You can find the Fund’s long-term performance data in the Performance Summary beginning on page 17.

Investment Strategy

We follow a strategy of maintaining a balance in the portfolio between the equity and debt characteristics of convertible securities with an emphasis on

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 65.

14 | Semiannual Report

 

the equity features. Convertible securities are attractive for two reasons: the opportunity to participate in common stocks’ potential growth with relatively reduced volatility, and the potential for current income with potential downside protection from bonds. Typically we sell securities whose equity sensitivity becomes too high and no longer offers appropriate downside protection. Likewise, as securities become too bond-like — reducing their ability to appreciate with increases in the underlying common stock — we attempt to redeploy those assets into more balanced convertible securities and maintain the potential for the Fund’s upside participation. Our experienced team of analysts searches for investment opportunities among all economic sectors and considers a company’s long-term earnings, asset value and cash flow potential, to create a broadly diversified portfolio.

Manager’s Discussion

During the six months under review, most sectors the Fund invested in rose in value, as did the majority of the portfolio’s individual securities. Investments in the health care, information technology (IT), consumer discretionary and industrials sectors accounted for the greater part of the Fund’s total return. Within health care, the Fund’s holdings of convertible bonds issued by specialty pharmaceutical companies such as Salix Pharmaceuticals and Pacira Pharmaceuticals enjoyed some of the largest gains, as did our holding in Mylan, a generics and specialty pharmaceutical company. The Fund’s holdings of convertible bonds issued by semiconductor and semiconductor equipment companies such as Micron Technology and Microchip Technology were key contributors in the IT sector. Top-performing consumer discretionary holdings included Goodyear Tire & Rubber and convertible bonds of MGM Resorts International. In the industrials sector, trucking company Swift Transportation was a standout performer.

Despite the Fund’s positive results this reporting period, there were some disappointments. Our energy sector holdings hindered performance, and top individual detractors were convertible bonds of James River Coal and oil and gas company Cobalt International Energy. Elsewhere, key detractors included convertible bonds of integrated travel and expense management solutions provider Concur Technologies, Internet-based image publishing service provider Shutterfly and a new position in Russian Internet search engine services company Yandex.

Top 10 Holdings

Franklin Convertible Securities Fund 4/30/14

 

Semiannual Report | 15

 

Thank you for your continued participation in Franklin Convertible Securities Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2014, 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.

The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
1. Source: © 2014 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or
timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of
this information.
2. Source BofA Merrill Lynch, used with permission. BOFA MERRILL LYNCH IS LICENSING THE MERRILL LYNCH INDICES
“AS IS,” MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE QUALITY, ACCURACY AND/OR
COMPLETENESS OF THE MERRILL LYNCH INDICES OR ANY DATA INCLUDED THEREIN OR DERIVED THEREFROM, AND
ASSUMES NO LIABILITY IN CONNNECTION WITH THEIR USE.

16 | Semiannual Report

 

Performance Summary as of 4/30/14

Franklin Convertible Securities Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does 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.

 

Semiannual Report | 17

 

Performance Summary (continued)

Performance as of 4/30/14¹

Cumulative total return excludes sales charges. Average annual total returns and value of $10,000 investment include
maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in
first year only; Class R6/Advisor Class: no sales charges.

 

 

Performance data represent past performance, which does not guarantee future results. Investment return and principal
value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from
figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.

18 | Semiannual Report

 

Performance Summary (continued)

All investments involve risks, including possible loss of principal. Convertible securities are subject to the risks of stocks when the underlying
stock price is high relative to the conversion price and debt securities when the underlying stock price is low relative to the conversion price.
The Fund may invest in high yielding, fixed income securities. High yields reflect the higher credit risk associated with these lower rated secu-
rities and, in some cases, the lower market prices for these instruments. Interest rate movements may affect the Fund’s share price and yield.
Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in the Fund adjust to a rise in interest rates, the
Fund’s share price may decline. The Fund may also invest in foreign securities, which involve special risks, including political uncertainty and
currency volatility. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired
results. The Fund’s prospectus also includes a description of the main investment risks.

