<PAGE> 1
TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI
Foreign Equity Series
ANNUAL REPORT
[TEMPLETON LOGO] DECEMBER 31, 1996
<PAGE> 2
Mutual funds, annuities, and other investment products:
- are not FDIC insured;
- are not deposits or obligations of, or guaranteed by,
any financial institution;
- are subject to investment risks, including possible loss of the
principal amount invested.
<PAGE> 3
December 31, 1996
Dear Shareholder...
In general, the fourth quarter of 1996 proved to be a very
profitable one for equity investors, capping a good, full year which saw
numerous markets around the world reach all-time peaks. The economic environment
remained positive for many stocks, with moderately strong economic growth,
subdued inflation, and solid corporate earnings results underpinning many
financial markets.
The benefits of diversification were also demonstrated in 1996.
In addition to the well-publicized rise in the U.S. stock market, many foreign
equity markets posted impressive gains. Brazil, Canada, Finland, Hong Kong,
Indonesia, Malaysia, the Netherlands, Norway, Spain, Sweden, and the United
Kingdom recorded rises of 25% or more in U.S. dollar terms for the year. On the
other hand, Chile, India, Japan, Korea, Singapore, South Africa, and Thailand
turned in negative results for 1996.
GARY MOTYL HAS BEEN A PORTFOLIO MANAGER AND RESEARCH ANALYST WITH TEMPLETON
INVESTMENT COUNSEL, INC. SINCE 1981. HE CURRENTLY MANAGES SEVERAL INSTITUTIONAL
MUTUAL FUNDS, AND IS RESPONSIBLE FOR MANAGING MANY OF OUR SEPARATE ACCOUNT
PORTFOLIOS. MR. MOTYL'S RESEARCH RESPONSIBILITIES INCLUDE THE GLOBAL AUTOMOBILE
INDUSTRY AND U.S.-BASED UTILITIES AS WELL AS COUNTRY COVERAGE OF GERMANY.
PRIOR TO JOINING THE TEMPLETON ORGANIZATION, MR. MOTYL WORKED FROM 1974 TO 1979
AS A SECURITY ANALYST WITH STANDARD & POOR'S CORPORATION. HE THEN WORKED AS A
RESEARCH ANALYST AND PORTFOLIO MANAGER FROM 1979 TO 1981 WITH LANDMARK FIRST
NATIONAL BANK. IN THIS CAPACITY HE HAD RESPONSIBILITY FOR EQUITY RESEARCH AND
MANAGED SEVERAL PENSION AND PROFIT SHARING PLANS.
MR. MOTYL HOLDS A BACHELOR OF SCIENCE IN FINANCE DEGREE FROM LEHIGH UNIVERSITY
IN PENNSYLVANIA AND A MASTER OF BUSINESS ADMINISTRATION DEGREE FROM PACE
UNIVERSITY IN NEW YORK, AND IS A CHARTERED FINANCIAL ANALYST.
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/96
<TABLE>
<CAPTION>
SINCE
INCEPTION(1,2)
ONE-YEAR(1,2) THREE-YEAR(1,2) FIVE-YEAR(1,2) (10/18/90)
<S> <C> <C> <C> <C>
TIFI Foreign
Equity Series 21.58% 11.24% 12.73% 13.12%
MSCI EAFE Index 6.36% 8.63% 8.48% 7.83%
</TABLE>
(1) Past expense reductions by the Fund's manager increased the Fund's total
returns.
(2) Average annual total return figures represent the average annual change in
value of an investment over the specified periods.
All total return calculations assume that all dividends and capital gains
distribution were reinvested when paid.
Investment return and principal value will fluctuate with market conditions,
currencies and the economic, social and political climates of the countries
where investments are made. Developing markets involve heightened risks
related to the same factors, in addition to those associated with the
relatively small size and lesser liquidity of these markets. Thus, your
shares, when redeemed, may be worth more or less than their initial cost.
Past performance is not predictive of future results.
continued...
<PAGE> 4
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued................................................................
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION ON 12/31/96
(% of Equity Assets)
<S> <C>
Europe 70.2%
North America 3.7%
Asia 13.9%
Australia/New Zealand 7.0%
Mid-East/Africa 0.1%
Latin America 5.1%
<CAPTION>
FUND ASSET ALLOCATION ON 12/31/96
<S> <C>
Short-term & Order 10.9%
Equity* 89.1%
</TABLE>
*Equity includes convertible and preferred stocks
Within this environment, the Templeton Institutional Funds,
Inc. Foreign Equity Series (the "Fund") returned 8.91%, 21.58%, 11.24%, 12.73%,
and 13.12% for the quarter, one-year, three-year, five-year and since inception
(October 18, 1990) periods ending December 31, 1996, compared to the unmanaged
Morgan Stanley Capital International Europe Australia, Far East (MSCI EAFE)
Index returns of 1.7%, 6.36%, 8.63%, 8.48%, and 7.83% for the same periods,
respectively.
Please remember that the Fund's performance differs from that
of the index because, among other things, the index does not contain cash (the
Fund generally carries a certain percentage of cash at any given time), is not
managed according to any investment strategy, and includes no sales charges or
management expenses. Of course, one cannot invest directly in an index.
We continued to search for securities that we considered to be
undervalued on the basis of future earnings and/or asset values. The Fund
benefited from its exposure to the financial sector, selected emerging markets,
and well-positioned European companies. A significant number of Japanese
equities were noticeably absent, reflecting the continued high valuations of
stocks in that country.
