Franklin Adjustable U.S. Government Securities Fund

This fund or share class has been closed to new investors.

This fund or share class has been closed to new investors.

Fund Description

The fund seeks a high level of current income, while providing lower volatility of principal than a fund that invests in fixed-rate securities. The fund invests predominantly in adjustable-rate mortgage securities (ARMS) that are issued or guaranteed by the U.S. government, its agencies or instrumentalities. The fund’s investments may include securities issued by government-sponsored entities, such as Fannie Mae and Freddie Mac.

Strategy Statement

"The fund seeks a high level of current income, while providing lower volatility of principal than a fund that invests in fixed-rate securities. It invests predominantly in adjustable-rate mortgages. "

Paul Varunok

Management

Paul Varunok

Paul Varunok

  • Joined Franklin Templeton in 2001
  • Managed Fund Since 2003

INVESTMENT PHILOSOPHY, STRATEGY AND APPROACH

Investment Philosophy

  • The fund seeks a high level of current income, while providing lower volatility of principal than a fund that invests in fixed rate securities
  • The fund invests predominantly in adjustable-rate mortgage securities (ARMS), which are issued or guaranteed by the U.S. government, its agencies or instrumentalities1
  • The fund's investment management team focuses on seasoned ARMS that may have been through multiple interest rate cycles and are therefore less sensitive to rate changes
  • The fund does not invest in non-agency mortgages, mortgage derivatives or sub-prime residential mortgage-backed securities
  • Historically a shorter duration MBS strategy, where ARM resets are laddered throughout the portfolio

Investment Process

The Mortgage Investment Process Consists of Three Steps:

Mortgage Sector Allocation

Decision Makers

  • FIPC with input from portfolio managers, sector specialists and quantitative analysts

Analysis

  • Sector factors
    • Level of rates
    • Slope of yield curve
    • Expected volatility
    • Health of the housing market
    • Expected supply
    • Macroeconomic factors

Output

  • Relative sector weighting

Mortgage “Generics” Allocation

  • Mortgage sector team
  • Weigh relative risks/rewards of mortgage markets “generic” securities
  • Models used to evaluate the impact of volatility, spread sensitivity, prepayments and yield curve movements
  • Portfolio of mortgage generics (agency, product type, origination year, coupon)

Security Selection

  • Mortgage sector team
  • Evaluate generics relative to specified pools:
    • GNMA loan program type
    • Weighted average coupon
    • Seasoning
    • Geographic distribution of loans
    • Loan to value
    • SATO (Spread at Origination)
    • Servicer
    • FICO
    • Loan balance
  • Individual securities selected

Mortgage Sector Allocation

Decision Makers

  • FIPC with input from portfolio managers, sector specialists and quantitative analysts

Analysis

  • Sector factors
    • Level of rates
    • Slope of yield curve
    • Expected volatility
    • Health of the housing market
    • Expected supply
    • Macroeconomic factors

Output

  • Relative sector weighting

Mortgage “Generics” Allocation

Decision Makers

  • Mortgage sector team

Analysis

  • Weigh relative risks/rewards of mortgage markets “generic” securities
  • Models used to evaluate the impact of volatility, spread sensitivity, prepayments and yield curve movements

Output

  • Portfolio of mortgage generics (agency, product type, origination year, coupon)

Security Selection

Decision Makers

  • Mortgage sector team

Analysis

  • Evaluate generics relative to specified pools:
    • GNMA loan program type
    • Weighted average coupon
    • Seasoning
    • Geographic distribution of loans
    • Loan to value
    • SATO (Spread at Origination)
    • Servicer
    • FICO
    • Loan balance

Output

  • Individual securities selected

Rating

Overall Morningstar Rating As of 10/31/2019

Rating Category: Short Government

Morningstar
The fund's overall Morningstar Rating measures risk-adjusted returns and is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) rating metrics.

Historical Morningstar Rating [further-information] As of 10/31/2019

Years Ratings Funds
in category
3
2 Stars
96
5
1 Stars
93
10
2 Stars
70

Morningstar Style Box As of09/30/2019

Strategy, Benefits, Results

Strategy

  • We invest predominantly in adjustable-rate mortgage securities (ARMS) that are issued or guaranteed by the U.S. government, its agencies or instrumentalities.i
  • We may invest in securities issued by government-sponsored entities, such as Fannie Mae and Freddie Mac.ii
  • We focus on the shortest part of the U.S. government market as well as seasoned ARMS that have been through multiple interest rate cycles and are therefore less sensitive to interest rate changes.
  • We do not invest in non-agency mortgages, mortgage derivatives or sub-prime residential mortgage-backed securities.

Benefits

  • Relative Share Price Stability. Our history reflects relative share price stability over changing interest rate climates.
  • Solid Performance. We maintain a record of solid risk-adjusted returns in a variety of interest rate environments.

Selling The Fund

  1. Cite the fund's long-term track record.
  2. Highlight the fund's historically low share price volatility in a variety of interest rate climates.
  3. Call attention to the fund's conservative approach and focus on high current income.