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 811-05569
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FRANKLIN UNIVERSAL TRUST
----------------------------
(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (650) 312-2000
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Date of fiscal year end: 8/31
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Date of reporting period: 2/28/10
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ITEM 1. REPORTS TO STOCKHOLDERS.
FEBRUARY 28, 2010
SEMIANNUAL REPORT
(GRAPHIC)
FIXED INCOME
FRANKLIN UNIVERSAL TRUST
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager structure combines the specialized
expertise of three world-class investment management groups--Franklin,
Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that
underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, with
offices in over 25 countries, Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among what it believes
are undervalued stocks, as well as arbitrage situations and distressed
securities.
TRUE DIVERSIFICATION Because our management groups work independently and adhere to different
investment approaches, Franklin, Templeton and Mutual Series funds typically
have distinct portfolios. That's why our funds can be used to build truly
diversified allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable, accurate and personal service that has helped us become one of the
most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
(GRAPHIC)
Not part of the semiannual report
Contents
SEMIANNUAL REPORT
Franklin Universal Trust .................................................. 1
Performance Summary ....................................................... 6
Important Notice to Shareholders .......................................... 7
Dividend Reinvestment and Cash Purchase Plan .............................. 8
Financial Highlights and Statement of Investments ......................... 11
Financial Statements ...................................................... 19
Notes to Financial Statements ............................................. 23
Shareholder Information ................................................... 32
Semiannual Report
Franklin Universal Trust
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Universal Trust's primary
investment objective is to provide high, current income consistent with
preservation of capital. Its secondary objective is growth of income through
dividend increases and capital appreciation.
PORTFOLIO BREAKDOWN
2/28/10
% OF TOTAL
INVESTMENTS*
------------
Corporate Bonds 69.9%
Utilities Common Stocks 26.0%
Natural Resources Common Stocks 1.0%
Media Common Stocks 0.5%
Senior Floating Rate Interests 0.5%
Miscellaneous Preferred Stocks 0.2%
Miscellaneous Common Stocks 0.0%**
Cash & Other Net Assets 1.9%
* Percentage of total investments of the Fund. Total investments of the Fund
include long-term and short-term investments and other net assets,
excluding long-term debt issued by the Fund.
** Rounds to less than 0.1% of total investments.
Dear Shareholder:
This semiannual report for Franklin Universal Trust covers the period ended
February 28, 2010.
PERFORMANCE OVERVIEW
For the six months under review, the Fund's cumulative total returns were
+12.16% based on net asset value and +19.48% based on market price, as shown in
the Performance Summary on page 6. For comparison, the Credit Suisse (CS) High
Yield Index had a +13.99% total return, and utilities stocks, as measured by the
Standard & Poor's (S&P) 500 Utilities Index, had a +2.09% total return for the
same period.(1)
(1.) Source: (C) 2010 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 performance does not guarantee future results. The
CS High Yield Index is designed to mirror the investible universe of the
U.S. dollar-denominated high yield debt market. The S&P 500 Utilities Index
is a market capitalization-weighted index that includes electric utility
stocks in the S&P 500. The indexes are unmanaged and include reinvestment
of any income or distributions. One cannot invest directly in an index, and
an index is not representative of the Fund's portfolio.
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 12.
Semiannual Report | 1
ECONOMIC AND MARKET OVERVIEW
The U.S. economy improved during the six-month reporting period as industrial
output, manufacturing and exports showed steady gains. The nation's economic
activity as measured by gross domestic product grew at annualized rates of 2.2%
and 5.6% (a six-year high) in 2009's third and fourth quarters. Hindering the
advance were elevated debt concerns, tight credit markets, stalled consumer
confidence, restrained spending, and lack of job prospects for the unemployed as
federal stimulus measures began to wind down. The unemployment rate, which
peaked at 10.1% in October 2009, stood at 9.7% by period-end.(2)
As economic conditions improved, demand for energy products increased and crude
oil prices rose from $70 per barrel in August 2009 to $79 at period-end, still
well below 2008 highs. February's inflation rate was an annualized 2.1%.(2) Core
inflation, which excludes food and energy costs, rose at a 1.3% annualized rate,
which was below the Federal Reserve Board's (Fed's) informal target range of
1.5% to 2.0%.(2) The core personal consumption expenditures price index reported
a 12-month increase of 1.3%.(3)
During the period under review, economic improvement and benign inflation trends
prompted Fed policymakers to maintain record-low interest rates and discontinue
certain stimulus plans. Noting that it believed the recession had ended, the Fed
left the federal funds target rate unchanged at a range of 0% to 0.25% and began
laying the groundwork for its exit strategy. The market anticipated an eventual
tightening of monetary policy and a gradual phase-out of the Fed's support and
liquidity programs.
Wary investors favored short-term Treasuries, and the Treasury yield curve
reached all-time steep levels by February. The spread between two- and 10-year
Treasury yields increased from 243 basis points (100 basis points equal one
percentage point) at the beginning of the period to 280 basis points at
period-end. The two-year Treasury bill yield declined from 0.97% to 0.81% over
the six-month period, while the 10-year Treasury note yield rose from 3.40% to
3.61%.
(2.) Source: Bureau of Labor Statistics.
(3.) Source: Bureau of Economic Analysis.
2 | Semiannual Report
INVESTMENT STRATEGY
We invest primarily in two asset classes: high yield bonds and utility stocks.
Within the high yield portion of the portfolio, we use fundamental research to
invest in a diversified portfolio of bonds. Within the utility portion of the
portfolio, we focus on companies with attractive dividend yields and with a
history of increasing their dividends.
MANAGER'S DISCUSSION
Performance of the Fund's primary asset classes diverged during the period under
review. High yield bonds, fueled by indications of an improving economy and a
thawing of credit markets, continued the rally that began in March 2009. New
issuance activity increased as companies sought primarily to refinance debt and
extend maturities. Shareholder friendly activity, such as dividend deals, also
emerged. During the period, yield spreads over Treasuries declined nearly 200
basis points, reflecting an improving fundamental outlook as well as continued
inflows into the asset class. Spreads ended the period approaching their
historical average levels. For the period, high yield bonds returned 13.99%, as
measured by the CS High Yield Index.(1) While high yield bonds enjoyed a period
of nearly uninterrupted growth, utility stocks experienced much more volatility.
Utility stocks were range-bound through early November, but then rallied sharply
into mid-December and declined in January and February. This volatility was the
result of fluctuating commodity prices and an uncertain regulatory backdrop
caused by Florida's adverse rulings concerning rate increases. Over the period,
utility stocks returned a modest 2.09%, as measured by the S&P 500 Utilities
Index.(1)
HIGH YIELD CORPORATE BONDS
The Fund's performance in the high yield asset class benefited from its
overweighted positions in broadcasting and chemicals relative to the CS High
Yield Index.(4) Bonds issued by broadcasting companies rallied from depressed
levels after advertising spending rebounded in step with the improving economy.
In particular, the federal government's "cash-for-clunkers" stimulus program
prompted auto companies to increase their advertising levels and boosted demand
for broadcasting services. Chemical manufacturers also benefited from the
economic uptick. Volumes, which were down sharply in 2009, began to recover in
the third quarter. Rising volumes led to improved results in third- and
fourth-quarter earnings.
(4.) The Fund's broadcasting holdings are in the media industry, and chemicals
holdings are in the materials industry, in the SOI.