Financial companies worldwide performed well during the year.
Good economic growth and favorable interest rate trends provided a healthy
backdrop for this sector in general. Many firms benefited from cost reduction
programs, and banks were further aided by a drop in loan loss provisions.
The "pure" emerging markets, meanwhile, were a mixed bag, with
some helping and others detracting from the performance of the Fund.
Nonetheless, we believe that the long-term outlook for these markets is
generally quite bright. Though many investors do not consider it an emerging
market, Hong Kong posted a very respectable performance in 1996, despite
investor concerns about the handover to China in July 1997. We believe that the
companies in the Fund's portfolio are poised to benefit from the changes in Hong
Kong and China over the next several years; however, we recognize that there
will likely be a great deal of market volatility.
The countdown toward European monetary and economic union
continues, but progress has been slower than hoped for. Europe desperately needs
a sustained economic expansion to reach its common goals. The recent interest
rate reduction by the German central bank illustrates how concerned and serious
they are to help Germany and the other European economies recover. The economic
data from Europe has been mixed of late, with only a few signs pointing to
accelerating growth. Order inflow from export related areas has been quite good,
for instance. In our view, a pickup in the European economy would be positive
for equities in general, as it would unlikely be strong enough to rekindle
inflation. Many companies posted respectable earnings numbers as cost reduction
programs have offset the effects of lackluster revenue growth. They continued to
restructure, invest in new plant and equipment, and implement programs to
enhance shareholder value. Moreover, the efforts
2
<PAGE> 5
................................................................................
of many European companies to compete more effectively in the global marketplace
were acknowledged by investors, particularly in the latter part of the year,
helping boost the Fund's returns.
Despite redoubled efforts, we continued to struggle to find
value among Japanese stocks during the year. Our lack of success and substantial
underweighting in the market were rewarded, however, as we were able to avoid
much of this market's poor performance. According to the MSCI index, Japan's
market closed down 15% in U.S. dollars for the 12 months ending December 1996.
Average stock market valuations in Japan support our underweighted stance. Price
to earnings ratios, recently at 95-100x, have been excessive. After adjusting
for differences in accounting and the possibility of earnings doubling from
currently depressed levels, stock prices are still among the highest worldwide.
Even assuming a better economy and a strong rebound in corporate earnings over
the next several years, Japanese equity valuations remain well in excess of
other global markets.
Trading activity in the Fund during the fourth quarter was
modest, occurring mostly on the buy side. New positions included BTR Ltd., a
diversified United Kingdom-based industrial products company; Hong Kong Electric
Holdings, a Hong Kong electric utility; and Siam City Cement, a cement producer
in Thailand. We also added to several positions, including Philips Electronics,
Svedala Industries, and Pioneer International. On the sell side, we eliminated
positions in Amer Group and the Capital Portugal Fund.
We have always maintained that our ability to serve you is
enhanced by our strong work ethic. There is nothing glamorous about hard work,
but there is a certain amount of pride that is built upon its success. Finding
cheap securities in over three dozen countries and industries worldwide takes an
enormous amount of work. During the last 12 months, our team of analysts wrote
over 2,000 research reports on companies in 38 countries and 32 industries,
working diligently to find cheap investments for our clients. The typical
analyst spent 3 to 4 months traveling to examine factories, speak with company
management, and analyze industry trends globally.
The work ethic at Templeton is perhaps best exemplified by the
research process. In order to purchase a security, an analyst must prepare a
written research report showing historical information, future estimates, and
justification for assumptions. Written research reports are sent to all analysts
in each of our global research offices. They must be discussed at one of three
conference calls during the week before being approved for our "bargain list" by
the Director of Research. Once approved, the idea is placed on our "bargain
list" for all Portfolio Managers to consider for their assigned portfolios. This
general "bargain list" is composed of ideas from all analysts within the global
team. It is important to consider that every Portfolio Manager is also an
analyst with specific research responsibilities for our group worldwide.
Looking ahead, we remain positive on global stock markets. The
Fund is, in our opinion, well-structured with broad diversification across
<TABLE>
<CAPTION>
INDUSTRY DIVERSIFICATION ON 12/31/96
(% of Total Portfolio)
<S> <C>
Banking 14.7%
Utilities, Electrical, & Gas 8.8%
Telecommunications 6.6%
Insurance 4.8%
Multi-industry 4.7%
Chemicals 4.3%
Energy Sources 4.3%
Electrical & Electronics 3.2%
Automobiles 2.9%
Forest Products & Paper 2.9%
</TABLE>
<TABLE>
<CAPTION>
10 LARGEST POSITIONS ON 12/31/96
(% of Total Portfolio)
<S> <C>
Stet Spa Sta Finanziaria Telefonica
Torino 1.8%
Telefonica de Espana SA 1.8%
Rhone-Poulenc SA 1.7%
Iberdrola SA 1.6%
Banco Bilbao Vizcaya SA 1.5%
Societe Elf Aquitaine SA 1.4%
Argentaria Corporacion Bancaria
de Espana SA 1.3%
Svenska Handelsbanken 1.3%
AXA SA 1.3%
ABN AMRO NV 1.2%
</TABLE>
3
<PAGE> 6
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued................................................................
many countries and industries, and in stocks which offer attractive valuations.
We believe the overall economic environment is healthy, and while the excellent
returns of the past year may be difficult to match, the long-term prospects for
equity investors remain bright.
This discussion reflects the strategies we employed for the
Fund during the past fiscal year, and includes our opinions as of the close of
the period. Since economic and market conditions are constantly changing, our
strategies, evaluations, conclusions and decisions regarding portfolio holdings
may change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the Fund.
