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 811-08394
----------
TEMPLETON DRAGON FUND, INC.
----------------------------------------
(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
-------------------------------------------------------------------
(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: (954) 527-7500
--------------
Date of fiscal year end: 12/31
-----
Date of reporting period: 06/30/09
---------
ITEM 1. REPORTS TO STOCKHOLDERS.
JUNE 30, 2009
SEMIANNUAL REPORT
(GRAPHIC)
INTERNATIONAL
TEMPLETON DRAGON FUND, INC.
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
Franklin - TEMPLETON - Mutual Series
Contents
SEMIANNUAL REPORT
Templeton Dragon Fund, Inc. .............................................. 1
Performance Summary ...................................................... 5
Important Notice to Shareholders ......................................... 6
Financial Highlights and Statement of Investments ........................ 7
Financial Statements ..................................................... 12
Notes to Financial Statements ............................................ 15
Annual Meeting of Shareholders ........................................... 22
Dividend Reinvestment and Cash Purchase Plan ............................. 23
Shareholder Information .................................................. 26
Semiannual Report
Templeton Dragon Fund, Inc.
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Dragon Fund seeks long-term
capital appreciation by investing at least 45% of its total assets in equity
securities of "China companies," as defined in the Fund's prospectus.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 6/30/09
(BAR CHART)
China 58.5%
Hong Kong 29.1%
Taiwan 9.9%
Cambodia 0.3%
U.S. 0.2%
Singapore 0.1%
Short-Term Investments & Other Net Assets 1.9%
Dear Shareholder:
We are pleased to bring you Templeton Dragon Fund's semiannual report for the
period ended June 30, 2009.
PERFORMANCE OVERVIEW
Templeton Dragon Fund delivered cumulative total returns of +35.34% in market
price terms and +36.08% in net asset value terms for the six months under
review. You can find the Fund's long-term performance data in the Performance
Summary on page 5.
ECONOMIC AND MARKET OVERVIEW
During the six months under review, China continued to be one of the world's
fastest growing major economies and was forecasted to grow about 8% in 2009.(1)
The Chinese economy grew 6.1% year-over-year in the first quarter of 2009,
compared to 6.8% in the last quarter of 2008.(2) Slower export and manufacturing
growth slowed economic expansion, yet fixed assets investment
(1.) Source: International Monetary Fund.
(2.) Source: National Bureau of Statistics, China.
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 8.
Semiannual Report | 1
increased 28% year-over-year as government stimulus efforts began to show
results.(2) A rebound in industrial production and retail sales growth in May
further confirmed improvement in the economy, and consumer prices fell 1.4% in
May due to lower transportation, food and housing costs.(2) In an effort to
improve global trade and economic relations, China signed a number of agreements
with the European Union, Russia, Brazil and Taiwan during the reporting period.
After a dismal 2008, equity markets in the greater China region recovered to
some degree in the first half of 2009 as renewed investor confidence, coupled
with a return of risk appetite and bargain hunters, drove strong fund inflows
into the asset class. Fiscal measures and easing monetary policies undertaken by
the region's governments and central banks also began to show signs of
rejuvenating economic growth. Significant foreign exchange reserves put China in
a much stronger position to weather external shocks. As a result, the Morgan
Stanley Capital International (MSCI) Golden Dragon Index delivered a +36.35%
total return in U.S. dollar terms for the first six months of the year,
recovering much of 2008's decline.(3)
INVESTMENT STRATEGY
Our investment strategy employs a fundamental, value-oriented, long-term
approach. In selecting companies for investment, we will consider overall growth
prospects, competitive positions in export markets, technologies, research and
development, productivity, labor costs, raw material costs and sources.
Additional considerations include profit margins, returns on investment, capital
resources, government regulation, management and other factors in comparison to
other companies around the world that we believe are comparable.
Our approach to selecting investments emphasizes fundamental company-by-company
analysis (rather than broader analyses of specific industries or sectors of the
economy) to construct an "action list" from which we make our buy decisions.
Although we will consider historical value measures, the primary factor in
selecting securities for investment by the Fund will be the company's current
price relative to its long-term earnings potential.
(3.) Source: (C) 2009 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. Past perfomance is no guarantee of future results. The
MSCI Golden Dragon Index is an aggregate of the MSCI Hong Kong Index, the
MSCI China Free Index and the MSCI Taiwan@65% Index. The MSCI Taiwan Index
has an inclusion weight at 65% of its market capitalization in the MSCI
index series.
2 | Semiannual Report
MANAGER'S DISCUSSION
During the six months under review, among the most significant contributors to
the Fund's absolute performance were Dairy Farm International Holdings, Sinopec
(China Petroleum and Chemical) and Dongfeng Motor. Dairy Farm operates
supermarkets, hypermarkets (department store and supermarket) as well as
convenience, home furnishing, and health and beauty stores in Asia, and it
benefited from the region's growing consumer demand for basic necessities and
discretionary items. The Chinese government's fuel price increases served the
country's largest integrated energy company Sinopec well, and with China's
economy showing some signs of recovery, rising fuel demand also improved
Sinopec's prospects. Dongfeng Motor is the country's third-largest automaker in
partnership with foreign automakers Honda Motor, Nissan Motor and PSA
Peugeot-Citroen. Lower raw material costs earlier this year and government
stimulus measures in boosting car sales supported Dongfeng Motor and the
automobile market, which the government encouraged to expand both organically
and through acquisitions.
On the other hand, some of the largest detractors from Fund performance included
China Mobile, the country's market leader in wireless telecommunication
services, Hopewell Holdings, a real estate and infrastructure development
company, and Norstar Founders Group, one of the world's largest auto parts
manufacturers and exporters. All three stocks underperformed their regional
peers during the reporting period. Hopewell's share price ended the period
virtually unchanged, while unexpected losses on foreign exchange trading hurt
Norstar's. China Mobile's stock ended the six months with a minor gain, as
investors switched from defensive holdings to stocks with higher correlation to
the broader market in a rising market. Over the longer term, however, we
believed that the Fund's investments were well positioned to benefit from the
region's recovery.
During the reporting period, we increased the Fund's investments in China and
Hong Kong due to what we considered attractive valuations. By industry, we made
purchases in Internet software and services, packaged foods and meats, steel,
and coal and consumable fuels companies, as we positioned the portfolio to
benefit from growing Chinese consumer demand and higher commodity prices. Key
investments included top Internet portal Sohu.com, leading pork processor China
Yurun Food Group, and the country's largest coal producer China Shenhua Energy.
TOP 10 HOLDINGS
6/30/09
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
------------------------ ----------
Dairy Farm International Holdings Ltd. 20.4%
FOOD & STAPLES RETAILING, HONG KONG
China Mobile Ltd. 8.0%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
Sinopec (China Petroleum and
Chemical Corp.), H 7.7%
OIL, GAS & CONSUMABLE FUELS, CHINA
PetroChina Co. Ltd., H 6.0%
OIL, GAS & CONSUMABLE FUELS, CHINA
CNOOC Ltd. 4.6%
OIL, GAS & CONSUMABLE FUELS, CHINA
China Construction Bank Corp., H 3.5%
COMMERCIAL BANKS, CHINA
Shanghai Industrial Holdings Ltd. 2.8%
INDUSTRIAL CONGLOMERATES, CHINA
Cheung Kong Infrastructure Holdings Ltd. 2.8%
ELECTRIC UTILITIES, HONG KONG
China Shenhua Energy Co. Ltd., H 2.8%
OIL, GAS & CONSUMABLE FUELS, CHINA
TSMC (Taiwan Semiconductor
Manufacturing Co. Ltd.) 2.8%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, TAIWAN
Semiannual Report | 3
On the other hand, we made select sales in Taiwanese and Hong Kong-listed China
H shares, which allowed us to focus on what we considered more attractively
valued stocks within our investment universe.(4) We also sold some stocks as
they reached their target prices, and trimmed the number of Dairy Farm shares in
our portfolio to better diversify risk. We also sold all or part of major
Chinese commercial banks China Construction Bank and Bank of China, leading
personal computer manufacturer Acer, and the world's largest tank container
manufacturer CIMC (China International Marine Containers).
