Templeton Dragon Fund, Inc. Announces Board Initiatives Intended to Reduce Fund Discount

Rhea-AI Summary

Templeton Dragon Fund (TDF) has announced three key initiatives aimed at reducing the fund's discount to net asset value (NAV) and benefiting shareholders:

1. A five-basis point management fee reduction effective March 1, 2025

2. Implementation of a managed distribution plan offering quarterly distributions of $0.10 per share (3.8% NAV-based and 4.6% market price-based annualized distribution as of January 31, 2025)

3. Introduction of an open-market share repurchase program allowing the fund to purchase up to 10% of common shares to reduce market price discount to NAV

The first quarterly distribution under the managed plan is expected around March 31, 2025. The repurchase program will be executed at management's discretion based on factors including discount level, performance, market conditions, and cash availability.

Positive

• Management fee reduction benefits shareholders
• New quarterly distribution provides consistent 3.8-4.6% yield
• 10% share repurchase program can help reduce NAV discount
• Multiple shareholder-friendly initiatives implemented simultaneously

Negative

• No guarantee the plan will successfully reduce NAV discount
• Distributions may include return of capital, not just investment income
• Capital gains might be offset by prior years' losses

Insights

Financial Analyst

Templeton Dragon Fund (TDF) has announced a comprehensive three-part strategy to address its trading discount to NAV, representing a significant shift in shareholder value proposition for this China-focused closed-end fund.

The management fee reduction of five basis points, while modest, demonstrates board responsiveness to shareholder concerns about costs. This reduction will slightly improve the fund's expense ratio, enhancing potential returns in a challenging market environment for Chinese equities.

The managed distribution plan establishing quarterly payments of $0.10 per share (4.6% yield at current market price) is particularly notable. This predictable income stream could attract yield-focused investors, potentially narrowing the discount. However, investors should understand that these distributions may include return of capital if investment income is insufficient, which has different tax implications than dividend income and could effectively represent a partial liquidation of their investment rather than true yield.

Most impactful is the share repurchase program authorizing repurchases of up to 10% of outstanding shares. If fully implemented, this could significantly enhance NAV per share while providing price support. The discretionary implementation is key - effective execution requires purchasing shares only when discounts are attractive and avoiding repurchases during periods of narrower discounts.

These actions reflect growing pressure across the closed-end fund industry to address persistent NAV discounts, which have made these vehicles vulnerable to activist investors. TDF's discount has been particularly problematic given challenges in Chinese equity markets, and these measures represent a substantive attempt to enhance shareholder value while maintaining the fund's investment mandate.

Investment Strategist

Templeton Dragon Fund's three-pronged approach to addressing its NAV discount represents a significant shift in capital allocation strategy that could materially impact shareholder returns.

The management fee reduction, while modest at just five basis points, signals board recognition of cost sensitivity during a challenging period for Chinese equities. More significant is the managed distribution plan establishing quarterly payments of $0.10 per share, creating a more predictable income profile for a fund focused on a growth-oriented market that traditionally offers yield.

This distribution strategy represents a fundamental repositioning of TDF in the marketplace. By offering a 4.6% market price yield, the fund now presents a hybrid value proposition - exposure to Chinese equities with an income component that could attract yield-focused investors who have historically avoided China-focused investments.

The share repurchase authorization of up to 10% of outstanding shares provides the most direct mathematical benefit. At TDF's current discount, repurchasing 10% of shares could increase NAV per share by approximately 1-2%, effectively transferring value from selling shareholders to those who remain invested.

However, investors should recognize important limitations. The discretionary nature of the repurchase program means implementation timing remains uncertain. Additionally, if the fund cannot generate sufficient income and capital gains to support distributions, return of capital distributions may erode NAV over time, potentially undermining long-term returns.

These measures represent a balanced approach to the persistent discount challenge facing China-focused closed-end funds, but effectiveness will ultimately depend on execution quality and underlying portfolio performance in a market that continues to face significant structural headwinds.

NEW YORK--(BUSINESS WIRE)-- Templeton Dragon Fund, Inc. [NYSE: TDF] (“TDF” or the “Fund”) today announced initiatives of the Fund’s Board of Directors (“Board”) designed to reduce the Fund’s discount to net asset value (“NAV”) and benefit shareholders. These initiatives include a management fee reduction, a managed distribution plan and a share repurchase program.

