Templeton Institutional Funds, Inc.
TIFI Emerging Fixed Income Markets Series Annual Report
December 31, 1997
<PAGE>
(Boxed)
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.
Investing in developing markets involves special considerations, which may
include risks related to market and currency volatility, adverse social and
political developments, and the relatively small size and lesser liquidity of
these markets. These special risk considerations are discussed in the Fund's
prospectus. The Fund is designed for the aggressive portion of a
well-diversified portfolio.
<PAGE>
December 31, 1997
[Picture of Neil Devlin]
Mr. Devlin is the Chief Investment Officer and Executive Vice President of
Templeton Global Bond Managers, a division of Templeton Investment Counsel, Inc.
He holds a BA in economics and philosophy from Brandeis University, and is a
Chartered Financial Analyst. Before joining the Templeton organization in 1987,
he was a portfolio manager and bond analyst with Constitution Capital Management
of Boston. Prior to that, Mr. Devlin was a bond trader and research analyst for
the Bank of New England. Mr. Devlin currently directs investment strategies in
both the developed and emerging fixed income markets. He also manages numerous
Franklin Templeton mutual funds as well as corporate pension accounts.
[Picture of Ronald Johnson]
Dr. Johnson is Vice President of Templeton Global Bond Managers. He holds a
Ph.D. and an MA in economics from Stanford University, and an MBA in finance and
a BA in economics from Adelphi University. Prior to joining the Templeton
organization in 1995, Dr. Johnson was chief strategist and head of research for
JPBT Advisers, Inc. in Miami. Before joining JPBT Advisers Inc., he was chief
economist and head of research at Vestrust Asset Management Corporation in
Miami. In addition, Dr. Johnson has held several positions at the Federal
Reserve Bank of New York, including chief of the Domestic Financial Markets
Division. Currently, Dr. Johnson co-directs the fixed income research process
and manages several emerging markets fixed income portfolios.
[Picture of Umran Demirors]
Dr. Demirors is Vice President of Templeton Global Bond Managers. He holds a
Ph.D. and an MA in economics from New York University, and a BA in economics
from Bursa Academy of Economics and Business Administration in Turkey. Prior to
joining the Templeton organization in 1996, Dr. Demirors was a principal and
portfolio manager for Socimer Advisory Inc. in New York. Before joining Socimer
Advisory Inc., Dr. Demirors was the head of research and strategy at Vestcor
Partners Group in Miami. Currently, Dr. Demirors co-directs the fixed income
process and manages several emerging markets fixed income portfolios.
Dear Shareholder:
The Templeton Institutional Funds, Inc. ("TIFI") Emerging Fixed Income Markets
Series reported a return of 12.4% from its inception date (June 4, 1997) through
December 31, 1997, compared to the unmanaged JP Morgan Emerging Markets Bond
Index plus ("EMBI+") and the Latin Eurobond Index ("LEI") returns of 3.3% and
3.5%, 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 management
expenses. Of course, one cannot invest directly in an index nor is an index
representative of the Fund's portfolio.
(Insert performance chart below)
TOTAL RETURNS AS OF 12/31/97
Cumulative
Since Inception
(06/04/97) /1,2/
TIFI Emerging Fixed Income Markets Series 12.4%
JPMorgan EMBI+ /3/ 3.3%
LEI /3/ 3.5%
1. The 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 1.25% of average net assets through April 30, 1998. 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,
1998, 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.
2. Cumulative total return represents the change in value of an investment over
the period indicated. Since the Fund has been in existence for less than one
year, the figures represent cumulative total return from inception; therefore,
average annual total returns are not provided.
3. The index is unmanaged, does not contain cash, and does not include
management expenses. The index includes reinvested dividends. One cannot invest
directly in an index.
All calculations assume reinvestment of dividends and capital gains at net asset
value. 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 the relatively small size and lesser liquidity of these markets. You may
have a gain or loss when you sell your shares. Past performance is not
predictive of future results.