TOP 10 HOLDINGS
Based on Total Investments*
2/28/10 vs. 8/31/09
ISSUER 2/28/10
------ -------
Ford Motor Credit Co. LLC 2.0%
The Southern Co. 1.9%
Dominion Resources Inc. 1.9%
Entergy Corp. 1.9%
CenterPoint Energy Inc. 1.8%
HCA Inc. 1.7%
Exelon Corp. 1.5%
GMAC Inc. 1.5%
Alliant Energy Corp. 1.3%
Duke Energy Corp. 1.3%
ISSUER 8/31/09
------ -------
FPL Group Inc. 2.2%
Entergy Corp. 2.1%
Ford Motor Credit Co. LLC 2.0%
The Southern Co. 2.0%
Exelon Corp. 1.9%
CCH II LLC 1.8%
Dominion Resources Inc. 1.7%
HCA Inc. 1.7%
CenterPoint Energy Inc. 1.5%
Ameren Corp. 1.4%
* Percentage of total investments of the Fund. Total investments of the Fund
include long-term and short-term investments and other net assets,
excluding long-term debt issued by the Fund.
Semiannual Report | 3
The Fund's relative performance was impeded by its underweighted positions in
financial services and building companies.(5) The index's financial services
returns were driven largely by a rebound in severely distressed and defaulted
credits of companies the Fund did not own, such as Lehman Brothers, Washington
Mutual and Thornburg Mortgage. The building sector's fundamental outlook
remained challenged due to excess housing supply and a growing number of homes
in foreclosure. Nevertheless, building companies rallied from low levels based
on improved market sentiment, in our view.
UTILITY STOCKS
The utilities sector trailed high yield corporate bonds and the broader equity
market during the review period. Fundamentally, weak electricity demand hurt
pricing levels, particularly for utilities that operate in unregulated markets,
such as Exelon and Public Service Enterprise Group. Florida state regulatory
decisions concerning rate increases limited utility companies' ability to pass
the costs of spending programs to the consumer, which pressured regulated
utilities. Technical factors also limited utility stocks' appeal, as their more
defensive nature caused them to lag the broader market recovery. Based on our
research, the outlook for utility stocks remains favorable. We believe
investment in infrastructure is necessary and provides a means for growth, and
utilities' generally strong balance sheets put them in a position to capture
that growth. Overall, the Fund's utility holdings continued to focus on
regulated, dividend-paying utilities.
(5.) The Fund's financial services holdings are in the diversified financials
industry, and building holdings are in the consumer durables and apparel
industry, in the SOI.
4 | Semiannual Report
Thank you for your continued participation in Franklin Universal Trust. We look
forward to serving your future investment needs.
Sincerely,
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
Senior Portfolio Manager
(PHOTO OF GLENN I. VOYLES)
/s/ Glenn I. Voyles
Glenn I. Voyles, CFA
Portfolio Manager
Franklin Universal Trust
CFA(R) and Chartered Financial Analyst(R) are trademarks owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 2010, 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.
Semiannual Report | 5
Performance Summary as of 2/28/10
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 sales charges paid at inception or brokerage
commissions paid on secondary market purchases. The performance table does not
reflect any taxes that a shareholder would pay on Fund dividends, capital gain
distributions, if any, or any realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
SYMBOL: FT CHANGE 2/28/10 8/31/09
---------- ------ ------- -------
Net Asset Value (NAV) +$0.48 $6.33 $5.85
Market Price (NYSE) +$0.75 $5.83 $5.08
DISTRIBUTIONS (9/1/09-2/28/10)
Dividend Income $0.2280
PERFORMANCE
6-MONTH 1-YEAR 5-YEAR 10-YEAR
------- ------ ------ -------
Cumulative Total Return(1)
Based on change in NAV(2) +12.16% +56.27% +27.40% +76.83%
Based on change in market price(3) +19.48% +62.93% +40.01% +109.90%
Average Annual Total Return(1)
Based on change in NAV(2) +12.16% +56.27% +4.96% +5.87%
Based on change in market price(3) +19.48% +62.93% +6.96% +7.70%
Distribution Rate(4) 7.82%
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
THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER RATED SECURITIES INCLUDE HIGHER
RISK OF DEFAULT AND LOSS OF PRINCIPAL. THESE SECURITIES CARRY A GREATER DEGREE
OF CREDIT RISK RELATIVE TO INVESTMENT-GRADE SECURITIES. IN ADDITION TO OTHER
FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES ARE PARTICULARLY SENSITIVE TO
INTEREST RATE MOVEMENTS. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY
INTEREST RATE MOVEMENTS. 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.
(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.
(4.) Distribution rate is based on an annualization of the Fund's 3.8 cent per
share February dividend and the NYSE closing price of $5.83 on 2/28/10.
6 | Semiannual Report
Important Notice to Shareholders
SHARE REPURCHASE PROGRAM
The Fund's Board previously authorized an open-market share repurchase program,
pursuant to which the Fund may purchase Fund shares, from time to time, up to
10% of the Fund's common shares in open-market transactions, at the discretion
of management. This authorization remains in effect.
Semiannual Report | 7
Dividend Reinvestment and Cash Purchase Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan (Plan) offers you a
prompt and simple way to reinvest dividends and capital gain distributions in
shares of the Fund. The Plan also allows you to purchase additional shares of
the Fund by making voluntary cash payments. PNC Global Investment Servicing
(Plan Agent), P.O. Box 6006, Carol Stream, IL 60197-6006, acts as your Plan
Agent in administering the Plan. The complete Terms and Conditions of the
Dividend Reinvestment and Cash Purchase Plan are contained in the Fund's
Dividend Reinvestment and Cash Purchase Plan Brochure. A copy of that Brochure
may be obtained from the Fund at the address on the back cover of this report.
You are automatically enrolled in the Plan unless you elect to receive dividends
or distributions in cash. If you own shares in your own name, you should notify
the Plan Agent, in writing, if you wish to receive dividends or distributions in
cash.
If the Fund declares a dividend or capital gain distribution payable either in
cash or in stock of the Fund and the market price of shares on the valuation
date equals or exceeds the net asset value, the Fund will issue new shares to
you at the higher of net asset value or 95% of the then current market price.
Whenever the Fund declares a distribution from capital gains or an income
dividend payable in either cash or shares, if the net asset value per share of
the Fund's common stock exceeds the market price per share on the valuation
date, the Plan Agent shall apply the amount of such dividend or distribution
payable to participants to the purchase of shares (less their pro rata share of
brokerage commissions incurred with respect to open market purchases in
connection with the reinvestment of such dividend or distribution). If the price
exceeds the net asset value before the Plan Agent has completed its purchases,
the average purchase price may exceed the net asset value, resulting in fewer
shares being acquired than if the Fund had issued new shares. All reinvestments
are in full and fractional shares, carried to three decimal places. The Fund
will not issue shares under the Plan at a price below net asset value.
The Plan permits you on a voluntary basis to submit in cash payments of not less
than $100 each up to a total of $5,000 per month to purchase additional shares
of the Fund. It is entirely up to you whether you wish to buy additional shares
with voluntary cash payments, and you do not have to send in the same amount
each time if you do. These payments should be made by check or money order
payable to PNC Global Investment Servicing and sent to PNC Global Investment
Servicing, P.O. Box 6006, Carol Stream, IL 60197-6006, Attn: Franklin Universal
Trust.
Your cash payment will be aggregated with the payments of other participants and
invested on your behalf by the Plan Agent in shares of the Fund that are
purchased in the open market.
8 | Semiannual Report
The Plan Agent will invest cash payments on approximately the 5th of each month
in which no dividend or distribution is payable and, during each month in which
a dividend or distribution is payable, will invest cash payments beginning on
the dividend payment date. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON YOUR
FUNDS HELD BY THE PLAN AGENT. Accordingly, you should send any voluntary cash
payments you wish to make shortly before an investment date but in sufficient
time to ensure that your payment will reach the Plan Agent not less than two
business days before an investment date. Payments received less than two
business days before an investment date will be invested during the next month
or, if there are more than 30 days until the next investment date, will be
returned to you. You may obtain a refund of any cash payment by written notice,
if the Plan Agent receives the written notice not less than 48 hours before an
investment date.
