TEMPLETON INSTITUTIONAL FUNDS, INC.
Foreign Equity Series
[TIFI LOGO]
SEMIANNUAL REPORT
JUNE 30, 1998
[TEMPLETON LOGO]
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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.
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PAGE
June 30, 1998
Dear Shareholder:
The investment climate in the first half of 1998 was meaningfully
influenced by the continued rapid deterioration of economic conditions and
corporate health in Asia. Investors seemed to have made the decision, with a
notable and brief exception early in the year when some Asian markets
temporarily advanced 50-60% in U.S. dollar terms, to evacuate the Asian equity
markets in view of the economic calamity that was unfolding there. The resulting
flow of money back into the U.S. and Europe did much to lift these markets to
valuation levels that many veteran investment managers would not have believed
possible earlier in their careers. Moreover, it was the world's most expensive
markets that seemed to benefit
TOTAL RETURNS AS OF 6/30/98
<TABLE>
<CAPTION>
CUMULATIVE
ONE-YEAR THREE-YEAR FIVE-YEAR SINCE
AVERAGE AVERAGE AVERAGE INCEPTION(1),(3)
ANNUAL(1),(2) ANNUAL(1),(2) ANNUAL(1),(2) (10/18/90)
<S> <C> <C> <C> <C>
TIFI Foreign
Equity Series 13.3% 18.0% 16.6% 174.6%
MSCI AC World ex
U.S. Free Index(4) 1.4% 9.4% 9.5% 98.5%
MSCI EAFE Index(4) 6.4% 11.0% 10.3% 89.1%
</TABLE>
(1) The Fund's Investment Manager and Fund Administrator have agreed in advance
to waive a portion of their respective fees in order to limit the total expenses
of the Fund to an annual rate of 1% of average net assets through April 30,
1999. If these fee waivers are insufficient to so limit the Fund's expenses, the
Fund Administrator has agreed to make certain payments to reduce the Fund's
expenses. After April 30, 1999, these agreements may end at any time upon notice
to the Board. These voluntary agreements did not result in any fee waivers for
the Fund for the fiscal year ended December 31, 1997. Past expense waivers by
the Fund's Investment Manager and Fund Administrator increased the Fund's total
returns. If they had not taken this action, the Fund's total returns would have
been lower.
(2) Average annual total return represents the average annual change in value of
an investment over the indicated periods.
(3) Cumulative total return represents the change in value of an investment over
the indicated periods.
(4) The index is unmanaged, does not contain cash, and does not include
management or operating expenses. The index includes reinvested dividends. One
cannot invest directly in an index.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where investments are made. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares. Past performance is not
predictive of future results.
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount beginning on page 9 of
this report.
continued...
[GARY MOTYL PHOTO APPEARS HERE]
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.
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued................................................................
GEOGRAPHIC DISTRIBUTION ON 6/30/98
(Equity Assets as a Percentage of Total Net Assets)
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Europe 59.5%
North America 3.0%
Australia/New Zealand 5.1%
Asia 6.0%
Latin America/Caribbean 6.4%
</TABLE>
most from this trend while the cheaper markets languished. Markets with
price-to-earnings ratios greater than 20x performed significantly better than
those selling at less than 20x. The world's largest and most expensive stocks,
primarily located in the U.S. and Europe, generally were the best performers in
1998's first half. Only in Japan and Latin America did the least expensive
stocks generally outperform. In these regions, however, the absolute level of
performance still trailed well behind the pace set in Europe and North America.
Investors were willing to pay high prices for the relative "safety" of European
shares versus the alternative of exposing themselves to the systemic risks
brought about by owning "cheap" shares in seemingly imploding Asian markets, in
particular, and emerging markets, in general. By maintaining low weightings in
Asian markets, the Templeton Institutional Funds, Inc. Foreign Equity Series
("the Fund") was impacted more indirectly than directly by the Asian market
downturn that continued during the first half of 1998. First, our Latin American
holdings were negatively affected by investor concerns surrounding emerging
market investments in general. Second, due to our strong value bent, our
European holdings tended toward the less expensive stocks that underperformed
versus high valuation European shares.
This was clearly a difficult period for Templeton's investment style,
which emphasizes diversification and purchasing those stocks selling at a price
we believe to be low in relation to long-term earnings potential. Diversifying
away from expensive European shares, which now represent 74.2% of the Morgan
Stanley Capital International Europe, Australia, Far East ("MSCI EAFE") Index,
resulted in the Fund's underperformance in 1998's first half. Our performance
relative to the MSCI All Country World ex U.S. Free Index was better than our
performance relative to the MSCI EAFE Index during the reporting period. The
MSCI All Country World ex U.S. Free Index is also relevant to our investment
approach, as it includes Canada and the emerging markets, while the MSCI EAFE
Index omits these markets. For the quarter and year-to-date periods ended June
30, 1998, the Fund reported cumulative total returns of -0.8% and 14.8%,
respectively, compared to the unmanaged MSCI All Country World ex U.S. Free
Index cumulative total returns of -1.5% and 12.0% for these periods. The MSCI
EAFE Index reported cumulative total returns of 1.1% and 16.1% for these
periods. Please remember that the Fund's performance differs from that of an
index because, among other things, an 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 management or
operating expenses. Of course, one cannot invest directly in an index. Looking
forward, we are confident in our analytical team's diligent efforts to identify
long-term values. It also remains clear that developments in Asia are likely to
continue to have an influential role on the future performance of the world's
stock markets.
Capitalism, even in its purest form, can at times be quite cruel.
Should a nation, however, have the temerity to tinker with freely
2
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................................................................................
functioning markets, the penalty it eventually pays for its iniquity is almost
assuredly severe. Moreover, the size and scope of the punishment is often linked
with the duration of the market interference. Asia's crony capitalism, Hong
Kong's tightly controlled property market, Korea's chaebols, China's centrally
controlled economy, and Japan's protectionist market policies have all been in
place for a long time. These attempts to twist market fundamentals, aided and
abetted in some cases by impressive quantities of U.S. dollar debt, finally
reached the point where they could no longer be sustained. The economic carnage
that has followed the collapse of these efforts to undermine free market forces
has been nothing short of horrific. The International Monetary Fund's (IMF)
attempts to restore capitalistic purity to these economic systems only increased
the pain in the short run. It is abundantly clear to us, however, that the
result of this process is an Asian banking system in desperate need of new
capital and a corporate sector whose recapitalization needs may eventually be
measured in the hundreds of billions of U.S. dollars. The collateral damage from
what could go down in history as one of the world's most dramatic economic
events may be deep and long lasting. It is not clear that we have yet reached
what we at Templeton refer to as "the point of maximum pessimism" in Asia.