Of course, it should be remembered that investing in foreign
securities involves special risks related to market and currency volatility, and
economic, social, political and other factors in the countries where the Fund is
invested. Developing markets involve heightened risks related to the same
factors, in addition to those associated with the relatively small size and
lesser liquidity of these markets. These special risks and other considerations
are discussed in the Fund's prospectus.
As always we appreciate your continued confidence in our
organization. Please feel free to contact us with any questions or comments you
might have.
Sincerely,
/s/ Donald F. Reed
Donald F. Reed, C.F.A., C.I.C.
President
Templeton Institutional Funds, Inc.
/s/ Gary P. Motyl
Gary P. Motyl, C.F.A.
Executive Vice President & Director
Templeton Investment Counsel, Inc.
Total Return Index Comparison(1)
$5,000,000 Investment: 10/18/90 - 12/31/96
[LINE GRAPH]
TIFI Foreign Equity Series
- - NOTE: First period return inception date is 10/18/90
<TABLE>
<CAPTION>
Monthly US Dollar US Dollar US Dollar
TIFI - Foreign Equity Series MSCI EAFE Index CPI Index
Acct 243 Acct -2 Acct -152
-------- ---------- ----------
<S> <C> <C> <C>
INCEPT 5000000 5000000 5000000
Oct-90 4970000 4934892.78 4998721.57
Nov-90 4875000 4645198.59 5009958.28
Dec-90 4860000 4722259.16 5028663.71
Jan-91 5005000 4876325.9 5059009.56
Feb-91 5615000 5400496.15 5066410.98
Mar-91 5453000 5077595.52 5073812.41
Apr-91 5503500 5128932.97 5081213.83
May-91 5579500 5183963.71 5096083.97
Jun-91 5296000 4804397.26 5111626.97
Jul-91 5604500 5041750.59 5119028.4
Aug-91 5615000 4940595.93 5133898.53
Sep-91 5756500 5220524.94 5156775.67
Oct-91 5736500 5295838.6 5164177.1
Nov-91 5685500 5050010.64 5179047.24
Dec-91 5899500 5312364.75 5183084.38
Jan-92 6060500 5200538.22 5190485.8
Feb-92 6155000 5015873.32 5209393.08
Mar-92 6108500 4686136.17 5235634.5
Apr-92 6304500 4709408.18 5243035.93
May-92 6657500 5026149.28 5250437.36
Jun-92 6584500 4789500.15 5269344.64
Jul-92 6360500 4668304.37 5280850.49
Aug-92 6181000 4962680.16 5295720.63
Sep-92 6024500 4866373.34 5310590.77
Oct-92 5811500 4612693.34 5329498.05
Nov-92 5822500 4657423.95 5336899.48
Dec-92 5821000 4682811.6 5333535.19
Jan-93 5786500 4683718.3 5359776.61
Feb-93 5913000 4826674.92 5378549.32
Mar-93 6059000 5248593.4 5397591.17
Apr-93 6254000 5748185.99 5412461.31
May-93 6420500 5871195.18 5419997.31
Jun-93 6300000 5780827.25 5427466.02
Jul-93 6403000 5984532.88 5427264.16
Aug-93 6856500 6308829.82 5442538.02
Sep-93 6804500 6168291.07 5453640.16
Oct-93 7206500 6359907.35 5476517.29
Nov-93 7040000 5805308.19 5480150.72
Dec-93 7725000 6225715.51 5479881.58
Jan-94 8276000 6753415.85 5495222.72
Feb-94 8049500 6736188.52 5514331.85
Mar-94 7693000 6447252.94 5533239.13
Apr-94 7804500 6722285.76 5540640.56
May-94 7604500 6685110.99 5544004.85
Jun-94 7359500 6781221.36 5562912.13
Jul-94 7678500 6848015.05 5577782.26
Aug-94 7941000 7011523.57 5600659.4
Sep-94 7752500 6792101.78 5615529.54
Oct-94 7918000 7019986.12 5619566.68
Nov-94 7576000 6684204.29 5626968.11
Dec-94 7516500 6727423.74 5626968.11
Jan-95 7300500 6470827.18 5649172.39
Feb-95 7414500 6453902.08 5671713.09
Mar-95 7449500 6858145.93 5690553.09
Apr-95 7777000 7117909.9 5709393.08
May-95 7976000 7034886.25 5720697.08
Jun-95 8023000 6913385.21 5732001.08
Jul-95 8420500 7345794.24 5731866.51
Aug-95 8204000 7067134.61 5747409.5
Sep-95 8356000 7207068.89 5758242.5
Oct-95 8175000 7015150.38 5777217.06
Nov-95 8303500 7212206.86 5776813.35
Dec-95 8492000 7504769.25 5773045.35
Jan-96 8764500 7537410.51 5806890.06
Feb-96 8903000 7564611.56 5825730.05
Mar-96 8970000 7727186.18 5855806.76
Apr-96 9298000 7953743.71 5878347.46
May-96 9407000 7809420.99 5889651.46
Jun-96 9376500 7855142.93 5893419.46
Jul-96 9134000 7627476.2 5904656.17
Aug-96 9401000 7646214.7 5915960.17
Sep-96 9480500 7851024.69 5934800.16
Oct-96 9571500 7772850.69 5953640.16
Nov-96 10064000 8084151.58 5964944.15
Dec-96 10324500 7981996.53 5964744.15
</TABLE>
<TABLE>
<CAPTION>
Periods ended December 31, 1996
SINCE
INCEPTION
ONE-YEAR (10/18/90)
<S> <C> <C>
Average Annual Total Return(1),(2) 21.58% 13.12%
Cumulative Total Return(1),(3) 21.58% 114.82%
</TABLE>
(1) Past expense reductions by the Fund's manager increased the
Fund's total returns.