There is no direct charge to participants for reinvesting dividends and capital
gain distributions, since the Plan Agent's fees are paid by the Fund. However,
when shares are purchased in the open market, each participant will pay a pro
rata portion of any brokerage commissions incurred. The Plan Agent will deduct a
$5.00 service fee from each of your voluntary cash payments.
The automatic reinvestment of dividends and capital gain distributions does not
relieve you of any taxes which may be payable on dividends or distributions. In
connection with the reinvestment of dividends and capital gain distributions, if
the Fund issues new shares, shareholders receiving such shares generally will be
treated as having a distribution equal to the market value of the shares
received, and if shares are purchased on the open market, shareholders generally
will be treated as having received a distribution equal to the cash distribution
that would have been paid.
The Fund does not issue new shares in connection with voluntary cash payments.
All investments are in full and fractional shares, carried to three decimal
places. If the market price exceeds the net asset value at the time the Plan
Agent purchases the additional shares, you will receive shares at a price
greater than the net asset value.
You will receive a monthly account statement from the Plan Agent showing total
dividends and capital gain distributions, date of investment, shares acquired
and price per share, and total shares of record held by you and by the Plan
Agent for you. You are entitled to vote all shares of record, including shares
purchased for you by the Plan Agent, and, if you vote by proxy, your proxy will
include all such shares.
As long as you participate in the Plan, the Plan Agent will hold the shares it
has acquired for you in safekeeping, in its name or in the name of its nominee.
This convenience provides added protection against loss, theft or inadvertent
Semiannual Report | 9
destruction of certificates. However, you may request that a certificate
representing your Plan shares be issued to you.
You may withdraw from the Plan without penalty at any time by notifying the Plan
Agent, in writing, at the address above. If you withdraw, you will receive,
without charge, stock certificates issued in your name for all full shares. The
Plan Agent 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
proceeds.
If you hold shares in your own name, please address all notices, correspondence,
questions, or other communications regarding the Plan to the Plan Agent at the
address noted above. If your shares are not held in your name, you should
contact your brokerage firm, bank, or other nominee for more information and to
determine if your nominee will participate in the Plan on your behalf.
The Fund or the Plan Agent may amend or terminate the Plan. You will receive
written notice at least 90 days before the effective date of termination or of
any amendment. In the case of termination, you will receive written notice at
least 90 days before the record date of any dividend or capital gain
distribution by the Fund.
10 | Semiannual Report
Franklin Universal Trust
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2010 ---------------------------------------------------------------
(UNAUDITED) 2009 2008 2007 2006 2005
----------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 5.85 $ 6.96 $ 7.41 $ 7.09 $ 7.12 $ 6.48
-------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income(a) ............. 0.24 0.35 0.49 0.47 0.45 0.45
Net realized and unrealized gains
(losses) .......................... 0.47 (1.00) (0.49) 0.29 (0.05) 0.59
-------- -------- -------- -------- -------- --------
Total from investment operations ........ 0.71 (0.65) -- 0.76 0.40 1.04
-------- -------- -------- -------- -------- --------
Less distributions from net investment
income .................................. (0.23) (0.46) (0.46) (0.46) (0.44) (0.40)
-------- -------- -------- -------- -------- --------
Repurchase of shares .................... -- -- 0.01 0.02 0.01 --
-------- -------- -------- -------- -------- --------
Net asset value, end of period .......... $ 6.33 $ 5.85 $ 6.96 $ 7.41 $ 7.09 $ 7.12
======== ======== ======== ======== ======== ========
Market value, end of period(b) .......... $ 5.83 $ 5.08 $ 6.15 $ 6.68 $ 6.52 $ 6.22
======== ======== ======== ======== ======== ========
Total return (based on market value
per share)(c) ........................ 19.48% (7.85)% (1.35)% 9.38% 12.48% 17.49%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses ................................ 2.73% 4.89%(e, f) 2.50%(e) 2.24%(e) 2.27%(e) 2.32%(e)
Net investment income ................... 7.69% 6.98% 6.51% 6.15% 6.47% 6.49%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $158,972 $147,066 $174,843 $190,968 $194,724 $198,861
Portfolio turnover rate ................. 21.19% 24.78% 18.52% 29.30% 32.95% 34.60%
Total debt outstanding at end of
period (000's) ....................... $ 42,000 $ 42,000 $ 65,000 $ 55,000 $ 55,000 $ 55,000
Asset coverage per $1,000 of debt ....... $ 4,785 $ 4,502 $ 3,690 $ 4,472 $ 4,540 $ 4,616
Average amount of senior fixed rate
Notes per share during the period .... $ 1.67 $ 1.80 $ 2.18 $ 2.06 $ 1.97 $ 1.97
(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%.
(f) Total expense ratio excluding Note prepayment fees and issuance costs was
3.44%. See Note 3.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 11
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED)
COUNTRY SHARES VALUE
--------------- ---------- ------------
COMMON STOCKS 34.8%
AUTOMOBILES & COMPONENTS 0.0%(a)
(b, c) Harvard Industries Inc. ................................. United States 109,618 $ 1,096
------------
COMMERCIAL & PROFESSIONAL SERVICES 0.0%
(c, d) VS Holdings Inc. ........................................ United States 181,875 --
------------
ENERGY 1.3%
Spectra Energy Corp. .................................... United States 92,350 2,013,230
------------
MEDIA 0.7%
(c) Charter Communications Inc., A .......................... United States 4,260 126,735
(c) Dex One Corp. ........................................... United States 32,497 968,414
------------
1,095,149
------------
UTILITIES 32.8%
Alliant Energy Corp. .................................... United States 85,000 2,688,550
American Electric Power Co. Inc. ........................ United States 75,000 2,521,500
Atmos Energy Corp. ...................................... United States 45,000 1,235,700
CenterPoint Energy Inc. ................................. United States 276,600 3,700,908
Consolidated Edison Inc. ................................ United States 42,000 1,795,500
Dominion Resources Inc. ................................. United States 100,000 3,799,000
Duke Energy Corp. ....................................... United States 160,000 2,616,000
Edison International .................................... United States 75,000 2,447,250
Entergy Corp. ........................................... United States 50,000 3,798,500
Exelon Corp. ............................................ United States 70,000 3,031,000
FirstEnergy Corp. ....................................... United States 50,000 1,932,500
FPL Group Inc. .......................................... United States 50,000 2,318,500
Great Plains Energy Inc. ................................ United States 32,600 580,606
NV Energy Inc. .......................................... United States 80,000 888,800
PG&E Corp. .............................................. United States 50,000 2,096,000
Pinnacle West Capital Corp. ............................. United States 70,000 2,548,700
PPL Corp. ............................................... United States 60,000 1,708,800
Progress Energy Inc. .................................... United States 45,000 1,723,050
Public Service Enterprise Group Inc. .. ................. United States 60,000 1,783,200
Sempra Energy ........................................... United States 48,500 2,384,745
The Southern Co. ........................................ United States 120,000 3,812,400
Westar Energy Inc. ...................................... United States 27,300 584,220
Wisconsin Energy Corp. .................................. United States 20,000 968,600
Xcel Energy Inc. ........................................ United States 60,000 1,248,600
------------
52,212,629
------------
TOTAL COMMON STOCKS (COST $48,434,490) .................. 55,322,104
------------
PREFERRED STOCKS (COST $214,420) 0.2%
DIVERSIFIED FINANCIALS 0.2%
(e) GMAC Inc., 7.00%, pfd., 144A ............................ United States 604 427,537
------------
PRINCIPAL
AMOUNT(f)
----------
(g, h) SENIOR FLOATING RATE INTERESTS (COST $994,917) 0.6%
MATERIALS 0.6%
Novelis Corp., U.S. Term Loan, 2.23% - 2.26%, 7/07/14 ... United States $ 994,917 965,070
------------
12 | Semiannual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
--------------- ---------- ------------
CORPORATE BONDS 88.4%
AUTOMOBILES & COMPONENTS 4.0%
Arvinmeritor Inc., senior note, 10.625%, 3/15/18 ........ United States $ 400,000 $ 392,096
