PROSPECTUS
LOGO
TEMPLETON
INSTITUTIONAL FUNDS, INC.
---------------------------------------------
MAY 1, 1998
GROWTH SERIES
FOREIGN EQUITY SERIES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
LOGO
- --------------------------------------------------------------------------------
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how the funds invest and the
services available to shareholders.
This prospectus describes the four funds listed above (the "funds") which are
series of Templeton Institutional Funds, Inc. (the "Company").
INVESTMENTS IN EMERGING MARKETS INVOLVE CERTAIN CONSIDERATIONS WHICH ARE NOT
NORMALLY INVOLVED IN INVESTMENT IN SECURITIES OF U.S. COMPANIES, AND AN
INVESTMENT IN THE FUNDS MAY BE CONSIDERED SPECULATIVE. THE FUNDS MAY BORROW
MONEY FOR INVESTMENT PURPOSES, WHICH MAY INVOLVE GREATER RISK AND ADDITIONAL
COSTS TO THE FUNDS. IN ADDITION, THE FUNDS MAY INVEST UP TO 10% OF THEIR ASSETS
IN RESTRICTED SECURITIES, WHICH MAY INVOLVE GREATER RISK AND INCREASED FUND
EXPENSES. THE EMERGING FIXED INCOME MARKETS SERIES MAY INVEST A SUBSTANTIAL
PORTION OF ITS ASSETS IN HIGH-YIELD, HIGH RISK DEBT INSTRUMENTS THAT ARE
PREDOMINANTLY SPECULATIVE. SEE "WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?"
To learn more about the Company and its policies, you may request a copy of the
Company's Statement of Additional Information ("SAI"), dated May 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE
TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THE FUNDS
Expense Summary........................................ 1
Financial Highlights................................... 2
How Do the Funds Invest Their Assets?.................. 6
What Are the Risks of Investing in the Funds?.......... 17
Who Manages the Funds?................................. 20
How Do the Funds Measure Performance?.................. 23
How Taxation Affects the Funds and Their 23
Shareholders.........................................
How Is the Company Organized?.......................... 23
ABOUT YOUR ACCOUNT
How Do I Buy Shares?................................... 24
May I Exchange Shares for Shares of Another Fund?...... 26
How Do I Sell Shares?.................................. 27
What Distributions Might I Receive From the Funds?..... 28
Transaction Procedures and Special Requirements........ 28
Services to Help You Manage Your Account............... 31
What If I Have Questions About My Account?............. 32
GLOSSARY
Useful Terms and Definitions........................... 34
APPENDIX
Corporate Bond Ratings................................. 36
</TABLE>
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
- --------------------------------
May 1, 1998
When reading this prospectus,
you will see certain terms
beginning with capital letters.
This means the term is explained
in our glossary section.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, FL 33733-8030
1-800/DIAL BEN
PAGE
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
funds. For Growth Series, Foreign Equity Series, and Emerging Markets Series,
the table is based on the fund's historical expenses for the fiscal year ended
December 31, 1997. For Emerging Fixed Income Markets Series, the table is based
on estimated expenses, after fee reductions and expense limitations, for the
current fiscal year. The funds' actual expenses may vary. The information in the
table does not reflect an administrative service fee of $5.00 per exchange for
market timing or allocation service accounts.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
EMERGING
FIXED
FOREIGN EMERGING INCOME
GROWTH EQUITY MARKETS MARKETS
SERIES SERIES SERIES SERIES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees (after fee reduction)*........... 0.70% 0.70% 1.25% 0.00%
Other Expenses (after fee reduction)*............ 0.16% 0.14% 0.32% 1.25%
Total Fund Operating Expenses (after fee
reduction)*.................................... 0.86% 0.84% 1.57% 1.25%
</TABLE>
EXAMPLE: Assume each fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in a fund.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROWTH SERIES.......................................... $ 9 $27 $48 $106
FOREIGN EQUITY SERIES.................................. $ 9 $27 $47 $104
EMERGING MARKETS SERIES................................ $16 $50 $86 $187
EMERGING FIXED INCOME MARKETS SERIES................... $13 $40 - -
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The funds pay their operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each fund and are not
directly charged to your account.
*The Investment Managers and FT Services have agreed in advance to reduce their
respective fees in order to limit the total expenses of each fund to an annual
rate of 0.90% of average net assets for Growth Series, 1% of average net assets
for Foreign Equity Series, and 1.6% of average net assets for Emerging Markets
Series through April 30, 1999; and 1.25% of average net assets for Emerging
Fixed Income Markets Series through December 31, 1998. If these fee reductions
are insufficient to so limit the funds' expenses, FT Services has agreed to make
certain payments to reduce the funds' expenses. After April 30, 1999, the
agreements for Growth Series, Foreign Equity Series and Emerging Markets Series
may end at any time upon notice to the Board. These voluntary agreements did not
result in any fee reductions for Growth Series, Foreign Equity Series or
Emerging Markets Series for the fiscal year ended December 31, 1997. After
December 31, 1998, the agreement for Emerging Fixed Income Markets Series may
end at any time. If this voluntary agreement was not in effect for Emerging
Fixed Income Markets Series, the fund's "Management Fees," "Other Expenses" and
"Total Fund Operating Expenses" would be 0.70%, 5.70% and 6.40%, respectively.
"Other Expenses" for Emerging Fixed Income Markets Series are based on estimated
amounts for the current fiscal year.
Templeton Institutional Funds, Inc. - 1
PAGE
FINANCIAL HIGHLIGHTS
These tables summarize the funds' financial history. The information has been
audited by McGladrey & Pullen, LLP, the funds' independent auditors. Their audit
reports covering the periods shown below appear in the financial statements in
each fund's Annual Report to Shareholders for the fiscal year ended December 31,
1997. The Annual Reports to Shareholders also include more information about the
funds' performance. For a free copy, please call Fund Information.
GROWTH SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993+
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net Asset Value, beginning of year........................ $13.41 $11.86 $10.94 $11.80 $10.00
----------------------------------------------------------------
Income from investment operations:
Net investment income................................... .73 .30 .27 .20 .06
Net realized and unrealized gain (loss)................. .89 2.32 1.62 (.36) 1.94
----------------------------------------------------------------
Total from investment operations.......................... 1.62 2.62 1.89 (.16) 2.00
----------------------------------------------------------------
Less distributions from:
Net investment income................................... (.87) (.29) (.27) (.20) (.05)
Net realized gains...................................... (.54) (.74) (.70) (.50) (.15)
In excess of net realized gains......................... -- (.04) -- -- --
----------------------------------------------------------------
Total distributions....................................... (1.41) (1.07) (.97) (.70) (.20)
----------------------------------------------------------------
Net Asset Value, end of year.............................. $13.62 $13.41 $11.86 $10.94 $11.80
================================================================
TOTAL RETURN*............................................. 12.27% 22.57% 17.59% (1.32)% 20.04%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)........................... $120,370 $268,158 $226,963 $194,059 $184,013
Ratios to average net assets:
Expenses................................................ .86% .87% .88% .95% 1.00%**
Net investment income................................... 2.15% 2.34% 2.28% 1.69% 1.19%**
Portfolio turnover rate................................... 16.73% 15.61% 30.20% 17.23% 17.32%
Average commission rate paid***........................... $.0105 $.0242 -- -- --
</TABLE>
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 3, 1993 (commencement of operations) to December 31, 1993.
2 - Templeton Institutional Funds, Inc.
PAGE
FOREIGN EQUITY SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993+ 1992+ 1991 1990++
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
(For a share outstanding
throughout the year)
Net Asset Value, beginning
of year................... $16.34 $14.04 $12.86 $13.32 $10.05 $10.63 $10.16 $10.00
-----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income..... .42 .45 .31 .20 .23 .27 .31 .12
Net realized and
unrealized gain
(loss).................. 1.43 2.54 1.35 (.16) 3.19 (.41) 1.30 .04
-----------------------------------------------------------------------------------------------
Total from investment
operations................ 1.85 2.99 1.66 .04 3.42 (.14) 1.61 .16
-----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income..... (.43) (.45) (.31) (.19) (.09) (.24) (.44) --
In excess of net
investment income....... -- (.02) -- -- -- -- -- --
Net realized gains........ (.40) (.14) (.17) (.31) (.06) (.20) (.70) --
In excess of net realized
gains................... -- (.08) -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
Total distributions......... (.83) (.69) (.48) (.50) (.15) (.44) 1.14 --
-----------------------------------------------------------------------------------------------
Net Asset Value, end of
year...................... $17.36 $16.34 $14.04 $12.86 $13.32 $10.05 $10.63 $10.16
===============================================================================================
TOTAL RETURN*............... 11.43% 21.58% 13.00% 0.24% 34.03% (1.33)% 16.13% 1.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's)................... $3,706,006 $2,857,591 $1,817,883 $1,093,227 $407,970 $566 $1,181 $1,015
Ratios to average net
assets:
Expenses.................. .84% .87% .88% .95% 1.00% 8.82% 9.15% 9.24%**
Expenses, excluding waiver
and payments by
affiliate............... .84% .87% .88% .95% 1.03% 1.00% 1.00% 1.00%**
Net investment income..... 2.49% 3.20% 2.70% 2.03% 1.73% 2.38% 2.47% 5.77%**
Portfolio turnover rate..... 15.25% 7.39% 20.87% 7.90% 42.79% 8.45% 76.16% 0.00%
Average commission rate
paid***................... $.0013 $.0021 -- -- -- -- -- --
</TABLE>
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+Based on average weighted shares outstanding.
++For the period October 18, 1990 (commencement of operations) to December 31,
1990.