(2) Average annual total return figures represent the average annual change in
value of an investment over the specified periods.
(3) The cumulative total return represents the change in value of an investment
over the period(s) indicated.
All total return calculations assume that all dividends and capital gains
distribution were reinvested when paid.
Investment return and principal value will fluctuate with market market
conditions, currencies and the economic, social and political climates of
the countries where investments are made. Developing markets involve
heightened risks related to the same factors, in addition to those
associated with the relatively small size and lesser liquidity of these
markets. Thus, your shares, when redeemed, may be worth more or less than
their initial cost. Past performance is not predictive of future results.
For more complete portfolio information, call Templeton Fund Information,
toll-free, at 1-800-362-6243.
4
<PAGE> 7
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1996 1995 1994 1993+ 1992+
---------- ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 14.04 $ 12.86 $ 13.32 $ 10.05 $ 10.63
---------- ---------- ---------- -------- ------
Income from investment operations:
Net investment income .45 .31 .20 .23 .27
Net realized and unrealized gain (loss) 2.54 1.35 (.16) 3.19 (.41)
---------- ---------- ---------- -------- ------
Total from investment operations 2.99 1.66 .04 3.42 (.14)
---------- ---------- ---------- -------- ------
Distributions:
Dividends from net investment income (.45) (.31) (.19) (.09) (.24)
Amount in excess of net investment income (.02) -- -- -- --
Distributions from net realized gains (.14) (.17) (.31) (.06) (.20)
Amount in excess of net realized gains (.08) -- -- -- --
---------- ---------- ---------- -------- ------
Total distributions (.69) (.48) (.50) (.15) (.44)
---------- ---------- ---------- -------- ------
Change in net asset value 2.30 1.18 (.46) 3.27 (.58)
---------- ---------- ---------- -------- ------
Net asset value, end of year $ 16.34 $ 14.04 $ 12.86 $ 13.32 $ 10.05
========== ========== ========== ======== ======
TOTAL RETURN* 21.58% 13.00% .24% 34.03% (1.33)%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000) $2,857,591 $1,817,883 $1,093,227 $407,970 $ 566
Ratio of expenses to average net assets .87% .88% .95% 1.03% 8.82%
Ratio of expenses, net of reimbursement, to average net assets .87% .88% .95% 1.00% 1.00%
Ratio of net investment income to average net assets 3.20% 2.70% 2.03% 1.73% 2.38%
Portfolio turnover rate 7.39% 20.87% 7.90% 42.79% 8.45%
Average commission rate paid (per share) $ .0021
</TABLE>
* ANNUALIZED.
+ BASED ON AVERAGE WEIGHTED SHARES OUTSTANDING.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE> 8
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Investment Portfolio, December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS: 81.8%
- ---------------------------------------------------------------------------------------------------------------------------------
APPLIANCES & HOUSEHOLD DURABLES: 1.1%
Sony Corp. Jpn. 471,700 $ 30,914,455
- ---------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES: 2.9%
Fiat Spa Itl. 11,600,000 34,975,989
Regie Nationale des Usines Renault SA Fr. 633,695 13,627,192
Volvo AB, B Swe. 1,513,075 33,390,439
-------------
81,993,620
- ---------------------------------------------------------------------------------------------------------------------------------
BANKING: 14.7%
ABN AMRO NV Neth. 2,269 147,718
Argentaria Corporacion Bancaria de Espana SA, ADR Sp. 1,648,000 37,080,000
Australia & New Zealand Banking Group Ltd. Aus. 3,126,161 19,704,679
Banco Bilbao Vizcaya Sp. 790,220 42,668,532
Banco di Sardegna SPA, di Risp Itl. 983,450 8,303,536
Banco Totta & Acores SA Port. 444,000 8,373,144
Banque Nationale de Paris, ADR, 144A Fr. 877,000 33,963,664
Barclays PLC U.K. 1,186,568 20,337,158
BPI Socieda de Gestora de Participacoes Socias SA Port. 441,600 5,496,859
*BPI Socieda de Gestora de Participacoes Socias, new Port. 167,808 1,980,578
C.S. Holding, ADR Swtz. 90 2,311
C.S. Holding, Reg. Swtz. 275 28,250
Canadian Imperial Bank of Commerce Can. 736,800 32,521,310
Daegu Bank Co. Ltd. Kor. 536,637 6,407,827
Deutsche Bank AG Ger. 679,900 31,774,332
HSBC Holdings PLC H.K. 1,588,930 33,999,343
Komercni Banka AS CSK. 132,500 11,040,855
Komercni Banka AS, GDR, 144A CSK. 326,500 8,952,630
*Merita Ltd., A Fin. 7,750,000 24,092,391
National Bank of Canada Can. 1,065,400 10,774,189
*Philippine National Bank Phil. 431,604 5,128,375
PT Lippo Bank, fgn. Indo. 5,600,500 5,453,493
PT Panin Bank, fgn. Indo. 4,772,000 5,454,869
Sparbanken Sverige AB, A Swe. 90,000 1,544,022
Sparbanken Sverige AB, A, 144A Swe. 374,320 6,421,760
Stadshypotek AB, A Swe. 225,000 6,169,491
Stadsyhpotek AS, A, 144A Swe. 380,000 10,419,584
Svenska Handelsbanken, A Swe. 1,289,650 37,064,070
Westpac Banking Corp. Aus. 1,000,970 5,696,642