Thank you for your continued participation in Templeton Dragon Fund. We look
forward to serving your future investment needs.
Sincerely,
(PHOTO OF MARK MOBIUS)
/s/ Mark Mobius
Mark Mobius
Executive Chairman
Templeton Asset Management Ltd.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF JUNE 30, 2009, 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.
(4.) "China H" denotes shares of China-incorporated, Hong Kong-listed companies
with most businesses in China. China H shares are traded on the Hong Kong
Stock Exchange.
4 | Semiannual Report
Performance Summary as of 6/30/09
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses. Total
returns do not reflect any taxes that a shareholder would pay on Fund dividends,
capital gain distributions, if any, or any unrealized gains on the sale of Fund
shares.
PRICE INFORMATION
SYMBOL: TDF CHANGE 6/30/09 12/31/08
----------- ------ ------- --------
Net Asset Value (NAV) +$6.78 $25.57 $18.79
Market Price (NYSE) +$6.10 $23.36 $17.26
PERFORMANCE
6-MONTH 1-YEAR 5-YEAR 10-YEAR
------- ------ -------- --------
Cumulative Total Return(1)
Based on change in NAV(2) +36.08% -4.46% +113.50% +276.48%
Based on change in market price(3) +35.34% +1.37% +128.85% +342.79%
Average Annual Total Return(1)
Based on change in NAV(2) +36.08% -4.46% +16.38% +14.17%
Based on change in market price(3) +35.34% +1.37% +18.01% +16.04%
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.
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE
THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME
FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND
LESSER LIQUIDITY. ALSO, AS A NONDIVERSIFIED INVESTMENT COMPANY INVESTING IN
"CHINA COMPANIES," THE FUND MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS
AND, AS A RESULT, BE SUBJECT TO A GREATER RISK OF LOSS WITH RESPECT TO ITS
PORTFOLIO SECURITIES.
(1.) Total return calculations represent the cumulative and average annual
changes in value of an investment over the periods indicated. Six-month
return has not been annualized.
(2.) Assumes reinvestment of distributions based on net asset value.
(3.) Assumes reinvestment of distributions based on the dividend reinvestment
and cash purchase plan.
Semiannual Report | 5
Important Notice to Shareholders
SHARE REPURCHASE PROGRAM
The Fund's Board previously authorized management to implement an open-market
share repurchase program pursuant to which the Fund may purchase Fund shares,
from time to time, in open-market transactions, at the discretion of management.
This authorization remains in effect.
6 | Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2009 --------------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
---------------- -------- ---------- ---------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 18.79 $ 34.73 $ 26.95 $ 21.80 $ 18.70 $ 16.62
-------- -------- ---------- ---------- -------- --------
Income from investment operations:
Net investment income(a) ........... 0.25 0.55 0.58 0.38 0.59 0.25
Net realized and unrealized gains
(losses) ........................ 6.53 (14.80) 10.44 7.12 3.28 2.39
-------- -------- ---------- ---------- -------- --------
Total from investment operations ...... 6.78 (14.25) 11.02 7.50 3.87 2.64
-------- -------- ---------- ---------- -------- --------
Less distributions from:
Net investment income .............. -- (0.58) (0.33) (0.37) (0.41) (0.16)
Net realized gains ................. -- (1.11) (2.91) (1.98) (0.36) (0.40)
-------- -------- ---------- ---------- -------- --------
Total distributions ................... -- (1.69) (3.24) (2.35) (0.77) (0.56)
-------- -------- ---------- ---------- -------- --------
Net asset value, end of period ........ $ 25.57 $ 18.79 $ 34.73 $ 26.95 $ 21.80 $ 18.70
======== ======== ========== ========== ======== ========
Market value, end of period(b) ........ $ 23.36 $ 17.26 $ 30.94 $ 26.26 $ 19.18 $ 17.47
======== ======== ========== ========== ======== ========
Total return (based on market value
per share)(c) ...................... 35.34% (39.68)% 31.69% 49.56% 14.08% 0.36%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses(e) ........................... 1.49% 1.51% 1.47% 1.49% 1.52% 1.52%
Net investment income ................. 2.47% 2.05% 1.85% 1.61% 2.92% 1.45%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $968,575 $711,753 $1,315,377 $1,017,910 $823,243 $706,138
Portfolio turnover rate ............... 5.27% 7.90% 15.66% 18.83% 8.84% 19.42%
(a) Based on average daily shares outstanding.
(b) Based on the last sale on the New York Stock Exchange.
(c) Total return is not annualized for periods less than one year.
(d) Ratios are annualized for periods less than one year.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 7
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED)
COUNTRY SHARES/UNITS VALUE
------------- ------------ ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 98.1%
AIR FREIGHT & LOGISTICS 0.1%
Sinotrans Ltd., H ......................................... China 4,063,000 $ 922,706
------------
AUTO COMPONENTS 2.1%
Cheng Shin Rubber Industry Co. Ltd. ....................... Taiwan 12,778,099 19,909,880
(a) Norstar Founders Group Ltd. ............................... Hong Kong 13,376,000 --
------------
19,909,880
------------
AUTOMOBILES 3.1%
Chongqing Changan Automobile Co. Ltd., B .................. China 5,435,602 2,510,930
Dongfeng Motor Corp., H ................................... China 24,994,000 21,091,983
Great Wall Motor Co. Ltd., H .............................. China 2,382,538 1,890,684
Jiangling Motors Corp. Ltd., B ............................ China 3,818,520 4,326,069
------------
29,819,666
------------
BEVERAGES 0.3%
Yantai Changyu Pioneer Wine Co. Ltd., B ................... China 529,490 3,269,216
------------
COMMERCIAL BANKS 8.1%
Bank of China Ltd., H ..................................... China 35,777,000 17,034,688
(b) Bank of China Ltd., H, 144A ............................... China 9,420,000 4,485,193
BOC Hong Kong (Holdings) Ltd. ............................. China 1,110,000 1,945,032
China Construction Bank Corp., H .......................... China 44,293,000 34,348,951
China Merchants Bank Co. Ltd., H .......................... China 562,000 1,286,453
Industrial and Commercial Bank of China Ltd., H ........... China 27,510,000 19,168,505
------------
78,268,822
------------
COMMUNICATIONS EQUIPMENT 0.3%
ZTE Corp., H .............................................. China 924,158 3,207,764
------------
COMPUTERS & PERIPHERALS 2.6%
Advantech Co. Ltd. ........................................ Taiwan 1,813,561 2,566,360
Asustek Computer Inc. ..................................... Taiwan 14,656,504 19,000,824
Lite-On IT Corp. .......................................... Taiwan 6,592,598 3,862,066
------------
25,429,250
------------
DISTRIBUTORS 1.8%
China Resources Enterprise Ltd. ........................... Hong Kong 5,818,000 11,666,179
Dah Chong Hong Holdings Ltd. .............................. Hong Kong 19,753,520 5,531,057
(b) Dah Chong Hong Holdings Ltd., 144A ........................ Hong Kong 550,000 154,002
------------
17,351,238
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 1.4%
China Telecom Corp. Ltd., H ............................... China 14,920,000 7,431,218
China Unicom (Hong Kong) Ltd. ............................. China 4,430,752 5,865,820
------------
13,297,038
------------
ELECTRIC UTILITIES 2.8%
Cheung Kong Infrastructure Holdings Ltd. .................. Hong Kong 7,814,000 27,424,973