Templeton Institutional Funds, Inc. - 3
PAGE
EMERGING MARKETS SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997
---------- 1996 1995 1994 1993+
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net Asset Value, beginning of year..................... $12.45 $10.75 $11.21 $13.22 $10.00
--------------------------------------------------------------------
Income from investment operations:
Net investment income................................ .18 .15 .19 .17 .04
Net realized and unrealized gain (loss).............. (1.60) 1.86 (.34) (1.65) 3.25
--------------------------------------------------------------------
Total from investment operations....................... (1.42) 2.01 (.15) (1.48) 3.29
--------------------------------------------------------------------
Less distributions from:
Net investment income................................ (.18) (.15) (.17) (.17) (.04)
Net realized gains................................... (.48) (.16) (.14) (.36) (.03)
--------------------------------------------------------------------
Total distributions.................................... (.66) (.31) (.31) (.53) (.07)
--------------------------------------------------------------------
Net Asset Value, end of year........................... $10.37 $12.45 $10.75 $11.21 $13.22
====================================================================
TOTAL RETURN*.......................................... (11.32)% 18.86% (1.23)% (11.39)% 32.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)........................ $1,923,881 $1,565,537 $798,515 $582,878 $422,433
Ratios to average net assets:
Expenses............................................. 1.57% 1.56% 1.52% 1.60% 1.60%**
Expenses, excluding waiver and payments by
affiliate.......................................... 1.57% 1.56% 1.52% 1.66% 1.60%**
Net investment income................................ 1.42% 1.56% 2.00% 1.59% 0.91%**
Portfolio turnover rate................................ 24.72% 7.92% 13.47% 12.51% 9.42%
Average commission rate paid***........................ $.0019 $.0019 -- -- --
</TABLE>
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 3, 1993 (commencement of operations) to December 31, 1993.
4 - Templeton Institutional Funds, Inc.
PAGE
EMERGING FIXED INCOME MARKETS SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997+
------------------
<S> <C>
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 gain.......................... .79
-------
Total from investment operations............................ 1.23
-------
Less distribution 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's)........................... $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%
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period June 4, 1997 (commencement of operations) to December 31, 1997.
Templeton Institutional Funds, Inc. - 5
PAGE
HOW DO THE FUNDS INVEST THEIR ASSETS?
THE FUNDS' INVESTMENT OBJECTIVES
Growth Series, Foreign Equity Series and Emerging Markets Series each seeks
long-term growth of capital. Emerging Fixed Income Markets Series seeks high
total return, consisting of current income and capital appreciation. The
investment objective of each fund is a fundamental policy and may not be changed
without shareholder approval. Of course, there is no assurance that a fund's
objective will be achieved.
PRIMARY INVESTMENT POLICIES OF THE FUNDS
Described below are the primary investment policies of each fund. Each of the
funds may, however, also invest in various types of securities and use various
investment strategies described under the headings "Types of Securities In Which
The Funds May Invest" and "Other Investment Policies Of The Funds." With the
exception of the investment objectives and the investment restrictions
specifically identified as fundamental, all investment policies and practices
described in this prospectus and in the SAI may be changed by the Board without
shareholder approval.
GROWTH SERIES. Growth Series seeks long-term capital growth through a flexible
policy of investing in stocks and debt obligations of companies and governments
of any nation, including developing nations. Under normal market conditions at
least 65% of Growth Series' total assets will be invested in such securities.
Although Growth Series generally invests in common stock, it may also invest in
preferred stocks and debt securities that the Investment Manager believes offer
the potential for capital growth. In selecting securities for Growth Series, the
Investment Manager attempts to identify companies that offer above-average
opportunities for capital appreciation in various countries and industries where
economic and political factors, including currency movements, are favorable to
capital growth.
Growth Series may invest up to 5% of its assets in warrants (not counting
warrants acquired in units or attached to other securities), and up to 10% of
its net assets in illiquid securities. Growth Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated at the
time of purchase lower than BBB by S&P or Baa by Moody's, (ii) structured
investments, and (iii) securities of Russian issuers. Growth Series may borrow
up to one-third of the value of its total assets and may lend portfolio
securities with an aggregate market value of up to one-third of its total
assets. Growth Series may purchase and sell put and call options on securities
or indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the fund's total
assets, and (ii) the fund will not purchase put or call options if the aggregate
premium paid for such options would exceed 5% of its total assets. Growth Series
may enter into forward foreign currency contracts and may purchase and write put
and call options on foreign currencies. For hedging purposes only, Growth Series
may buy and sell financial futures contracts, stock index futures contracts,
foreign currency futures contracts and options on any of these futures
contracts, provided that (i) the fund will not commit more than 5% of its total
assets to initial margin deposits on futures contracts and related options, and
(ii) the value of the underlying securities on which futures contracts will be
written at any one time will not exceed 25% of the total assets of the fund.
FOREIGN EQUITY SERIES. Foreign Equity Series seeks long-term capital growth
through a flexible policy of investing primarily in equity securities and debt
obligations of companies and governments outside the U.S. including emerging
markets securities. Foreign Equity Series normally will invest at least 65% of
its total assets in foreign equity securities. Foreign Equity Series may also
invest up to 35% of its total assets in debt securities when, in the judgment of
the Investment Manager, they offer greater potential for capital appreciation
than is available through investment in stocks. In selecting securities for
Foreign Equity Series, the Investment Manager attempts to identify those
companies that offer above-average opportunities for capital appreciation in
various countries and industries where economic and political factors, including
currency movements, are favorable to capital growth.
6 - Templeton Institutional Funds, Inc.
PAGE
Foreign Equity Series may invest up to 5% of its assets in warrants (not
counting warrants acquired in units or attached to other securities), and up to
10% of its net assets in illiquid securities. Foreign Equity Series will not
invest more than 5% of its total assets in any of the following: (i) debt
securities rated at the time of purchase lower than BBB by S&P or Baa by
Moody's, (ii) structured investments, and (iii) securities of Russian issuers.
Foreign Equity Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Foreign Equity Series may purchase and sell put
and call options on securities or indices, provided that (i) the value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the fund's total assets, and (ii) the fund will not purchase put
or call options if the aggregate premium paid for such options would exceed 5%
of its total assets. Foreign Equity Series may enter into forward foreign
currency contracts and may purchase and write put and call options on foreign
currencies. For hedging purposes only, Foreign Equity Series may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of these futures contracts, provided that
(i) the fund will not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options, and (ii) the value of the
underlying securities on which futures contracts will be written at any one time
will not exceed 25% of the total assets of the fund.
EMERGING MARKETS SERIES. Emerging Markets Series seeks long-term capital growth
by investing primarily in equity securities of issuers in countries with
emerging markets. Under normal conditions at least 65% of Emerging Markets
Series' total assets will be invested in equity securities of emerging market
companies. Emerging Markets Series will, at all times except during defensive
periods, maintain investments in at least three countries with emerging markets.
The Investment Manager may, from time to time, use various methods of selecting
securities for Emerging Markets Series' portfolio and may also employ and rely
on independent or affiliated sources of information and ideas in connection with
management of the portfolio. Emerging Markets Series may invest up to 35% of its
total assets in debt securities that the Investment Manager believes offer the
potential for capital growth.
Emerging Markets Series seeks to benefit from economic and other developments in
emerging markets. The investment objective of Emerging Markets Series reflects
the belief that investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain countries with emerging markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of emerging market
countries. Certain emerging market countries, which may be in the process of
developing more market-oriented economies, may experience relatively high rates
of economic growth. Other countries, although having relatively mature emerging
markets, may also be in a position to benefit from local or international
developments encouraging greater market orientation and diminishing governmental
intervention in economic affairs.
Emerging Markets Series may invest up to 5% of its assets in warrants (not
counting warrants acquired in units or attached to other securities), and up to
15% of its net assets in illiquid securities. Emerging Markets Series will not
invest more than 5% of its total assets in any of the following: (i) debt
securities rated at the time of purchase lower than BBB by S&P or Baa by
Moody's, (ii) structured investments, and (iii) securities of Russian issuers.
Emerging Markets Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Emerging Markets Series may purchase and sell put
and call options on securities or indices, provided that (i) the value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the fund's total assets, and (ii) the fund will not purchase put
or call options if the aggregate premium paid for such options would exceed 5%
of its total assets. Emerging Markets Series may enter into forward foreign
currency contracts and may purchase and write put and call options on foreign
currencies. For hedging purposes only, Emerging Markets Series may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of these futures contracts, provided that
(i) the fund will not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options, and (ii) the value of the
underlying
Templeton Institutional Funds, Inc. - 7
PAGE
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the fund.
EMERGING FIXED INCOME MARKETS SERIES. Emerging Fixed Income Markets Series seeks
high total return, consisting of current income and capital appreciation, by
investing at least 65% of its total assets in a portfolio of "fixed income" or
debt obligations of sovereign or sovereign-related entities of emerging market
countries, as well as debt obligations of emerging market companies. For
purposes of this restriction, the fund uses the term "fixed income" generically
to mean debt obligations of all types, including debt obligations which pay a
variable or floating rate of interest as well as a fixed rate of interest. In
selecting investments for Emerging Fixed Income Markets Series, the Investment
Manager will draw on its experience in global investing in seeking to identify
those markets and issuers around the world which are anticipated to provide the
opportunity for high current income and capital appreciation. Debt securities
issued in emerging markets are generally rated below investment grade.
Consequently, the fund anticipates that a substantial percentage of its assets
may be invested in higher risk, lower quality debt securities, commonly known as
"junk bonds." These investments are speculative in nature. See "Debt Securities"
in this section and "What Are the Risks of Investing in the Funds?"
Emerging Fixed Income Markets Series' investments in sovereign or
sovereign-related debt obligations may consist of (i) bonds, notes, bills,
debentures or other fixed income or floating rate securities issued or
guaranteed by governments, governmental agencies or instrumentalities, or
government owned, controlled or sponsored entities, including central banks,
located in emerging market countries (including loans and participations in and
assignments of portions of loans between governments and financial
institutions), (ii) debt securities issued by entities organized and operated
for the purpose of restructuring the investment characteristics of securities
issued by any of the entities described above, including indexed or
currency-linked securities, and (iii) debt securities issued by supra-national
organizations such as the Asian Development Bank, the Inter-American Development
Bank, and the Corporacion Andina de Fomento, among others. These securities may
be issued in either registered or bearer form. These securities may include
Brady Bonds discussed below under "Types of Securities In Which the Funds May
Invest."
