TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI Foreign Equity Series
ANNUAL REPORT
December 31, 1997
[Templeton Logo]
<PAGE>
TECHNOLOGY UPDATE: FRANKLIN TEMPLETON
COMBATS THE YEAR 2000 PROBLEM
By Charles B. Johnson
President of Franklin Resources, Inc.
As we near the 21st century, Franklin Templeton is taking important steps
to tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the
Millennium Bug. The problem originated from the software designers' attempt to
save memory by recording years in a two-digit format -- "98" instead of "1998",
for example -- but didn't take into account that the year 2000 or "00", could
also be interpreted as 1900. Uncorrected, this problem could prevent computers
from accurately processing date-sensitive data after 1999.
Franklin Templeton's Information Services & Technology division
established a Year 2000 Project Team that has already begun making the
necessary software changes to help ensure that our computer systems, which
service the funds and their shareholders, will be Year-2000 Compliant. As
changes reach completion, we will conduct comprehensive tests to verify their
effectiveness. We will also require all of our major software or data-services
suppliers to be Year-2000 Compliant.
In addition, with an estimated 80% of businesses facing the Year 2000
Problem, mutual fund portfolio managers must be aware of the impact it could
have on companies in their portfolios. That is why Franklin Templeton portfolio
managers consistently keep this issue in mind while selecting investments and
managing their portfolios.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
* ARE NOT FDIC INSURED;
* ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY FINANCIAL INSTITUTION;
* ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
December 31, 1997
Dear Shareholders:
In general, 1997 proved to be a year of contrasting fortunes. It was a
year when the bill for the extended consumption of "free lunches" arrived with
a vengeance in Asia. It was a year when developed markets, powered by the
perceived benefits of the 'New Paradigm,' continued their seemingly inexorable
rise. Perhaps most importantly of all, it was a year when the combined benefits
of diligent company research and portfolio diversification were clearly
demonstrated.
For the quarter and one year periods ending December 31, 1997, the
Templeton Institutional Funds, Inc. Foreign Equity Series (the "Fund") reported
a return of -6.5% and 11.4%, compared to the unmanaged Morgan Stanley Capital
International Europe, Australia, Far East ("MSCI EAFE") Index returns of -7.8%
and 2.1%, respectively. For the three- and
[Photo of Gary Motyl]
GARY MOTYL HAS BEEN A PORTFOLIO MANAGER AND RESEARCH ANALYST WITH TEMPLETON
INVESTMENT COUNSEL, INC. SINCE 1981. HE CURRENTLY MANAGES SEVERAL
INSTITUTIONAL MUTUAL FUNDS, AND IS RESPONSIBLE FOR MANAGING MANY OF OUR
SEPARATE ACCOUNT PORTFOLIOS. MR. MOTYL'S RESEARCH RESPONSIBILITIES INCLUDE THE
GLOBAL AUTOMOBILE INDUSTRY AND U.S.-BASED UTILITIES AS WELL AS COUNTRY COVERAGE
OF GERMANY.
PRIOR TO JOINING THE TEMPLETON ORGANIZATION, MR. MOTYL WORKED FROM 1974 TO 1979
AS A SECURITY ANALYST WITH STANDARD & POOR'S CORPORATION. HE THEN WORKED AS A
RESEARCH ANALYST AND PORTFOLIO MANAGER FROM 1979 TO 1981 WITH LANDMARK FIRST
NATIONAL BANK. IN THIS CAPACITY HE HAD RESPONSIBILITY FOR EQUITY RESEARCH AND
MANAGED SEVERAL PENSION AND PROFIT SHARING PLANS.
MR. MOTYL HOLDS A BACHELOR OF SCIENCE IN FINANCE DEGREE FROM LEHIGH UNIVERSITY
IN PENNSYLVANIA AND A MASTER OF BUSINESS ADMINISTRATION DEGREE FROM PACE
UNIVERSITY IN NEW YORK, AND IS A CHARTERED FINANCIAL ANALYST.