-------------
421,001,612
- ---------------------------------------------------------------------------------------------------------------------------------
BEVERAGES & TOBACCO: 0.0%
*Swedish Match AB Swe. 3,450 12,141
- ---------------------------------------------------------------------------------------------------------------------------------
BROADCASTING & PUBLISHING: 0.2%
News Corp. Ltd. Aus. 1,225,715 6,469,078
Sing Tao Holdings Ltd. H.K. 503,400 219,662
-------------
6,688,740
- ---------------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS &
COMPONENTS: 2.0%
Pioneer International Ltd. Aus. 9,989,572 29,775,769
Siam City Cement, fgn. Thai. 87,200 455,619
Svedala Industri, A Swe. 1,355,000 22,948,085
Unione Cementi Marchino Emiliane (Unicem), di Risp Itl. 1,168,200 3,008,346
-------------
56,187,819
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC SERVICES: 2.1%
*Adecco SA Swtz. 34,051 $ 8,622,751
Esselte AB, B Swe. 929,400 20,578,077
Hyder PLC U.K. 998,333 12,715,603
Societe Generale de Surveillance Holdings Ltd., br. Swtz. 5,120 12,584,834
*Waste Management International PLC U.K. 1,431,560 5,959,315
-------------
60,460,580
- ---------------------------------------------------------------------------------------------------------------------------------
CHEMICALS: 4.3%
Akzo Nobel NV Neth. 123,064 16,821,954
Bayer AG Ger. 846,230 34,487,241
European Vinyls Corp. EVC International NV Neth. 183,140 5,812,958
Rhone-Poulenc SA, A Fr. 1,424,012 48,583,939
Solvay SA Bel. 29,517 18,071,633
Solvay SA, ADR Bel. 1,615 98,878
-------------
123,876,603
- ---------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & HOUSING: 1.0%
Daito Trust Construction Co. Ltd. Jpn. 1,337,000 14,892,755
Fletcher Challenge Building Ltd. N.Z. 1,403,250 4,315,311
Kyudenko Corp. Jpn. 909,000 9,418,876
-------------
28,626,942
- ---------------------------------------------------------------------------------------------------------------------------------
DATA PROCESSING &
REPRODUCTION: 0.5%
*Newbridge Networks Corp. Can. 475,800 13,497,010
- ---------------------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS: 3.2%
ABB AG, br. Swtz. 19,679 24,479,294
Alcatel Alsthom SA Fr. 200,654 16,129,718
BBC Brown Boveri Ltd., ADR Swtz. 5 622
Hitachi Ltd. Jpn. 3,255,000 30,354,892
Philips Electronics NV Neth. 500,000 20,272,227
-------------
91,236,753
- ---------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS &
INSTRUMENTS: 1.0%
BICC U.K. 5,991,099 28,429,342
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES: 1.0%
Koninklijke Pakhoed NV Neth. 946,542 29,605,136
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY SOURCES: 4.3%
Fletcher Challenge Energy Ltd. N.Z. 1,405,000 4,072,377
Hafslund ASA, B Nor. 1,057,790 7,247,636
MOL Magyar Olay-Es Gazipari RT, GDS 144A Hun. 1,339,742 16,746,775
Repsol SA Sp. 915,500 35,117,966
Saga Petroleum AS, A Nor. 1,128,500 18,932,189
Societe Elf Aquitane SA Fr. 442,308 40,289,695
-------------
122,406,638
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES: 2.3%
Axa SA Fr. 580,354 36,936,706
Chile Fund Inc. Chil. 342,600 7,151,775
*India Fund, B Ind. 3,755,265 5,532,477
Korea International Trust Kor. 72 2,250,000
London Pacific Group Ltd. U.K. 1,212,080 4,350,066
Singapore Fund Sing. 13,634 160,200
Thai Fund Inc. Thai. 360,043 5,940,710
Thailand International Fund Ltd. Thai. 95 2,185,000
-------------
64,506,934
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
(CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS: 1.8%
Albert Fisher Group PLC U.K. 29,283,920 $ 21,069,734
Hillsdown Holdings PLC U.K. 6,885,010 23,589,303
Vetropack AG Swtz. 1,160 2,905,417
Vitro SA Mex. 2,642,800 4,800,818
-------------
52,365,272
- ---------------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER: 2.9%
* Asia Pacific Resources International, A Indo. 59,000 331,875
Cartiere Burgo SPA Itl. 2,218,760 10,244,934
Fletcher Challenge Ltd. Forestry Division N.Z. 3,952,768 6,622,737
Fletcher Challenge Paper Ltd. N.Z. 2,732,500 5,621,355
Metsa Serla OY, B Fin. 1,251,500 9,386,250
PT Barito Pacific Timber, fgn. Indo. 3,852,000 2,364,691
PT Pabrik Kertas Tjiwi Kimia, fgn. Indo. 1,405,998 1,398,855
Sappi Ltd. S.AF. 207,345 1,861,385
Stora Kopparbergs Bergslags AB, B Swe. 1,196,500 16,316,268
Svenska Cellulosa AB, B Swe. 600,000 12,185,019
+ Unipapel SA Sp. 309,693 5,748,971
* UPM-Kymmene Corp. Fin. 495,600 10,396,826
-------------
82,479,166
- ---------------------------------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL CARE: 2.1%
Astra AB, A Swe. 542,500 26,807,408
Hafslund Nycomed AS, ADR B Nor. 4,350 29,805
Medeva PLC U.K. 1,739,171 7,612,262
* Nycomed ASA, A Nor. 560,000 8,560,677
* Nycomed ASA, B Nor. 1,062,140 16,320,119
-------------
59,330,271
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE: 4.8%
Ace Ltd. Bmu. 336,500 20,232,063
Aegon NV Neth. 544,689 34,735,163