Templeton's security analysts, however, are not timid and are trained
to look most closely where the gloom is the deepest. To be sure, it is just such
cataclysmic share price declines that we rely on to create the bargain priced
shares that we seek to fuel our future performance. At the same time, however,
we do not buy stocks simply because the price has declined. Each security that
we purchase is closely evaluated to determine a conservative forecast of
earnings five years in the future. This process allows our analysts to "look
beyond" current problems and focus on future possibilities. As our team of 40
analysts pored over the possibilities, however, they have often been
disappointed with their findings due to the implications of the problems we are
attempting to look beyond. For example, while we might forecast that an IMF plan
may eventually stabilize an Asian nation's currency, leading to growth in GDP
and corporate sales, our analysis of an Asian company's earnings potential five
years from the present often shows that margins could also be unfavorably
impacted by still high debt loads. Alternatively, revenue growth may be reduced
by the sale of assets to help restore a company's balance sheet. Or, more
commonly, we may forecast improving sales, rising margins, and growing net
income, but we also need to anticipate a greater number of shares outstanding
due to recapitalization needs. The resulting reduction in earnings per share
often leaves many Asian stocks still too expensive to meet our stringent value
criteria. Essentially, IMF economic plans can do much to restore long-term
economic health to a nation, but they may do nothing to prevent earnings
dilution at the company level. Accordingly, our purchases of Asian stocks have
been limited to those companies with strong balance sheets, and these have been
primarily found in Hong Kong.
FUND ASSET ALLOCATION ON 6/30/98
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Equity* 80.0%
Short-Term Investments & Other Net Assets 16.8%
Fixed Income 3.2%
</TABLE>
*Equity includes convertible and preferred securities
3
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TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued................................................................
INDUSTRY DIVERSIFICATION ON 6/30/98
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Finance 23.1%
Services 18.7%
Energy 12.2%
Materials 10.8%
Capital Equipment 7.2%
Consumer Goods 6.3%
Multi-Industry 1.7%
</TABLE>
10 LARGEST POSITIONS ON 6/30/98
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Nokia AB, A 1.9%
Rhone-Poulenc SA, A 1.9%
Banque Nationale de Paris
BNP, ADR, 144A 1.6%
Telefonica SA 1.6%
Zuerich Versicherung, new 1.6%
Telecomunicacoes Brasileiras SA
(Telebras), pfd, ADR 1.5%
Axa-UAP 1.4%
Argentaria Corporacion
Bancaria de Espana SA, ADR 1.4%
Credit Suisse Group, reg. 1.4%
Societe Elf Aquitaine SA 1.4%
</TABLE>
Even here we have been hesitant, given the potential for balance sheet erosion
due to the potential decline in property prices and the possibility of a
devaluation of the Hong Kong dollar.
Throughout Asia, economic and stock market reforms that we believe
could help to sow the seeds of future prosperity are already being put in place.
Unfortunately, in most cases the reforms lead first to pain and later to gain.
Stock market pain following economic reform was already seen in Korea, Thailand,
and Indonesia. Now, Japan is facing a similar dilemma. Japanese authorities were
hesitant to provide greater transparency in the banking system for fear of a
loss of confidence in the financial system's integrity and bank runs.
Additionally, addressing the banking system's ills could require billions of
taxpayer funds from a country that is already squeezing its consumers with high
taxes and still running a large fiscal deficit. We believe Japan's protectionist
trade policies also need to be torn down. Doing so, however, could likely lead
to sharply increased unemployment, bankruptcies, and more bad loans for the
nation's banks. Already, the unemployment rate for workers aged 60-64 in Japan
is over 12%, and the country's pension funds are badly underfunded. Unemployment
benefits could represent a further drain on the federal budget and add to the
already high level of government debt. Large-scale layoffs could also take place
if Japanese corporations decided to make the creation of shareholder wealth a
priority.
Capital flight increased in Japan as a result of looser regulations on
investing overseas. Some government officials are now calling for a return to
the old, constrictive regulations in order to stem the flow of money searching
for better investment returns and a safer currency. If these regulations are not
changed, the capital flight could have negative ramifications for the yen and
Japanese bond market which, with yields barely above 1% for long-term bonds as
of June 30, 1998, probably represents the world's biggest current investment
bubble. Higher bond yields would likely depress Japanese share prices which
could, in turn, reduce the capital of the Japanese banks further. A weaker yen
may also negatively impact bank capital. Is it any wonder that Japanese
government officials appear much like the proverbial deer caught in the
headlights? If they do what is right, the intermediate term economic and
political costs are likely to be severe and higher than those incurred by
continuing the "muddle through" policy for another decade. These are not
problems that temporary interventions in the currency market will solve. Should
capital continue to exit Japan, however, we believe the government may be forced
to more rapidly endorse a more free-market style of capitalism. Initially, the
consequences could be negative for investors in Japanese stocks and bonds, but
the long-term prospects for attractive returns could be enhanced.
Templeton's analysts have never made a greater effort to identify
long-term values in the Japanese stock market than in the past year. Given the
pressures that are coming to bear on Japan, we believe changes that could have
favorable long-term consequences for Japanese
4
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................................................................................
corporations are likely to be implemented in the intermediate term. While
recognizing that these changes may first cause pain, we began to be more
optimistic about increased profit margins and lower corporate tax rates in
formulating our long-term earnings estimates. We also began to see movement in
the direction of managing companies for the benefit of shareholders. Share
repurchases picked up and several companies are beginning to restructure and
focus their efforts and capital on those businesses where they have a true
competitive advantage. Moreover, corporate Japan, in general, has a strong
balance sheet. While our analytical team's efforts thus far have been largely
fruitless in identifying a substantial number of Templeton-defined bargains in
Japan, we have laid the groundwork for adding Japanese shares as soon as
valuations allow.
While Asia wallowed in economic gore, the U.S. and European markets
continued to soar. The "tax cut" these markets received from lower oil and other
commodity prices related to Asia's economic crisis actually spurred growth in
the western world. The strong performance of these markets is not unjustified.
Returns on invested capital moved sharply higher based largely on restructuring
initiatives, productivity improvements, and sounder management. Interest rates
plunged, as inflation remained subdued, thereby allowing the higher level of
earnings to be accorded enhanced P/E valuations. Additionally, there were signs
that management is becoming increasingly shareholder-friendly and many investors
showed greater interest in equity investments due to both demographics and a
lack of suitable investment alternatives. The "New Paradigm" was certainly
rewarding, but the question remains as to its sustainability. Thus far, the New
Paradigm has beaten off all skeptics, but the developments in Asia, noted above,
may represent its greatest challenge yet. As Asia works through its crisis,
there is little doubt that Asian demand for U.S. and European manufactured goods
will dramatically increase. There is already evidence of this trend, and the
impact on corporate profit margins in the industrial sector will likely be much
more than a rounding error. Declining demand from Asia also could undercut the
western world's economic growth. Profits may also be undermined, or at least
slowed, by the year 2000 computer glitch and the spending needed to correct it.
The move to the European Monetary Unit is also expected to have a negative
impact on the earnings of some sectors in Europe. Clearly, the risks are rising
regarding the sustainability of earnings at current above-average levels of
return on invested capital. Given the generally open nature of markets in the
western world, it seems sensible to assume that the forces of competition could
lead capital towards areas of high returns, thereby eventually eroding those
same high returns.