Emerging Fixed Income Markets Series' investments in debt obligations of private
sector companies in emerging market countries may take the form of bonds, notes,
bills, debentures, convertible securities, warrants, indexed or currency-linked
securities, bank debt obligations, short-term paper, loan participations, loan
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of instruments issued by
emerging market country issuers. Emerging market country debt securities held by
Emerging Fixed Income Markets Series may or may not be listed or traded on a
securities exchange. Emerging Fixed Income Markets Series will not be subject to
any restrictions on the maturities of the emerging market country debt
securities it holds; those maturities may range from overnight to more than 30
years.
Emerging Fixed Income Markets Series may invest up to 35% of its total assets in
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities.
Emerging Fixed Income Markets Series may invest up to 5% of its assets in
warrants (not counting warrants acquired in units or attached to other
securities), and up to 15% of its net assets in illiquid securities. Emerging
Fixed Income Markets Series will not invest more than 5% of its total assets in
securities of Russian issuers. Emerging Fixed Income Markets Series may invest
in debt securities rated below BBB by S&P or Baa by Moody's (or unrated debt
securities determined by the fund's Investment Manager to be of comparable
quality). Emerging Fixed Income Markets Series may borrow up to one-third of the
value of its total assets and may lend portfolio securities with an aggregate
market value of up to one-third of its total assets. Emerging Fixed Income
Markets Series may purchase and sell put and call options on securities or
indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the fund's total
assets, and (ii) the fund will not purchase put or call options if the aggregate
premium paid for such options
8 - Templeton Institutional Funds, Inc.
PAGE
would exceed 5% of its total assets. Emerging Fixed Income Markets Series may
enter into forward foreign currency contracts and may purchase and write put and
call options on foreign currencies. For hedging purposes only (including
anticipatory hedges where the Investment Manager seeks to anticipate an intended
shift in maturity, duration or asset allocation), Emerging Fixed Income Markets
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the fund. Emerging Fixed Income Markets Series may enter into swap
agreements as discussed below, provided that the fund will not enter into an
agreement with any single party if the amount owed or to be received under any
existing contracts with that party would exceed 5% of the fund's assets.
TYPES OF SECURITIES IN WHICH THE FUNDS MAY INVEST
Each fund is authorized to invest in certain of the types of securities
described below.
EQUITY SECURITIES. As used in this prospectus, "equity securities" refers to
common stock, preferred stock, securities convertible into common or preferred
stock, warrants or rights to subscribe to or purchase such securities, and
sponsored or unsponsored Depositary Receipts, including American Depositary
Receipts, European Depositary Receipts, Global Depositary Receipts and similar
instruments (see "Depositary Receipts" below).
EMERGING MARKETS SECURITIES. As used in this prospectus, an "emerging market"
country is any country that is generally considered to be developing or emerging
by the International Bank for Reconstruction and Development (more commonly
referred to as the World Bank) and the International Finance Corporation, as
well as countries that are classified by the United Nations or otherwise
regarded by their authorities as developing. Currently, the countries not in
this category include Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands,
New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the
United States. In addition, as used in this prospectus, emerging market
companies means (i) companies whose principal securities trading markets are in
emerging market countries, as defined above, (ii) companies that derive 50% or
more of their total revenue from either goods or services produced in emerging
market countries or sales made in emerging market countries, or (iii) companies
organized under the laws of, and with principal offices in, emerging market
countries.
DEBT SECURITIES. A fund's investments in debt securities may include bonds,
notes, debentures, commercial paper, certificates of deposit, time deposits and
bankers' acceptances, and which may include structured investments. The funds
are not limited as to the type of debt securities in which they may invest. For
example, bonds may include Eurobonds, Global Bonds, Yankee Bonds, bonds sold
under SEC Rule 144A, restructured external debt such as Brady Bonds, as well as
restructured external debt that has not undergone a Brady-style debt exchange,
or other types of instruments structured or denominated as bonds. Issuers of
debt securities may include the U.S. government, its agencies or
instrumentalities; a foreign government, its agencies or instrumentalities;
supranational organizations; local governments, their agencies or
instrumentalities; U.S. or foreign corporations; and U.S. or foreign banks,
savings and loan associations, and bank holding companies.
Debt securities purchased by the funds may be rated below BBB by S&P or Baa by
Moody's or, if unrated, of comparable quality as determined by each fund's
Investment Manager. Each fund except Emerging Fixed Income Markets Series will
limit its investment in such debt securities to 5% of its total assets. The
Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a different level of investment in high
risk, lower quality debt securities would be consistent with the interests of
the funds and their shareholders. Debt securities rated C by Moody's are the
lowest rated class of bonds and may be regarded as having extremely poor
prospects of ever attaining any real investment standing. Debt securities rated
C by S&P are
Templeton Institutional Funds, Inc. - 9
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typically subordinated to senior debt which is vulnerable to default and is
dependent on favorable conditions to meet timely payment of interest and
repayment of principal. Debt securities rated C are therefore risky and
speculative investments.
Commercial paper purchased by the funds will meet the credit quality criteria
set forth under "How Do the Funds Invest Their Assets?" in the SAI. Certain debt
securities can provide the potential for capital appreciation based on various
factors such as changes in interest rates, economic and market conditions,
improvement in an issuer's ability to repay principal and pay interest, and
ratings upgrades. Each of the funds may invest in debt or preferred securities
which have equity features, such as conversion or exchange rights, or which
carry warrants to purchase common stock or other equity interests. Such equity
features may enable the holder of the bond or preferred security to benefit from
increases in the market price of the underlying equity.
BRADY BONDS AND OTHER SOVEREIGN-RELATED DEBT. Emerging Fixed Income Markets
Series may invest a portion of its assets in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, the Ivory Coast, Jordan, Mexico,
Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela and
Vietnam. In addition, some countries have negotiated and others are expected to
negotiate similar restructurings to the Brady Plan and, in some cases, their
external debts have been restructured into new loans or promissory notes: namely
Bolivia, Russia, Macedonia and Bosnia.
Brady Bonds have been issued relatively recently, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
have been actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds which have the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are considered
speculative.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Emerging Fixed Income Markets Series may
invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a sovereign, sovereign-related or corporate entity and one
or more financial institutions ("Lenders"). Emerging Fixed Income Markets Series
may invest in such Loans in the form of participations ("Participations") in
Loans and assignments ("Assignments") of all or a portion of Loans from third
parties. Participations typically will result in Emerging Fixed Income Markets
Series having a contractual relationship only with the Lender, not with the
borrower. Emerging Fixed Income Markets Series will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations,
Emerging Fixed Income Markets Series generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of
10 - Templeton Institutional Funds, Inc.
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set-off against the borrower, and Emerging Fixed Income Markets Series may not
benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, Emerging Fixed Income Markets Series
will assume the credit risk of both the borrower and the Lender that is selling
the Participation. In the event of the insolvency of the Lender selling a
Participation, Emerging Fixed Income Markets Series may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. Emerging Fixed Income Markets Series will acquire
Participations only if the Lender interpositioned between Emerging Fixed Income
Markets Series and the borrower is believed by the Investment Manager to be
creditworthy. When Emerging Fixed Income Markets Series purchases Assignments
from Lenders, Emerging Fixed Income Markets Series will acquire direct rights
against the borrower on the Loan, except that under certain circumstances such
rights may be more limited than those held by the assigning Lender.
Emerging Fixed Income Markets Series may have difficulty disposing of
Assignments and Participations. Because the market for such instruments is not
highly liquid, Emerging Fixed Income Markets Series anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market will have an adverse impact on the
value of such instruments and on the ability of Emerging Fixed Income Markets
Series to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower.
STRUCTURED INVESTMENTS. Included among the issuers of emerging market country
debt securities in which the funds may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity and
arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as Brady Bonds) and the issuance by that
entity of one or more classes of securities ("structured investments") backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments. Because structured
investments of the type in which the funds anticipate investing typically
involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
The funds are permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Because the right of
payment of subordinated structured investments is subordinated to the right of
payment of another class, subordinated structured investments bear an increased
risk of non-payment or decreased payments in the event of a decrease in the cash
flow of the underlying securities. Although the purchase of subordinated
structured investments would have a similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of the limitations placed on the extent of assets that may
be used for borrowing activities. See "Other Investment Policies of the
Funds - Borrowing."
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a fund's investment in these
structured investments may be limited by the restrictions contained in the 1940
Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. Each of the funds, except Emerging Fixed Income Markets Series,
will limit its investment in structured investments to 5% of its total assets.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN SECURITIES. The funds
will normally conduct foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward contracts to purchase or sell foreign
currencies.
Templeton Institutional Funds, Inc. - 11
PAGE
The funds will generally not enter into forward contracts with terms of greater
than one year. A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. The
funds will generally enter into forward contracts under two circumstances.
First, when a fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock" in the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when a fund's Investment Manager believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency. This second investment practice is
generally referred to as "cross-hedging." A fund's forward transactions may call
for the delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its portfolio
securities are then denominated. The funds have no specific limitation on the
percentage of assets they may commit to forward contracts, subject to their
stated investment objectives and policies, except that a fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management or the fund's ability to meet redemption
requests. Although forward contracts will be used primarily to protect the funds
from adverse currency movements, they also involve the risk of loss in the event
that anticipated currency movements are not be accurately predicted.
The funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the U.S. dollar value of foreign
currency denominated portfolio securities and against increases in the U.S.
dollar cost of such securities to be acquired. As in the case of other kinds of
options, however, the writing of an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and a fund could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates
although, in the event of rate movements adverse to a fund's position, it may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the funds are traded on U.S.
and foreign exchanges or over-the-counter.
WARRANTS. A warrant is typically a long-term option issued by a corporation that
gives the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
the expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If a fund does not exercise or dispose of a warrant
before its expiration, it will expire worthless.