Ford Motor Credit Co. LLC,
7.80%, 6/01/12 ....................................... United States 2,000,000 2,021,756
senior note, 9.875%, 8/10/11 ......................... United States 1,500,000 1,573,670
senior note, 8.125%, 1/15/20 ......................... United States 500,000 499,097
(e) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 .. United States 2,000,000 1,900,000
------------
6,386,619
------------
CAPITAL GOODS 6.2%
(e) Allison Transmission Inc., senior note, 144A, 11.00%,
11/01/15 ............................................. United States 2,000,000 2,085,000
Case New Holland Inc., senior note,
7.125%, 3/01/14 ...................................... United States 1,000,000 1,005,000
(e) 144A, 7.75%, 9/01/13 ................................. United States 500,000 505,000
Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 ...... United States 500,000 442,500
(e) Libbey Glass Inc., senior secured note, 144A, 10.00%,
2/15/15 .............................................. United States 600,000 624,000
The Manitowoc Co. Inc., senior note, 9.50%, 2/15/18 ..... United States 600,000 601,500
(e) Oshkosh Corp., senior note, 144A,
8.25%, 3/01/17 ....................................... United States 200,000 200,000
8.50%, 3/01/20 ....................................... United States 200,000 200,000
RBS Global & Rexnord Corp., senior note, 9.50%,
8/01/14 .............................................. United States 2,000,000 2,035,000
RSC Equipment Rental Inc., senior note, 9.50%,
12/01/14 ............................................. United States 2,200,000 2,139,500
------------
9,837,500
------------
COMMERCIAL & PROFESSIONAL SERVICES 1.2%
ARAMARK Corp., senior note, 8.50%, 2/01/15 .............. United States 400,000 406,000
(e) Casella Waste Systems Inc., senior secured note, 144A,
11.00%, 7/15/14 ...................................... United States 500,000 540,000
(e, i) JohnsonDiversey Holdings Inc., senior note, 144A, PIK,
10.50%, 5/15/20 ...................................... United States 1,000,000 1,045,000
------------
1,991,000
------------
CONSUMER DURABLES & APPAREL 3.5%
Jarden Corp., senior sub. note, 7.50%, 5/01/17 .......... United States 2,000,000 2,020,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 .... United States 400,000 404,000
KB Home, senior note,
6.25%, 6/15/15 ....................................... United States 700,000 664,125
7.25%, 6/15/18 ....................................... United States 800,000 756,000
(e) Norcraft Cos. LP, senior secured note, 144A, 10.50%,
12/15/15 ............................................. United States 500,000 522,500
Visant Holding Corp., senior note, 8.75%, 12/01/13 ...... United States 1,100,000 1,122,000
------------
5,488,625
------------
CONSUMER SERVICES 5.4%
(e, j) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 .......... United States 1,600,000 25,000
Harrah's Operating Co. Inc., senior secured note, 11.25%,
6/01/17 .............................................. United States 1,500,000 1,563,750
MGM MIRAGE, senior note,
6.875%, 4/01/16 ...................................... United States 1,500,000 1,177,500
7.50%, 6/01/16 ....................................... United States 1,200,000 957,000
(e) Norwegian Cruise Line Ltd., senior secured note, 144A,
11.75%,
11/15/16 ............................................. United States 1,500,000 1,597,500
Pinnacle Entertainment Inc.,
(e) senior note, 144A, 8.625%, 8/01/17 ................... United States 500,000 477,500
senior sub. note, 8.25%, 3/15/12 ..................... United States 323,000 319,770
senior sub. note, 7.50%, 6/15/15 ..................... United States 700,000 582,750
Semiannual Report | 13
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
--------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
(e) Shingle Springs Tribal Gaming, senior note, 144A,
9.375%, 6/15/15 ...................................... United States $ 600,000 $ 480,000
(j) Station Casinos Inc.,
senior note, 7.75%, 8/15/16 .......................... United States 1,100,000 165,000
senior sub. note, 6.50%, 2/01/14 ..................... United States 100,000 1,020
senior sub. note, 6.875%, 3/01/16 .................... United States 1,200,000 12,240
(e) Universal City Development,
senior note, 144A, 8.875%, 11/15/15 .................. United States 800,000 810,000
senior sub. note, 144A, 10.875%, 11/15/16 ............ United States 400,000 416,000
------------
8,585,030
------------
DIVERSIFIED FINANCIALS 1.6%
GMAC Inc.,
senior note, 6.875%, 8/28/12 ......................... United States 2,300,000 2,288,500
sub. note, 8.00%, 12/31/18 ........................... United States 300,000 280,500
------------
2,569,000
------------
ENERGY 14.6%
(e) Antero Resources Finance, senior note, 144A, 9.375%,
12/01/17 ............................................. United States 1,000,000 1,025,000
Berry Petroleum Co., senior note, 10.25%, 6/01/14 ....... United States 800,000 874,000
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 .... United States 2,000,000 1,875,000
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ....................................... France 400,000 394,000
7.75%, 5/15/17 ....................................... France 600,000 591,000
Concho Resources Inc., senior note, 8.625%, 10/01/17 .... United States 500,000 515,625
Copano Energy LLC, senior note, 8.125%, 3/01/16 ......... United States 1,000,000 1,012,500
(e) Crosstex Energy/Crosstex Energy Finance, senior note,
144A, 8.875%,
2/15/18 .............................................. United States 300,000 306,000
Denbury Resources Inc., senior sub. note, 8.25%,
2/15/20 .............................................. United States 500,000 520,000
El Paso Corp., senior note, 12.00%, 12/12/13 ............ United States 1,200,000 1,401,000
(g) Enterprise Products Operating LLC, junior sub. note,
FRN, 7.034%,
1/15/68 .............................................. United States 1,200,000 1,138,679
(e) Expro Finance Luxembourg, senior secured note, 144A,
8.50%,
12/15/16 ............................................. United Kingdom 1,100,000 1,095,294
(e) General Maritime Corp., senior note, 144A, 12.00%,
11/15/17 ............................................. United States 700,000 728,000
(e) Holly Corp., senior note, 144A, 9.875%, 6/15/17 ......... United States 400,000 412,000
Mariner Energy Inc., senior note, 7.50%, 4/15/13 ........ United States 1,500,000 1,507,500
MarkWest Energy Partners LP, senior note, 6.875%,
11/01/14 ............................................. United States 2,000,000 1,950,000
(e) OPTI Canada Inc., senior secured note, 144A, 9.00%,
12/15/12 ............................................. Canada 400,000 409,000
Plains Exploration & Production Co., senior note, 7.625%,
6/01/18 .............................................. United States 1,900,000 1,914,250
Quicksilver Resources Inc., senior note, 8.25%,
8/01/15 .............................................. United States 2,000,000 2,030,000
(e) SandRidge Energy Inc., senior note, 144A, 8.00%,
6/01/18 .............................................. United States 1,900,000 1,828,750
Teekay Corp., senior note, 8.50%, 1/15/20 ............... Marshall Islands 300,000 306,000
Tesoro Corp., senior note, 6.50%, 6/01/17 ............... United States 1,500,000 1,353,750
------------
23,187,348
------------
FOOD & STAPLES RETAILING 1.1%
Rite Aid Corp., senior secured note, 9.75%, 6/12/16 ..... United States 900,000 965,250
SUPERVALU Inc., senior note, 8.00%, 5/01/16 ............. United States 800,000 810,000
------------
1,775,250
------------
14 | Semiannual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
--------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
FOOD, BEVERAGE & TOBACCO 2.8%
(e) CEDC Finance Corp. International Inc., senior secured
note, 144A, 9.125%,
12/01/16 ............................................. United States $ 700,000 $ 735,000
(e) Cott Beverages Inc., senior note, 144A, 8.375%,
11/15/17 ............................................. United States 700,000 714,000
(e) Dole Food Co. Inc., senior note, 144A, 13.875%,
3/15/14 .............................................. United States 676,000 809,510
(e) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 ........ United States 1,200,000 1,356,000
(e) Pinnacle Foods Finance LLC, senior note, 144A, 9.25%,
4/01/15 .............................................. United States 800,000 816,000
------------
4,430,510
------------
HEALTH CARE EQUIPMENT & SERVICES 7.4%
FMC Finance III SA, senior note, 6.875%, 7/15/17 ........ Germany 1,500,000 1,545,000
(e) Fresenius US Finance II, senior note, 144A, 9.00%,
7/15/15 .............................................. Germany 700,000 777,000
HCA Inc.,
senior note, 6.50%, 2/15/16 ............................. United States 2,500,000 2,343,750
(i) senior secured note, PIK, 9.625%, 11/15/16 .............. United States 1,051,000 1,127,197
Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 .... United States 1,700,000 1,708,500
(i) United Surgical Partners International Inc., senior sub.