We believe inflation and interest rates should remain at low levels,
given the slowing of world economic growth, and might even move lower. This
could provide an offset to lower earnings. As Asia enters into the
recapitalization phase of its crisis, however, U.S. and European shares may
suffer due to attractively priced shares available in Asia.
Total Return Index Comparison
$5,000,000 Investment: 10/18/90-6/30/98
<TABLE>
<CAPTION>
TIFI-Foreign Equity Series MS EAFE INDEX CPI MSCI AC World ex US Free Index
-------------------------- ------------- --- ------------------------------
<S> <C> <C> <C> <C>
10/18/90 $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00
10/31/90 $4,969,999.79 $5,030,345.00 $5,012,580.65 $5,278,000.00
11/30/90 $4,875,000.00 $4,734,560.71 $5,023,608.32 $4,984,543.20
12/31/90 $4,860,000.13 $4,814,574.79 $5,023,608.32 $5,075,760.34
1/31/91 $5,005,000.11 $4,968,641.18 $5,053,749.97 $5,234,631.64
2/28/91 $5,614,714.77 $5,504,757.57 $5,061,330.60 $5,796,831.08
3/31/91 $5,452,703.32 $5,175,022.59 $5,068,922.59 $5,478,005.37
4/30/91 $5,503,331.66 $5,227,290.32 $5,076,525.98 $5,537,715.63
5/31/91 $5,579,274.89 $5,282,699.59 $5,091,755.56 $5,616,351.19
6/30/91 $5,295,754.37 $4,897,590.79 $5,106,521.65 $5,225,453.15
7/31/91 $5,604,588.82 $5,138,062.50 $5,114,181.43 $5,476,797.44
8/31/91 $5,614,714.77 $5,036,328.86 $5,129,012.55 $5,382,596.53
9/30/91 $5,756,474.79 $5,319,874.18 $5,151,580.21 $5,656,570.69
10/31/91 $5,736,223.36 $5,397,012.35 $5,159,307.58 $5,755,560.68
11/30/91 $5,685,594.54 $5,147,670.38 $5,174,269.57 $5,499,438.23
12/31/91 $5,899,356.20 $5,415,864.01 $5,177,891.56 $5,784,859.07
1/31/92 $6,060,449.72 $5,302,130.87 $5,185,658.40 $5,704,449.53
2/29/92 $6,154,883.90 $5,114,435.43 $5,204,326.77 $5,529,322.93
3/31/92 $6,108,303.64 $4,776,882.70 $5,230,868.84 $5,194,798.89
4/30/92 $6,304,442.05 $4,800,767.11 $5,238,192.05 $5,211,941.73
5/31/92 $6,657,490.87 $5,123,378.66 $5,245,525.52 $5,528,306.59
6/30/92 $6,584,639.48 $4,882,067.52 $5,264,409.41 $5,261,289.38
7/31/92 $6,360,481.75 $4,758,551.22 $5,275,464.67 $5,149,223.92
8/31/92 $6,181,155.04 $5,058,815.80 $5,290,235.97 $5,423,677.55
9/30/92 $6,024,244.63 $4,960,674.77 $5,305,048.63 $5,312,492.16
10/31/92 $5,811,294.52 $4,701,727.55 $5,323,616.30 $5,079,273.76
11/30/92 $5,822,502.68 $4,747,334.31 $5,331,069.37 $5,107,209.76
12/31/92 $5,820,811.46 $4,773,444.64 $5,327,337.62 $5,150,110.33
1/31/93 $5,843,978.84 $4,774,399.33 $5,353,441.57 $5,149,595.31
2/28/93 $5,971,399.74 $4,920,018.51 $5,372,178.62 $5,307,172.93
3/31/93 $6,119,128.07 $5,350,520.13 $5,390,981.24 $5,743,953.26
4/30/93 $6,316,144.98 $5,859,889.65 $5,406,075.99 $6,251,144.34
5/31/93 $6,484,189.18 $5,985,291.29 $5,413,644.50 $6,390,544.85
6/30/93 $6,362,501.96 $5,893,117.80 $5,421,223.60 $6,313,858.32
7/31/93 $6,466,805.45 $6,100,555.55 $5,421,223.60 $6,523,478.41
8/31/93 $6,924,581.09 $6,431,205.66 $5,436,403.03 $6,873,789.20
9/30/93 $6,872,429.34 $6,287,789.77 $5,447,819.47 $6,732,189.15
10/31/93 $7,278,053.79 $6,482,711.26 $5,470,155.53 $6,975,894.39
11/30/93 $7,110,009.58 $5,917,418.83 $5,473,984.64 $6,444,331.24
12/31/93 $7,801,439.17 $6,345,839.96 $5,473,984.64 $6,946,989.08
1/31/94 $8,357,848.58 $6,883,967.19 $5,488,764.40 $7,518,031.58
2/28/94 $8,129,427.86 $6,866,068.87 $5,507,426.20 $7,460,894.54
3/31/94 $7,768,919.31 $6,571,514.52 $5,526,151.45 $7,119,185.57
4/30/94 $7,881,598.04 $6,851,461.04 $5,533,888.06 $7,360,525.96
5/31/94 $7,911,250.51 $6,813,778.00 $5,537,761.78 $7,362,734.12
6/30/94 $7,656,240.01 $6,911,896.40 $5,556,590.17 $7,415,009.53
7/31/94 $7,988,346.72 $6,979,632.99 $5,571,592.96 $7,535,874.19
8/31/94 $8,261,148.48 $7,146,446.22 $5,593,879.34 $7,789,833.15
9/30/94 $8,065,442.93 $6,922,762.45 $5,608,982.81 $7,596,645.28
10/31/94 $8,237,426.62 $7,154,674.99 $5,612,909.10 $7,800,995.04
11/30/94 $7,881,598.04 $6,812,681.53 $5,620,205.88 $7,424,987.08
12/31/94 $7,819,891.47 $6,856,963.96 $5,620,205.88 $7,407,909.61
1/31/95 $7,594,902.43 $6,595,027.93 $5,642,686.70 $7,071,590.51
2/28/95 $7,713,478.10 $6,577,880.86 $5,665,257.45 $7,032,696.77
3/31/95 $7,749,976.88 $6,989,656.20 $5,683,952.80 $7,430,044.13
4/30/95 $8,090,635.47 $7,254,564.17 $5,702,709.84 $7,719,815.85
5/31/95 $8,297,463.83 $7,169,685.77 $5,714,115.26 $7,685,848.66
6/30/95 $8,346,129.26 $7,045,650.21 $5,725,543.49 $7,579,783.95
7/31/95 $8,759,785.41 $7,486,003.35 $5,725,543.49 $8,010,315.68
8/31/95 $8,534,707.65 $7,202,283.82 $5,740,429.91 $7,732,357.73
9/30/95 $8,692,870.59 $7,344,889.04 $5,751,910.77 $7,864,581.04
10/31/95 $8,504,291.62 $7,149,514.99 $5,770,892.07 $7,654,596.73
11/30/95 $8,638,121.84 $7,350,416.36 $5,766,852.45 $7,834,479.75
12/31/95 $8,834,439.23 $7,648,108.22 $5,762,815.65 $8,143,941.70
1/31/96 $9,117,594.21 $7,680,995.09 $5,796,816.26 $8,255,513.71
2/29/96 $9,262,240.88 $7,708,646.67 $5,815,366.08 $8,255,513.71
3/31/96 $9,331,739.67 $7,874,382.58 $5,845,605.98 $8,409,066.26
4/30/96 $9,672,913.59 $8,105,101.98 $5,868,403.84 $8,663,860.97
5/31/96 $9,786,637.83 $7,957,589.13 $5,879,553.81 $8,533,903.05
6/30/96 $9,755,047.53 $8,004,538.90 $5,883,081.54 $8,577,425.96
7/31/96 $9,502,326.33 $7,772,407.28 $5,894,259.40 $8,292,655.42
8/31/96 $9,780,319.65 $7,791,061.05 $5,905,458.49 $8,417,874.51
9/30/96 $9,862,544.30 $7,999,861.49 $5,924,355.96 $8,549,193.36
10/31/96 $9,957,437.04 $7,919,862.88 $5,943,313.90 $8,463,701.42
11/30/96 $10,469,858.82 $8,236,657.39 $5,954,606.19 $8,790,400.30
12/31/96 $10,741,158.03 $8,132,875.51 $5,954,606.19 $8,688,431.65
1/31/97 $10,938,363.61 $7,849,851.44 $5,973,660.93 $8,528,564.51
2/28/97 $11,089,454.94 $7,980,158.97 $5,992,179.28 $8,684,637.24
3/31/97 $11,201,336.73 $8,011,281.59 $6,007,159.73 $8,666,399.50
4/30/97 $11,148,686.55 $8,055,343.64 $6,014,368.32 $8,739,197.26