GIO Australia Holdings Ltd. Aus. 7,735,003 19,797,083
Ing Groep NV Neth. 849,353 30,599,302
London Insurance Group Inc. Can. 1,039,200 13,809,967
Skandia Foersaekrings AB, free Swe. 300,000 8,489,923
Zuerich Versicherung, new Swtz. 30,875 8,580,874
-------------
136,244,375
- ---------------------------------------------------------------------------------------------------------------------------------
LEISURE & TOURISM: 0.5%
Kuoni Reisen Holding AG, B Swtz. 6,395 15,527,643
- ---------------------------------------------------------------------------------------------------------------------------------
MACHINERY & ENGINEERING: 0.9%
Hitachi Koki Co. Ltd. Jpn. 612,000 4,380,865
Hitachi Koki Co. Ltd., ADR Jpn. 50 3,600
VA Technologie AG, br., 144A Aust. 135,550 21,270,230
-------------
25,654,695
- ---------------------------------------------------------------------------------------------------------------------------------
MERCHANDISING: 1.2%
Dairy Farm International Holdings Ltd. H.K. 5,531,430 4,452,801
House of Fraser PLC U.K. 1,750,000 4,601,792
Koninklijke Bijenkorf Beheer NV (KBB) Neth. 159,099 11,472,821
Kwik Save Group PLC U.K. 2,665,910 14,659,902
-------------
35,187,316
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
METALS & MINING: 1.3%
Boehler Uddeholm AG Aust. 20,450 $ 1,463,344
Boehler Uddeholm AG, 144A Aust. 60,000 4,293,431
Elkem AS Nor. 820,100 13,501,176
*Inmet Mining Corp. Can. 461,500 2,240,864
*Union Miniere NPV Bel. 248,670 16,851,013
-------------
38,349,828
- ---------------------------------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY: 4.7%
Alfa SA de CV, A Mex. 450,000 2,077,934
BTR PLC U.K. 5,500,000 26,758,488
BTR PLC, A U.K. 1,375,780 6,320,649
Compagnie Generale D' Industrie Et de Participati Fr. 25,000 6,899,711
*Fotex First Hungarian-American Photo-Service Hun. 30,000 16,620
Hutchison Whampoa Ltd. H.K. 3,149,500 24,737,491
Jardine Matheson Holdings Ltd. H.K. 3,142,341 20,739,451
Jardine Strategic Holdings Ltd. H.K. 4,815,130 17,430,771
*Jardine Strategic Holdings Ltd., wts. H.K. 345,687 138,275
Marine Wendel Fr. 29,105 2,671,934
PT Bimantara Citra, fgn. Indo. 4,280,000 5,707,875
Swire Pacific Ltd., A H.K. 2,195,000 20,929,763
-------------
134,428,962
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE: 2.6%
Bail Investissement Fr. 92,800 13,262,257
*Fastighets AB Tornet, A Swe. 46,432 708,070
Hang Lung Development Co. Ltd. H.K. 4,684,050 10,295,281
New World Development Co. Ltd. H.K. 3,269,719 22,088,411
Taylor Woodrow PLC U.K. 11,078,810 29,227,683
-------------
75,581,702
- ---------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS: 6.6%
Compania de Telecomunicaciones de Chile SA, ADR Chil. 74,120 7,495,385
Nokia AB, A"" Fin. 580,000 33,665,217
Philippine Long Distance Telephone Co., GDR, 144A Phil. 585,500 18,882,375
*SPT Telecom AS CSK. 208,000 25,898,654
STET (Sta Finanziaria Telefonica Torino) SPA, di
Risp Itl. 15,290,950 51,662,431
Telefonica de Espana SA Sp. 2,172,945 50,463,541
-------------
188,067,603
- ---------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION: 1.9%
Brambles Industries Ltd. Aus. 569,000 11,103,211
Cathay Pacific Airways Ltd. H.K. 8,911,050 14,055,829
Qantas Airways Ltd., ADR, 144A Aus. 827,500 13,550,313
Singapore Airlines Ltd., fgn. Sing. 417,200 3,786,493
Unitor AS Nor. 818,735 10,526,226
-------------
53,022,072
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Investment Portfolio, December 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
UTILITIES ELECTRICAL & GAS: 8.8%
British Gas PLC U.K. 6,116,150 $ 23,522,042
*CEZ CSK. 454,663 16,368,136
Electricidad de Caracas Venz. 8,747,372 8,871,257
Endesa-Empresa Nacional de Electricidad SA Sp. 379,200 26,988,700
Evn Energie-Versorgung Niederoesterreich AG, ADR Aust. 2 60
Evn Energie-Versorgung Niederoesterreich AG Aust. 124,136 18,682,580
Hongkong Electric Holdings Ltd. H.K. 2,399,800 7,973,994
Iberdrola SA Sp. 3,237,643 45,886,872
National Power PLC U.K. 3,069,416 25,712,551
Shandong Huaneng Power chn. 1,032,965 10,071,409
Thames Water Group PLC U.K. 3,318,260 34,817,457
VEBA AG Ger. 544,500 31,321,579
-------------
250,216,637
- ---------------------------------------------------------------------------------------------------------------------------------
WHOLESALE & INTERNATIONAL TRADE: 1.1%
Brierley Investments Ltd. N.Z. 32,693,199 30,277,259
-------------
TOTAL COMMON STOCKS (cost $1,893,510,804) 2,336,177,126
- ---------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS: 5.9%
- ---------------------------------------------------------------------------------------------------------------------------------
ABN Amro NV, conv., pfd. Neth. 571,188 35,432,514
Banco Bradesco SA, pfd. Braz. 600,000,000 4,347,993
Cia de Inversiones en Telecomunicaciones SA, 7.0%,
3/3/98 Arg. 558,790 29,336,471
Concessioni e Costruzioni Autostrade SPA, B, pfd. Itl. 8,865,000 17,425,923