 

1. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its cur-
rent fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; 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. Six-month return has not
been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
6. Figures are as stated in the Fund’s current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund
operating expenses to become higher than the figures shown.
7. Performance shown is not annualized.
8. Effective 5/15/08, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations
for this class reflect the following methods of calculation: (a) For periods prior to 5/15/08, a restated figure is used based upon the Fund’s Class A
performance, excluding the effect of Class A’s maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for peri-
ods after 5/15/08, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 5/15/08 (commencement
of sales), the cumulative and average annual total returns of Advisor Class shares were +55.42% and +7.68%.
9. Distribution rate is based on the sum of the respective class’s last four quarterly dividends (Class R6: based on the most recent quarterly dividend
for Class R6 and prior three quarterly dividends for Advisor Class) and the maximum offering price (NAV for Classes C, R6 and Advisor) per share
on 4/30/14.
10. The 30-day standardized yield for the 30 days ended 4/30/14 reflects an estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution
rate (which reflects the Fund’s past dividends paid to shareholders) or the income reported in the Fund’s financial statements.

Semiannual Report | 19

 

Your Fund’s Expenses

Franklin Convertible Securities Fund

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases; and
• Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

20 | Semiannual Report

 

Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

 

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 0.86%; C: 1.61%;
R6: 0.51%; and Advisor: 0.61%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period
for Class R6 hypothetical expenses and actual and hypothetical expenses for Classes A, C and Advisor. The multiplier is 58/365 for Class R6 actual
expenses to reflect the number of days since inception.

Semiannual Report | 21

 

Franklin Equity Income Fund

Your Fund’s Goal and Main Investments: Franklin Equity Income Fund seeks to maximize total return, emphasizing high current income and long-term capital appreciation, consistent with reasonable risk, by investing at least 80% of its net assets in equity securities including securities convertible into common stocks.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.

This semiannual report for Franklin Equity Income Fund covers the period ended April 30, 2014.

Performance Overview

For the six months under review, Franklin Equity Income Fund – Class A delivered a +7.00% cumulative total return. In comparison, the Fund’s benchmark, the Standard & Poor’s 500 Index (S&P 500), which tracks the broad U.S. stock market, posted a total return of +8.36%.^{1, 2} The Fund’s peers, as measured by the Lipper Equity Income Funds Classification Average, which consists of funds chosen by Lipper that seek relatively high current income and growth of income by investing at least 60% of their portfolios in stocks, posted a +7.37% total return.³ You can find the Fund’s long-term performance data in the Performance Summary beginning on page 25.

Investment Strategy

We seek to invest in a broadly diversified portfolio of equity securities that we consider to be financially strong, with a focus on “blue chip” companies. We apply a bottom-up approach to investing in individual securities. We will assess the market price of a company’s securities relative to our evaluation of the company’s long-term earnings, asset value and cash flow potential. We also consider a company’s price/earnings ratio, profit margins, balance sheet and liquidation value. We consider dividend yield in selecting stocks for the Fund because we believe that, over time, dividend income can contribute significantly to total return and can be a more consistent source of investment return than capital appreciation. We seek to take advantage of price dislocations that result from the market’s short-term focus and choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation.

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 74.

22 | Semiannual Report

 

 

* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative
of future trends.
**Includes an additional 5.07 cent per share distribution to meet excise tax requirements.

 

Manager’s Discussion

Every sector the Fund invested in rose in value, as did most of the portfolio’s individual securities, supporting overall performance during the six months under review. Key contributing sectors included industrials, financials, materials and energy. Within the industrials sector, the Fund’s positions in aerospace and defense firm Lockheed Martin and industrial engines manufacturer Cummins were strong performers. In financials, a top contributor was banking and diversified financial services firm Wells Fargo & Co. Within materials, The Dow Chemical Co. and Canadian fertilizer producer Potash Corp. of Saskatchewan led results. In the energy sector, oil and gas companies Royal Dutch Shell (U.K.) and Exxon Mobil aided performance.