note, PIK, 9.25%,
5/01/17 .............................................. United States 2,000,000 2,070,000
(g, i) US Oncology Holdings Inc., senior note, PIK, FRN, 6.428%,
3/15/12 .............................................. United States 2,323,000 2,195,235
------------
11,766,682
------------
MATERIALS 9.2%
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%,
4/01/17 .............................................. United States 1,500,000 1,629,687
Huntsman International LLC, senior sub. note, 7.875%,
11/15/14 ............................................. United States 2,000,000 1,950,000
(e) Ineos Group Holdings PLC, senior secured note, 144A,
8.50%,
2/15/16 .............................................. United Kingdom 1,500,000 982,500
(e) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 .. United States 1,800,000 1,809,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 ........... United States 1,500,000 1,545,000
NewPage Corp., senior secured note,
10.00%, 5/01/12 ...................................... United States 200,000 116,000
11.375%, 12/31/14 .................................... United States 1,400,000 1,344,000
Novelis Inc., senior note,
7.25%, 2/15/15 ....................................... Canada 200,000 186,500
11.50%, 2/15/15 ...................................... Canada 250,000 266,875
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 ............................................. United States 1,500,000 1,518,750
Solo Cup Co.,
senior secured note, 10.50%, 11/01/13 ................ United States 300,000 315,750
senior sub. note, 8.50%, 2/15/14 ..................... United States 1,000,000 955,000
Teck Resources Ltd., senior secured note, 10.75%,
5/15/19 .............................................. Canada 900,000 1,111,500
Weyerhaeuser Co., senior note, 7.375%, 10/01/19 ......... United States 900,000 958,938
------------
14,689,500
------------
MEDIA 10.4%
(e) Cablevision Systems Corp., senior note, 144A, 8.625%,
9/15/17 .............................................. United States 500,000 517,500
(e) CCH II LLC/CCH II Capital Corp., senior note, 144A,
13.50%,
11/30/16 ............................................. United States 2,200,134 2,587,908
(e) Clear Channel Worldwide Holdings Inc., senior note,
A, 144A, 9.25%, 12/15/17 ............................. United States 200,000 205,000
B, 144A, 9.25%, 12/15/17 ............................. United States 600,000 619,500
(e) CSC Holdings Inc., senior note, 144A, 8.50%, 4/15/14 .... United States 300,000 316,875
EchoStar DBS Corp., senior note, 7.125%, 2/01/16 ........ United States 1,500,000 1,511,250
Semiannual Report | 15
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
--------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
Lamar Media Corp., senior sub. note, B, 6.625%,
8/15/15 .............................................. United States $2,000,000 $ 1,880,000
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 .. United States 1,500,000 1,428,750
(e) Media General Inc., senior sec. note, 144A, 11.75%,
2/15/17 .............................................. United States 800,000 780,000
(k) Radio One Inc., senior sub. note, 6.375%, 2/15/13 ....... United States 1,700,000 1,353,625
(e) Sinclair Television Group Inc., senior secured note,
144A, 9.25%, 11/01/17 ................................ United States 1,200,000 1,251,000
(e, i) Univision Communications Inc., senior note, 144A, PIK,
10.50%,
3/15/15 .............................................. United States 1,052,500 936,725
(e) UPC Germany GmbH, senior secured bond, 144A, 8.125%,
12/01/17 ............................................. Germany 1,200,000 1,203,866
(e) UPC Holding BV, senior note, 144A, 9.875%, 4/15/18 ...... Netherlands 300,000 313,500
(e) Virgin Media Secured Finance, senior secured note, 144A,
6.50%,
1/15/18 .............................................. United Kingdom 600,000 600,114
(e) WMG Acquisition Corp., senior secured note, 144A, 9.50%,
6/15/16 .............................................. United States 900,000 949,500
-----------
16,455,113
-----------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.5%
(e) Talecris Biotherapeutics Holdings Corp., senior note,
144A, 7.75%,
11/15/16 ............................................. United States 800,000 808,000
-----------
REAL ESTATE 1.4%
(e) FelCor Lodging LP, senior secured note, 144A, 10.00%,
10/01/14 ............................................. United States 1,400,000 1,368,500
Forest City Enterprises Inc., senior note, 7.625%,
6/01/15 .............................................. United States 900,000 814,500
-----------
2,183,000
-----------
RETAILING 1.4%
Michaels Stores Inc., senior note, 10.00%, 11/01/14 ..... United States 1,500,000 1,530,000
(e) QVC Inc., senior secured note, 144A, 7.50%, 10/01/19 .... United States 700,000 712,250
-----------
2,242,250
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.0%
(e) Advanced Micro Devices Inc., senior note, 144A, 8.125%,
12/15/17 ............................................. United States 300,000 305,250
Freescale Semiconductor Inc., senior note, 8.875%,
12/15/14 ............................................. United States 1,500,000 1,338,750
-----------
1,644,000
-----------
SOFTWARE & SERVICES 2.2%
First Data Corp., senior note, 9.875%, 9/24/15 .......... United States 1,300,000 1,131,000
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ............................ United States 900,000 925,875
senior sub. note, 10.25%, 8/15/15 ....................... United States 1,400,000 1,459,500
-----------
3,516,375
-----------
TECHNOLOGY HARDWARE & EQUIPMENT 1.7%
Jabil Circuit Inc., senior note, 7.75%, 7/15/16 ......... United States 500,000 520,000
Sanmina-SCI Corp.,
(e, g) senior note, 144A, FRN, 3.004%, 6/15/14 .............. United States 700,000 654,500
senior sub. note, 6.75%, 3/01/13 ..................... United States 1,100,000 1,102,750
senior sub. note, 8.125%, 3/01/16 .................... United States 400,000 396,000
-----------
2,673,250
-----------
16 | Semiannual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
--------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES 7.1%
Crown Castle International Corp.,
senior bond, 7.125%, 11/01/19 ........................ United States $ 100,000 $ 100,500
senior note, 9.00%, 1/15/15 .......................... United States 800,000 868,000
(e) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 .. Jamaica 2,000,000 1,927,500
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 ..... Bermuda 500,000 536,250
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.50%,
1/15/13 .............................................. Bermuda 1,500,000 1,522,500
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 .... United States 2,000,000 2,005,000
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 ....................................... United States 2,000,000 2,030,000
(e) SBA Telecommunications Inc., senior note, 144A, 8.25%,
8/15/19 .............................................. United States 600,000 633,000
(e) Wind Acquisition Finance SA, senior note, 144A, 12.00%,
12/01/15 ............................................. Italy 1,500,000 1,612,500
------------
11,235,250
------------
TRANSPORTATION 1.3%
(e) Ceva Group PLC, senior secured note, 144A, 10.00%,
9/01/14 .............................................. United Kingdom 1,500,000 1,507,500
(e) Delta Air Lines Inc., senior secured note, 144A, 9.50%,
9/15/14 .............................................. United States 500,000 515,000
------------
2,022,500
------------
UTILITIES 4.4%
Ameren Corp., senior note, 8.875%, 5/15/14 .............. United States 900,000 1,047,378
CMS Energy Corp., senior note, 8.75%, 6/15/19 ........... United States 700,000 790,202
(e) Dynegy Holdings Inc., senior note, 144A, 7.50%,
6/01/15 .............................................. United States 1,500,000 1,305,000
NRG Energy Inc., senior note, 7.375%,
2/01/16 .............................................. United States 1,800,000 1,779,750
1/15/17 .............................................. United States 200,000 197,250
Texas Competitive Electric Holdings Co. LLC, senior note,
A, 10.25%,
11/01/15 ............................................. United States 2,500,000 1,881,000
------------
7,000,580
------------
TOTAL CORPORATE BONDS (COST $139,797,188) ............... 140,487,382
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $189,441,015) .................................. 197,202,093
------------
SHARES
----------
SHORT TERM INVESTMENTS (COST $1,735,999) 1.1%
MONEY MARKET FUNDS 1.1%
(l) Institutional Fiduciary Trust Money Market Portfolio,
0.00% ................................................ United States 1,735,999 1,735,999
------------
TOTAL INVESTMENTS (COST $191,177,014) 125.1% ............ 198,938,092
NOTES PAYABLE (26.4)% ................................... (42,000,000)
OTHER ASSETS, LESS LIABILITIES 1.3% ..................... 2,034,028
------------
NET ASSETS 100.0% ....................................... $158,972,120
============
Semiannual Report | 17
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2010 (UNAUDITED) (CONTINUED)
See Abbreviations on page 31.