------------
ELECTRICAL EQUIPMENT 0.2%
Dongfang Electric Co. Ltd., H ............................. China 564,000 2,015,871
------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENT 0.2%
(c) China Security & Surveillance Technology Inc. ............. United States 202,800 1,529,112
------------
8 | Semiannual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED) (CONTINUED)
COUNTRY SHARES/UNITS VALUE
------------- ------------ ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ENERGY EQUIPMENT & SERVICES 0.1%
Honghua Group Ltd. ........................................ China 5,083,000 $ 1,154,348
------------
FOOD & STAPLES RETAILING 20.5%
Beijing Jingkelong Co. Ltd., H ............................ China 2,947,447 1,521,283
Dairy Farm International Holdings Ltd. .................... Hong Kong 30,511,878 197,106,732
------------
198,628,015
------------
FOOD PRODUCTS 2.0%
China Foods Ltd. .......................................... China 17,406,000 10,466,195
China Yurun Food Group Ltd. ............................... China 1,500,000 2,264,545
(d) China Yurun Food Group Ltd., Reg S ........................ China 514,000 775,984
People's Food Holdings Ltd. ............................... China 3,574,000 1,393,877
Uni-President China Holdings Ltd. ......................... Taiwan 2,340,000 1,286,262
Uni-President Enterprises Corp. ........................... Taiwan 1,290,692 1,327,614
Xiwang Sugar Holdings Co. Ltd. ............................ Hong Kong 9,154,000 1,771,765
------------
19,286,242
------------
HOTELS, RESTAURANTS & LEISURE 0.3%
NagaCorp Ltd. ............................................. Cambodia 18,208,875 2,420,049
------------
HOUSEHOLD PRODUCTS 0.0%(e)
(b, c, f) Bawang International, 144A ................................ China 1,074,000 329,826
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.8%
Datang International Power Generation Co. Ltd., H ......... China 34,592,000 21,067,916
Guangdong Electric Power Development Co. Ltd., B .......... China 10,599,160 5,087,663
Huaneng Power International Inc., H ....................... China 1,454,000 1,020,627
------------
27,176,206
------------
INDUSTRIAL CONGLOMERATES 2.8%
Shanghai Industrial Holdings Ltd. ......................... China 6,850,000 27,577,130
------------
INSURANCE 1.6%
China Life Insurance Co. Ltd., H .......................... China 4,134,000 15,202,648
------------
INTERNET SOFTWARE & SERVICES 0.6%
(c) Sohu.com Inc. ............................................. China 91,800 5,767,794
------------
IT SERVICES 0.3%
Travelsky Technology Ltd., H .............................. China 5,629,706 3,123,619
------------
LEISURE EQUIPMENT & PRODUCTS 0.2%
Yorkey Optical International Cayman Ltd. .................. China 11,491,000 2,060,993
------------
MACHINERY 1.6%
China International Marine Containers (Group) Co.
Ltd., B ................................................ China 7,850,206 7,485,648
Lonking Holdings Ltd. ..................................... China 6,432,000 3,120,598
Shin Zu Shing Co. Ltd. .................................... Taiwan 985,637 4,679,226
------------
15,285,472
------------
MARINE 0.3%
China Shipping Development Co. Ltd., H .................... China 1,198,000 1,545,827
Sinotrans Shipping Ltd. ................................... Hong Kong 3,090,500 1,347,874
------------
2,893,701
------------
Semiannual Report | 9
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED) (CONTINUED)
COUNTRY SHARES/UNITS VALUE
------------- ------------ ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA 0.1%
Next Media Ltd. ........................................... Hong Kong 5,588,000 $ 757,094
------------
METALS & MINING 0.4%
Angang Steel Co. Ltd., H .................................. China 1,880,000 3,119,627
China Steel Corp. ......................................... Taiwan 1,292,000 1,108,777
------------
4,228,404
------------
OIL, GAS & CONSUMABLE FUELS 22.7%
China Coal Energy Co., H .................................. China 1,261,000 1,493,694
China Petroleum and Chemical Corp., H ..................... China 97,904,000 74,660,659
China Shenhua Energy Co. Ltd., H .......................... China 7,424,000 27,349,411
CNOOC Ltd. ................................................ China 35,637,000 44,190,450
PetroChina Co. Ltd., H .................................... China 52,788,000 58,578,408
Yanzhou Coal Mining Co. Ltd., H ........................... China 9,996,000 13,749,514
------------
220,022,136
------------
PHARMACEUTICALS 0.1%
Tong Ren Tang Technologies Co. Ltd., H .................... China 713,000 1,012,013
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 4.2%
Agile Property Holdings Ltd. .............................. China 536,000 770,467
Cheung Kong (Holdings) Ltd. ............................... Hong Kong 933,000 10,726,629
Hopewell Holdings Ltd. .................................... Hong Kong 7,088,000 22,224,596
Soho China Ltd. ........................................... China 11,126,500 6,891,341
(b) Soho China Ltd., 144A ..................................... China 764,000 473,193
------------
41,086,226
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.0%
MediaTek Inc. ............................................. Taiwan 383,800 4,578,503
Novatek Microelectronics Corp. Ltd. ....................... Taiwan 2,875,766 6,861,231
Taiwan Semiconductor Manufacturing Co. Ltd. ............... Taiwan 16,295,661 27,126,374
------------
38,566,108
------------
SOFTWARE 0.7%
Kingdee International Software Group Co. Ltd., fgn. ....... Hong Kong 12,774,000 2,208,694
(c) Shanda Interactive Entertainment Ltd., ADR ................ China 80,200 4,193,658
------------
6,402,352
------------
SPECIALTY RETAIL 0.1%
(c, f) I.T Ltd. .................................................. Hong Kong 7,719,993 737,144
------------
TEXTILES, APPAREL & LUXURY GOODS 0.4%
Anta Sports Products Ltd. ................................. China 2,198,000 2,748,244
Weiqiao Textile Co. Ltd., H ............................... China 1,556,000 805,115
------------
3,553,359
------------
TRANSPORTATION INFRASTRUCTURE 0.9%
Cosco Pacific Ltd. ........................................ China 6,710,000 7,558,588
Hopewell Highway Infrastructure Ltd. ...................... Hong Kong 708,800 396,933
Rickmers Maritime (Trust Units) ........................... Singapore 2,904,000 1,052,392
------------
9,007,913
------------
10 | Semiannual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2009 (UNAUDITED) (CONTINUED)
COUNTRY SHARES/UNITS VALUE
------------- ------------ ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES 8.4%
China Mobile Ltd. ......................................... China 7,731,500 $ 77,415,760
Taiwan Mobile Co. Ltd. .................................... Taiwan 2,074,831 3,535,926
------------
80,951,686
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $483,358,267) .................................... 949,676,014
------------
SHORT TERM INVESTMENTS (COST $15,591,382) 1.6%
MONEY MARKET FUNDS 1.6%
(g) Institutional Fiduciary Trust Money Market
Portfolio, 0.00% ....................................... United States 15,591,382 15,591,382
------------
TOTAL INVESTMENTS (COST $498,949,649) 99.7% ............... 965,267,396
OTHER ASSETS, LESS LIABILITIES 0.3% ....................... 3,307,368
------------
NET ASSETS 100.0% ......................................... $968,574,764
============
See Abbreviations on page 21.