5/31/97 $11,609,375.31 $8,581,357.58 $6,010,759.70 $9,279,279.65
6/30/97 $12,122,715.50 $9,056,764.79 $6,017,972.61 $9,791,495.89
7/31/97 $12,563,661.23 $9,205,295.73 $6,025,194.18 $9,990,263.25
8/31/97 $11,852,883.18 $8,519,501.20 $6,036,642.05 $9,204,029.54
9/30/97 $12,807,167.84 $8,998,297.17 $6,051,733.65 $9,701,967.53
10/31/97 $11,859,464.61 $8,309,027.61 $6,066,862.99 $8,876,330.10
11/30/97 $11,780,488.71 $8,225,937.33 $6,063,222.87 $8,765,375.97
12/31/97 $11,968,833.04 $8,299,970.77 $6,055,947.00 $8,866,177.79
1/31/98 $12,113,616.67 $8,681,487.22 $6,067,210.52 $9,131,276.51
2/28/98 $12,885,800.00 $9,240,558.94 $6,078,473.45 $9,740,332.65
3/31/98 $13,833,181.85 $9,527,178.53 $6,089,736.92 $10,077,348.16
4/30/98 $14,013,103.33 $9,604,757.01 $6,101,000.31 $10,149,905.07
5/31/98 $13,860,862.69 $9,560,319.16 $6,112,263.67 $9,966,191.79
6/30/98 $13,741,560.00 $9,634,820.53 $6,119,775.65 $9,928,320.26
</TABLE>
Periods ended June 30, 1998
<TABLE>
<CAPTION>
Since
Inception
One-Year Five-Year (10/18/90)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual
Total Return(1),(2) 13.3% 16.6% 14.0%
Cumulative
Total Return(1),(3) 13.3% 115.8% 174.6%
</TABLE>
(1) The Fund's Investment Manager and Fund Administrator have agreed in advance
to waive a portion of their respective fees in order to limit the total expenses
of the Fund to an annual rate of 1% of average net assets through April 30,
1999. If these fee waivers are insufficient to so limit the Fund's expenses, the
Fund Administrator has agreed to make certain payments to reduce the Fund's
expenses. After April 30, 1999, these agreements may end at any time upon notice
to the Board. These voluntary agreements did not result in any fee waivers for
the Fund for the fiscal year ended December 31, 1997. Past expense waivers by
the Fund's Investment Manager and Fund Administrator increased the Fund's total
returns. If they had not taken this action, the Fund's total returns would have
been lower.
(2) Average annual total return represents the average annual change in value of
an investment over the specified periods.
(3) Cumulative total return represents the change in value of an investment over
the indicated periods.
(4) Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
(5) Source: U.S. Bureau of Labor Statistics (7/14/98).
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where investments are made. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares. Past performance is not
predictive of future results.
5
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued................................................................
Investors may also become less enamored with shares in general due to earnings
disappointments, the potential for increased political risk (highlighted
recently by Indonesia, India, and Pakistan), and demographic changes (baby
boomers' preference for fixed income investments may grow as they approach
retirement). Veteran investment managers are also having a difficult time
ignoring the obvious speculative fever that is apparent in the NASDAQ's
valuation levels and most apparent in the meteoric movements in shares of
internet-related businesses. Additionally, the surge in mega-mergers, often
accompanied by grandiose projections of future market domination and nearly
always financed with the expensive stock of the acquiring firm, is another
symptom of the extreme optimism that often ushers in a bull market's final
stages. Overall, the possibility that returns in the western world over the next
five years may not be able to keep up with recent experience is at the forefront
of our thinking. Indeed, if the western world were to continue to grow at its
recent pace, and Asia does not recover, there would most likely be unsavory
political and economic consequences for investors in both regions.
The Fund increased its Latin American holdings during the period. Share
prices in this region were found guilty by association. As Asian markets
declined, Latin American markets also fell as numerous investors withdrew funds
from emerging markets. While Latin American economies are certainly feeling some
pain as a result of the Asian crisis, the decline in share prices seems to be
overdone in our opinion. Many Latin American companies have little, if any,
debt. In many cases the debt that is on the balance sheet is not
dollar-denominated. Moreover, capital investment was generally accomplished at a
careful pace as economic conditions were generally poor over the last twenty
years. Economic reforms and privatization are also well underway in the region,
and banking systems are generally soundly capitalized if not overcapitalized.
This stands in stark contrast to the situation in Asia. With valuations on
trailing twelve-month earnings in Brazil at less than one-third the level in
Germany, it does not appear to be difficult to identify bargains. Even if a
currency devaluation were to occur in Brazil, we believe it is unlikely that
many companies would need to issue new shares in order to rescue their balance
sheets. Indeed, many companies could benefit due to improved export potential.
These are the ingredients that lead to attractive long-term investment
opportunities, and our analytical team is carefully researching this region to
find what we believe are the best positioned companies at least expensive share
price relative to future earnings potential.
This discussion reflects our views, opinions, and portfolio holdings as
of June 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the Fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
6
PAGE
................................................................................