(a) Rounds to less than 0.1% of net assets.
(b) Security has been deemed illiquid because it may not be able to be sold
within seven days. At February 28, 2010, the value of this security was
$1,096, representing less than 0.01% of net assets.
(c) Non-income producing.
(d) See Note 10 regarding restricted securities.
(e) 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 Trustees. At February 28, 2010,
the aggregate value of these securities was $47,288,579, representing
29.75% of net assets.
(f) The principal amount is stated in U.S. dollars unless otherwise indicated.
(g) The coupon rate shown represents the rate at period end.
(h) See Note 1(c) regarding senior floating rate interests.
(i) Income may be received in additional securities and/or cash.
(j) See Note 9 regarding defaulted securities.
(k) See Note 11 regarding other considerations.
(l) See Note 8 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.
18 | Semiannual Report
Franklin Universal Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 2010 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................. $ 189,441,015
Cost - Sweep Money Fund (Note 8) ........................ 1,735,999
-------------
Total cost of investments ............................... $ 191,177,014
=============
Value - Unaffiliated issuers ............................ $ 197,202,093
Value - Sweep Money Fund (Note 8) ....................... 1,735,999
-------------
Total value of investments .............................. 198,938,092
Cash ....................................................... 928
Receivables:
Investment securities sold .............................. 606,228
Dividends and interest .................................. 3,328,034
Note issuance costs (Note 3) ............................... 204,341
-------------
Total assets ......................................... 203,077,623
-------------
Liabilities:
Payables:
Investment securities purchased ......................... 887,202
Affiliates .............................................. 125,137
Distributions to shareholders ........................... 955,012
Senior fixed rate Notes (Note 3) ........................... 42,000,000
Accrued expenses and other liabilities ..................... 138,152
-------------
Total liabilities .................................... 44,105,503
-------------
Net assets, at value .............................. $ 158,972,120
=============
Net assets consist of:
Paid-in capital ............................................ $ 235,458,220
Undistributed net investment income ........................ 944,465
Net unrealized appreciation (depreciation) ................. 7,761,078
Accumulated net realized gain (loss) ....................... (85,191,643)
-------------
Net assets, at value .............................. $ 158,972,120
=============
Shares outstanding ............................................ 25,131,894
=============
Net asset value per share ..................................... $ 6.33
=============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 19
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended February 28, 2010 (unaudited)
Investment income:
Dividends .................................................. $ 1,324,643
Interest ................................................... 6,833,701
-----------
Total investment income ................................. 8,158,344
-----------
Expenses:
Management fees (Note 4a) .................................. 746,699
Interest expense (Note 3) .................................. 1,232,700
Transfer agent fees ........................................ 23,350
Custodian fees (Note 5) .................................... 1,719
Reports to shareholders .................................... 24,601
Professional fees .......................................... 51,461
Trustees' fees and expenses ................................ 8,507
Amortization of Note issuance costs (Note 3) ............... 25,236
Other ...................................................... 24,533
-----------
Total expenses .......................................... 2,138,806
-----------
Net investment income ................................ 6,019,538
-----------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments .................. (4,086,564)
Net change in unrealized appreciation (depreciation) on
investments ............................................. 15,703,365
-----------
Net realized and unrealized gain (loss) ....................... 11,616,801
-----------
Net increase (decrease) in net assets resulting from
operations ................................................. $17,636,339
===========
The accompanying notes are an integral part of these financial statements.
20 | Semiannual Report
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
FEBRUARY 28, 2010 YEAR ENDED
(UNAUDITED) AUGUST 31, 2009
----------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................ $ 6,019,538 $ 8,850,848
Net realized gain (loss) from investments and foreign currency
transactions .................................................. (4,086,564) (13,240,866)
Net change in unrealized appreciation (depreciation) on
investments. .................................................. 15,703,365 (11,926,993)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ................................................. 17,636,339 (16,317,011)
Distributions to shareholders from net investment income ............ (5,730,072) (11,460,143)
------------ ------------
Net increase (decrease) in net assets ......................... 11,906,267 (27,777,154)
Net assets:
Beginning of period ................................................. 147,065,853 174,843,007
------------ ------------
End of period ....................................................... $158,972,120 $147,065,853
============ ============
Undistributed net investment income included in net assets:
End of period ....................................................... $ 944,465 $ 654,999
============ ============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 21
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
for the six months ended February 28, 2010 (unaudited)
Cash flow from operating activities:
Dividends and interest received ............................. $ 7,493,394
Operating expenses paid ..................................... (878,856)
Interest expense paid ....................................... (1,232,700)
Purchases of long-term investments .......................... (40,501,060)
Sales and maturities of long-term investments ............... 42,446,179
Net purchases of short-term investments ..................... (1,595,957)
------------
Cash provided - operating activities ..................... 5,731,000
============
Cash flow used from financing activities - distributions to
shareholders ................................................ (5,730,072)
------------
Net increase (decrease) in cash ................................ 928
Cash at beginning of period .................................... --
------------
Cash at end of period .......................................... $ 928
============
RECONCILIATION OF NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATING
ACTIVITIES TO NET CASH PROVIDED BY OPERATING ACTIVITIES
for the six months ended February 28, 2010 (unaudited)
Net increase (decrease) in net assets resulting from operating
activities ........................................................ $ 17,636,339
Adjustments to reconcile net increase (decrease) in net assets
resulting from operating activities to net cash provided by
operating activities:
Amortization of Note issuance costs ............................ 25,236
Net amortization income ........................................ (322,350)
Other investment transactions .................................. (36,523)
Increase in dividends and interest receivable .................. (306,077)
Increase in other liabilities .................................. 2,014
Decrease in cost of investments ................................ 4,435,726
Increase in unrealized appreciation on investments ............. (15,703,365)
------------
Net cash provided by operating activities ............................ $ 5,731,000
============
The accompanying notes are an integral part of these financial statements.
22 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Universal Trust (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.