During the period under review, bond prices rose in most of the emerging market
countries that comprise the JP Morgan EMBI+. Bulgaria was the star performer
with a total return of 15.6%. This performance reflected the fundamental
improvements and economic reforms that concluded with the successful
implementation of a currency board regime. Other countries that performed well
were Ecuador with a total return of 11.6%, Mexico with 10.1%, Venezuela with
8.2%, and Peru with 4.4%./1/ Ecuador, Mexico, and Venezuela benefited from
higher oil prices. Exceptions to this positive performance were the Philippines
and Russia. The Philippines were affected by the devaluations in the neighboring
countries that started in the second half of 1997.
1 Source: Bloomberg.
<PAGE>
Russia's performance appeared to reflect investors' worries about the
sustainability of fiscal imbalances under a scenario of lower financing
available to emerging market countries.
GEOGRAPHIC DISTRIBUTION ON 12/31/97- pie chart
(Fixed Income Assets as a Percentage of Total Net Assets)
Asia 4.5%
Europe 12.5%
Latin America 54.4%
North America 28.6%
FUND ASSET ALLOCATION ON 12/31/97 - pie chart
Short-Term Investments and Other Net Assets 28.6%
Fixed Income 71.4%
The Fund was launched soon after investors became worried from February to April
over the uncertainty of whether U.S. interest rates would increase. In May, the
Czech koruna depreciated, which was a precursor of the calamity that occurred
later in Southeast Asia. On July 1, the Thai baht devalued and triggered
currency devaluations in Malaysia, the Philippines, and Indonesia. Until late
October, there was a separation between Asia and the rest of the emerging market
countries, which generally were able to continue their rallies unscathed.
However, a speculative attack against the Hong Kong dollar on October 23 started
the contagion to the other two major emerging market regions of Eastern Europe
and Latin America. Stock markets crashed and interest rate spreads on emerging
markets widened as a result. Some countries, such as Mexico and Venezuela, were
perceived as "safe havens" due to their strong policies and closer economic ties
to the U.S. and, therefore, were able to better withstand the adverse change in
market sentiment. Countries with weak current accounts, fiscal positions, or
currency overvaluations like Brazil, Argentina, and Russia suffered the most
from the "Asian Contagion." Despite this, we believe the Fund did well because
it was positioned in anticipation of these changes with a low exposure to
Southeast Asia.
Looking forward, we will continue to focus on bonds from countries experiencing
strong economic growth, such as Mexico, and those which we believe show strong
repayment capacity notwithstanding temporary problems. We are aware that the
current volatility could affect countries that face problems of currency
overvaluation, but we are convinced that they undoubtedly possess long term
potential. In Asia and Eastern Europe, we will look for opportunities arising
from the currency problems many of these countries have experienced in recent
months. In addition, we hope to take advantage of several countries' plans to
trade their "Brady bonds" for new, uncollaterized sovereign debt in an effort to
reduce their debt servicing costs and improve their balance sheets.
Of course, investments in foreign securities involve special risks, such as
market and currency volatility and adverse economic, social and political
developments in the countries where the Fund is invested. Developing markets
involve heightened risks related to the same factors, in addition to risks
associated with their relatively small size and lesser liquidity. 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 market has
increased 1,268% in the last 15 years, but has suffered five declines of more
than 20% during that time./2/ These special risks and other considerations are
discussed in the Fund's prospectus.
10 LARGEST POSITIONS ON 12/31/97
(Percent of Total Net Assets)
Republic of Venezuela, 9.25%, 9/15/27 25.0%
Republic of Argentina, 9.75%, 9/19/27 10.7%
Federal National Mortgage Assn., 5.51%, 1/05/98 10.2%
United Mexican States, 11.50%, 5/15/26, GLOB BD 7.9%
Federal National Mortgage Assn., 5.64%, 2/18/98 5.5%
Federal Home Loan Bank, 5.57%, 3/31/98 5.5%
Federal National Mortgage Assn., 5.50%, 1/30/98 4.6%
Republic of Turkey, 10.00%, 9/19/97, 144A 4.5%
Republic of Poland, FRN, 6.938%, 10/27/24 4.3%
Republic of Argentina, 8.75%, 5/09/02 4.2%
For the most current portfolio information, please call 1-800-362-6243
This discussion reflects our views and opinions as of December 31, 1997, the end
of the reporting period. However, market and economic conditions are changing
constantly, which may affect our strategies, and portfolio holdings. Although
historic performance is no guarantee of future results, these insights may help
you understand our investment and management philosophy.