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. Emerging markets involve heightened risks related to the same factors,
in addition to those associated with their relatively small size and lesser
liquidity. Investing in any emerging market means accepting a certain amount of
volatility and, in some cases, severe market corrections. While short-term
volatility can be disconcerting, declines of as much as 40% to 50% are not
unusual in emerging markets. For example, the Hong Kong equity market has
increased 785% in the last 15 years, but has suffered six quarterly declines of
more than 20% during that time. (1) These special risks and other considerations
are discussed in the Fund's prospectus.
We would be surprised if the world's most expensive stocks continued
their stellar performance over the longer term. As the Asian crisis moves
forward, there will come a time when the point of maximum pessimism has been
reached. This will likely be quickly followed by a mass exodus of investors from
the western world's expensive markets into the markets of Latin America and
Asia. While it is always difficult to pinpoint when we have arrived at the point
of maximum pessimism, it is usually not too difficult to determine when we are
near it. The Templeton investment process is designed to highlight the value in
individual stocks that often occurs when other market participants are suffering
from undue levels of pessimism. Our team of security analysts has consistently
and diligently applied this process, in a wide variety of market conditions,
over the years with a focus on long-term success. Therefore, we look forward to
a bright future with confidence that the relationship we have enjoyed with you
will continue to grow stronger.
Thank you for allowing us to serve your investment management needs.
Best Regards,
/s/DONALD F. REED
Donald F. Reed, CFA, CIC
President
Templeton Institutional Funds, Inc.
/s/GARY P. MOTYL
Gary P. Motyl, CFA
Executive Vice President
Templeton Investment Counsel, Inc.
(1) Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended June 30, 1998. Market returns are measured in Hong Kong dollars.
For the most current portfolio information, please call 1-800-362-6243.
7
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ----------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993+
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the
period)
Net asset value, beginning of period........ $17.36 $16.34 $14.04 $12.86 $13.32 $10.05
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income...................... .27 .42 .45 .31 .20 .23
Net realized and unrealized gains
(losses)................................. 2.29 1.43 2.54 1.35 (.16) 3.19
---------------------------------------------------------------------------------
Total from investment operations............ 2.56 1.85 2.99 1.66 .04 3.42
---------------------------------------------------------------------------------
Less distributions from:
Net investment income...................... -- (.43) (.45) (.31) (.19) (.09)
In excess of net investment income......... -- -- (.02) -- -- --
Net realized gains......................... (.07) (.40) (.14) (.17) (.31) (.06)
In excess of net realized gains............ -- -- (.08) -- -- --
---------------------------------------------------------------------------------
Total distributions......................... (.07) (.83) (.69) (.48) (.50) (.15)
---------------------------------------------------------------------------------
Net asset value, end of period.............. $19.85 $17.36 $16.34 $14.04 $12.86 $13.32
==================================================================================
Total Return*............................... 14.80% 11.43% 21.58% 13.00% 0.24% 34.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........... $4,637,404 $3,706,006 $2,857,591 $1,817,883 $1,093,227 $407,970
Ratios to average net assets:
Expenses................................... .84%** .84% .87% .88% .95% 1.00%
Expenses, excluding waiver and payments by
affiliate................................ .84%** .84% .87% .88% .95% 1.03%
Net investment income...................... 2.91%** 2.49% 3.20% 2.70% 2.03% 1.73%
Portfolio turnover rate..................... 6.27% 15.25% 7.39% 20.87% 7.90% 42.79%
</TABLE>
*Total Return is not annualized.
**Annualized.
+Based on average weighted shares outstanding.
See Notes to Financial Statements.
8
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 75.1%
APPLIANCES & HOUSEHOLD DURABLES .9%
Sony Corp. ................................................. Japan 502,300 $ 43,250,243
--------------
AUTOMOBILES 2.2%
Autoliv Inc. ............................................... Sweden 400,000 12,650,000
Fiat SpA.................................................... Italy 9,222,000 40,487,462
Volvo AB, B................................................. Sweden 1,586,075 47,234,801
--------------
100,372,263
--------------
BANKING 12.8%
Argentaria Corporacion Bancaria de Espana SA, ADR........... Spain 1,468,000 66,243,500
Australia & New Zealand Banking Group Ltd. ................. Australia 3,384,161 23,345,401
*Banco Pinto & Sotto Mayor SA............................... Portugal 710,400 17,633,088
Banque Nationale de Paris BNP, ADR, 144A.................... France 929,500 75,946,576
Barclays Plc. .............................................. United Kingdom 49,500 1,428,822
BPI Socieda de Gestora de Participacoes Socias SA........... Portugal 681,408 21,989,352
Canadian Imperial Bank of Commerce.......................... Canada 1,555,200 50,022,753
*Cho Hung Bank Co. Ltd., GDR................................ South Korea 600,000 375,000
*Commercial Bank of Korea Co. Ltd. ......................... South Korea 723,530 440,020
Credit Suisse Group, reg. .................................. Switzerland 296,100 65,884,593
*Daegu Bank Co. Ltd. ....................................... South Korea 280,613 296,350
Deutsche Bank AG............................................ Germany 710,200 60,140,759
Foreningssparbanken AB, A................................... Sweden 464,320 13,973,442
HSBC Holdings Plc. ......................................... Hong Kong 1,478,930 36,168,758
*Komercni Banka AS.......................................... Czech Republic 141,500 4,747,813
Komercni Banka AS, GDR, 144A................................ Czech Republic 326,500 4,105,738
Kookmin Bank, GDR, Reg S.................................... South Korea 339,683 1,333,256
*Korea Long Term Credit Bank................................ South Korea 386,977 718,712
Merita Ltd., A.............................................. Finland 8,113,000 53,530,170
National Bank of Canada..................................... Canada 1,154,200 22,565,197
National Westminster Bank Plc. ............................. United Kingdom 58,300 1,044,719
*Philippine National Bank................................... Philippines 2,058,512 2,443,557
*PT Bank Pan Indonesia TBK.................................. Indonesia 14,316,000 338,554
*PT Bank Pan Indonesia TBK, wts. ........................... Indonesia 2,045,142 6,357
*PT Lippo Bank, fgn. ....................................... Indonesia 5,629,500 285,729
Svenska Handelsbanken, A.................................... Sweden 1,354,450 62,840,474
Thai Farmers Bank Public Co. Ltd., fgn. .................... Thailand 8,000,000 7,044,917
--------------
594,893,607
--------------
BROADCASTING & PUBLISHING .2%
News Corp. Ltd. ............................................ Australia 1,317,422 10,752,401
--------------
BUILDING MATERIALS & COMPONENTS 1.3%
Pioneer International Ltd. ................................. Australia 10,983,572 26,186,017
*Siam City Cement Public Co. Ltd., fgn. .................... Thailand 815,746 578,543
Svedala Industri, A......................................... Sweden 1,355,000 31,432,996
--------------
58,197,556
--------------
BUSINESS & PUBLIC SERVICES 1.2%
Esselte AB, A............................................... Sweden 63,000 1,398,262
Esselte AB, B............................................... Sweden 929,400 21,560,020
Hyder Plc. ................................................. United Kingdom 1,083,333 17,008,982
SGS Societe Generale de Surveillance Holdings Ltd., br. .... Switzerland 1,090 1,847,567
*TNT Post Group NV.......................................... Netherlands 200,000 5,112,575
*Waste Management International Plc. ....................... United Kingdom 1,764,960 9,688,521
--------------
56,615,927
--------------
CHEMICALS 4.4%
Akzo Nobel NV............................................... Netherlands 522,256 29,024,206
Bayer AG.................................................... Germany 899,230 46,381,337
Courtaulds Plc. ............................................ United Kingdom 1,285,000 9,551,632
Imperial Chemical Industries Plc. .......................... United Kingdom 387,000 6,237,561
Rhone-Poulenc SA, A......................................... France 1,561,412 88,065,083
</TABLE>
9
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
CHEMICALS (CONT.)