Lojas Americanas SA, pfd. Braz. 340,255,000 4,486,087
Nacional Financiera SA, 11.25%, conv., pfd.,
5/15/98, PRIDE EURO TRANCHE Mex. 541,031 18,395,054
Nacional Financiera SA, 11.25%, conv., pfd.,
5/15/98, PRIDE 4 Mex. 177,000 6,018,000
News Corp. Ltd., pfd. Aus. 4,243,957 18,890,517
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR Braz. 445,000 34,042,500
-------------
TOTAL PREFERRED STOCKS (cost $129,143,417) 168,375,059
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL IN
LOCAL CURRENCY**
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS: 1.4%
- ---------------------------------------------------------------------------------------------------------------------------------
C.S. Holding Finance BV, 4.875%, conv., 11/19/02 U.S. 18,675,000 29,319,750
PIV Investment Finance (Cayman) Ltd., 4.5%, conv.,
12/1/00 U.S. 12,200,000 10,858,000
-------------
TOTAL BONDS (cost $36,312,864) 40,177,750
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 9.2% (cost $262,839,108)
- ---------------------------------------------------------------------------------------------------------------------------------
U. S. Treasury Bill, 4.78% to 5.01%, with maturities
to 3/27/97 U.S. 264,879,000 262,886,664
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS: 98.3% (cost $2,321,806,193) 2,807,616,599
OTHER ASSETS, LESS LIABILITIES: 1.7% 49,974,134
-------------
TOTAL NET ASSETS: 100.0% $2,857,590,733
=============
</TABLE>
* NON-INCOME PRODUCING.
** PRINCIPAL AMOUNT IN CURRENCY OF COUNTRIES INDICATED.
+ SEE NOTE 6.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost $2,321,806,193) $2,807,616,599
Cash 40,465
Receivables:
Investment securities sold 1,540,350
Capital shares sold 48,150,015
Dividends and interest 10,757,942
-------------
Total assets 2,868,105,371
-------------
Liabilities:
Payables:
Investment securities purchased 7,453,164
Capital shares redeemed 565,051
Accrued expenses 2,496,423
-------------
Total liabilities 10,514,638
-------------
Net assets, at value $2,857,590,733
=============
Net assets consist of:
Distribution in excess of net investment income $ (2,669,031)
Unrealized appreciation on investments 485,810,406
Distribution in excess of net realized gain (13,512,324)
Net capital paid in on shares of capital stock 2,387,961,682
-------------
Net assets, at value $2,857,590,733
=============
Shares outstanding 174,840,843
=============
Net asset value per share ($2,857,590,733 / 174,840,843) $ 16.34
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 14
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<S> <C> <C>
Investment income:
(net of $10,020,876 foreign taxes withheld)
Dividends $ 79,994,062
Interest 16,174,482
------------
Total income $ 96,168,544
Expenses:
Management fees (Note 4) 16,525,094
Administrative fees (Note 4) 2,117,449
Transfer agent fees (Note 4) 28,834
Custodian fees 1,300,582
Reports to shareholders 49,285
Audit fees 36,542
Legal fees 15,000
Registration and filing fees 341,100
Directors' fees and expenses 82,500
Other 52,783
------------
Total expenses 20,549,169
------------
Net investment income 75,619,375
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 20,454,246
Foreign currency transactions (653,246)
------------
19,801,000
Net unrealized appreciation on investments:
Investments 367,800,266
Foreign currency transactions 62,474
------------
367,862,740
------------
Net realized and unrealized gain 387,663,740
------------
Net increase in net assets resulting from operations $463,283,115
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 75,619,375 $ 38,249,666
Net realized gain on investments and foreign currency transactions 19,801,000 24,407,376
Net unrealized appreciation 367,862,740 116,272,586
-------------- --------------
Net increase in net assets resulting from operations 463,283,115 178,929,628
Distributions to shareholders:
From net investment income (76,624,372) (37,739,736)
Amount in excess of net investment income (2,669,031) --
From net realized gain (21,922,688) (20,589,597)
Amount in excess of net realized gain (13,512,324) --
Capital share transactions (Note 3) 691,152,726 604,056,205
-------------- --------------
Net increase in net assets 1,039,707,426 724,656,500
Net assets:
Beginning of year 1,817,883,307 1,093,226,807
-------------- --------------
End of year $2,857,590,733 $1,817,883,307
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 16
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Foreign Equity Series (the Fund) is a separate series of Templeton Institutional
Funds, Inc. (the Company) which is registered under the Investment Company Act
of 1940 as an open-end, diversified management investment company. The Fund
seeks long-term capital growth through a flexible policy of investing in stocks
and debt obligations of companies and governments outside the United States. The
following summarizes the Fund's significant accounting policies.