2. Source: Bloomberg. Based on quarterly percentage price change over the 15
years ended December 31, 1997.
<PAGE>
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Best regards,
/s/DONALD F. REED
Donald F. Reed, CFA, CIC
President
Templeton Institutional Funds, Inc.
Neil S. Devlin, CFA
Chief Investment Officer & Executive Vice President
Templeton Global Bond Managers
Ronald A. Johnson, Ph.D.
Vice President
Templeton Global Bond Managers
Umran Demirors, Ph.D.
Vice President
Templeton Global Bond Managers
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
Financial Highlights
- -------------------------------------------------------------------------------
Period Ended
December 31,
1997+
------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $10.00
------------------
Income from investment operations:
Net investment income .44
Net realized and unrealized loss .79
------------------
Total from investment operations 1.23
------------------
Less distributions from:
Net investment income (.44)
Net realized gains (.32)
------------------
Total distributions (.76)
------------------
Net asset value, end of period $10.47
==================
Total Return * 12.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $2,249
Ratios to average net assets:
Expenses 1.25%**
Expenses, excluding waiver and payments
by affiliate 6.40%**
Net investment income 7.26%**
Portfolio turnover rate 172.62%
* Total return not annualized.
** Annualized.
+ For the period June 4, 1997 (commencment of operations) to
December 31, 1997.
See Notes to Financial Statements.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKET SERIES
Statement of Investments, December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount* Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM INVESTMENTS 71.4%
ARGENTINA 14.9%
Republic of Argentina:
8.75%, 5/09/02 100,000 $ 95,200
9.75%, 9/19/27 250,000 240,250
-----------
335,450
-----------
BULGARIA 4.1%
Repulic of Bulgaria, FRN, 6.688%, 7/28/11 125,000 91,719
------------
ECUADOR 2.4%
Repulic of Ecuador, FRN, 3.50%, 2/28/25 100,000 54,870
------------
MEXICO 12.1%
Banco Nacional de Comercio Exterior, 7.25%, 2/02/04 100,000 93,125
United Mexican States, 11.50%, 5/15/26 150,000 177,938
-----------
271,063
-----------
POLAND 4.3%
Republic of Poland, FRN, 6.938%, 10/27/24 100,000 97,250
-----------
RUSSIA 4.1%
Minfin of Russia, 144A, 10.00%, 6/26/07 100,000 92,825
-----------
TURKEY 4.5%
Republic of Turkey, 144A, 10.00%, 9/19/07 100,000 101,750
-----------
VENEZUELA 25.0%
Republic of Venezuela, 9.25%, 9/15/27 625,000 561,719
----------
TOTAL LONG TERM INVESTMENTS (COST $1,550,025) 1,606,646
SHORT TERM INVESTMENTS 25.9%
Federal Home Loan Bank, 5.57%, 3/31/98 125,000 123,310
Federal National Mortgage Association, 5.50% to 5.64%
with maturities to 2/18/98 460,000 458,524
-----------
TOTAL SHORT TERM INVESTMENTS (COSTS $581,642) 581,834
-----------
TOTAL INVESTMENTS (COST $2,131,667) 97.3% 2,188,480
OTHER ASSETS, LESS LIABILITIES 2.7% 60,825
-----------
TOTAL NET ASSETS 100.0% $2,249,305
===========
</TABLE>
*Securities traded in U.S. dollars.
See Notes to Financial Statements.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
Financial Statements
- ------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1997
Assets:
Investments in securities, at value
(cost $2,131,667) $2,188,480
Cash 34,520
Receivables from dividends and interest 39,194
------------------
Total assets 2,262,194
------------------
Liabilities:
Other liabilities 12,889
------------------
Total liabilities 12,889
------------------
Net assets, at value $2,249,305
==================
Net assets consist of:
Undistributed net investment income $ 942
Net unrealized appreciation 56,813
Accumulated net realized gain 40,550
Capital shares 2,151,000
------------------
Net assets, at value $2,249,305
==================
Net asset value per share
($2,249,305/214,746 shares outstanding) $10.47
==================
See Notes to Financial Statements.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
Financial Statements (cont.)
