Top 5 Fixed Income Holdings and Senior Floating Rate Interests*
Franklin Income Fund 3/31/13
yield segment, the lowest, or most speculative, grade securities outperformed their higher grade counterparts.
Most of the Fund s fixed income sectors delivered positive relative returns, led by technology, communications and energy.3 Transportation and electric utilities detracted from results largely because of the performance of two issuers, rather than broad-based sector weakness.4 Cemex was a top contributor during the period. The Fund owns positions across Cemex s capital structure including straight debt and convertible securities. Individual bond issuers that performed well included First Data, CC Media Holdings,5 Sprint Nextel and Chesapeake Energy. Our investment in CC Media Holdings made gains as investors reacted positively to the company s efforts to extend its debt maturities. Fundamentals remained solid for the company, and we expect the company to further strengthen its capital structure. Sprint Nextel bonds also delivered strong returns as Softbank announced its intention to acquire a majority of the company. We believe that whether Sprint is acquired by Softbank or another large player in the industry, investors are expecting the company s competitive and financial profile to improve.
In contrast, Texas Competitive Electric Holdings and CEVA Group were among the largest fixed income detractors. Texas Competitive Electric s financial position was challenged by a high debt burden amid a protracted downturn in the natural gas and power markets, while CEVA Group continued to struggle with the comparatively weaker economic environment in Europe, its principal market.
The Fund s equity allocation rose during the period as we continued to find opportunities in high dividend paying stocks. In many instances, cash received from the sale, calling or tendering of fixed income securities was reinvested into equity securities. Our actions during the period were anchored on our belief that many equity securities presented an attractive investment opportunity for current income and the potential for long-term capital appreciation. Consistent with our fundamental approach, we remained selective as we believe security selection will continue to play a significant role in our investment strategy.
3. Technology holdings are in information technology in the SOI. Communications holdings are in consumer discretionary and telecommunication services in the SOI.
4. Transportation holdings are in industrials in the SOI. Electric utility holdings are in utilities in the SOI.
5. CC Media Holdings comprises Clear Channel Communications, Inc. and Clear Channel Worldwide Holdings, Inc. in the SOI.
22 | Semiannual Report
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