Solvay SA................................................... Belgium 311,370 $ 24,685,340
Solvay SA, ADR.............................................. Belgium 1,615 128,037
--------------
204,073,196
--------------
CONSTRUCTION & HOUSING .4%
Daito Trust Construction Co. Ltd. .......................... Japan 1,135,400 8,590,049
Fletcher Challenge Building Ltd. ........................... New Zealand 1,403,250 1,748,226
Kyudenko Corp. ............................................. Japan 909,000 5,947,127
--------------
16,285,402
--------------
DATA PROCESSING & REPRODUCTION .2%
*Newbridge Networks Corp. .................................. Canada 475,800 11,372,867
--------------
ELECTRICAL & ELECTRONICS 4.3%
ABB AB, A................................................... Sweden 164,000 2,323,791
ABB AG, br. ................................................ Switzerland 19,679 29,061,814
Alcatel Alsthom Cie Generale D'Electricite SA............... France 216,154 44,010,184
General Electric Co. Plc. .................................. United Kingdom 3,600,000 31,084,193
Hitachi Ltd. ............................................... Japan 4,242,000 27,661,563
Philips Electronics NV...................................... Netherlands 760,000 63,887,523
--------------
198,029,068
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .3%
BICC Plc. .................................................. United Kingdom 6,281,099 13,728,835
--------------
ENERGY SOURCES 4.0%
Fletcher Challenge Energy Ltd. ............................. New Zealand 1,405,000 3,354,945
MOL Magyar Olay-Es Gazipari RT, GDS 144A.................... Hungary 1,339,742 36,106,047
Perez Companc SA, B......................................... Argentina 1,691,000 8,489,669
*Renaissance Energy Ltd. ................................... Canada 822,800 12,337,384
Repsol SA................................................... Spain 756,900 41,679,189
Saga Petroleum AS, A........................................ Norway 1,194,500 18,368,541
Societe Elf Aquitane SA..................................... France 465,808 65,487,397
YPF Sociedad Anonima, ADR................................... Argentina 46,000 1,382,875
--------------
187,206,047
--------------
FINANCIAL SERVICES 2.3%
Axa-UAP..................................................... France 594,754 66,892,610
Chile Fund Inc. ............................................ Chile 359,100 4,870,294
India Fund, B............................................... India 4,211,265 5,410,408
Industrial Credit & Inv. Corp. of India (ICICI)............. India 6,758,750 12,345,186
Industrial Credit & Inv. Corp. of India (ICICI), GDR,
144A...................................................... India 1,667,800 16,907,323
*Korea International Trust.................................. South Korea 92 839,500
*Korea International Trust, IDR............................. South Korea 2 23,010
--------------
107,288,331
--------------
FOOD & HOUSEHOLD PRODUCTS 1.1%
Albert Fisher Group Plc. ................................... United Kingdom 30,658,920 11,765,528
*Express Dairies Plc. ...................................... United Kingdom 635,905 1,766,580
Hillsdown Holdings Plc. .................................... United Kingdom 7,265,010 19,637,128
Northern Foods Plc. ........................................ United Kingdom 1,271,811 4,626,002
Tate & Lyle Plc. ........................................... United Kingdom 1,450,000 11,516,001
--------------
49,311,239
--------------
FOREST PRODUCTS & PAPER 2.8%
*Asia Pacific Resources International Hldgs. Ltd., A........ Indonesia 103,250 187,141
Asia Pulp & Paper Co. Ltd., ADR............................. Indonesia 185,100 2,082,375
Assidomaen AB............................................... Sweden 200,000 5,818,255
Carter Holt Harvey Ltd. .................................... New Zealand 3,149,000 2,746,207
Cartiere Burgo SPA.......................................... Italy 1,300,760 10,351,636
Enso OY, R.................................................. Finland 54,000 580,703
Fletcher Challenge Ltd. Forestry Division................... New Zealand 20,122,398 11,281,186
Fletcher Challenge Paper Ltd. .............................. New Zealand 2,732,500 3,035,465
</TABLE>
10
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER (CONT.)
Metsa Serla OY, B........................................... Finland 1,418,000 $ 13,698,111
PT Tjiwi Kimia TBK.......................................... Indonesia 2,530,782 316,348
*PT Tjiwi Kimia TBK, wts. .................................. Indonesia 351,495 19,237
PT Barito Pacific Timber TBK................................ Indonesia 3,652,000 61,689
Stora Kopparbergs Bergslags AB, B........................... Sweden 1,241,500 19,615,168
Svenska Cellulosa AB, B..................................... Sweden 600,000 15,536,245
+Unipapel SA................................................ Spain 309,693 10,256,343
UPM-Kymmene Corp. .......................................... Finland 1,305,000 34,727,374
--------------
130,313,483
--------------
HEALTH & PERSONAL CARE 2.0%
Astra AB, A................................................. Sweden 1,533,066 31,334,532
Medeva Plc. ................................................ United Kingdom 1,739,171 4,962,096
Nycomed Amersham Plc. ...................................... United Kingdom 7,722,993 57,367,639
--------------
93,664,267
--------------
INDUSTRIAL COMPONENTS 1.0%
BTR Plc. . ................................................. United Kingdom 9,269,000 26,445,740
BTR Plc., A................................................. United Kingdom 1,117,821 3,018,033
*BTR Plc., B................................................ United Kingdom 1,375,780 791,945
Lucas Varity Plc. .......................................... United Kingdom 4,600,000 18,324,323
--------------
48,580,041
--------------
INSURANCE 5.1%
Ace Ltd. ................................................... Bermuda 1,009,500 39,370,500
GIO Australia Holdings Ltd. ................................ Australia 7,735,003 19,849,307
ING Groep NV................................................ Netherlands 886,952 58,077,872
Istituto Nazionale Delle Assicurazioni SpA.................. Italy 9,104,000 25,930,945
Skandia Foersaekrings AB.................................... Sweden 1,500,000 21,442,275
Zuerich Versicherung, new................................... Switzerland 113,655 72,532,991
--------------
237,203,890
--------------