Despite the Fund’s positive results this reporting period, there were a few disappointments in the portfolio. Key detractors included consumer discretionary sector holdings such as home improvement retailer Lowe’s Cos., auto manufacturer Ford Motor, mass-market discount retailer Target, hotel and resort company Starwood Hotels & Resorts Worldwide and online retail shopping provider Amazon.com. Software firm CA and U.K. premium alcoholic beverage manufacturer Diageo also hindered returns during the period.

Semiannual Report | 23

 

 

Thank you for your continued participation in Franklin Equity Income Fund.

We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2014, 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 man-
ager 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.

The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, and an index is not
representative of the Fund’s portfolio.
1. Source: © 2014 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or
its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither
Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
2. S&P 500: Copyright © 2014, S&P Dow Jones Indices LLC. All rights reserved. Reproduction of S&P U.S. Index data in
any form is prohibited except with the prior written permission of S&P. S&P does not guarantee the accuracy, adequacy,
completeness or availability of any information and is not responsible for any errors or omissions, regardless of the
cause or for the results obtained from the use of such information. S&P DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED
WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE. In no event shall S&P be liable for any direct, indirect, special or consequential damages, costs, expenses,
legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with subscriber’s or others’
use of S&P U.S. Index data.
3. Source: Lipper, a Thomson Reuters Company. For the six-month period ended 4/30/14, this category consisted of
475 funds. Lipper calculations do not include sales charges or expense subsidization by a fund’s manager. The Fund’s
performance relative to the average may have differed if these and other factors had been considered.

24 | Semiannual Report

 

Performance Summary as of 4/30/14

Franklin Equity Income Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does 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.

 

Semiannual Report | 25

 

Performance Summary (continued)

Performance as of 4/30/14¹

Cumulative total return excludes sales charges. Average annual total returns and value of $10,000 investment include
maximum sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge
in first year only; Class R/R6/Advisor Class: no sales charges.

 

 

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.

26 | Semiannual Report

 

Performance Summary (continued)

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. While stocks have historically outperformed other asset classes over the long term, they tend to fluctuate dramatically over the short term as a result of factors affecting individual companies, industries or the securities market as a whole. Convertible securities are subject to the risks of stocks when the underlying stock price is high relative to the conversion price and debt securities when the underlying stock price is low relative to the conversion price. The Fund’s investment in foreign securities also involves special risks, including currency fluctuations and economic as well as political uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

 

1. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its
current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; 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. Six-month return has not
been annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
6. Figures are as stated in the Fund’s current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund
operating expenses to become higher than the figures shown.
7. Performance shown is not annualized.
8. Effective 5/15/08, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations
for this class reflect the following methods of calculation: (a) For periods prior to 5/15/08, a restated figure is used based upon the Fund’s Class A
performance, excluding the effect of Class A’s maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for peri-
ods after 5/15/08, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 5/15/08 (commencement
of sales), the cumulative and average annual total returns of Advisor Class shares were +44.34% and +6.35%.
9. Distribution rate is based on an annualization of the respective class’s April dividend and the maximum offering price (NAV for Classes C, R, R6
and Advisor) per share on 4/30/14.
10. The 30-day standardized yield for the 30 days ended 4/30/14 reflects an estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution
rate (which reflects the Fund’s past dividends paid to shareholders) or the income reported in the Fund’s financial statements.

Semiannual Report | 27

 

Your Fund’s Expenses

Franklin Equity Income Fund

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases; and
• Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

28 | Semiannual Report

 

Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

 

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 0.89%; C: 1.64%;
R: 1.14%; R6: 0.51%; and Advisor: 0.64%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half
year period.

Semiannual Report | 29

 

Franklin Limited Maturity U.S. Government Securities Fund

Your Fund’s Goal and Main Investments: Franklin Limited Maturity U.S. Government Securities Fund seeks to provide investors with as high a level of current income as is consistent with prudent investing, while seeking to preserve shareholders’ capital, by investing at least 80% of its net assets in securities with a dollar-weighted average maturity of less than 10 years¹ and issued or guaranteed by the U.S. government, its agencies or instrumentalities.² Some of the Fund’s investments may include securities issued or guaranteed by U.S. government-sponsored entities such as Fannie Mae and Freddie Mac.³

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.