Corporate debt securities generally trade in the over-the-counter market rather
than on a securities exchange. The Fund may utilize independent pricing
services, quotations from bond dealers, and information with respect to bond and
note transactions, to assist in determining a current market value for each
security. The Fund's pricing services may use valuation models or matrix pricing
which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Senior secured corporate loans with floating or variable interest rates
generally trade in the over-the-counter market rather than on a securities
exchange. The Fund may utilize independent pricing services, quotations from
loan dealers and other financial institutions, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Fund's pricing services use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond characteristics such as dealer quotes,
issuer type, coupon, maturity, weighted average maturity, interest rate spreads
and yield curves, cash flow and credit risk/quality analysis, to determine
current value.
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,
Semiannual Report | 23
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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. 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 Trustees.
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. The Fund may enter
into foreign currency exchange contracts to facilitate transactions denominated
in a foreign currency. 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 Trustees.
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. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily
marketable, but may be subject to some restrictions on resale.
24 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. 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.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2010, and has
determined that no provision for income tax is required in the Fund's financial
statements.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on 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.
F. 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.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and trustees are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
Semiannual Report | 25
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2010, there were an unlimited number of shares authorized ($0.01
par value). During the period ended February 28, 2010 and year ended August 31,
2009 there were no shares issued; all reinvested distributions were satisfied
with previously issued shares purchased in the open market.
The Fund's Board of Trustees 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 periods ended February 28, 2010 and
August 31, 2009, there were no shares repurchased.
3. SENIOR FIXED RATE NOTES
On August 29, 2008, the Fund issued $65,000,000 million principal amount of a
new class of five-year senior fixed rate notes (Notes). The Notes are general
unsecured obligations of the Fund and rank senior to trust shares and all
existing or future unsecured indebtedness of the Fund. The Notes bear interest,
payable semi-annually, at the rate of 5.87% per year, to maturity on August 28,
2013. The Fund is required to maintain on a monthly basis a specified discounted
asset value for its portfolio in compliance with guidelines established in the
Notes Agreement, and is required under the 1940 Act to maintain asset coverage
for the Notes of at least 300%. The Fund has met these requirements during the
period ended February 28, 2010. The issuance costs of $427,946 incurred by the
Fund are deferred and amortized on an interest method basis over the term of the
Notes. Subject to certain restrictions and make whole premiums, the Fund may
prepay the Notes at any time. At February 28, 2010, if the Notes were fully
prepaid, the make whole premium related to the current balance of the Notes
would have been approximately $5,346,000.
For the year ended August 31, 2009, the Fund incurred realized and unrealized
losses related to the broader market downturn. As a result of these losses, the
Fund no longer met certain asset coverage requirements contained in the Notes
agreement, which are consistent with the 300% asset coverage requirements under
the 1940 Act. On October 14, 2008, the Fund made an early partial prepayment of
$8,000,000 of the Notes, together with a make whole premium of $951,222. Upon
this early prepayment, the asset coverage requirement under the Notes was met.
On October 27, 2008, the Fund made another partial prepayment of $10,000,000 of
the Notes, together with an additional make whole premium of $500,000. An
additional prepayment of $5,000,000 of the Notes, together with a make whole
premium of $250,000 was made on October 30, 2008. Upon completion of these early
prepayments, the balance of the Notes was reduced to $42,000,000. In connection
with the early Notes prepayments, the Fund expensed $145,034 of previously
incurred Note issuance costs.
Based on the Notes' current credit rating, remaining time to maturity, stated
coupon rates, and other covenants, at February 28, 2010, the estimated fair
value of the Notes was approximately $45,365,000.
26 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. 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
trustees of the Fund are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
---------- ----------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers of 0.75% per year of the
average weekly managed assets. Managed assets are defined as the Fund's gross
asset value minus the sum of accrued liabilities, other than the principal
amount of the Notes.
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
5. 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 February 28, 2010, there
were no credits earned.
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any.
At August 31, 2009, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in:
2010 ............................... $ 6,827,086
2011 ............................... 37,932,623
2012 ............................... 18,676,213
2013 ............................... 3,096,550
2014 ............................... 4,643,995
2017 ............................... 1,679,183
-----------
$72,855,650
===========
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 August 31, 2009, the Fund deferred realized
capital losses and realized currency losses of $8,134,669 and $114,950,
respectively.
Semiannual Report | 27
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INCOME TAXES (CONTINUED)
At February 28, 2010, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments .......................... $191,462,891
============
Unrealized appreciation ...................... $ 18,884,936
Unrealized depreciation ...................... (11,409,735)
------------
Net unrealized appreciation (depreciation) ... $ 7,475,201
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, payments-in-kind, bond discounts and premiums, corporate actions,
and Note issuance costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions,
payments-in-kind, bond discounts and premiums, and corporate actions.
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended February 28, 2010, aggregated $41,388,262 and $42,706,315,
respectively.
8. 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 Advisers.
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.
9. CREDIT RISK AND DEFAULTED SECURITIES
At February 28, 2010, the Fund had 71.32% of its portfolio invested in high
yield, senior secured floating rate notes, or other securities rated below
investment grade. These securities may be more sensitive to economic conditions
causing greater price volatility and are potentially subject to a greater risk
of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At February 28, 2010, the aggregate value of
these securities was $203,260, representing 0.10% of the Fund's portfolio. The
Fund discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. The
securities have been identified on the accompanying Statement of Investments.
28 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At February 28, 2010, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Trustees as reflecting fair value, as
follows:
ACQUISITION
SHARES ISSUER DATE COST VALUE
------- ------ ----------- -------- -----
181,875 VS Holdings Inc. ................................ 12/06/01 $181,875 $--
===
TOTAL RESTRICTED SECURITIES (0.00% of Net Assets)
11. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Fund's Investment
Manager may have discussions or enter into agreements with issuers, underwriters
or creditors' committees which, pursuant to the Fund's policies and requirements
of applicable securities laws, could prevent the Fund from trading in the
securities of such company for limited or extended periods of time.
12. FAIR VALUE MEASUREMENTS
The Fund follows a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Fund's own market
assumptions (unobservable inputs). These inputs are used in determining the
value of the Fund's 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.
Semiannual Report | 29
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
The following is a summary of the inputs used as of February 28, 2010, in
valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ------------ ------- ------------
ASSETS:
Investments in Securities:
Equity Investments:(a)
Automobiles & Components $ -- $ -- $1,096 $ 1,096
Commercial & Professional Services -- -- --(b) --(b)
Diversified Financials -- 427,537 -- 427,537
Other Equity Investments(c) 55,321,008 -- -- 55,321,008
Senior Floating Rate Interests -- 965,070 -- 965,070
Corporate Bonds -- 140,487,382 -- 140,487,382
Short Term Investments 1,735,999 -- -- 1,735,999
----------- ------------ ------ ------------
Total Investments in Securities $57,057,007 $141,879,989 $1,096 $198,938,092
=========== ============ ====== ============
(a) Includes common and preferred stock.
(b) Includes security determined to have no value at February 28, 2010.
(c) For detailed industry descriptions, see the accompanying Statement of
Investments.
At February 28, 2010, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:
NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF AT END ON ASSETS HELD
OF PERIOD GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 OF PERIOD AT PERIOD END
---------- ----------- -------------- --------- ----------- --------- --------------
ASSETS
Equity Investments:
Automobiles & Components .. $1,096 $ -- $ -- $ -- $-- $1,096 $--
Commercial & Professional
Services ............... --(a) -- -- -- -- --(a) --
Corporate Bonds .............. 7,216 (718,255) 714,387 (3,348) -- -- --
------ --------- -------- ------- --- ------ ---
Total ........................... $8,312 $(718,255) $714,387 $(3,348) $-- $1,096 $--
====== ========= ======== ======= === ====== ===
(a) Includes security determined to have no value at February 28, 2010.