(a) Security has been deemed illiquid because it may not be able to be sold
within seven days.
(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under the
Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At June 30, 2009, the
aggregate value of these securities was $5,442,214, representing 0.56% of
net assets.
(c) Non-income producing.
(d) Security was purchased pursuant to Regulation S under the Securities Act of
1933, which exempts from registration securities offered and sold outside
of the United States. Such a security cannot be sold in the United States
without either an effective registration statement filed pursuant to the
Securities Act of 1933, or pursuant to an exemption from registration. This
security has been deemed liquid under guidelines approved by the Fund's
Board of Trustees. At June 30, 2009, the value of this security was
$775,984, representing 0.08% of net assets.
(e) Rounds to less than 0.1% of net assets.
(f) A portion or all of the security purchased on a delayed delivery basis. See
Note 1(c).
(g) See Note 7 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 11
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2009 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............. $483,358,267
Cost - Sweep Money Fund (Note 7) ......... 15,591,382
------------
Total cost of investments ................ $498,949,649
============
Value - Unaffiliated issuers ............. $949,676,014
Value - Sweep Money Fund (Note 7) ........ 15,591,382
------------
Total value of investments ............... 965,267,396
Cash ........................................ 2,917,990
Foreign currency, at value (cost $662) ...... 664
Receivables:
Investment securities sold ............... 2,104,439
Dividends ................................ 2,721,778
------------
Total assets .......................... 973,012,267
------------
Liabilities:
Payables:
Investment securities purchased .......... 3,095,768
Affiliates ............................... 1,092,565
Accrued expenses and other liabilities ...... 249,170
------------
Total liabilities ..................... 4,437,503
------------
Net assets, at value ............... $968,574,764
============
Net assets consist of:
Paid-in capital ............................. $458,954,780
Undistributed net investment income ......... 30,202,439
Net unrealized appreciation (depreciation) .. 466,316,095
Accumulated net realized gain (loss) ........ 13,101,450
============
Net assets, at value ............... $968,574,764
============
Shares outstanding .......................... 37,873,327
============
Net asset value per share ................... $ 25.57
============
The accompanying notes are an integral part of these financial statements.
12 | Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended June 30, 2009 (unaudited)
Investment income:
Dividends: (net of foreign taxes withheld of $714,173)
Unaffiliated issuers ........................................................... $ 15,339,379
Sweep Money Fund (Note 7) ...................................................... 5,670
-------------
Total investment income ..................................................... 15,345,049
-------------
Expenses:
Management fees (Note 3a) ......................................................... 4,832,751
Administrative fees (Note 3b) ..................................................... 581,475
Transfer agent fees ............................................................... 66,342
Custodian fees (Note 4) ........................................................... 135,086
Reports to shareholders ........................................................... 29,858
Registration and filing fees ...................................................... 16,707
Professional fees ................................................................. 65,454
Directors' fees and expenses ...................................................... 36,268
Other ............................................................................. 18,925
-------------
Total expenses .............................................................. 5,782,866
Expense reductions (Note 4) ................................................. (39)
-------------
Net expenses ............................................................. 5,782,827
-------------
Net investment income ................................................. 9,562,222
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................................................... 335,184
Foreign currency transactions .................................................. 26,979
-------------
Net realized gain (loss) .............................................. 362,163
-------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................................... 246,898,598
Translation of other assets and liabilities denominated in foreign currencies .. (1,652)
-------------
Net change in unrealized appreciation (depreciation) .................. 246,896,946
-------------
Net realized and unrealized gain (loss) .............................................. 247,259,109
-------------
Net increase (decrease) in net assets resulting from operations ...................... $ 256,821,331
=============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 13
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2009 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2008
---------------- -----------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................... $ 9,562,222 $ 20,796,224
Net realized gain (loss) from investments and foreign currency
transactions .......................................................... 362,163 12,792,710
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign
currencies ............................................................ 246,896,946 (573,237,100)
------------ --------------
Net increase (decrease) in net assets resulting from operations ....... 256,821,331 (539,648,166)
------------ --------------
Distributions to shareholders from:
Net investment income .................................................... -- (21,913,507)
Net realized gains ....................................................... -- (42,062,117)
------------ --------------
Total distributions to shareholders ......................................... -- (63,975,624)
------------ --------------
Net increase (decrease) in net assets ................................. 256,821,331 (603,623,790)
------------ --------------
Net assets:
Beginning of period ......................................................... 711,753,433 1,315,377,223
------------ --------------
End of period ............................................................... $968,574,764 $ 711,753,433
============ ==============
Undistributed net investment income included in net assets:
End of period ............................................................... $ 30,202,439 $ 20,640,217
============ ==============
The accompanying notes are an integral part of these financial statements.
14 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (Fund) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as a closed-end investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Equity and other securities listed on a securities exchange or on the NASDAQ
National Market System are valued at the last quoted sale price or the official
closing price of the day, respectively. Over-the-counter securities and listed
securities for which there is no reported sale are valued within the range of
the most recent quoted bid and ask prices. Securities that trade in multiple
markets or on multiple exchanges are valued according to the broadest and most
representative market. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities. Investments
in open-end mutual funds are valued at the closing net asset value.
Foreign equity securities are valued as of the close of trading on the foreign
stock exchange on which the security is primarily traded, or the NYSE, whichever
is earlier. If no sale is reported at that time, the foreign equity security
will be valued within the range of the most recent quoted bid and ask prices.
The value is then converted into its U.S. dollar equivalent at the foreign
exchange rate in effect at the close of the NYSE on the day that the value of
the security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, matrix pricing, discounts from market prices of similar securities,
or discounts applied due to the nature and duration of restrictions on the
disposition of the securities. Due to the inherent uncertainty of valuations of
such securities, the fair values may differ significantly from the values that
would have been used had a ready market for such investments existed.
Occasionally, events occur between the time at which trading in a security is
completed and the close of the NYSE that might call into question the
availability (including the reliability) of the value of a portfolio security
held by the Fund. The investment manager monitors price movements following the
close of trading in foreign stock markets through a series of country specific
market proxies (such as baskets of American Depository Receipts, futures
contracts and exchange traded funds). These price movements are measured against
established trigger thresholds for each specific market proxy to assist in
determining if an event has occurred. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. All security valuation procedures are approved by
the Fund's Board of Directors.
Semiannual Report | 15
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
D. FOREIGN CURRENCY CONTRACTS
The Fund enters into foreign exchange contracts in order to manage foreign
exchange rate risk between the trade date and settlement date of securities
transactions. A foreign exchange contract is an agreement between the Fund and a
counterparty to buy or sell a foreign currency for a specific exchange rate on a
future date.
E. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
16 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. INCOME TAXES (CONTINUED)
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of June 30, 2009, and has determined
that no provision for income tax is required in the Fund's financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend income received. Foreign taxes, if any, are recorded based on the tax
regulations and rates that exist in the foreign markets in which the Fund
invests.
F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Estimated expenses are accrued daily. Dividend income is recorded on the
ex-dividend date except that certain dividends from foreign securities are
recognized as soon as the Fund is notified of the ex-dividend date.
Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States of
America. These differences may be permanent or temporary. Permanent differences
are reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and Directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
Semiannual Report | 17
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK
At June 30, 2009, there were 100 million shares authorized ($0.01 par value).
During the period ended June 30, 2006 and the year ended December 31, 2008 there
were no shares issued; all reinvested distributions were satisfied with
previously issued shares purchased in the open market.
The Fund's Board of Directors previously authorized an open-market share
repurchase program pursuant to which the Fund may purchase, from time to time,
Fund shares in open-market transactions, at the discretion of management. This
authorization remains in effect. During the period ended June 30, 2009 and year
ended December 31, 2008, there were no shares repurchased.
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
---------- ----------------------
Templeton Asset Management Ltd. (TAML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
The Fund pays an investment management fee to TAML based on the average weekly
net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS
------------------- ----------------------------------------------------
1.250% Up to and including $1 billion
1.200% Over $1 billion, up to and including $5 billion
1.150% Over $5 billion, up to and including $10 billion
1.100% Over $10 billion, up to and including $15 billion
1.050% Over $15 billion, up to and including $20 billion
1.000% In excess of $20 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.15% per year of the
average weekly net assets, of which 0.10% is paid to Nomura Asset Management
U.S.A. Inc., for sub-administrative services. On May 19, 2009, the Fund's Board
of Directors approved the termination of its sub-administrative agreement with
Nomura and all administration fees will be retained by FT Services effective on
August 1, 2009.
18 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended June 30, 2009, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses and realized currency losses occurring
subsequent to October 31, may be deferred and treated as occurring on the first
day of the following fiscal year. At December 31, 2008, the Fund deferred
realized capital losses and realized currency losses of $1,119,925 and $11,962,
respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ............................... $501,970,140
============
Unrealized appreciation ........................... $506,304,710
Unrealized depreciation ........................... (43,007,454)
------------
Net unrealized appreciation (depreciation) ........ $463,297,256
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and corporate
actions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended June 30, 2009, aggregated $40,939,479 and $41,624,705,
respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio
(Sweep Money Fund), an open-end investment company managed by Franklin Advisers,
Inc. (an affiliate of the investment manager). Management fees paid by the Fund
are reduced on assets invested in the Sweep Money Fund, in an amount not to
exceed the management and administrative fees paid by the Sweep Money Fund.
Semiannual Report | 19
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
9. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On May 29, 2002, the Board of Directors approved an Agreement and Plan of
Reorganization (Agreement) whereby the Fund would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. The
completion of the reorganization is pending guidance from the National Tax
Agency in Japan relating to the tax treatment of the Plan under Japanese laws
with respect to the Fund's Japanese shareholders. If and when the reorganization
is completed, the Delaware statutory trust will be the successor to the Fund.
10. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value
Measurement" (SFAS 157) establishes a fair value hierarchy that distinguishes
between market data obtained from independent sources (observable inputs) and
the Fund's own market assumptions (unobservable inputs). These inputs are used
in determining the value of the Fund's investments and are summarized in the
following fair value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
20 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of June 30, 2009, in valuing
the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------ ------- ------- ------------
ASSETS:
Investments in Securities
Equity Investments:(a)
Auto Components ..................... $ 19,909,880 $-- $--(b) $ 19,909,880
All Other Equity Investments(c) ..... 929,766,134 -- -- 929,766,134
Short Term Investments ................. 15,591,382 -- -- 15,591,382
------------ --- --- ------------
Total Investments in Securities .. $965,267,396 $-- $-- $965,267,396
============ === === ============
(a) Includes common stock as well as other equity investments.
(b) Includes securities determined to have no value at June 30, 2009.
(c) For detailed industry descriptions, see the accompanying Statement of
Investments.
At June 30, 2009, the reconciliation of assets in which significant unobservable
inputs (Level 3) were used in determining fair value, is as follows:
NET CHANGE
IN UNREALIZED
NET CHANGE APPRECIATION
IN (DEPRECIATION)
NET UNREALIZED NET TRANSFER ON ASSETS
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) ENDING HELD AT
BALANCE GAIN (LOSS) (DEPRECIATION) (SALES) OF LEVEL 3 BALANCE PERIOD END
--------- ----------- -------------- --------- ---------- ------- --------------
ASSETS:
Investments in
Securities
Equity Investments:
Auto Components .......... $ -- $-- $(1,259,860) $-- $1,259,860 $-- $(1,259,860)
Automobiles .............. 952,764 -- -- -- (952,764) -- --
-------- --- ----------- --- ---------- --- -----------
Total Investments in
Securities ......... $952,764 $-- $(1,259,860) $-- $ 307,096 $-- $(1,259,860)
======== === =========== === ========== === ===========
11. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 18, 2009 and
determined that no events have occurred that require disclosure.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
Semiannual Report | 21
Templeton Dragon Fund, Inc.
ANNUAL MEETING OF SHAREHOLDERS, MAY 29, 2009
The Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Fort Lauderdale, Florida, on May 29, 2009. The purpose of
the meeting was to elect four Directors of the Fund. At the meeting, the
following persons were elected by the shareholders to serve as Directors of the
Fund: Ann Torre Bates, David W. Niemiec, Frank A. Olson and Robert E. Wade.* No
other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
The election of four Directors:
% OF % OF SHARES % OF % OF SHARES
OUTSTANDING PRESENT OUTSTANDING PRESENT
TERM EXPIRING 2012 FOR SHARES AND VOTING WITHHELD SHARES AND VOTING
------------------ ---------- ----------- ----------- --------- ----------- -----------
Ann Torre Bates......... 26,931,523 71.11% 80.32% 6,599,612 17.43% 19.68%
David W. Niemiec........ 26,970,210 71.21% 80.43% 6,560,925 17.32% 19.57%
Frank A. Olson.......... 26,829,292 70.84% 80.01% 6,701,843 17.70% 19.99%
Robert E. Wade.......... 27,041,501 71.40% 80.65% 6,489,634 17.14% 19.35%
* Charles B. Johnson, Gregory E. Johnson, Harris J. Ashton, Frank J.
Crothers, Edith E. Holiday, Larry D. Thompson and Constantine D.
Tseretopoulos are Directors of the Fund who are currently serving and whose
terms of office continued after the Annual Meeting of Shareholders.
22 | Semiannual Report
Templeton Dragon Fund, Inc.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with
the following features:
If shares of the Fund are held in the shareholder's name, the shareholder will
automatically be a participant in the Plan, unless he elects to withdraw. If
shares are registered in the name of a broker-dealer or other nominee (i.e., in
"street name"), the broker-dealer or nominee will elect to participate in the
Plan on the shareholder's behalf unless the shareholder instructs them
otherwise, or unless the reinvestment service is not provided by the
broker-dealer or nominee.
Participants should contact BNY Mellon Shareowner Services, P.O. Box 358035,
Pittsburgh, PA 15252-8035, to receive the Plan brochure.
To receive dividends or distributions in cash, the shareholder must notify The
Bank of New York Mellon (the "Plan Administrator") at the address above or the
institution in whose name the shares are held. The Plan Administrator must
receive written notice ten business days before the record date for a
distribution.
Whenever the Fund declares dividends in either cash or shares of the Fund, if
the market price is equal to or exceeds net asset value at the valuation date,
the participant will receive the dividends entirely in new shares at a price
equal to the net asset value, but not less than 95% of the then current market
price of the Fund's shares. If the market price is lower than net asset value or
if dividends and/or capital gains distributions are payable only in cash, the
participant will receive shares purchased on the New York Stock Exchange or
otherwise on the open market.