We are pleased to bring you Franklin Limited Maturity U.S. Government Securities Fund’s semiannual report for the period ended April 30, 2014. Effective January 22, 2014, Franklin Limited Maturity U.S. Government Securities Fund closed to new investors. The Fund is expected to merge into Franklin Adjustable U.S. Government Securities Fund on June 18, 2014.

Performance Overview

For the six months under review, Franklin Limited Maturity U.S. Government Securities Fund – Class A delivered a +0.32% cumulative total return. In comparison, the Fund’s primary benchmark, the Barclays U.S. Treasury Index: 1-5 Year Component, which tracks U.S. Treasury securities with one to five years remaining maturity, posted a +0.15% total return.^{4, 5} Also for comparison, the Fund’s secondary benchmark, the Barclays U.S. Treasury Index: 1-3 Year Component, which tracks U.S. Treasury securities with one to three years remaining maturity, returned +0.23%.^{4, 5} You can find the Fund’s long-term performance data in the Performance Summary beginning on page 34.

Investment Strategy

We currently maintain the portfolio’s average dollar-weighted maturity between one and five years. The Fund’s average dollar-weighted maturity will vary with market conditions and the outlook for interest rates. We invest primarily in short- to intermediate-term securities issued or guaranteed by

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 80.

30 | Semiannual Report

 

 

*Assumes shares were purchased and held for the entire accrual period. Since dividends accrue daily, your actual
distributions will vary depending on the date you purchased your shares and any account activity. All Fund distributions
will vary depending upon current market conditions, and past distributions are not indicative of future trends.

the U.S. government, its agencies and instrumentalities.² Some of the Fund’s investments may include securities issued by U.S. government-sponsored entities, such as Fannie Mae (FNMA) and Freddie Mac (FHLMC).³ The Fund’s portfolio emphasizes mortgage-backed bonds and agency debentures, while also diversifying across components of the U.S. Treasury sector. We analyze securities using proprietary and nonproprietary research to help identify attractive investment opportunities.

Manager’s Discussion

During the reporting period, economic indicators broadly supported the U.S. economy’s modest recovery. Much of the U.S. economic data released during the first quarter of 2014 was softer than many observers predicted and likely reflected the transitory effects of severe winter weather across much of the nation. U.S. economic data released near period-end, however, reflected a mild rebound that occurred after the sustained period of cold weather ended. However, despite the soft patch, employment data generally indicated the labor market continued to improve. Consumers’ financial situations in the fourth quarter of 2013 also continued to show meaningful improvement, which we thought could support consumption trends. Retail sales in March exceeded expectations, which suggested to us that consumer activity could recover from the weakness early in 2014. Although housing data were mixed, the housing market showed signs of recovery during the period after the effects of the severe winter and 2013’s higher mortgage rates subsided. Although

Semiannual Report | 31

 

 

consumer price inflation recently began to rise, it remained below the U.S. Federal Reserve Board’s (Fed’s) 2.0% target.

In a sign of more confidence in the economic outlook, the Fed revised its quantitative easing policy by reducing its monthly asset purchases starting in January. The reduction was split evenly between mortgage-backed securities (MBS) and Treasuries. The Fed also reiterated that it was not following a “preset course” and emphasized that future decisions would continue to be “contingent” on new economic data.

As measured by Barclays indexes,⁵ most fixed income sectors posted positive total returns during the period, including U.S. Treasury Inflation Protected Securities (TIPS), Ginnie Maes, U.S. agency fixed-rate MBS, U.S. hybrid adjustable-rate mortgage (ARM) securities and U.S. agencies.

The Fund invested in U.S. Treasuries, including TIPS, agency debentures, agency mortgage pass-through securities and other U.S. government-related bonds, as we looked for strong valuations within lower interest rate risk government bond markets.