TOTAL RETURNS AS OF 12/31/97
<TABLE>
<CAPTION>
CUMULATIVE
ONE-YEAR THREE-YEAR FIVE-YEAR SINCE
AVERAGE AVERAGE AVERAGE INCEPTION(1,3)
ANNUAL(1,2) ANNUAL(1,2) ANNUAL(1,2) (10/18/90)
<S> <C> <C> <C> <C>
TIFI Foreign
Equity Series....... 11.4% 15.3% 15.5% 139.4%
MSCI EAFE Index(4).. 2.1% 6.6% 11.7% 62.9%
</TABLE>
(1) The Investment Manager and Fund Administrator have agreed in advance to
waive a portion of their respective fees in order to limit the total
expenses of the Fund to 1% of average net assets through April 30, 1998. If
these fee waivers are insufficient to so limit the Fund's expenses, the Fund
Administrator has agreed to make certain payments to reduce the Fund's
expenses. After April 30, 1998, these agreements may end at any time upon
notice to the Board. These voluntary agreements did not result in any fee
waivers for the Fund for the fiscal year ended December 31, 1997. Past
expense waivers by the Fund's manager increased the Fund's total returns.
(2) Average annual total return represents the average annual change in value of
an investment over the indicated periods.
(3) Cumulative total return represents the change in value of an investment over
the indicated periods.
(4) The index is unmanaged, does not contain cash, and does not include
management expenses. The index includes reinvested dividends. One cannot
invest directly in an index.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Investment return and principal value will fluctuate with market
conditions, currency volatility, and the economic, social, and political
climates of the countries where investments are made. Emerging markets involve
heightened risks related to the same factors, in addition to those associated
with the relatively small size and lesser liquidity of these markets. You may
have a gain or loss when you sell your shares. Past performance is not
predictive of future results.
continued...
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
LETTER CONTINUED................................................................
GEOGRAPHIC DISTRIBUTION ON 12/31/97
(Equity Assets as a Percentage of Total Net Assets)
<TABLE>
<CAPTION>
<S> <C>
Europe 61.4%
North America 3.3%
Asia 8.9%
Australia/New Zealand 5.7%
Latin America 6.6%
</TABLE>
FUND ASSET ALLOCATION ON 12/31/97*
<TABLE>
<CAPTION>
<S> <C>
Short Term & Other 14.1%
Equity* 85.9%
</TABLE>
*Equity includes convertible and preferred securities
five-year periods ending December 31, 1997, the Fund produced average
annual returns of 15.3% and 15.5% versus MSCI EAFE returns of 6.6% and 11.7%,
respectively. Please remember that the Fund's performance differs from that of
the index because, among other things, the index does not contain cash (the Fund
generally carries a certain percentage of cash at any given time), is not
managed according to any investment strategy, and includes no management
expenses. Of course, one cannot invest directly in an index.
The Fund continues to be well diversified while maintaining
significant weightings in both Europe and the financial sector. The Fund's
overall weighting in Asia at the end of 1997 was 8.9%. As value-oriented
investors, we utilized market volatility to uncover securities at what we
believe to be distressed prices throughout Asia. We also recognize that the
crisis in Asia has had a spillover effect, commonly known as the "Asian
Contagion," and in some instances it unfairly overshadowed the economies of some
other countries, providing value-oriented investors with even more opportunities
on a worldwide basis. As you know, all of the country and sector weightings in
the Fund are a function of our bottom-up investment style, which we have
employed for more than 50 years. We will continue to patiently and cautiously
seek opportunities in this period of great despondency and challenge.
We believe that volatility in world market returns will continue and
perhaps become more of a feature in developed markets, and that the patient
investor could benefit from this. The key to our portfolio management style will
remain the same: diligent company research and portfolio diversification.
In the run up to 1997, the economic view was that the Asian growth
rates were the product of a combination of low cost labor, a high domestic
savings rate, an improved skills base, and a dynamic competitive entrepreneurial
culture. All are at least partially true; however, in many cases, the Asian
emerging markets tied their currencies either explicitly to the U.S. dollar, to
a U.S. dollar-dominated currency basket, or to a level of stability which
implicitly tracked the U.S. dollar. The principal problem is that unless a
country, whose currency is U.S. dollar linked, had an economy synchronized to
that of the U.S., then either that country's domestic interest rate policy will
be inappropriate, or there will exist an interest rate differential presenting a
potential arbitrage opportunity for as long as the currency link is maintained.