Management fee reduction: The Board approved a five-basis point reduction in the investment management fee that shareholders pay to the investment manager, Templeton Asset Management Ltd. The management fee reduction will be effective March 1, 2025. The prior and new investment management fees, calculated weekly and paid monthly, to Templeton Asset Management Ltd. based on the average weekly net assets of the Fund are as follows:

Net Assets	Prior Annual Fee Rate	New Annual Fee Rate
Up to and including $1 billion	1.100%	1.050%
Over $1 billion, up to and including $2 billion	1.050%	1.000%
In excess of $2 billion	1.000%	0.950%

Managed distribution plan: The Board authorized a managed distribution plan (the “Plan”) pursuant to which the Fund will make quarterly distributions to shareholders at the fixed rate of $0.10 per share (this equates to an annualized distribution of 3.8% and 4.6% based on the Fund’s January 31, 2025, closing NAV and market price, respectively). The Plan is intended to provide shareholders with consistent distributions each quarter and is intended to narrow the discount between the market price and NAV of the Fund’s common shares, but there can be no assurance that the Plan will be successful in doing so. The Fund anticipates the first quarterly distribution to be paid on or about March 31, 2025. Additional information about the Plan is provided below.

Share repurchase program: The Board approved an open-market share repurchase program (the “Share Repurchase Program”) to authorize the Fund to purchase, from time to time, up to 10% of the Fund’s common shares in open-market transactions, at the discretion of management, in order to help reduce the Fund’s market price discount to NAV. Additional information about the Share Repurchase Program is provided below.

Additional information about the Plan: To the extent that sufficient distributable income is not available on a quarterly basis, the Fund will distribute long-term capital gains and/or return of capital in order to maintain its managed distribution rate. A return of capital may occur, for example, when some or all of the money that was invested in the Fund is paid back to shareholders. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.” Even though the Fund may realize current year capital gains, such gains may be offset, in whole or in part, by the Fund’s capital loss carryovers from prior years.

The Board may amend the terms of the Plan or terminate the Plan at any time without prior notice to the Fund’s shareholders. The amendment or termination of the Plan could have an adverse effect on the market price of the Fund’s common shares. The Plan will be subject to periodic review by the Board, including a yearly review of the distribution rate to determine if an adjustment should be made.

Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of the distribution or from the terms of the Plan. The amounts and sources of distributions for tax reporting purposes will depend upon the Fund’s investment experience during its fiscal year and may be subject to changes based on tax regulations. The Fund will send a Form 1099-DIV to shareholders for the calendar year that will describe how to report the Fund’s distributions for federal income tax purposes.

Additional information about the Share Repurchase Program: Subject to the 10% limitation, the timing and amount of repurchases would be in the discretion of the Fund’s portfolio managers. In exercising its discretion consistent with their portfolio management responsibilities, the portfolio managers will take into account various other factors, including, but not limited to, the level of the discount, the Fund’s performance, portfolio holdings, dividend history, market conditions, cash on hand, the availability of other attractive investments, and whether the sale of certain portfolio securities would be undesirable because of liquidity concerns or because the sale might subject the Fund to adverse tax consequences. Any repurchases would be made on a national securities exchange at the prevailing market price, subject to exchange requirements, federal securities laws and rules that restrict repurchases, and the terms of any outstanding leverage or borrowing of the Fund.

If and when the Fund’s 10% threshold is reached, no further repurchases could be completed unless authorized by the Board. Until the 10% threshold is reached, Fund management will have the flexibility to rapidly commence share repurchases if and when it is determined to be appropriate in light of prevailing circumstances. The Share Repurchase Program is intended to benefit shareholders by enabling the Fund to repurchase shares at a discount to NAV, thereby increasing the proportionate interest of each remaining shareholder in the Fund.

For further information on Templeton Dragon Fund, Inc. please visit our web site at www.franklintempleton.com.

About Franklin Templeton

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives and multi-asset solutions. With more than 1,500 investment professionals, and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and $1.58 trillion in assets under management as of January 31, 2025. For more information, please visit franklintempleton.com and follow us on LinkedIn, X and Facebook.

Category: Fund Announcement

Source: Franklin Templeton Closed End Funds

Source: Franklin Resources, Inc.

View source version on businesswire.com: https://www.businesswire.com/news/home/20250226829369/en/

Investor Contact: Fund Investor Services: 1-800-342-5236

Media Contact: Lisa Tibbitts: 1-904-942-4451 or Lisa.Tibbitts@franklintempleton.com

Source: Franklin Templeton

FAQ

What is the quarterly distribution amount under TDF's new managed distribution plan?

TDF will distribute $0.10 per share quarterly, representing a 3.8% NAV-based and 4.6% market price-based annualized distribution rate.

When will Templeton Dragon Fund's management fee reduction take effect?

The five-basis point management fee reduction will become effective March 1, 2025.

How much of TDF's shares can be repurchased under the new program?

The fund can repurchase up to 10% of its common shares through open-market transactions.

When will TDF's first quarterly distribution under the new plan be paid?

The first quarterly distribution is anticipated to be paid on or about March 31, 2025.