A participant has the option of submitting additional payments to the Plan
Administrator, in any amounts of at least $100, up to a maximum of $5,000 per
month, for the purchase of Fund shares for his or her account. These payments
can be made by check or money order payable to The Bank of New York Mellon and
sent to BNY Mellon Shareowner Services, P.O. Box 382009, Pittsburgh, PA
15250-8009, Attention: Templeton Dragon Fund, Inc. The Plan Administrator will
apply such payments (less a $5.00 service charge and less a pro rata share of
trading fees) to purchases of the Fund's shares on the open market.
Whenever shares are purchased on the New York Stock Exchange or otherwise on the
open market, each participant will pay a pro rata portion of trading fees.
Trading fees will be deducted from amounts to be invested.
The automatic reinvestment of dividends and/or capital gains does not relieve
the participant of any income tax which may be payable on dividends or
distributions.
A participant may withdraw from the Plan without penalty at any time by written
notice to the Plan Administrator and sent to BNY Mellon Shareowner Services,
P.O. Box 358035, Pittsburgh, PA 15252-8035. Upon withdrawal, the participant
will receive, without charge, share certificates issued in the participant's
name for all full shares held by the Plan Administrator; or, if the
Semiannual Report | 23
Templeton Dragon Fund, Inc.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
participant wishes, the Plan Administrator will sell the shares and send the
proceeds to the participant, less a service charge of $15.00 and less trading
fees of $0.12 per share. The Plan Administrator will convert any fractional
shares you hold at the time of your withdrawal to cash at current market price
and send you a check for the net proceeds.
DIRECT DEPOSIT SERVICE FOR REGISTERED SHAREHOLDERS
Cash distributions can now be electronically credited to a checking or savings
account at any financial institution that participates in the Automated Clearing
House ("ACH") system. The Direct Deposit service is provided for registered
shareholders at no charge. To enroll in the service, access your account online
by going to http://vault.bnymellon.com/isd or dial 1-800-416-5585 (toll free)
and follow the instructions. Direct Deposit will begin with the next scheduled
distribution payment date following enrollment in the service.
24 | Semiannual Report
Templeton Dragon Fund, Inc.
TRANSFER AGENT
BNY Mellon Shareowner Services
P.O. Box 358035
Pittsburgh, PA 15252-8035
1-800-416-5585
www.bnymellon.com
DIRECT REGISTRATION
If you are a registered shareholder of the Fund, purchases of shares of the Fund
can be electronically credited to your Fund account at BNY Mellon Shareowner
Services through Direct Registration. This service provides shareholders with a
convenient way to keep track of shares through book entry transactions, to
electronically move book-entry shares between broker-dealers, transfer agents
and DRS eligible issuers, and eliminates the possibility of lost certificates.
For additional information, please contact BNY Mellon Shareowner Services at
1-800-416-5585.
SHAREHOLDER INFORMATION
Shares of Templeton Dragon Fund, Inc. are traded on the New York Stock Exchange
under the symbol TDF. The Fund's shares were also listed and traded in Japan on
the Osaka Securities Exchange Co., Ltd. until July 6, 2009. Information about
the net asset value and the market price is published each Monday in the WALL
STREET JOURNAL, weekly in BARRON'S and each Saturday in THE NEW YORK TIMES and
other newspapers. Daily market prices for the Fund's shares are published in the
New York Stock Exchange Composite Transactions section of newspapers.
For current information about distributions and shareholder accounts, call
1-800-416-5585. Registered shareholders can now access their Fund account
on-line with INVESTOR SERVICE DIRECT(R). For information go to BNY Mellon
Shareowner Services' web site at http://vault.bnymellon.com/isd and follow the
instructions.
The daily closing net asset value as of the previous business day may be
obtained when available by calling Franklin Templeton Fund Information after 7
a.m. Pacific time any business day at 1-800/DIAL BEN(R) (1-800-342-5236). The
Fund's net asset value and dividends are also listed on the NASDAQ Stock Market,
Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS").
Shareholders not receiving copies of the reports to shareholders because their
shares are registered in the name of a broker or a custodian can request that
they be added to the Fund's mailing list by writing Templeton Dragon Fund, Inc.,
100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
Semiannual Report | 25
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 24, 2009, the Board of Directors (Board), including a
majority of non-interested or independent Directors, approved renewal of the
investment management agreement for Templeton Dragon Fund, Inc. (Fund). In
reaching this decision, the Board took into account information furnished
throughout the year at regular Board meetings, as well as information prepared
specifically in connection with the annual renewal review process. Information
furnished and discussed throughout the year included investment performance
reports on the Fund, information on its share price discount to net asset value,
and other related financial information, as well as periodic reports on legal,
compliance, pricing, brokerage commissions and execution and other services
provided by the Investment Manager (Manager) and its affiliates. Information
furnished specifically in connection with the renewal process included a report
prepared by Lipper, Inc. (Lipper), an independent organization, as well as
additional material, including a Fund profitability analysis report prepared by
management. The Lipper report compared the Fund's investment performance and
expenses with those of other funds deemed comparable to the Fund as selected by
Lipper. The Fund profitability analysis report discussed the profitability to
Franklin Templeton Investments from its overall U.S. fund operations, as well as
on an individual fund-by-fund basis. Included with such profitability analysis
report was information on a fund-by-fund basis listing portfolio managers and
other accounts they manage, as well as information on management fees charged by
the Manager and its affiliates including management's explanation of differences
where relevant, and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Fund by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
In considering such materials, the independent Directors received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment management agreement for the Fund, the Board,
including a majority of independent Directors, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment management agreement was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses some primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished it showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy
26 | Semiannual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
of net asset value calculations. Favorable consideration was given to
management's continuous efforts and expenditures in establishing back-up systems
and recovery procedures to function in the event of a natural disaster, it being
noted that such systems and procedures had functioned smoothly during the
Florida hurricanes and blackouts experienced in recent years. Among other
factors taken into account by the Board were the Manager's best execution
trading policies, including a favorable report by an independent portfolio
trading analytical firm. Consideration was also given to the experience of the
Fund's portfolio management team, the number of accounts managed and general
method of compensation. In this latter respect, the Board noted that a primary
factor in management's determination of the level of a portfolio manager's bonus
compensation was the relative investment performance of the funds he or she
managed and that a portion of such bonus was required to be invested in a
predesignated list of funds within such person's fund management area so as to
be aligned with the interests of Fund shareholders. Particular attention was
given to the overall performance and actions taken by the Manager and its
affiliates in response to problems arising out of the market turmoil and
financial crisis experienced during the past year. In this respect, the Board
noted that management's independent credit analysis and diligent risk management
procedures had prevented any structured investment products or other volatile
instruments from being held in the portfolios of any of the money market funds
within the Franklin Templeton complex, including the sweep money fund utilized
by the Fund as part of its cash management. The Board also took into account,
among other things, the strong financial position of the Manager's parent
company and its commitment to the fund business. The Board also noted that
during the past year Franklin Templeton Investments, like many other fund
managers, had announced a hiring freeze and implemented employee reductions, and
the Board discussed with management the nature of such reductions and steps
being taken to minimize any negative impact on the nature and quality of
services being provided the Fund.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper reports furnished for the agreement renewal.