During the period, many of the broad sectors in which we invested outperformed comparable maturity Treasuries. Our ARM positions and shorter-duration fixed-rate agency MBS outperformed Treasuries and contributed to performance. Our multi-family agency MBS slightly detracted relative to comparable maturity Treasuries.

Agency MBS was one of the Fund’s largest sector allocations because of its return potential and income advantage over Treasuries. Over the period, we marginally increased exposure to agency ARMs, and slightly reduced exposure to residential fixed-rate agency MBS. Our exposure to agency debentures remained at historically low levels as they remained more fully valued in our assessment.

32 | Semiannual Report

 

Thank you for your participation in Franklin Limited Maturity U.S.

Government Securities Fund.

The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2014, 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.
The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
1. In determining a security’s maturity for the purposes of calculating the Fund’s average maturity, an estimate of the
average time for its principal to be paid may be used. This can be substantially shorter than its stated final maturity.
2. Securities owned by the Fund, but not shares of the Fund, are issued or guaranteed by the U.S. government, its agen-
cies or instrumentalities, including government-sponsored entities, as to timely payment of principal and interest.
3. Although U.S. government-sponsored entities may be chartered or sponsored by acts of Congress, their securities are
neither insured nor guaranteed by the U.S. government. Please refer to the Fund’s prospectus for a detailed discussion
regarding various levels of credit support. The Fund’s yield and share price are not guaranteed and will vary with market
conditions.
4. Source: © 2014 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or
timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of
this information.
5. Source: Barclays Global Family of Indices. © 2014 Barclays Capital Inc. Used with permission.

Semiannual Report | 33

 

Performance Summary as of 4/30/14

Franklin Limited Maturity U.S. Government Securities Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does 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.

 

34 | Semiannual Report

 

Performance Summary (continued)

Performance as of 4/30/14¹

Cumulative total return excludes sales charges. Average annual total returns includes maximum sales charges.
Class A: 2.25% maximum initial sales charge; Class R6/Advisor Class: no sales charges.

 

 

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.

Semiannual Report | 35

 

Performance Summary (continued)

All investments involve risks, including possible loss of principal. Interest rate movements, unscheduled mortgage prepayments and other risk factors will affect the Fund’s share price and yield. Bond prices, and thus a fund’s share price, generally move in the opposite direction of interest rates. Therefore, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

 

1. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current
fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; 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. Six-month return has not
been annualized.
4. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
5. Figures are as stated in the Fund’s current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund
operating expenses to become higher than the figures shown.
6. Performance shown is not annualized.
7. Distribution rate is based on an annualization of the respective class’s April dividend and the maximum offering price (NAV for Classes R6 and
Advisor) per share on 4/30/14.
8. The 30-day standardized yield for the 30 days ended 4/30/14 reflects an estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution
rate (which reflects the Fund’s past dividends paid to shareholders) or the income reported in the Fund’s financial statements.

36 | Semiannual Report

 

Your Fund’s Expenses

Franklin Limited Maturity U.S. Government Securities Fund

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases; and
• Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

Semiannual Report | 37

 

Your Fund’s Expenses (continued)

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

 

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 0.91%; R6: 0.54%; and Advisor: 0.81%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.

38 | Semiannual Report

 

Franklin Real Return Fund

Your Fund’s Goal and Main Investments: Franklin Real Return Fund seeks to achieve total return that exceeds the rate of inflation over an economic cycle. The Fund will generally invest a substantial portion of its assets in inflation-protected securities. Managers also have the flexibility to invest in other sectors of the market to increase real return (total return less inflation) potential and offer greater diversification.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown Please visit franklintempleton.com or call (800) 342-5236 for most recent month-end performance.

We are pleased to bring you Franklin Real Return Fund’s semiannual report for the period ended April 30, 2014.

Performance Overview

For the six months under review, Franklin Real Return Fund — Class A delivered a +1.64% cumulative total return. In comparison, the Barclays U.S. TIPS Index, which tracks the universe of inflation-protected notes issued by the U.S. Treasury that have at least one year to final maturity, posted a +0.70% total return.^{1, 2} Also for comparison, the Consumer Price Index (CPI)

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 88.