COMMON AND PREFERRED CONVERTIBLE SECURITIES. Convertible securities are, in
general, debt obligations or preferred stocks that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like common stock, the value of a convertible security
tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
its value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an ownership
interest in a pool of residential and commercial mortgage loans. Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor. The mortgagee's monthly payments to his/her lending
institution are passed through to investors such as a fund. Most issuers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual loan,
title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various governmental, government-related and private organizations.
A fund may invest in securities issued or guaranteed by the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Fannie Mae, and other government agencies. If there is no guarantee provided by
the issuer, mortgage-backed securities purchased by a fund will be those which
at the time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the Investment Manager to be of investment grade quality.
DEPOSITARY RECEIPTS. The funds may purchase sponsored or unsponsored Depositary
Receipts and other similar instruments, including American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "depositary receipts"). ADRs are depositary receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign
12 - Templeton Institutional Funds, Inc.
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corporation. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
United States corporation. Generally, depositary receipts in registered form are
designed for use in the U.S. securities market and depositary receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary receipts may
be issued pursuant to sponsored or unsponsored programs. In sponsored programs,
an issuer has made arrangements to have its securities traded in the form of
depositary receipts. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in some
cases it may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program. Accordingly, there may be
less information available regarding issuers of securities underlying
unsponsored depositary receipts and there may not be a correlation between such
information and the market value of the depositary receipts. Depositary receipts
also involve the risks of investments in foreign securities, as discussed below.
For purposes of the funds' investment policies, the funds' investments in
depositary receipts will be deemed to be investments in the underlying
securities.
Other Investment Policies Of The Funds
Each fund is authorized to engage in certain investment techniques and
strategies. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
funds in some of the markets in which the funds will invest and may not be
available for extensive use in the future.
TEMPORARY INVESTMENTS. For temporary defensive purposes, each fund may invest up
to 100% of its total assets in the following money market securities,
denominated in U.S. dollars or in the currency of any foreign country, issued by
entities organized in the United States or any foreign country: short-term (less
than twelve months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. government or the
governments of foreign countries, their agencies or instrumentalities; finance
company and corporate commercial paper, and other short-term corporate
obligations, in each case rated Prime-1 by Moody's or A or better by S&P or, if
unrated, of comparable quality as determined by each fund's Investment Manager;
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of banks having total assets in excess of $1 billion; and
repurchase agreements with banks and broker-dealers with respect to such
securities. In addition, for temporary defensive purposes, each fund may invest
up to 25% of its total assets in obligations (including certificates of deposit,
time deposits and bankers' acceptances) of U.S. foreign banks; provided that a
fund will limit its investment in time deposits for which there is a penalty for
early withdrawal to 10% of its total assets.
CONCENTRATION AND DIVERSIFICATION. Each fund reserves the right to invest more
than 25% of its assets in any one country, but will not invest more than 25% of
its total assets in any one industry (excluding the U.S. government). Under
normal circumstances, each fund will invest at least 65% of its assets in
issuers domiciled in at least three different nations (one of which may be the
United States). Each fund, except Emerging Fixed Income Markets Series, may
invest no more than 5% of its total assets in securities issued by any one
company or government, exclusive of U.S. government securities.
REPURCHASE AGREEMENTS. When a fund acquires a security from a U.S. bank or a
registered broker-dealer, it may simultaneously enter into a repurchase
agreement, wherein the seller agrees to repurchase the security at a specified
time and price. The repurchase price is in excess of the purchase price by an
amount which reflects an agreed-upon rate of return, which is not tied to the
coupon rate on the underlying security. Under the 1940 Act, repurchase
agreements are considered to be loans collateralized by the underlying security
and therefore will be fully collateralized. However, if the seller should
default on its obligation to repurchase the underlying security, a
Templeton Institutional Funds, Inc. - 13
PAGE
fund may experience delay or difficulty in its ability to dispose of the
underlying security and might incur a loss if the value of the security
declines, as well as incur disposition costs in liquidating the security.
BORROWING. Each fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities, to meet redemption
requests, to pay expenses or for other temporary needs. Under the 1940 Act, a
fund is required to maintain continuous asset coverage of 300% with respect to
such borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of a fund's holdings may be
disadvantageous from an investment standpoint. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities on a fund's Net Asset Value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received or capital appreciation realized from the securities purchased with
borrowed funds.
LOANS OF PORTFOLIO SECURITIES. Each fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total assets
to generate income. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. A fund may terminate the loans at
any time and obtain the return of the securities loaned within five business
days. A fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to retain any voting rights with respect to
the securities. Loans of portfolio securities involve the risk of default by the
counter-party to the loan transaction, which could involve delay or difficulty
in a fund's exercise of its right to realize upon the collateral for such loans,
as well as transaction costs.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield. No income accrues to the
purchaser of a security on a when-issued or delayed delivery basis prior to
delivery. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The funds will
only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date to attempt to "lock" in gains or avoid
losses, or if otherwise deemed advisable by the Investment Manager.
Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities has
made a commitment to issue the securities as of a specified future date, there
can be no assurance that the securities will be issued and that the trade will
settle. In the event settlement does not occur, any appreciation in the value of
the when-issued security would be lost, including the amount of any appreciation
"locked" in by the sale of an appreciated security prior to settlement. Each
fund will establish a segregated account in which it will maintain liquid assets
in an amount at least equal in value to the fund's net commitments to purchase
securities on a when-issued or delayed delivery basis. If the value of these
assets declines, the fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
OPTIONS ON SECURITIES OR INDICES. In order to hedge against market shifts, each
fund may purchase put and call options on securities or securities indices. In
addition, each fund may seek to generate income to offset operating expenses
and/or may hedge a portion of its portfolio investments through writing (i.e.,
selling) covered put and call options. Options purchased or written by the funds
will be traded on United States and foreign exchanges or in the over-the-counter
markets. An option on a security is a contract that permits the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a
14 - Templeton Institutional Funds, Inc.
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specified security (in the case of a put option) from or to the writer of the
option at a designated price during the term of the option. An option on a
securities index permits the purchaser of the option, in return for the premium
paid, the right to receive from the seller cash equal to the difference between
the closing price of the index and the exercise price of the option.
A fund may write a call or put option only if the option is "covered." This
means that so long as a fund is obligated as the writer of a call option, it
will own the underlying securities subject to the call, or hold a call at the
same exercise price, for the same exercise period, and on the same securities as
the written call. A put is covered if a fund maintains liquid assets with a
value equal to the exercise price in a segregated account, or holds a put on the
same underlying securities at an equal or greater exercise price. The value of
the underlying securities on which options may be written at any one time will
not exceed 25% of the total assets of a fund. A fund will not purchase put or
call options if the aggregate premium paid for such options would exceed 5% of
its total assets at the time of purchase.
FUTURES CONTRACTS. For hedging purposes only (including anticipatory hedges
where the Investment Manager seeks to anticipate an intended shift in maturity,
duration or asset allocation), the funds may buy and sell covered financial
futures contracts, stock index futures contracts, foreign currency futures
contracts and options on any of the foregoing. A financial futures contract is
an agreement between two parties to buy or sell a specified debt security at a
set price on a future date. An index futures contract is an agreement to take or
make delivery of an amount of cash based on the difference between the value of
the index at the beginning and at the end of the contract period. A futures
contract on a foreign currency is an agreement to buy or sell a specified amount
of a currency for a set price on a future date. When a fund enters into a
futures contract, it must make an initial deposit, known as "initial margin," as
a partial guarantee of its performance under the contract. As the value of the
security, index or currency fluctuates, either party to the contract is required
to make additional margin payments, known as "variation margin," to cover any
additional obligation it may have under the contract. In addition, when a fund
enters into a futures contract, it will segregate assets or "cover" its position
in accordance with the 1940 Act. See "How Do the Funds Invest Their
Assets? - Futures Contracts" in the SAI.
A fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of a fund.
SWAP AGREEMENTS. Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the fund
than if the fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations which the parties to a swap agreement have agreed to exchange.
Emerging Fixed Income Markets Series' obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). Emerging Fixed Income Markets Series'
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the fund's portfolio. Emerging Fixed Income
Markets Series will not enter into a swap agreement
Templeton Institutional Funds, Inc. - 15
PAGE
with any single party if the net amount that would be owed or received under
contracts with that party would exceed 5% of the fund's assets.
Whether Emerging Fixed Income Markets Series' use of swap agreements will be
successful in furthering its investment objective will depend on the ability of
the Investment Manager correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two-party contracts and may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, Emerging Fixed Income
Markets Series bears the risk of loss of the amount expected to be received
under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. The Investment Manager will cause Emerging Fixed Income
Markets Series to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
funds' repurchase agreement guidelines. Certain restrictions imposed on Emerging
Fixed Income Markets Series by the Code may limit its ability to use swap
agreements. The swap market is a relatively new market and is largely
unregulated. It is possible that developments in the swap market and the laws
relating to swaps, including potential government regulation, could adversely
affect Emerging Fixed Income Markets Series' ability to terminate existing swap
agreements, to realize amounts to be received under such agreements, or to enter
into swap agreements, or could have adverse tax consequences. See "Additional
Information on Distributions and Taxes" in the SAI for more information
regarding the tax considerations relating to swap agreements.
CLOSED-END AND OPEN-END INVESTMENT COMPANIES. Some countries have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. The 1940 Act limits the amount each fund
may invest in securities of closed-end investment companies, including those
that invest principally in securities that a fund may purchase. These
restrictions may limit opportunities for a fund to invest indirectly in certain
emerging markets. Shares of certain closed-end investment companies may at times
be acquired only at market prices representing premiums to their net asset
values. Investment by a fund in shares of closed-end investment companies would
involve duplication of fees, in that shareholders would bear both their
proportionate share of expenses of the fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
Emerging Fixed Income Markets Series may invest in open-end investment companies
as well, subject to the above restrictions, and subject to a maximum of 10% of
its total assets in closed and open-end funds combined.