30 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
13. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2010-6, FAIR VALUE MEASUREMENTS AND
DISCLOSURES (TOPIC 820): IMPROVING DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS,
which enhances and clarifies existing fair value measurement disclosure
requirements and is effective for interim and annual periods beginning after
December 15, 2009. The Fund is currently evaluating the impact, if any, of
applying this provision.
In March 2010, the FASB issued ASU No. 2010-11, DERIVATIVES AND HEDGING (TOPIC
815): SCOPE EXCEPTION RELATED TO EMBEDDED CREDIT DERIVATIVES, which clarifies
existing derivatives and hedging disclosure requirements and is effective for
fiscal quarters beginning after June 15, 2010. The Funds are currently
evaluating the impact, if any, of applying this provision.
14. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial
statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS
SELECTED PORTFOLIO
FRN - Floating Rate Note
PIK - Payment-in-kind
Semiannual Report | 31
Franklin Universal Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 23, 2010, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for Franklin Universal Trust (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 to U.S. funds and other accounts, 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.
In considering such materials, the independent Trustees 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 Trustees, 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 of net asset value
calculations. Favorable consideration was given to management's efforts and
32 | Semiannual Report
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted by the Board 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 management's conservative approach and diligent risk management
procedures, including continuous monitoring of counterparty credit risk and
attention given to derivatives and other complex instruments. 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 as evidenced by
its subsidization of money market funds. The Board also noted management's
efforts to minimize any negative impact on the nature and quality of services
provided the Fund arising from Franklin Templeton Investments' implementation of
a hiring freeze and employee reductions in response to market conditions during
the latter part of 2008 and early 2009.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. Consideration
was given to performance reports and discussions with portfolio managers at
Board meetings during the year, as well as the Lipper report furnished for the
agreement renewals. The Lipper report prepared for the Fund showed its
investment performance in comparison with a performance universe consisting of
the Fund and all leveraged closed-end high current yield funds as selected by
Lipper during 2009, as well as the previous 10 years ended December 31, 2009.
Such report considered both income return and total return on a net asset value
basis without regard to market discounts or premiums to accurately reflect
investment performance. The Lipper report showed the Fund's income return to be
in the lowest quintile of such performance universe for the one-year period and
on an annualized basis for each of the previous three-, five- and 10-year
periods, as well. In discussing such performance, management pointed out the
Fund's mandate to invest between 20 and 30 percent of its assets in utilities
stocks differed from the Lipper performance universe, which included pure high
yield funds, and that its relative income performance within such universe
reflected such difference. The Board believed such explanation was reasonable
and noted that the Fund's income return exceeded 8% in 2009 and on an annualized
basis exceeded 7% for the previous three- and five-year periods and exceeded 8%
for the previous 10-year period as shown by the Lipper report. The Fund's Lipper
report showed the Fund's total return to be in the second-lowest quintile of its
performance universe in 2009, but to be in either the highest or second-highest
quintile of such universe for each of the previous three-, five- and 10-year
periods on an annualized basis. The Board was satisfied with such performance,
noting that the Fund's total return during 2009 exceeded 54% as shown by the
Lipper report.
Semiannual Report | 33
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fee and total expense ratio of the Fund compared with a Lipper
expense group consisting of the Fund and eight other leveraged closed-end high
current yield funds as selected by Lipper. Lipper expense data is based upon
information taken from each fund's most recent annual report, which reflects
historical asset levels that may be quite different from those currently
existing, particularly in a period of market volatility. While recognizing such
inherent limitation and the fact that expense ratios generally increase as
assets decline and decrease as assets grow, the Board believed the independent
analysis conducted by Lipper to be an appropriate measure of comparative
expenses. In reviewing comparative costs, Lipper provides information on the
Fund's contractual investment management fee 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 expenses of the Fund in comparison with those of its
Lipper expense group. The Lipper contractual investment management fee analysis
considers administrative fees to be part of investment management fees and
showed the Fund's contractual management fee rate to be the second least
expensive in its Lipper expense group and its actual total expense ratio to be
the most expensive in such expense group. Management explained that the Lipper
report reflected the Fund's expenses for its fiscal year ended August 31, 2009,
and that such high total expense ratio reflected costs, including penalty fees,
involved in the Fund's October 2008 partial prepayment of its senior notes
necessitated by the sharp decline in asset values in 2008 and the maximum
debt-to-asset ratios required by the terms of such notes. The Board found such
expenses to be acceptable, noting management's explanation.
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, 2009, being the most
recent fiscal year-end for Franklin Resources, Inc., the Manager's parent. 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, such 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 review the reasonableness of the allocation methodologies solely for
use by the Fund's Board 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
34 | Semiannual Report
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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, including
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.
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.
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.
Semiannual Report | 35
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
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 August 31, 2009. Additionally, the Fund expects to file, on or
about April 30, 2010, such certifications with its Form N-CSRS for the six
months ended February 28, 2010.
36 | Semiannual Report
Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL
BEN/(800) 342-5236 OR VISIT franklintempleton.com. INVESTORS SHOULD CAREFULLY
CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE
INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY
READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE,
WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE
DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING
TONE.
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund(2)
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin DynaTech Fund
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Global Discovery Fund(4)
Templeton Global Long-Short Fund(5)
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(6)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(6)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(6)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(7)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(8)
LIMITED-/INTERMEDIATE-TERM
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(9)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(10)
Michigan(10)
Minnesota(10)
Missouri
New Jersey
New York(9)
North Carolina
Ohio(10)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(1)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest
Fund. The fund's investment goal and strategy remained unchanged.
(3.) The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25% of
the outstanding number of shares. Investors may tender all or a portion of
their shares during the tender period.
(4.) Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global
Discovery Fund. The fund's investment goal and strategy remained unchanged.
(5.) Effective 12/18/09, this fund is closed to new investors, pending a
proposal to merge the fund into Templeton World Fund. Existing shareholders
may continue to make additional investments until shortly before the
completion of the transaction, expected in April 2010.
(6.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(7.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(8.) The fund invests primarily in insured municipal securities.
(9.) These funds are available in three or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and a money market portfolio (CA only).
(10.) The Board of Trustees approved the elimination of the non-fundamental
policy requiring the fund to invest at least 80% of net assets in insured
municipal securities and the removal of the word "Insured" from the fund
name. The changes became effective 2/15/09.
(11.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
02/10 Not part of the semiannual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
SEMIANNUAL REPORT
FRANKLIN UNIVERSAL TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
(800) DIAL BEN(R)
TRANSFER AGENT
PNC Global Investment Servicing
P.O. Box 43027
Providence, RI 02940-3027
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.
FUT S 04/10
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 John B. Wilson 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: Michael Luttig, Frank A. Olson
and John B. Wilson.
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 trustees of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Franklin Advisers, Inc. 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. As a matter of policy, the
officers, directors/trustees and employees of 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,
distributor, broker dealer 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 the manager's
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, if any, 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 any one of Sections 12(d)(1)(E), (F), or (G) 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 that the manager
considers in determining how proxies should be voted. However, the manager does
not consider recommendations from management to be 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. 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 the 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.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. However, as
with all proxy issues, the manager conducts an independent review of each
anti-takeover proposal. 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. In addition, 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 realizes that a company's financing
decisions have a significant impact on its shareholders, particularly when they
involve the issuance of additional shares of common or preferred stock or the
assumption of additional debt. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase. 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 they would 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 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
the manager's proxy voting decisions for international investments. However, the
manager must be 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 (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 COMPANIES.
N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to 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
Gaston Gardey, 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
Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN UNIVERSAL TRUST
By /s/LAURA F. FERGERSON
------------------------------
Laura F. Fergerson
Chief Executive Officer -
Finance and Administration
Date: April 27, 2010
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: April 27, 2010
By /s/GASTON GARDEY
--------------------------------
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date: April 27, 2010