A. SECURITIES VALUATIONS:
Securities listed or traded on a recognized national or foreign stock exchange
or NASDAQ are valued at the last reported sales prices on the principal exchange
on which the securities are traded. Over-the-counter securities and listed
securities for which no sale is reported are valued at the mean between the last
current bid and asked prices. Securities for which market quotations are not
readily available are valued at fair value as determined by management in good
faith and approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSACTIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign currencies
are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customarily
enters into foreign exchange contracts to minimize foreign exchange risk between
the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, the differences between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at the end of the fiscal
period, resulting from changes in the exchange rate.
C. INCOME TAXES:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND EXPENSES:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign
securities is recorded as soon as information is available to the Fund. Interest
income and estimated expenses are accrued daily. Distribution to shareholders
are determined in accordance with income tax regulations, which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for passive foreign investment companies held by the Fund.
Distributions are recorded on the ex-dividend date.
E. ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
2. MERGER OF TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY (SOUTH AFRICA
FREE) SERIES
On January 29, 1996, the Fund acquired all of the net assets of the Company's
Foreign Equity (South Africa Free) Series pursuant to a plan of reorganization
approved by Foreign Equity (South Africa Free) Series shareholders. The merger
was accomplished by a tax free exchange of shares of the Fund (valued at
$17,800,619) for the net assets of the Foreign Equity (South Africa Free) Series
which aggregated $17,800,619 including $1,537,866 of unrealized appreciation.
The combined net assets of the Fund immediately after the merger were
$1,911,308,133.
14
<PAGE> 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
3. TRANSACTIONS IN SHARES OF CAPITAL STOCK
At December 31, 1996, there were 700 million shares of the Company's ($.01 par
value) capital stock authorized of which 355 million have been classified as
Fund shares. Transactions in the Fund's shares for the years ended December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Shares sold 57,725,609 $ 882,382,585 54,841,050 $ 746,123,192
Shares issued in reinvestment of
distributions 6,311,870 97,071,255 3,679,491 50,240,082
Shares issued on merger 1,243,044 17,800,619
Shares redeemed (19,936,059) (306,101,733) (14,047,591) (192,307,069)
---------- ------------ ---------- ------------
Net increase 45,344,464 $ 691,152,726 44,472,950 $ 604,056,205
========== ============ ========== ============
</TABLE>
4. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Company are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FTSI),
Franklin Templeton Distributors, Inc. (FTD), and Franklin Templeton Investor
Services, Inc. (FTIS), the Company's investment manager, administrative manager,
principal underwriter and transfer agent, respectively.
The Fund pays monthly an investment management fee to TICI equal, on an annual
basis, to 0.70% of the average daily net assets of the Fund. The Fund pays FTSI
monthly its allocated share of an administrative fee of 0.15% per annum on the
first $200 million of the Company's aggregate average daily net assets, 0.135%
of the next $500 million, 0.10% of the next $500 million and 0.075% per annum of
such average net assets in excess of $1.2 billion. FTSI has voluntarily agreed
to limit the total expenses of the Fund to an annual rate of 1% of the Fund's
average net assets through the year ended December 31, 1996. For the year ended
December 31, 1996, no reimbursement was necessary under the agreement. For the
year ended December 31, 1996, FTD did not receive any commissions from the sale
of the Fund's shares and FTIS received fees of $28,834.
An officer of the Fund is a partner of Dechert Price & Rhoades, legal counsel
for the Funds, which firm received fees for the year ended December 31, 1996.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1996 were $737,997,479 and $153,812,515, respectively. The
cost of securities for federal income tax purposes is $2,330,901,654. Realized
gains and losses are reported on an identified cost basis.
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of portfolio securities, based on cost for federal income tax
purposes, was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $573,212,884
Unrealized depreciation (96,497,939)
------------
Net unrealized appreciation $476,714,945
============
</TABLE>
As required by the tax rules, the Fund has deferred capital and currency losses
occurring subsequent to October 31, 1995 of $9,450,000 to the year ending
December 31, 1997.
The amount distributed from net investment income includes $5,300,000
attributable to the mark to market income tax rules for passive foreign
investment companies which is included in unrealized appreciation under
generally accepted accounting principles.
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" as of December 31, 1996
amounted to $5,748,971. For the year ended December 31, dividend income from
affiliated companies was $269,897.
15
<PAGE> 18
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc.--Foreign Equity Series
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of the Foreign Equity Series of Templeton
Institutional Funds, Inc. as of December 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Foreign Equity Series of Templeton Institutional Funds, Inc. as of December 31,
1996, the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles.
[McGLADREY & PULLEN, LLP SIGNATURE]
New York, New York
January 31, 1997
16
<PAGE> 19
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc., which contains more complete information
including risk factors, charges, and expenses.
Investors should be aware that the value of investments made for the Fund may go
up as well as down and that the Investment Manager may make errors in selecting
the securities for the Fund's portfolio. Like any investment in securities, the
Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political, and other factors. The Fund and Fund investors are not
protected from such losses by the Investment Manager. Therefore, investors who
cannot accept the risk of such losses should not invest in shares of the Fund.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
700 Central Avenue
St. Petersburg, Florida 33701-3628
[RECYCLE LOGO] Institutional Services: 1-800-321-8563
Fund Information: 1-800-362-6243