PORTFOLIO TURNOVER. Growth Series, Foreign Equity Series and Emerging Markets
Series each invests for long-term growth of capital and does not intend to place
emphasis upon short-term trading profits. Accordingly, each of these funds
expects to have a portfolio turnover rate of less than 50%. The Investment
Manager may engage in short-term trading in the portfolio of Emerging Fixed
Income Markets Series when such trading is considered consistent with the fund's
investment objective. Also, a security may be sold and another of comparable
quality simultaneously purchased to take advantage of what the Investment
Manager believes to be a temporary disparity in the normal yield relationship
between the two securities. As a result of its investment policies, under
certain market conditions, the portfolio turnover rate of Emerging Fixed Income
Markets Series may be higher than that of other mutual funds, and is expected to
be between 400% and 500%. Because a higher turnover rate increases transaction
costs and may increase capital gains, the Investment Manager carefully weighs
the anticipated benefits of short-term investment against these consequences.
ILLIQUID INVESTMENTS. Growth Series' and Foreign Equity Series' policy is not to
invest more than 10% of net assets, at the time of purchase, in illiquid
securities. Emerging Markets Series' and Emerging Fixed Income Markets Series'
policy is not to invest more than 15% of net assets, at the time of purchase, in
illiquid securities. Illiquid securities are generally securities that cannot be
sold within seven days in the normal course of business at approximately the
amount at which a fund has valued them.
16 - Templeton Institutional Funds, Inc.
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The Investment Managers, based on a continuing review of the trading markets,
may consider certain restricted securities which may otherwise be deemed to be
illiquid, that are offered and sold to "qualified institutional buyers," to be
liquid. The Board has adopted guidelines and delegated to the Investment
Managers the daily function of determining and monitoring the liquidity of
restricted securities. The Board, however, will oversee and be ultimately
responsible for the determinations. If the fund invests in restricted securities
that are deemed liquid, the general level of illiquidity in a fund may be
increased if qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may be changed without shareholder approval. For a list of these
restrictions and more information about each fund's investment policies, please
see "How Do the Funds Invest Their Assets?" and "Investment Restrictions" in the
SAI.
Each fund's policies and restrictions discussed in this prospectus and in the
SAI are considered at the time the fund makes an investment. The funds are
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the funds, nor can
there be any assurance that a fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the funds' portfolio
securities, including general economic conditions and market factors.
Additionally, investment decisions made by the Investment Managers will not
always be profitable or prove to have been correct. In addition to the factors
which affect the value of individual securities, a shareholder may anticipate
that the value of the shares of the funds will fluctuate with movements in the
broader equity and bond markets, as well. A decline in the stock market of any
country or region in which a fund is invested in equity securities may also be
reflected in declines in the price of the shares of the fund. Changes in
prevailing rates of interest in any of the countries or regions in which a fund
is invested in fixed income securities will likely affect the value of such
holdings and thus the value of fund shares. Increased rates of interest which
frequently accompany inflation and/or a growing economy are likely to have a
negative effect on the value of a fund's shares. In addition, changes in
currency valuations will affect the price of the shares of a fund. History
reflects both decreases and increases in stock markets and interest rates in
individual countries and throughout the world and in currency valuations, and
these may occur unpredictably in the future. The funds are not intended as a
complete investment program.
FOREIGN INVESTMENTS. The funds have the right to purchase securities in any
foreign country, developed or underdeveloped. Investors should consider
carefully the risks associated with investing in foreign securities, which are
in addition to the usual risks inherent in domestic investments. These risks are
often heightened for investments in developing markets. See "What Are the Risks
of Investing in the Funds?" in the SAI. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), foreign investment controls
on daily stock market movements, default in foreign government securities,
political, economic or social instability, or diplomatic developments which
could affect investments in securities of issuers in foreign nations. Some
countries may withhold portions of interest and dividends at the source. In
addition, in many countries there is less publicly available information about
issuers than is available about companies in the U.S. Foreign companies are not
generally subject to uniform accounting or financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. The funds may encounter difficulties or be unable to vote
proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts.
Templeton Institutional Funds, Inc. - 17
PAGE
As a non-fundamental policy, each fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. Russia's system of share registration and
custody creates certain risks of loss (including the risk of total loss) that
are not normally associated with investments in other securities markets. These
risks and other risks associated with the Russia securities market are discussed
more fully in the SAI under the caption "What Are the Risks of Investing in the
Funds?" and investors should read this section in detail.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S.
Foreign securities markets have different clearance and settlement procedures
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of a fund are uninvested and no return is earned thereon.
The inability of a fund to make intended security purchases due to settlement
problems could cause a fund to miss attractive investment opportunities or risk
loss of its investment. Inability to dispose of a portfolio security due to
settlement problems could result either in losses to a fund due to subsequent
declines in value of the portfolio security or, if the fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. There is an increased risk, therefore, of uninsured loss due to
lost, stolen, or counterfeit stock certificates. In addition, the foreign
securities markets of many of the countries in which the funds may invest may
also be smaller, less liquid, and subject to greater price volatility than those
in the U.S. For a discussion of special risks, see "What Are the Risks of
Investing in the Funds?" in the SAI. Prior governmental approval of non-domestic
investments may be required under certain circumstances in some developing
countries, and the extent of foreign investment in domestic companies may be
subject to limitation in other developing countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
developing countries to prevent, among other concerns, violation of foreign
investment limitations. Repatriation of investment income, capital and proceeds
of sales by foreign investors may require governmental registration and/or
approval in some developing countries. The funds could be adversely affected by
delays in or a refusal to grant any required governmental registration or
approval for such repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
FOREIGN CURRENCY EXCHANGE. The funds may effect currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market. However, some price spread on currency exchange (to cover service
charges) will be incurred when a fund converts assets from one currency to
another. Further, the funds may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations. Cross-hedging transactions by the funds involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability that is the subject of the hedge.
MORTGAGE-BACKED SECURITIES. Due to the possibility that prepayments on home
mortgages will alter cash flow on mortgage-backed securities, it is not possible
to determine in advance the actual final maturity date or average life. Like
bonds in general, mortgage-backed securities will generally decline in price
when interest rates rise. Rising interest rates also tend to discourage
refinancing of home mortgages, with the result that the average life of
mortgage-backed securities held by a fund may be lengthened. This extension of
average life causes the market price of the securities to decrease further than
if their average lives were fixed. However, when interest rates fall, mortgages
may not enjoy as large a gain in market value due to prepayment risk because
additional mortgage prepayments must be reinvested at lower interest rates.
Faster prepayment will shorten the average life and slower prepayments will
lengthen it. However, it is possible to determine what the range of that
movement could be and to calculate the effect that it will have on the price of
the security. In selecting these securities, the Investment Managers will look
for those securities that offer a higher yield to compensate for any variation
in average maturity.
SMALL COMPANY STOCKS. The funds may purchase securities issued by companies with
comparatively smaller capitalization although the funds do not emphasize smaller
companies. Securities of smaller capitalization companies involve additional
risks. For example, smaller capitalization issuers include relatively new or
unseasoned companies which are in their early stages of development, or small
companies positioned in new and emerging
18 - Templeton Institutional Funds, Inc.
PAGE
industries where the opportunity for rapid growth is expected to be above
average. Historically, smaller capitalization stocks have been more volatile in
price than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for these stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect the shares of a fund that invests a
substantial portion of its assets in small company stocks to be more volatile
than the shares of a fund that invests solely in larger capitalization stocks.
EMERGING FIXED INCOME MARKETS SERIES - A NON-DIVERSIFIED FUND. Emerging Fixed
Income Markets Series is a "non-diversified" fund, which means the fund is not
limited in the proportion of its assets that may be invested in the securities
of a single issuer. However, Emerging Fixed Income Markets Series intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Code, which generally will relieve the fund of any liability for
Federal income tax to the extent its earnings are distributed to shareholders.
See "How Taxation Affects You and the Funds." To so qualify, among other
requirements, Emerging Fixed Income Markets Series will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25% of
the market value of the fund's total assets will be invested in the securities
of a single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the fund will not own more
than 10% of the outstanding voting securities of a single issuer. Emerging Fixed
Income Markets Series' investments in U.S. government securities are not subject
to these limitations. Because Emerging Fixed Income Markets Series, as a
non-diversified fund, may invest in a smaller number of individual issuers than
a diversified investment company, and may be more susceptible to any single
economic, political or regulatory occurrence, an investment in the fund may
present greater risk to an investor than an investment in a diversified fund.
HIGH-RISK DEBT SECURITIES. The funds are authorized to invest in medium quality
or high-risk, lower quality debt securities (see "Types of Securities In Which
the Funds May Invest - Debt Securities"). High-risk, lower quality debt
securities, commonly known as junk bonds, are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and may be in
default. Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by a fund's Investment Manager to insure, to
the extent possible, that the planned investment is sound. The funds may, from
time to time, purchase defaulted debt securities if, in the opinion of a fund's
Investment Manager, the issuer may resume interest payments in the near future.
A fund will not invest more than 5% of its total assets in defaulted debt
securities, which may be illiquid.
Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish a fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a fund to obtain accurate market
quotations for the purposes of valuing the fund's portfolio. Market quotations
are generally available on many low rated or unrated securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
Templeton Institutional Funds, Inc. - 19
PAGE
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of a fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities may be less sensitive to interest rate
changes than higher rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in low rated debt securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low rated debt
securities defaults, a fund may incur additional expenses to seek recovery.
Based upon the monthly weighted average ratings of debt securities held by
Emerging Fixed Income Markets Series during the period from commencement of
operations (June 4, 1997) to December 31, 1997, the Series had 100% of its total
assets invested in debt securities that received a rating from Moody's and/or S
& P, and 0% of its total assets invested in debt securities that were not so
rated. Emerging Fixed Income Markets Series had the following weighted average
percentages of its total assets invested in rated securities: AAA and/or Aaa:
14.6%, BBB and/or Baa: 4.0%, BB and/or Ba: 49.0%, and B: 32.4%.
LEVERAGE. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on a fund's Net Asset
Value and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds.