The Lipper report prepared for the Fund showed its investment performance during
2008 and the previous 10 years ended December 31, 2008, in comparison with a
performance universe consisting of the Fund and all non-leveraged closed-end
emerging markets funds as selected by Lipper. Such report considers total return
on a net asset value basis without regard to market discounts or premiums to
accurately reflect investment performance. Consistent with the market declines
that occurred in 2008, the Fund and all other funds within such performance
universe experienced losses during the past year. The Lipper report showed the
Fund's total return for 2008, however, to be in the highest or best performing
quintile in the performance universe, and its total return on an annualized
basis to be in the highest or second-highest quintile in such universe during
each of the previous three-, five- and 10-year periods. The Board noted such
favorable comparative performance.
Semiannual Report | 27
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
COMPARATIVE EXPENSES. Consideration was given to a Lipper report analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of seven other funds selected by Lipper as its appropriate Lipper expense
group. Lipper expense data is based upon historical information taken from each
fund's most recent annual report and, as a result of the severe decline in fund
industry assets during the last quarter of 2008, is based on asset levels that
are higher than the level currently existing for most funds. While recognizing
the limitations inherent in Lipper's methodology and recognizing that current
expense ratios may increase as assets decline, the Board believed that the
independent analysis conducted by Lipper remained an appropriate measure of
comparative expenses. In reviewing comparative costs, Lipper provides
information on the Fund's contractual investment management fee rate in
comparison with the contractual investment management fee rate that would have
been charged by other funds within its Lipper expense group assuming they were
similar in size to the Fund, as well as the actual total expense ratio of the
Fund in comparison with those of such expense group. The Lipper contractual
investment management fee analysis considers administrative fees to be part of
management fees and the results of such expense comparisons showed the Fund's
contractual investment management fee rate to be the highest in its Lipper
expense group, being approximately 15 basis points above the expense group
median, and the Fund's actual total expense rate to be the third highest in such
expense group, being approximately 16 basis points above the expense group
median. The Board found such expenses to be acceptable in light of the Fund's
comparative investment performance and factors relating to the Fund's
operations, such as the quality and experience of its portfolio managers and
research staff and the depth of the Manager's physical presence and coverage in
emerging markets geographic areas.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. Fund
business, as well as its profits in providing management and other services to
the Fund during the 12-month period ended September 30, 2008, being the most
recent fiscal year end for Franklin Resources, Inc., the Manager's parent.
During such period, the assets of the Franklin Templeton U.S. fund business were
significantly higher than currently existing, and to such extent the
profitability analysis does not reflect current fund operations. While taking
this into account in assessing the significance of the Fund profitability
analysis, the Board recognized such analysis was made at a given point in time
and that the decline in assets and effect on profitability would be reflected in
the profitability analysis covering Franklin Resources' 2009 fiscal year period.
In reviewing the analysis, attention was given to the methodology followed in
allocating costs to the Fund, it being recognized that allocation methodologies
are inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the Manager's
own cost accounting, the cost allocation methodology was consistent with that
followed in profitability report presentations made in prior years and that the
Fund's independent registered public accounting firm had been engaged by the
Manager to perform
28 | Semiannual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
certain procedures on a biennial basis, specified and approved by the Manager
and the Fund's Board solely for their purposes and use in reference to the
profitability analysis. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in establishing the
infrastructure necessary for the type of fund operations conducted by the
Manager and its affiliates may not be fully reflected in the expenses allocated
to the Fund in determining its profitability, as well as the fact that the level
of profits, to a certain extent, reflected operational cost savings and
efficiencies initiated by management. In addition, the Board considered a
third-party study comparing the profitability of the Manager's parent on an
overall basis as compared to other publicly held managers broken down to show
profitability from management operations exclusive of distribution expenses, as
well as profitability including distribution expenses. The Board also considered
the extent to which the Manager and its affiliates might derive ancillary
benefits from fund operations, as well as potential benefits resulting from
allocation of fund brokerage and the use of commission dollars to pay for
research. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to the Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether the Manager realizes
economies of scale as the Fund grows larger and the extent to which any such
benefit is shared with the Fund and its shareholders. The Board believed that a
Manager's ability to realize economies of scale and the sharing of such benefit
is a more relevant consideration in the case of an open-end fund whose size
increases as a result of the continuous sale of its shares. A closed-end
investment company such as the Fund does not continuously offer shares and
growth following its initial public offering will primarily result from market
appreciation, which benefits its shareholders. While believing economies of
scale to be less of a factor in the context of a closed-end fund, the Board
believes at some point an increase in size may lead to economies of scale that
should be shared with the Fund and its shareholders and intends to monitor
future growth of the Fund accordingly. The Board noted at the end of 2008 the
Fund's net assets were approximately $712 million and that it had previously
added a breakpoint to the Fund's investment advisory fee at the $1 billion
level.
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager has established Proxy Voting Policies and
Procedures (Policies) that the Fund uses to determine how to vote proxies
relating to portfolio securities. Shareholders may view the Fund's complete
Policies online at franklintempleton.com. Alternatively, shareholders may
request copies of the Policies free of charge by calling the Proxy Group collect
at (954) 527-7678 or by sending a written request to: Franklin Templeton
Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are
also made available online at franklintempleton.com and posted on the U.S.
Securities and Exchange Commission's website at sec.gov and reflect the most
recent 12-month period ended June 30.
Semiannual Report | 29
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling (800)
SEC-0330.
CERTIFICATIONS
The Fund's Chief Executive Officer - Finance and Administration is required by
the New York Stock Exchange's Listing Standards to file annually with the
Exchange a certification that she is not aware of any violation by the Fund of
the Exchange's Corporate Governance Standards applicable to the Fund. The Fund
has filed such certification.
In addition, the Fund's Chief Executive Officer - Finance and Administration and
Chief Financial Officer and Chief Accounting Officer are required by the rules
of the U.S. Securities and Exchange Commission to provide certain certifications
with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's
annual and semiannual reports to shareholders) that are filed semiannually with
the Commission. The Fund has filed such certifications with its Form N-CSR for
the year ended December 31, 2008. Additionally, the Fund expects to file, on or
about August 31, 2009, such certifications with its Form N-CSRS for the six
months ended June 30, 2009.
30 | Semiannual Report
This page intentionally left blank.
This page intentionally left blank.
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) 100 Fountain Parkway
P.O. Box 33030
St. Petersburg, FL 33733-8030
SEMIANNUAL REPORT
TEMPLETON DRAGON FUND, INC.
INVESTMENT MANAGER
Templeton Asset Management Ltd.
TRANSFER AGENT
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Toll free number: (800) 416-5585
Hearing Impaired phone number: (800) 231-5469
Foreign Shareholders phone number: (201) 680-6578
www.bnymellon.com
Investors should be aware that the value of investments made for the Fund may go
down as well as up. Like any investment in securities, the value of the Fund's
portfolio will be subject to the risk of loss from market, currency, economic,
political and other factors. The Fund and its investors are not protected from
such losses by the investment manager. Therefore, investors who cannot accept
this risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
TLTDF S2009 08/09
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is David W. Niemiec and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Members of the Audit Committee are: Frank J. Crothers, David W. Niemiec, Ann
Torre Bates and Constantine D. Tseretopoulos
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The board of directors of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Templeton Asset Management Ltd. in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to RiskMetrics Group
(RiskMetrics), an unaffiliated third party corporate governance research service
that provides in-depth analyses of shareholder meeting agendas, vote
recommendations, recordkeeping and vote disclosure services. In addition, the
manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated
third party analytical research firm, to receive analyses and vote
recommendations on the shareholder meetings of publicly held U.S. companies.