Semiannual Report | 39

 

 

*All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative
of future trends.
**The Fund paid no dividends due to negative inflation adjustments for TIPS, which are the Fund’s primary investments.

for Urban Consumers (All Items) NSA (non-seasonally adjusted), a measure of the average change in prices of all goods and services purchased for consumption by urban householders, rose 1.51% for the same period.³ You can find more of the Fund’s performance data in the Performance Summary beginning on page 43.

Investment Strategy

We seek to allocate assets among investments to achieve the highest level of real return (total return less the rate of inflation) consistent with an acceptable level of risk. We will allocate the Fund’s assets among securities in various market sectors based on our assessment of changing economic, global market, industry and issuer conditions. When making our investment decisions, we use a “top-down” analysis of macroeconomic trends combined with a “bottom-up” fundamental analysis of market sectors, industries and issuers to try to take advantage of varying sector reactions to economic events. We will evaluate such criteria as country risk, business cycles, yield curves, and values between and within markets.

40 | Semiannual Report

 

Manager’s Discussion

During the reporting period, economic indicators broadly supported the U.S. economy’s modest recovery. Much of the U.S. economic data released during the first quarter of 2014 was softer than many observers predicted and likely reflected the transitory effects of severe winter weather across much of the nation. U.S. economic data released near period-end, however, reflected a mild rebound that occurred after the sustained period of cold weather ended. However, despite the soft patch, employment data generally indicated the labor market continued to improve. Consumers’ financial situations in the fourth quarter of 2013 also continued to show meaningful improvement, which we thought could support consumption trends. Retail sales in March exceeded expectations, which suggested to us that consumer activity could recover from the weakness early in 2014. Although housing data were mixed, the housing market showed signs of recovery during the period after the effects of the severe winter and 2013’s higher mortgage rates subsided. Although consumer price inflation recently began to rise, it remained below the U.S. Federal Reserve Board’s (Fed’s) 2.0% target.

In a sign of more confidence in the economic outlook, the Fed revised its quantitative easing policy by reducing its monthly asset purchases starting in January. The reduction was split evenly between mortgage-backed securities (MBS) and Treasuries. The Fed also reiterated that it was not following a “preset course” and emphasized that future decisions would continue to be “contingent” on new economic data.

We invested the Fund’s assets in the allowable sectors during the period under review. At period-end, just under half of total net assets were invested in Treasury Inflation Protected Securities (TIPS). For diversification, we also allocated the Fund’s assets to short-term non-U.S. dollar securities, natural resources, real estate investment trusts (REITs), high yield bonds and senior secured floating rate loans. We employed a non-U.S. dollar strategy to help hedge against U.S. dollar weakness versus certain currencies and concentrated our TIPS holdings in shorter maturities.

Our diversified mix of inflation-sensitive assets performed relatively well over the period. In particular, our exposures to natural resources, REITs, high yield corporate bonds, TIPS and senior secured floating rate loans contributed to performance relative to the benchmark Barclays U.S. TIPS Index. In contrast, the Fund’s non-U.S. dollar holdings were detractors.

Semiannual Report | 41

 

Thank you for your continued participation in Franklin Real Return Fund.

We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of April 30, 2014, 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.

The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
1. Source: © 2014 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or
timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of
this information.
2. Source: Barclays Global Family of Indices. © 2014 Barclays Capital Inc. Used with permission.
3. Source: Bureau of Labor Statistics.

42 | Semiannual Report

 

Performance Summary as of 4/30/14

Franklin Real Return Fund

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does 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.

 

 

Semiannual Report | 43

 

Performance Summary (continued)

Performance as of 4/30/14¹

Cumulative total return excludes sales charges. Average annual total returns include maximum sales charges. Class A: 4.25% maximum initial sales
charge; Class C: 1% contingent deferred sales charge in first year only; Class R6/Advisor Class: no sales charges.

 

 

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.

44 | Semiannual Report