FUTURES CONTRACTS AND RELATED OPTIONS. Use of futures contracts and related
options is subject to special risk considerations. A liquid secondary market for
any futures or options contract may not be available when a futures or options
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
futures or options contract is based and movements in the securities or currency
in a fund's portfolio. Successful use of futures or options contracts is further
dependent on the ability of a fund's Investment Manager to correctly predict
movements in the securities or foreign currency markets and no assurance can be
given that its judgment will be correct. Use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, a fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in this prospectus and in the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Company's Board oversees the management of the funds and elects
their officers. The officers are responsible for the funds' day-to-day
operations.
INVESTMENT MANAGERS. The Investment Manager of Growth Series and Foreign Equity
Series is Templeton Investment Counsel, Inc. ("Investment Counsel"). The
Investment Manager of Emerging Markets Series is Templeton Asset Management
Ltd. - Hong Kong Branch ("Asset Management Hong Kong"). The Investment Manager
of Emerging Fixed Income Markets Series is Investment Counsel through its
Templeton Global Bond Managers division. The Investment Managers manage the
funds' assets and make their investment decisions. The Investment Managers also
perform similar services for other funds. Investment Counsel and Asset
Management Hong Kong are wholly owned by Resources, a publicly owned company
engaged in the financial services industry
20 - Templeton Institutional Funds, Inc.
PAGE
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. Together, the Investment Managers and their
affiliates manage over $232 billion in assets. The Templeton organization has
been investing globally since 1940. The Investment Managers and their affiliates
have offices in Argentina, Australia, Bahamas, Brazil, Canada, China, France,
Germany, Hong Kong, India, Italy, Japan, Korea, Luxembourg, the Netherlands,
Poland, Russia, Singapore, South Africa, Switzerland, Taiwan, United Kingdom,
U.S., and Vietnam. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the funds' Code of Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for Growth Series and Foreign
Equity Series since 1996 is Gary P. Motyl, an executive vice president of
Investment Counsel. Mr. Motyl holds a BS degree in finance from Lehigh
University and an MBA in finance from Pace University. He is a Chartered
Financial Analyst. Prior to joining the Templeton organization in 1981, Mr.
Motyl worked from 1974 to 1979 as a security analyst with S&P and as a research
analyst and portfolio manager from 1979 to 1981 with Landmark First National
Bank. While at Landmark, Mr. Motyl had responsibility for equity research and
managed several pension and profit-sharing plans. His research responsibilities
with Templeton include the global automobile industry, U.S. utilities and
country coverage of Germany. Mark Beveridge, Gary R. Clemons and Edward Ramos
exercise secondary portfolio management responsibilities with respect to Growth
Series and Foreign Equity Series. Mr. Beveridge is a senior vice president of
Investment Counsel. He holds a BBA in finance from the University of Miami. He
is a Chartered Financial Analyst and a Chartered Investment Counselor, and a
member of the South Florida Society of Financial Analysts and the International
Society of Financial Analysts. Before joining the Templeton organization in 1985
as a security analyst, Mr. Beveridge was a principal with a financial accounting
software firm based in Miami, Florida. He is currently a portfolio manager and
research analyst with responsibility for non-life insurance and industrial
components industries. He also has country coverage of Argentina. Mr. Clemons is
a senior vice president of Investment Counsel. He holds a BS degree from the
University of Nevada-Reno and an MBA from the University of Wisconsin-Madison.
He joined Investment Counsel in 1993. Prior to that time he was a research
analyst at Templeton Quantitative Advisors, Inc. in New York, where he was also
responsible for management of a small capitalization fund. As a portfolio
manager and research analyst with Templeton, Mr. Clemons has responsibility for
the telecommunications industry and country coverage of Columbia and Peru. Mr.
Ramos is vice president of Investment Counsel. He holds a BS in finance from
Lehigh University and an MBA with emphases in finance, accounting and
international business from The Columbia Graduate School of Business. Prior to
joining the Templeton organization in 1993, Mr. Ramos worked as assistant to the
chief investment officer of Prudential Equity Management Association. He is
currently a portfolio manager and research analyst with responsibility for the
merchandising and financial service industries as well as country coverage of
Egypt, Israel and Taiwan.
The lead portfolio manager for Emerging Markets Series since its inception is
Dr. J. Mark Mobius. Dr. Mobius, a German citizen, is managing director of
Templeton Asset Management Ltd., of which Asset Management Hong Kong is a
representative office. In addition, Dr. Mobius serves as a director and/or
officer of many other funds within the Franklin Templeton Group of Funds and
many investment advisory subsidiaries of Resources. He holds a BA in fine arts
from Boston University, an MA in mass communications from Boston University, and
a Ph.D. in economics from the Massachusetts Institute of Technology. Prior to
joining the Templeton organization in 1987, Dr. Mobius was president of the
International Investment Trust Company Limited (investment manager of Taiwan,
R.O.C. Fund) (1986-1987) and a director of Vickers da Costa, Hong Kong (an
international securities firm) (1983-1986). Dr. Mobius began working in Vickers
da Costa's Hong Kong office in 1980 and moved to Taiwan in 1983 to open the
firm's office there and to direct operations in India, Indonesia, Thailand, the
Philippines, and Korea. Before joining Vickers da Costa, Dr. Mobius operated his
own consulting firm in Hong Kong from 1970 until 1980. Messrs. Allan Lam and Tom
Wu exercise secondary portfolio management responsibilities with respect to
Emerging Markets Series. Mr. Lam holds a BA in accounting from Rutgers
University. Prior to joining the Templeton organization in 1987, he worked as an
auditor with two international accounting firms in Hong Kong: Deloitte Haskins &
Sells CPA and KPMG Peat Marwick CPA. Mr. Wu is a director of Asset Management
Hong
Templeton Institutional Funds, Inc. - 21
PAGE
Kong. He holds a BSS in economics from the University of Hong Kong and an MBA in
finance from the University of Oregon. Prior to joining the Templeton
organization in 1987, Mr. Wu worked as an investment analyst, specializing in
Hong Kong companies, with Vickers da Costa.
The portfolio managers of the Emerging Fixed Income Markets Series since its
inception are Neil S. Devlin, Ronald A. Johnson and Umran Demirors. Mr. Devlin
is the chief investment officer and executive vice president of Templeton Global
Bond Managers, a division of Investment Counsel. 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 and corporate pension accounts. 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. 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 VestcorPartners Group in Miami. Currently, Dr. Demirors co-directs
the fixed income process and manages several emerging markets fixed income
portfolios.
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, management fees
as a percentage of each fund's average daily net assets were as follows: Growth
Series, 0.70%; Foreign Equity Series, 0.70%; and Emerging Markets Series, 1.25%.
The Investment Managers voluntarily agreed to reduce their fees in order to
limit total expenses of the funds. These voluntary agreements did not result in
any management fee reductions for Growth Series, Foreign Equity Series or
Emerging Markets Series. After April 30, 1999, these agreements may end at any
time upon notice to the Board. Total operating expenses of the funds during the
fiscal year ended December 31, 1997, including fees paid to the Investment
Managers, were as follows: Growth Series, 0.86%; Foreign Equity Series, 0.84%;
and Emerging Markets Series, 1.57%.
During the fiscal period ended December 31, 1997, Emerging Fixed Income Markets
Series' management fees, before any advance waiver, totaled 0.70% and total
operating expenses, before any advance waiver, were 6.40% of the average daily
net assets of the fund. Under an agreement by Investment Counsel to waive its
fees, the fund paid no management fees and total operating expenses were 1.25%
of its average daily net assets. After December 31, 1998, this agreement may end
at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. The Investment Managers try to obtain the best execution
on all transactions. If an Investment Manager believes more than one broker or
dealer can provide the best execution, it may consider research and related
services and the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, when selecting a broker or dealer. Please see
"How Do the Funds Buy Securities for Their Portfolios?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the funds. During the fiscal year ended December 31, 1997,
administration fees totaling 0.09% of the average daily net assets of Growth
22 - Templeton Institutional Funds, Inc.
PAGE
Series, Foreign Equity Series and Emerging Markets Series were paid to FT
Services. These fees are included in the amount of total operating expenses
shown above.
During the fiscal period ended December 31, 1997, Emerging Fixed Income Markets
Series' administration fees, before any advance waiver, totaled 0.08% of the
average daily net assets of the fund. Under an agreement by FT Services to waive
its fees, the fund paid no administration fees. Administration fees are included
in the amount of total operating expenses shown above. Please see "Investment
Management and Other Services" in the SAI for more information.
HOW DO THE FUNDS MEASURE PERFORMANCE?
From time to time, the funds advertise their performance. The commonly used
measure of performance is total return. Performance figures are usually
calculated using the maximum sales charge, but certain figures may not include
the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The funds' investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how each fund calculates its performance figures, please see "How
Do the Funds Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of
1997 (the "1997 Act"). This new law makes sweeping changes in the Code. Because
many of these changes are complex they are discussed in the SAI.
HOW DOES A FUND EARN INCOME
AND GAINS?
A Fund earns dividends and interest (the fund's "income") on its investments.
When the fund sells a security for a price that is higher than it paid, it has a
gain. When the fund sells a security for a price that is lower than it paid, it
has a loss. If the fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The fund's gains and losses are netted together, and, if the fund
has a net gain (the fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF THE FUND'S INVESTMENTS. The funds invest your money in the stocks,
bonds and other securities that are described in the section "How Do the Funds
Invest Their Assets?" Special tax rules may apply in determining the income and
gains that a fund earns on its investments. These rules may, in turn, affect the
amount of distributions that the funds pay to you. These special tax rules are
discussed in the SAI.
TAXATION OF THE FUNDS. As series of a regulated investment company, the funds
generally pay no federal income tax on the income and gains that they distribute
to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the funds investments in foreign stocks and bonds. These taxes will reduce the
amount of a fund's distributions to you, but, depending upon the amount of the
fund's assets that are invested in foreign securities and foreign taxes paid,
may be passed through to you as a foreign tax credit on your income tax return.