- -------------------------------------------------------------------------------
Statement of Operations
for the period June 4, 1997(commencement of operations) to December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income:
Dividends $ 1,030
Interest 102,117
-----------
Totalinvestment income $103,147
---------
Expenses:
Management fees (Note 3) 8,484
Administrative fees (Note 3) 1,030
Transfer agent fees (Note 3) 200
Custodian fees 725
Reports to shareholders 1,000
Registration and filing fees 47,050
Professional fees (Note 3) 18,506
Directors' fees and expenses 20
Other 505
---------
Total expenses 77,520
Expenses waived/paid by affiliate (Note 3) 62,315
---------
Net expenses 15,205
---------
Net investment income 87,942
---------
Realized and unrealized gain:
Net realized gain from investments 104,550
Net unrealized appreciation on investments 56,813
----------
Net realized and unrealized gain 161,363
----------
Net increase in net assets resulting from operations $249,305
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
Financial Statements (cont.)
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
for the period June 4, 1997(commencement of operations) to December 31, 1997
1997
--------------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 87,942
Net realized gain from investments 104,550
Net unrealized appreciation on investments 56,813
--------------------
Net increase in net assets
resulting from operations 249,305
Distribution to shareholders from:
Net investment income (87,000)
Net realized gains (64,000)
Capital share transactions (Note 2) 2,151,000
------------------
Net increase in net assets 2,249,305
Net assets:
Beginning of year 0
------------------
End of year $2,249,305
==================
Undistributed net investment income included
in net assets: ------------------
End of year $ 942
==================
See Notes to Financial Statements.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Emerging Fixed Income Markets 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 high total return, by investing primarily in a portfolio of debt
obligations of companies, governments and government related entities in
emerging market countries. 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, 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 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
<PAGE>
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.
F. SECURITIES ISSUED ON A WHEN-ISSUED OR DELAYED BASIS:
The Fund may trade securities on a when-issued or delayed basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Fund will
generally purchase these securities with the intention of acquiring such
securities, it may sell such securities before the settlement date.
2. CAPITAL STOCK
At December 31, 1997, there were 700 million shares authorized ($0.01 par
value), of which 70 million have been classified as Fund shares. Transactions in
the Fund's shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
-------------------------------------------------
SHARES AMOUNT
----------------------- -------------------------
<S> <C> <C>
Shares sold 200,000 $2,000,000
Shares reinvested 14,746 151,000
----------------------- -------------------------
Net increase 214,746 $2,151,000
----------------------- -------------------------
</TABLE>
*Effective date was June 4, 1997
Templeton Global Investors, Inc., a subsidiary of Franklin Resources, is the
record owner of 100% of the Fund shares as of December 31, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund 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:
ANNUALIZED FEE AVERAGE DAILY NET ASSETS
RATE
- ----------------- ---------------------------------------------------------
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
TICI and FT Services have agreed in advance to limit total expenses of the Fund
to an annual rate of 1.25% of average net assets through May 1, 1998, as noted
in the Statement of Operations.
During the period June 4, 1997 to December 31, 1997, legal fees of $260 were
paid to a law firm in which an officer of the Company is a partner.
<PAGE>
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
statement of investments. At December 31, 1997, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
Unrealized appreciation $84,780
Unrealized depreciation (27,967)
--------------
Net unrealized appreciation $56,813
--------------
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period June 4, 1997 to December 31, 1997, aggregated $4,487,144 and $3,051,084,
respectively.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Emerging Fixed Income Markets Series
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Emerging Fixed Income Markets Series of
Templeton Institutional Funds, Inc. as of December 31, 1997, and the related
statement of operations, the statement of changes in net assets and the
financial highlights for the period June 4, 1997 (commencement of operations) to
December 31, 1997. 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
audit.
We conducted our audit 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, 1997, by
correspondence with the custodian. 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
audit provides 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
Emerging Fixed Income Markets Series of Templeton Institutional Funds, Inc. as
of December 31, 1997, the results of its operations, the changes in its net
assets and the financial highlights for the period indicated, in conformity with
generally accepted accounting principles.
New York, New York
January 30, 1998
<PAGE>
(Back Cover)
ZT453 A 12/97
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