What occurred in Asia was a mixture of the two.
In Hong Kong, for example, there existed an extended period of
negative real interest rates. Typically, this inflates asset values. In Hong
Kong, it took the form of a property price inflation explosion which is
currently being deflated by the emergence of positive real interest rates. In
Thailand, property prices soared, and property development expanded sharply and
indiscriminately. However, Thailand differed from Hong Kong in that Thai
property companies and banks not only reduced the cost of development by raising
the funding in U.S. dollars (rather than the higher cost Thai baht), but they
also geared their balance sheets to do so. However,
2
<PAGE>
this cost reduction can last only as long as the position of the tied exchange
rate can resist the fundamental forces of supply and demand. When that position
cannot be maintained, the accumulated 'savings' and possibly more will have to
be repaid.
In Thailand, lower-than-economic-funding costs proved unsustainable. Now,
the Thai baht has been forced to adjust to reflect the underlying economic
fundamentals and subsequently left a massive oversupply of property in Thailand.
Many companies have a currency-mismatched balance sheet, and have become hostage
to the vagaries of short-term currency fluctuations. This is also the situation
in other Asia-Pacific markets.
As we have recently witnessed in Asia, bear markets can be long-lived or
short and savage. The confidence that surrounded prospects in Asia has been
ebbing away in response to these market movements and the subsequent financial
fallout. While it is true that there is a genuine cause for concern over the
possibility of a debt moratorium being declared by certain countries, most
notably South Korea and Indonesia, we believe that there may be 'bargain' stocks
in Asia.
Widely different returns characterized 1997. In emerging markets, the
outcome was mixed. Asian returns were strongly negative, and the ten worst
performing markets were in the Pacific Rim. Thailand, South Korea, and Indonesia
were the most damaged, with U.S. dollar declines of over 65% by year end. Some
non-Asian emerging markets made substantial gains, with Turkey, Hungary, Greece,
and Mexico all recording U.S. dollar returns in excess of 30%. In the developed
markets, returns, for the most part, were strongly positive. Continental Europe,
in general, produced returns in the 20-30% range (in U.S. dollars). An exception
to this rule for developed markets was Japan, where the eight-year bear market
continued, most recently with high profile bankruptcies such as Yamaichi
Securities Ltd.
Four or five years ago, we were being asked why an investor should invest
in global funds. Why not simply concentrate on emerging markets? Now, some
investors question why one would invest in emerging markets. Now, as then, our
answer is unchanged. We should invest where the most undervalued securities
exist. After this year's events, there may be a greater potential for value
found in the emerging markets, and, if so, we would expect portfolios to
reflect this through 1998.
In the developed markets, there are now fewer undervalued securities, and
in some cases overvalued securities. Hence, exposure there is likely to continue
to decline. Europe historically has represented a fairly large exposure for the
Fund, and while we have not found many new 'bargains' there at present, neither
are there a large number of overvalued securities. It is therefore likely that
the Fund's exposure to Europe will continue along current lines.