The funds may also invest in the securities of foreign companies that are
"passive foreign investment companies" ("PFICs"). These investments in PFICs may
cause the funds to pay income taxes and interest charges. If possible, the funds
will adopt strategies to avoid PFIC taxes and interest charges.
Templeton Institutional Funds, Inc. - 23
PAGE
Taxation of Shareholders.
WHAT IS A DISTRIBUTION?
AS A SHAREHOLDER, YOU WILL RECEIVE YOUR SHARE OF A FUND'S INCOME AND GAINS ON
ITS INVESTMENTS IN STOCKS, BONDS AND OTHER SECURITIES. THE FUND'S INCOME AND
SHORT TERM CAPITAL GAINS ARE PAID TO YOU AS ORDINARY DIVIDENDS. THE FUND'S
LONG-TERM CAPITAL GAINS ARE PAID TO YOU AS CAPITAL GAIN DISTRIBUTIONS. IF THE
FUND PAYS YOU AN AMOUNT IN EXCESS OF ITS INCOME AND GAINS, THIS EXCESS WILL
GENERALLY BE TREATED AS A NON-TAXABLE DISTRIBUTION. THESE AMOUNTS, TAKEN
TOGETHER, ARE WHAT WE CALL THE FUND'S DISTRIBUTIONS TO YOU.
DISTRIBUTIONS. Distributions from the funds, whether you receive them in cash or
in additional shares, are generally subject to income tax. The fund will send
you a statement in January that reflects the amount of ordinary dividends,
capital gain distributions and non-taxable distributions you received from the
fund in the prior year. This statement will include distributions declared in
December and paid to you in January of the current year, but which are taxable
as if paid on December 31 of the prior year. The IRS requires you to report
these amounts on your income tax return for the prior year. The fund's statement
for the prior year will tell you how much of your capital gain distribution
represents 28% rate gain. The remainder of the capital gain distribution
represents 20% rate gain.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from a Fund.
WHAT IS A REDEMPTION?
A REDEMPTION IS A SALE BY YOU TO A FUND OF SOME OR ALL OF YOUR SHARES IN THE
FUND. THE PRICE PER SHARE YOU RECEIVE WHEN YOU REDEEM FUND SHARES MAY BE MORE OR
LESS THAN THE PRICE AT WHICH YOU PURCHASED THOSE SHARES. AN EXCHANGE OF FUND
SHARES FOR SHARES OF ANOTHER FRANKLIN TEMPLETON FUND IS TREATED AS A REDEMPTION
OF FUND SHARES AND THEN A PURCHASE OF SHARES OF THE OTHER FUND. WHEN YOU REDEEM
OR EXCHANGE YOUR SHARES, YOU WILL GENERALLY HAVE A GAIN OR LOSS, DEPENDING UPON
WHETHER THE BASIS IN YOUR SHARES IS MORE OR LESS THAN YOUR COST OR OTHER BASIS
IN THE SHARES. CALL FUND INFORMATION FOR A FREE SHAREHOLDER TAX INFORMATION
HANDBOOK IF YOU NEED MORE INFORMATION IN CALCULATING THE GAIN OR LOSS ON THE
REDEMPTION OR EXCHANGE OF YOUR SHARES.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
fund shares for shares in another Franklin Templeton Fund, you will generally
have a gain or loss that the IRS requires you to report on your income tax
return. If you hold your shares for six months or less, any loss you have will
be treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the fund. All or a portion of any loss on the
redemption or exchange or your shares will be disallowed by the IRS if you
purchase other shares in the fund within 30 days before or after your redemption
or exchange.
24 - Templeton Institutional Funds, Inc.
PAGE
WHAT IS A FOREIGN TAX CREDIT?
A FOREIGN TAX CREDIT IS A TAX CREDIT FOR THE AMOUNT OF TAXES IMPOSED BY A
FOREIGN COUNTRY ON EARNINGS OF A FUND. WHEN A FOREIGN COMPANY IN WHICH THE FUND
INVESTS PAYS A DIVIDEND TO THE FUND, THE DIVIDEND WILL GENERALLY BE SUBJECT TO A
WITHHOLDING TAX. THE TAXES WITHHELD IN FOREIGN COUNTRIES CREATE CREDITS THAT YOU
MAY USE TO OFFSET YOUR U.S. FEDERAL INCOME TAX.
FOREIGN TAXES. If more than 50% of the value of a fund's assets consist of
foreign securities, the fund may elect to pass-through to you the amount of
foreign taxes it paid. If the fund makes this election, your year-end statement
will show more taxable income than was actually distributed to you. However, you
will be entitled to either deduct your share of such taxes in computing your
taxable income or claim a foreign tax credit for such taxes against your U.S.
federal income tax. Your year-end statement, showing the amount of deduction or
credit available to you, will be distributed to you in January along with other
shareholder information records including your fund's Form 1099-DIV.
The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS SIMPLIFIED
PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND IS NOT AVAILABLE
IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investments in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from a fund, and gains arising from redemptions or exchanges of your fund shares
will generally be subject to state and local income tax. The holding of fund
shares may also be subject to state and local intangibles taxes. You may wish to
contact your tax advisor to determine the state and local tax consequences of
your investment in the fund.
WHAT IS A BACKUP WITHHOLDING?
BACKUP WITHHOLDING OCCURS WHEN A FUND IS REQUIRED TO WITHHOLD AND PAY OVER TO
THE IRS 31% OF YOUR DISTRIBUTIONS AND REDEMPTION PROCEEDS. YOU CAN AVOID BACKUP
WITHHOLDING BY PROVIDING THE FUND WITH YOUR TIN, AND BY COMPLETING THE TAX
CERTIFICATIONS ON YOUR SHAREHOLDER APPLICATION THAT YOU WERE ASKED TO SIGN WHEN
YOU OPENED YOUR ACCOUNT. HOWEVER, IF THE IRS INSTRUCTS THE FUND TO BEGIN BACKUP
WITHHOLDING, IT IS REQUIRED TO DO SO EVEN IF YOU PROVIDED THE FUND WITH YOUR TIN
AND THESE TAX CERTIFICATIONS, AND BACKUP WITHHOLDING WILL MAIN IN PLACE UNTIL
THE FUND IS INSTRUCTED BY THE IRS THAT IT IS NO LONGER REQUIRED.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, a fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. A fund is
also required to begin backup withholding on your account if the IRS instructs
the fund to do so. A fund reserves the right not to open your account, or,
alternatively, to redeem your shares at the current net asset value, less any
taxes withheld, if you fail to provide a correct TIN, fail to provide the proper
tax certifications, or the IRS instructs the fund to begin backup withholding on
your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. A MORE
Templeton Institutional Funds, Inc. - 25
PAGE
COMPLETE DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE
SECTION ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND INFORMATION.
HOW IS THE COMPANY ORGANIZED?
Each of the funds, with the exception of the Emerging Fixed Income Markets
Series, is a diversified series of the Company, which is an open-end management
investment company, commonly called a mutual fund. The Emerging Fixed Income
Markets Series is a non-diversified series of the Company. The Company was
organized as a Maryland corporation on July 6, 1990, and is registered with the
SEC. Shares of each series of the Company have equal and exclusive rights to
dividends and distributions declared by that series and the net assets of the
series in the event of liquidation or dissolution. Shares of the funds are
considered Class I shares for redemption, exchange and other purposes.
Additional series and classes of shares may be offered in the future.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Company for matters that
affect the Company as a whole.
The Company has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Company does not intend to hold annual shareholder meetings. The Company or
a fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may also be called by the Board in its discretion or for the
purpose of considering the removal of a Board member if requested in writing to
do so by shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
As of April 17, 1998, T. Rowe Price, for the benefit of Honeywell, and the
Norton Family Trust each owned of record and beneficially more than 25% of the
outstanding shares of Growth Series. As of the same date, Templeton Global
Investors, Inc. owned substantially all of the outstanding shares of Emerging
Fixed Income Markets Series as a result of providing its initial capitalization.
26 - Templeton Institutional Funds, Inc.
PAGE
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the funds may be purchased at Net Asset Value without a sales charge
through any broker that has a dealer agreement with Distributors, the Principal
Underwriter of the shares of the funds, or directly from Distributors, upon
receipt by Distributors of an Institutional Account Application Form and
payment. Distributors may establish minimum requirements with respect to amount
of purchase.
Please note that as of January 1, 1998, shares of the funds are not available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in Franklin Templeton's ValuSelect program before January 1, 1998,
however, may continue to invest in the funds.
MINIMUM INVESTMENT
There is a minimum initial investment of $5 million ($25 for subsequent
investments) for all investors except the following:
(a) Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under Section 401
of the Code, including salary reduction plans qualified under Section 401(k)
of the Code, are subject to no minimum initial investment if the number of
employees is equal to or greater than 1,000 or the amount of plan assets is
$10 million or more. Plans with less than 1,000 employees or $10 million in
plan assets are subject to a $1 million initial investment or an investment
of $1 million over the subsequent 13-month period in the funds or any other
funds in the Franklin Templeton Group of Funds;
(b) Trust companies or bank trust departments investing assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion are subject to a $1 million initial investment or an
investment of $1 million over the subsequent 13-month period in the funds or
any other funds in the Franklin Templeton Group of Funds. Trust companies
and bank trust departments making such purchases may be required to register
as dealers pursuant to state law;
(c) Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of
the Code are subject to an initial investment in the funds of $1 million;
(d) Service agents and broker-dealers who have entered into an agreement with
Distributors may purchase shares of the funds for clients of associated
registered investment advisors participating in fee-based programs until May
31, 1997. After this date, additional purchases of a fund may be made only
for clients who already own or hold shares of that fund.
LETTER OF INTENT
An initial investment of less than $5 million may be made if the investor
executes a Letter of Intent ("Letter") which expresses the investor's intention
to invest at least $5 million within a 13-month period in the Franklin Templeton
Group of Funds, including at least $1 million in the funds. See the
Institutional Account Application Form. The minimum initial investment under a
Letter is $1 million. If the investor does not invest at least $5 million in
shares of the funds or other funds in the Franklin Templeton Group of Funds
within the 13-month period, the shares actually purchased will be involuntarily
redeemed and the proceeds sent the investor at the
Templeton Institutional Funds, Inc. - 27
PAGE
address of record. Any redemptions made by the shareholder during the 13-month
period will be subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter have been completed.