LEISURE & TOURISM .7%
Kuoni Reisen Holding AG, B.................................. Switzerland 6,765 33,584,157
--------------
MACHINERY & ENGINEERING 1.0%
Hitachi Koki Co. Ltd. ...................................... Japan 45,000 184,494
New Holland NV.............................................. Netherlands 1,372,000 26,925,500
*Tata Engineering & Locomotive Co Telco, GDR, 144A.......... India 200,000 640,000
VA Technologie AG........................................... Austria 114,450 14,239,783
VA Technologie AG, 144A..................................... Austria 28,000 3,483,739
--------------
45,473,516
--------------
MERCHANDISING 2.2%
Dairy Farm International Holdings Ltd. ..................... Hong Kong 1,586,430 1,697,022
House of Fraser Plc. ....................................... United Kingdom 1,750,000 5,124,387
Safeway Plc. ............................................... United Kingdom 4,650,000 30,529,833
Somerfield Plc. ............................................ United Kingdom 3,110,228 19,849,540
Storehouse Plc. ............................................ United Kingdom 10,968,000 45,933,327
--------------
103,134,109
--------------
METALS & MINING 2.0%
Boehler Uddeholm AG......................................... Austria 20,450 1,351,095
Boehler Uddeholm AG, 144A................................... Austria 60,000 3,964,092
Elkem AS.................................................... Norway 872,300 10,458,278
Grupo Mexico SA de CV, B.................................... Mexico 1,297,000 3,557,873
Pechiney SA, A.............................................. France 568,000 22,875,951
RGC Ltd. ................................................... Australia 7,429,095 7,360,732
Union Miniere NPV........................................... Belgium 326,270 20,167,186
WMC Ltd. ................................................... Australia 7,070,000 21,277,510
--------------
91,012,717
--------------
</TABLE>
11
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MISC MATERIALS & COMMODITIES .3%
Golden Hope Plantations Bhd. ............................... Malaysia 1,960,000 $ 1,795,781
Unitor ASA.................................................. Norway 818,735 12,056,696
--------------
13,852,477
--------------
MULTI-INDUSTRY 1.7%
Alfa SA de CV, A............................................ Mexico 752,500 3,123,553
Cie Generale d'Industrie et de Participation CGIP........... France 25,000 13,211,214
Hicom Holdings Bhd. ........................................ Malaysia 4,800,000 1,215,190
Hutchison Whampoa Ltd. ..................................... Hong Kong 3,333,500 17,595,456
Jardine Matheson Holdings Ltd. ............................. Hong Kong 3,286,341 8,873,121
Jardine Strategic Holdings Ltd. ............................ Hong Kong 5,115,130 9,718,747
Marine Wendel SA............................................ France 29,105 5,357,900
PT Bimantara Citra.......................................... Indonesia 1,301,000 24,174
Swire Pacific Ltd., A....................................... Hong Kong 4,993,000 18,847,953
--------------
77,967,308
--------------
REAL ESTATE 1.1%
Bail Investissement......................................... France 92,800 14,796,427
Taylor Woodrow Plc. ........................................ United Kingdom 11,078,810 37,154,884
--------------
51,951,311
--------------
TELECOMMUNICATIONS 9.5%
British Telecommunications Plc. ............................ United Kingdom 2,930,000 36,420,896
Compania De Telecomunicaciones De Chile SA, Spons. ADR...... Chile 707,010 14,361,141
*Digital Telecommunications Philippines Inc. ............... Philippines 57,462,500 1,791,397
Hong Kong Telecommunications Ltd. .......................... Hong Kong 255,500 479,767
*Jasmine International Public Co. Ltd., fgn. ............... Thailand 3,969,000 1,290,160
Koninklijke Ptt Nederland NV................................ Netherlands 200,000 7,698,358
Nokia AB, A................................................. Finland 1,222,400 90,235,398
Philippine Long Distance Telephone Co., ADR................. Philippines 709,905 16,061,601
PT Indosat TBK, ADR......................................... Indonesia 158,300 1,761,088
Rostelecom, ADR............................................. Russia 690,000 9,228,750
Tele Danmark AS, B.......................................... Denmark 85,000 8,157,627
Telecom Argentina Stet France SA, ADR....................... Argentina 1,115,400 33,252,863
Telecom Italia SpA, di Risp................................. Italy 11,224,000 54,612,459
Telefonica de Argentina SA, B, ADR.......................... Argentina 1,520,980 49,336,789
Telefonica SA............................................... Spain 1,566,245 72,536,920
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 757,306 36,398,020
Videsh Sanchar Nigam Ltd., GDR, 144A........................ India 127,600 1,320,660
--------------
434,943,894
--------------
TEXTILES & APPAREL .2%
Courtaulds Textiles Plc. ................................... United Kingdom 1,500,000 7,257,984
--------------
TRANSPORTATION 1.4%
Kvaerner ASA, A............................................. Norway 450,000 15,247,280
Mayne Nickless Ltd., A...................................... Australia 7,210,251 38,175,226
Qantas Airways Ltd., ADR, 144A.............................. Australia 827,500 12,412,500
--------------
65,835,006
--------------
UTILITIES ELECTRICAL & GAS 8.1%
BG Plc. .................................................... United Kingdom 7,483,308 43,294,909
British Energy Ltd. ........................................ United Kingdom 3,000,000 26,228,852
Centrais Eletricas Brasileiras SA (Eletrobras), ADR......... Brazil 1,693,800 24,895,902
*Centrais Geradoras Do Sul Do Brasil SA (Gerasul), ADR...... Brazil 117,000 799,153
*Centrica Plc. ............................................. United Kingdom 6,482,150 10,950,674
*CEZ AS..................................................... Czech Republic 480,663 13,285,266
Endesa SA, br. ............................................. Spain 1,567,200 34,345,522
Evn Energie-Versorgung Niederoesterreich AG................. Austria 133,338 19,953,211
Gener SA, ADR............................................... Chile 63,000 1,149,750
Guangdong Electric Power Development Co Ltd., B, 144A....... China 2,455,129 912,523
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 2,799,800 8,671,915
</TABLE>
12
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS (CONT.)