Although RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from RiskMetrics, Glass Lewis or any other third party to be
determinative of the manager's ultimate decision. The manager votes proxies
solely in the interests of the Fund and its shareholders. As a matter of policy,
the officers, directors/trustees and employees of the Fund, the manager and the
Proxy Group will not be influenced by outside sources whose interests conflict
with the interests of the Fund and its shareholders. Efforts are made to resolve
all conflicts in the interests of the manager's clients. Material conflicts of
interest are identified by the Proxy Group based upon analyses of client, broker
and vendor lists, information periodically gathered from directors and officers,
and information derived from other sources, including public filings. In
situations where a material conflict of interest is identified, the Proxy Group
may defer to the voting recommendation of RiskMetrics, Glass Lewis or those of
another independent third party provider of proxy services; or send the proxy
directly to the Fund with a recommendation regarding the vote for approval. If
the conflict is not resolved by the Fund, the Proxy Group may refer the matter,
along with the recommended course of action by the manager to an
interdepartmental Proxy Review Committee (which may include portfolio managers
and/or research analysts employed by the manager), for evaluation and voting
instructions. The Proxy Review Committee may defer to the voting recommendation
of RiskMetrics, Glass Lewis or those of another independent third party provider
of proxy services; or send the proxy directly to the Fund. Where the Proxy Group
or the Proxy Review Committee refers a matter to the Fund, it may rely upon the
instructions of a representative of the Fund, such as the board or a committee
of the board.
Where a material conflict of interest has been identified, but the items on
which the manager's vote recommendations differ from Glass Lewis, RiskMetrics,
or another independent third party provider of proxy services relate
specifically to (1) shareholder proposals regarding social or environmental
issues or political contributions, (2) "Other Business" without describing the
matters that might be considered, or (3) items the manager wishes to vote in
opposition to the recommendations of an issuer's management, the Proxy Group may
defer to the vote recommendations of the manager rather than sending the proxy
directly to the Fund for approval.
To avoid certain potential conflicts of interest, the manager will employ echo
voting, if possible, in the following instances: (1) when the Fund invests in an
underlying fund in reliance on Sections 12(d)(1) of the 1940 Act, or pursuant to
an SEC exemptive order; (2) when the Fund invests uninvested cash in affiliated
money market funds pursuant to an SEC exemptive order ("cash sweep
arrangement"); or (3) when required pursuant to the Fund's governing documents
or applicable law. Echo voting means that the Investment Manager will vote the
shares in the same proportion as the vote of all of the other holders of the
fund's shares.
The recommendation of management on any issue is a factor which the manager
considers in determining how proxies should be voted, but is not determinative
of the manager's ultimate decision. As a matter of practice, the votes with
respect to most issues are cast in accordance with the position of the company's
management. Each issue, however, is considered on its own merits, and the
manager will not support the position of the company's management in any
situation where it deems that the ratification of management's position would
adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general
proxy voting guidelines, which are summarized below. These guidelines are not an
exhaustive list of all the issues that may arise and the manager cannot
anticipate all future situations. In all cases, each proxy will be considered
based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and
prefers that key committees such as audit, nominating, and compensation
committees be comprised of independent directors. The manager will generally
vote against management efforts to classify a board and will generally support
proposals to declassify the board of directors. The manager may withhold votes
from directors who have attended less than 75% of meetings without a valid
reason. While generally in favor of separating Chairman and CEO positions, the
manager will review this issue as well as proposals to restore or provide for
cumulative voting on a case-by-case basis, taking into consideration factors
such as the company's corporate governance guidelines or provisions and
performance.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high
profile accounting scandals, the manager will closely scrutinize the role and
performance of auditors. On a case-by-case basis, the manager will examine
proposals relating to non-audit relationships and non-audit fees. The manager
will also consider, on a case-by-case basis, proposals to rotate auditors, and
will vote against the ratification of auditors when there is clear and
compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan
should be in alignment with its shareholders' long-term interests. The manager
believes that executive compensation should be directly linked to the
performance of the company. The manager evaluates plans on a case-by-case basis
by considering several factors to determine whether the plan is fair and
reasonable, including the RiskMetrics quantitative model utilized to assess such
plans and/or the Glass Lewis evaluation of the plans. The manager will generally
oppose plans that have the potential to be excessively dilutive, and will almost
always oppose plans that are structured to allow the repricing of underwater
options, or plans that have an automatic share replenishment "evergreen"
feature. The manager will generally support employee stock option plans in which
the purchase price is at least 85% of fair market value, and when potential
dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although the manager will generally oppose "golden parachutes" that are
considered to be excessive. The manager will normally support proposals that
require a percentage of directors' compensation to be in the form of common
stock, as it aligns their interests with those of shareholders. The manager will
review on a case-by-case basis any shareholder proposals to adopt policies on
expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. On
occasion, the manager may vote with management when the research analyst has
concluded that the proposal is not onerous and would not harm the Fund or its
shareholders' interests. The manager generally supports proposals that require
shareholder rights' plans ("poison pills") to be subject to a shareholder vote
and will closely evaluate such plans on a case-by-case basis to determine
whether or not they warrant support. The manager will generally vote against any
proposal to issue stock that has unequal or subordinate voting rights. The
manager generally opposes any supermajority voting requirements as well as the
payment of "greenmail." The manager generally supports "fair price" provisions
and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase and proposals seeking preemptive rights. The manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
The manager will generally vote in favor of the issuance of preferred stock in
cases where the company specifies the voting, dividend, conversion and other
rights of such stock and the terms of the preferred stock issuance are deemed
reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether each will be
beneficial to shareholders. The manager will analyze various economic and
strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring and reincorporation proposals are also subject to a
thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management
discretion with regard to social, environmental and ethical issues, although the
manager may vote in favor of those that are believed to have significant
economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to
proxy voting decisions for international companies. However, the manager must be
more flexible in these instances and must be mindful of the varied market
practices of each region.
The manager will attempt to process every proxy it receives for all domestic and
foreign issuers. However, there may be situations in which the manager cannot
process proxies, for example, where a meeting notice was received too late, or
sell orders preclude the ability to vote. If a security is on loan, the manager
may determine that it is not in the best interests of the Fund to recall the
security for voting purposes. Also, the manager may abstain from voting under
certain circumstances or vote against items such as "Other Business" when the
manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com.
Alternatively, shareholders may request copies of the Policies free of charge by
calling the Proxy Group collect at 1-954/527-7678 or by sending a written
request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite
1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's
proxy voting records are available online at franklintempleton.com and posted on
the SEC website at WWW.SEC.GOV. The proxy voting records are updated each year
by August 31 to reflect the most recent 12-month period ended June 30.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY AND
AFFILIATED PURCHASERS. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's board of directors that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(A) (1) Code of Ethics
(A)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Mark H. Otani, Chief Financial Officer and Chief Accounting Officer
(B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Mark H. Otani, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON DRAGON FUND, INC.
By /s/LAURA F. FERGERSON
-------------------------------
Laura F. Fergerson
Chief Executive Officer -
Finance and Administration
Date August 27, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/LAURA F. FERGERSON
-------------------------------
Laura F. Fergerson
Chief Executive Officer -
Finance and Administration
Date August 27, 2009
By /s/MARK H. OTANI
-------------------------------
Mark H. Otani
Chief Financial Officer and
Chief Accounting Officer
Date August 27, 2009