GROUP PURCHASES
Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
shares of the funds if the group as a whole meets the minimum initial investment
of $5 million, at least $1 million of which is invested or to be invested in the
funds. The minimum initial investment is based upon the aggregate dollar value
of shares previously purchased and still owned by the group, plus the amount of
the current purchase. A "qualified group" is one which (i) has formalized
operations which have been in existence for more than six months, (ii) has a
purpose other than acquiring fund shares, and (iii) satisfies uniform criteria,
such as centralized accounting and communications, which enable Distributors to
realize economies of scale in its costs of distributing shares.
Purchases by Telephone. Shares of the funds may be purchased for existing
accounts by telephone, and paid for by wire, in the following manner:
1. Call Institutional Services at 1-800/321-8563 or 1-415/312-3600 to advise of
the intention to wire funds for investment. The call must be received prior
to 4:00 p.m. Eastern time to receive that day's price. Each fund will supply
a wire control number for the investment. It is necessary to obtain a new
wire control number every time money is wired into an account in a fund. Wire
control numbers are effective for one transaction only and cannot be used
more than once. Wired money which is not properly identified with a currently
effective wire control number will be returned to the bank from which it was
wired and will not be credited to the shareholder's account.
2. On the next business day, wire funds to Bank of America, ABA Routing No.
121000358, for credit to account no. 1493304779. Be sure to include the wire
control number, the investor's Franklin or Templeton account number and
account registration. Wired funds received by the bank and reported by the
bank to the funds by the close of the Federal Reserve Wire System are
available for credit on that day. Later wires are credited the following
business day. In order to maximize efficient fund management, investors are
urged to place and wire their investments as early in the day as possible.
If the purchase is not for an existing account, identify the fund in which the
investment is being made and send a completed Institutional Account Application
Form to Institutional Services.
PURCHASES BY MAIL. Shares of the funds may be purchased by mail, and paid for by
check, Federal Reserve draft or negotiable bank draft in the following manner:
1. For an initial investment, send a completed Institutional Account Application
Form to Institutional Services.
2. Make the check, Federal Reserve draft or negotiable bank draft payable to the
fund in which the investment is being made.
3. Send the check, Federal Reserve draft or negotiable bank draft to
Institutional Services. Investments in good order and received by the fund
prior to 4:00 p.m. Eastern time on any business day will receive the price
next calculated on that day. Items received after 4:00 p.m. Eastern time will
receive the price calculated on the next business day.
Orders mailed to Distributors by dealers or individual investors do not require
advance notice. Checks or negotiable bank drafts must be in U.S. currency drawn
on a commercial bank in the U.S. and, if over $100,000, may not be deemed to
have been received until the proceeds have been collected, unless the check is
certified or issued by such bank. Any subscription may be rejected by
Distributors or by the Company.
28 - Templeton Institutional Funds, Inc.
PAGE
Shares of the funds may be purchased with "in-kind" securities, if approved in
advance by the Company. Securities used to purchase fund shares must be
appropriate investments for that fund, consistent with its investment objective,
policies and limitations, as determined by the Company, and must have readily
available market quotations. The securities will be valued in accordance with
the Company's policy for calculating Net Asset Value (as set forth above),
determined as of the close of the day on which the securities are received by
the Company in salable form. A prospective shareholder will receive shares of
the applicable fund next computed after such receipt. To obtain the approval of
the Company, call Institutional Services. Investors who are affiliated persons
of the Company (as defined in the 1940 Act) may not purchase shares in this
manner in the absence of SEC approval.
If an investment in the funds is made through a broker that has executed a
dealer agreement with respect to the Templeton Funds, Distributors or one of its
affiliates may make a payment out of its own resources to such dealer in an
amount not to exceed 0.25% of the amount invested. Dealers may contact
Institutional Services for additional information.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal and
policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ---------------------------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the shares
you want to exchange
- ---------------------------------------------------------------------------------------
BY PHONE Call Institutional Services or TeleFACTS(R)
[ARROW] IF YOU DO NOT WANT THE ABILITY TO EXCHANGE BY PHONE
TO APPLY TO YOUR ACCOUNT, PLEASE LET US KNOW.
- ---------------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ---------------------------------------------------------------------------------------
</TABLE>
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
- - You may only exchange shares within the same class, except as noted below.
- - The accounts must be identically registered. You may, however, exchange shares
from a fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to be
available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
- - Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
- - The fund you are exchanging into must be eligible for sale in your state.
Templeton Institutional Funds, Inc. - 29
PAGE
- - We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
- - Your exchange may be restricted or refused if you have: (i) requested an
exchange out of a fund within two weeks of an earlier exchange request, (ii)
exchanged shares out of a fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of a fund's net
assets. Shares under common ownership or control are combined for these
limits. If you have exchanged shares as described in this paragraph, you will
be considered a Market Timer. Each exchange by a Market Timer, if accepted,
will be charged $5.00. Some of our funds do not allow investments by Market
Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe a fund would
be harmed or unable to invest effectively, or (ii) a fund receives or
anticipates simultaneous orders that may significantly affect the fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ---------------------------------------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us signed written instructions. If you would like
your redemption proceeds wired to a bank account, your
instructions should include:
- The name, address and telephone number of the bank where
you want the proceeds sent
- Your bank account number
- The Federal Reserve ABA routing number
- If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court jurisdiction
may have other requirements.
- ---------------------------------------------------------------------------------------------------
BY PHONE Call Institutional Services at 1-800/321-8563. If you would
like your redemption proceeds wired to a bank account, other
(Only available if you have than an escrow account, you must complete the Institutional
completed and sent the Telephone Privileges Agreement.
Institutional Telephone
Privileges Agreement.) Telephone requests will be accepted:
- If you have filed an Institutional Telephone Privileges
Agreement.
- If the redemption is to be sent to the address of record.
- If the redemption is to be sent via previously designated
wiring instructions.
- ---------------------------------------------------------------------------------------------------
</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
30 - Templeton Institutional Funds, Inc.
PAGE
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 4:00 p.m. Eastern time, your wire payment will be
sent the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?
Each fund intends to pay a dividend at least annually representing substantially
all of the fund's net investment income, if any, and any net realized capital
gains.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the fund's shares by the amount of the
distribution.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
Templeton Institutional Funds, Inc. - 31
PAGE
HOW AND WHEN SHARES ARE PRICED
The Company is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 4:00 p.m. Eastern
time. You can find the prior day's closing Net Asset Value and Offering Price
for each fund in many newspapers.
To calculate Net Asset Value per share of each fund, the assets of each fund are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. Each fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
- - Your name,
- - The fund's name,
- - A description of the request,
- - For exchanges, the name of the fund you are exchanging into,
- - Your account number,
- - The dollar amount or number of shares, and
- - A telephone number where we may reach you during the day, or in the evening if
preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1. You wish to sell over $50,000 worth of shares,
2. You want the proceeds to be paid to someone other than the registered
owners,
3. The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4. We receive instructions from an agent, not the registered owners,
5. We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
32 - Templeton Institutional Funds, Inc.
PAGE
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Institutional Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Templeton Institutional Funds, Inc. - 33
PAGE
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ---------------------------------------------------------------------------------
<S> <C>
CORPORATION Corporate Resolution
- ---------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- ---------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ---------------------------------------------------------------------------------
</TABLE>
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,000. We will only do
this if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the reinvestment
of distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $1,000.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
34 - Templeton Institutional Funds, Inc.
PAGE
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by a fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
- - obtain information about your account;
- - obtain price and performance information about any Franklin Templeton Fund;
- - exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
- - request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the funds' code number to use TeleFACTS(R). The funds' codes are:
453, for Emerging Fixed Income Markets Series; 454, for Foreign Equity Series;
455, for Growth Series; and 456, for Emerging Markets Series.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
- - Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
- - Financial reports of the funds will be sent every six months. To reduce fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the fund's financial reports.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, a fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida 33733-8030. The
funds and Distributors are also located at this address. Investment Counsel is
located at 500 East Broward Boulevard, Fort Lauderdale, FL 33394-3091. Asset
Management
Templeton Institutional Funds, Inc. - 35
PAGE
Hong Kong is located at Two Exchange Square, Hong Kong. You may also contact us
by phone at one of the numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION (EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
36 - Templeton Institutional Funds, Inc.
PAGE
GLOSSARY
USEFUL TERMS AND DEFINITIONS
Board - The Board of Directors of the Company
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate interests
in the same portfolio of investment securities. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans. Shares of the funds are
considered Class I shares for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the funds' principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors"
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
funds are a legally permissible investment and that can only buy shares of the
funds without paying sales charges
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the funds' administrator
Investment Manager - A fund's investment manager: Templeton Investment Counsel,
Inc. ("Investment Counsel") for Growth Series and Foreign Equity Series;
Templeton Asset Management Ltd. - Hong Kong Branch ("Asset Management Hong
Kong") for Emerging Markets Series; and Investment Counsel through its Templeton
Global Bond Managers division for Emerging Fixed Income Markets Series.
Investor Services - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
Moody's - Moody's Investors Service, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Templeton Institutional Funds, Inc. - 37
PAGE
NYSE - New York Stock Exchange
Offering Price - The public offering price is the Net Asset Value per share.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
38 - Templeton Institutional Funds, Inc.
PAGE
APPENDIX
DESCRIPTION OF RATINGS
Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Templeton Institutional Funds, Inc. - 39
PAGE
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
40 - Templeton Institutional Funds, Inc.
PAGE
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country in which the offering is not authorized. No sales
representative, dealer or other person is authorized to give any information or
make any representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
Principal Underwriter:
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
TIFI
- ------------------------------------------------
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
MAY 1, 1998
PROSPECTUS
Institutional Services and Fund Information: 800-321-8563
ZTIFI P 5/98