Iberdrola SA................................................ Spain 2,999,043 $ 48,779,261
Korea Electric Power Corp. ................................. South Korea 628,810 6,709,444
National Power Plc. ........................................ United Kingdom 3,069,416 28,935,496
Nova Corp. ................................................. Canada 365,000 4,220,313
Shandong Huaneng Power Development Co. Ltd., ADR............ China 1,032,965 5,552,187
Thames Water Group Plc. .................................... United Kingdom 3,439,260 61,974,852
VEBA AG..................................................... Germany 544,500 37,104,432
--------------
377,763,662
--------------
WHOLESALE & INTERNATIONAL TRADE .4%
Brierley Investments Ltd. .................................. New Zealand 33,843,199 16,865,294
--------------
TOTAL COMMON STOCKS (COST $2,510,938,136)................... 3,480,780,098
--------------
PREFERRED STOCKS 4.9%
ABN Amro NV, conv., pfd. ................................... Netherlands 457,188 41,129,389
Banco Bradesco SA, pfd. .................................... Brazil 2,401,200,000 20,034,221
Banco Itau SA, pfd. ........................................ Brazil 34,056,000 19,433,650
Cia Vale do Rio Doce, pfd., ADR............................. Brazil 335,000 6,661,767
Concessioni e Costruzioni Autostrade SPA, B, pfd. .......... Italy 8,865,000 35,269,489
*Lojas Americanas SA, pfd. ................................. Brazil 396,729,153 2,205,575
News Corp. Ltd., pfd. ...................................... Australia 5,481,457 38,831,768
Telecomunicacoes Brasileiras SA (Telebras), pfd., ADR....... Brazil 617,800 67,456,038
--------------
TOTAL PREFERRED STOCKS (COST $142,517,697).................. 231,021,897
--------------
PRINCIPAL
AMOUNT**
--------
BONDS 3.2%
Australia Govt., 8.75%, 8/15/08............................. Australia 64,000,000AUD 49,184,004
New Zealand Govt., 7.00%, 7/15/09........................... New Zealand 90,000,000NZD 48,987,749
United Kingdom, 7.25%, 12/07/07............................. United Kingdom 27,000,000GBP 49,554,510
--------------
TOTAL BONDS (COST $145,571,523)............................. 147,726,263
--------------
SHORT TERM INVESTMENTS (COST $922,155,451) 19.9%
U.S. Treasury Bills, 4.94% to 5.06%, with maturities to
10/15/98.................................................. United States 928,143,000 922,371,208
--------------
TOTAL INVESTMENTS (COST $3,721,182,807) 103.1%.............. 4,781,899,466
OTHER ASSETS, LESS LIABILITIES (3.1%)....................... (144,495,912)
--------------
TOTAL NET ASSETS 100.0%..................................... $4,637,403,554
==============
</TABLE>
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C>
AUD -- Australian Dollar
GBP -- British Pound
NZD -- New Zealand Dollar
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars unless otherwise indicated.
+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 at June 30,
1998, were $10,256,343.
See Notes to Financial Statements.
13
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$3,721,182,807)........................................... $4,781,899,466
Receivables:
Investment securities sold................................ 5,617,947
Capital shares sold....................................... 13,620,728
Dividends and interest.................................... 20,132,195
--------------
Total assets........................................... 4,821,270,336
--------------
Liabilities:
Payables:
Investment securities purchased........................... 163,963,207
Capital shares redeemed................................... 13,550,169
To affiliates............................................. 2,969,239
Funds advanced by custodian................................ 2,560,408
Accrued liabilities........................................ 823,759
--------------
Total liabilities...................................... 183,866,782
--------------
Net assets, at value........................................ $4,637,403,554
==============
Net assets consist of:
Undistributed net investment income........................ $ 61,882,806
Net unrealized appreciation................................ 1,060,717,087
Accumulated net realized gain.............................. 82,414,973
Capital shares............................................. 3,432,388,688
--------------
Net assets, at value........................................ $4,637,403,554
==============
Net asset value per share ($4,637,403,554/233,623,150
shares outstanding)....................................... $19.85
==============
</TABLE>
See Notes to Financial Statements.
14
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $8,022,817)
Dividends.................................................. $ 60,787,863
Interest................................................... 19,762,678
------------
Total investment income................................ $ 80,550,541
Expenses:
Management fees (Note 3)................................... 15,046,514
Administrative fees (Note 3)............................... 1,802,996
Transfer agent fees (Note 3)............................... 7,300
Custodian fees............................................. 901,056
Reports to shareholders.................................... 19,000
Registration and filing fees............................... 123,000
Professional fees.......................................... 23,000
Directors' fees and expenses............................... 61,000
Other...................................................... 8,400
------------
Total expenses......................................... 17,992,266
------------
Net investment income............................. 62,558,275
------------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 85,426,451
Foreign currency transactions............................. 587,460
------------
Net realized gain...................................... 86,013,911
Net unrealized appreciation on:
Investments............................................... 413,813,189
Translation of assets and liabilities denominated in
foreign currencies...................................... 428
------------
Net unrealized appreciation............................ 413,813,617
------------
Net realized and unrealized gain............................ 499,827,528
------------
Net increase in net assets resulting from operations........ $562,385,803
============
</TABLE>
See Notes to Financial Statements.
15
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
-----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 62,558,275 $ 84,964,806
Net realized gain from investments and foreign currency
transactions............................................. 86,013,911 111,423,125
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign
currencies............................................... 413,813,617 161,093,064
-------------------------------------
Net increase in net assets resulting from operations.... 562,385,803 357,480,995
Distributions to shareholders from:
Net investment income..................................... -- (86,272,005)
Net realized gains........................................ (15,379,264) (82,399,083)
Capital share transactions (Note 2)........................ 384,390,871 659,605,504
-------------------------------------
Net increase in net assets................................ 931,397,410 848,415,411
Net assets:
Beginning of period........................................ 3,706,006,144 2,857,590,733
-------------------------------------
End of period.............................................. $4,637,403,554 $3,706,006,144
=====================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ 61,882,806 $ (675,469)
=====================================
</TABLE>
See Notes to Financial Statements.
16
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Equity Series (the Fund) is a separate, diversified series of Templeton
Institutional Funds, Inc. (the Company), which is an open-end investment company
registered under the Investment Company Act of 1940. The Fund seeks long-term
capital growth through a flexible policy of investing primarily in equity
securities and debt obligations of companies and governments outside the United
States including emerging markets securities. The following summarizes the
Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
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.
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 currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. 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.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles 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 expense during the reporting
period. Actual results could differ from those estimates.
17
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK
At June 30, 1998, there were 700 million shares authorized ($0.01 par value), of
which 355 million have been classified as Fund shares. Transactions in the
Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................. 44,591,162 $ 858,182,977 60,131,124 $1,060,228,157
Shares issued on reinvestment of distributions.............. 754,221 14,255,154 8,887,806 151,119,277
Shares redeemed............................................. (25,151,803) (488,047,260) (30,430,203) (551,741,930)
------------------------------------------------------------------
Net increase................................................ 20,193,580 $ 384,390,871 38,588,727 $ 659,605,504
==================================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Company's aggregate average daily
net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- ------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
TICI and FT Services have agreed in advance to limit total expenses of the Fund
to an annual rate of 1.00% of average net assets through May 1, 1999. For the
six months ended June 30, 1998, no reimbursement was necessary under the
agreement.
Legal fees of $45,024 were paid to a law firm in which a partner is an officer
of the Fund.
4. INCOME TAXES
At June 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $3,722,123,028 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $1,365,721,156
Unrealized depreciation..................................... (305,944,718)
--------------
Net unrealized appreciation................................. $1,059,776,438
==============
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1998 aggregated $399,109,164 and $222,759,602,
respectively.
18
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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. Like any investment in
securities, the value of the Fund's portfolio will be subject to the risk of
loss from market, currency, economic, political, and other factors, as well as
investment decisions by the Investment Manager, which will not always be
profitable or wise. The Fund and its investors are not protected from such
losses by the Investment Manager. Therefore, investors who cannot accept this
risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
Institutional Services: 1-800-321-8563
Fund Information: 1-800-362-6243
[RECYCLE LOGO]
ZT454 S 6/98