In our view, the best way to minimize volatility is to invest in the most
undervalued securities worldwide. Risk lies in investing in securities which are
overvalued, and as such, risk can be minimized -- but not removed -- by
diligent company research which leads to a diversified
INDUSTRY DIVERSIFICATION ON 12/31/97
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Finance 24.5%
Services 19.3%
Energy 12.3%
Materials 11.1%
Capital Equipment 8.5%
Consumer Goods 7.6%
Multi-Industry 2.6%
</TABLE>
10 LARGEST POSITIONS ON 12/31/97
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Telecom Italia SpA 1.9%
Rhone-Poulenc SA 1.9%
Telefonica de Espana SA 1.5%
Nycomed Amersham Plc. 1.5%
Telebras-Telecomunicacoes
Brasileiras SA 1.5%
Societe Elf Aquitaine SA 1.5%
Zuerich Versicherung 1.5%
Thames Water Group Plc. 1.4%
Deutsche Bank AG 1.3%
Banque Nationale de Paris 1.3%
</TABLE>
3
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued--------------------------------------------------------
Total Return Index Comparison(1)
$5,000,000 Investment: 10/18/90 - 12/31/97
[graph]
<TABLE>
<CAPTION>
TIFI-Foreign Equ MS EAFE CPI
<S> <C> <C> <C>
10/18/90 $ 5,000,000.00 $5,000,000.00 $5,000,000.00
10/31/90 $ 4,969,999.79 $5,030,345.00 $5,012,580.65
11/30/90 $ 4,875,000.00 $4,734,560.71 $5,023,608.32
12/31/90 $ 4,860,000.13 $4,814,574.79 $5,023,608.32
1/31/91 $ 5,005,000.11 $4,968,641.18 $5,053,749.97
2/28/91 $ 5,614,714.77 $5,504,757.57 $5,061,330.60
3/31/91 $ 5,452,703.32 $5,175,022.59 $5,068,922.59
4/30/91 $ 5,503,331.66 $5,227,290.32 $5,076,525.98
5/31/91 $ 5,579,274.89 $5,282,699.59 $5,091,755.56
6/30/91 $ 5,295,754.37 $4,897,590.79 $5,106,521.65
7/31/91 $ 5,604,588.82 $5,138,062.50 $5,114,181.43
8/31/91 $ 5,614,714.77 $5,036,328.86 $5,129,012.55
9/30/91 $ 5,756,474.79 $5,319,874.18 $5,151,580.21
10/31/91 $ 5,736,223.36 $5,397,012.35 $5,159,307.58
11/30/91 $ 5,685,594.54 $5,147,670.38 $5,174,269.57
12/31/91 $ 5,899,356.20 $5,415,864.01 $5,177,891.56
1/31/92 $ 6,060,449.72 $5,302,130.87 $5,185,658.40
2/29/92 $ 6,154,883.90 $5,114,435.43 $5,204,326.77
3/31/92 $ 6,108,303.64 $4,776,882.70 $5,230,868.84
4/30/92 $ 6,304,442.05 $4,800,767.11 $5,238,192.05
5/31/92 $ 6,657,490.87 $5,123,378.66 $5,245,525.52
6/30/92 $ 6,584,639.48 $4,882,067.52 $5,264,409.41
7/31/92 $ 6,360,481.75 $4,758,551.22 $5,275,464.67
8/31/92 $ 6,181,155.04 $5,058,815.80 $5,290,235.97
9/30/92 $ 6,024,244.63 $4,960,674.77 $5,305,048.63
10/31/92 $ 5,811,294.52 $4,701,727.55 $5,323,616.30
11/30/92 $ 5,822,502.68 $4,747,334.31 $5,331,069.37
12/31/92 $ 5,820,811.46 $4,773,444.64 $5,327,337.62
1/31/93 $ 5,843,978.84 $4,774,399.33 $5,353,441.57
2/28/93 $ 5,971,399.74 $4,920,018.51 $5,372,178.62
3/31/93 $ 6,119,128.07 $5,350,520.13 $5,390,981.24
4/30/93 $ 6,316,144.98 $5,859,889.65 $5,406,075.99
5/31/93 $ 6,484,189.18 $5,985,291.29 $5,413,644.50
6/30/93 $ 6,362,501.96 $5,893,117.80 $5,421,223.60
7/31/93 $ 6,466,805.45 $6,100,555.55 $5,421,223.60
8/31/93 $ 6,924,581.09 $6,431,205.66 $5,436,403.03
9/30/93 $ 6,872,429.34 $6,287,789.77 $5,447,819.47
10/31/93 $ 7,278,053.79 $6,482,711.26 $5,470,155.53
11/30/93 $ 7,110,009.58 $5,917,418.83 $5,473,984.64
12/31/93 $ 7,801,439.17 $6,345,839.96 $5,473,984.64
1/31/94 $ 8,357,848.58 $6,883,967.19 $5,488,764.40
2/28/94 $ 8,129,427.86 $6,866,068.87 $5,507,426.20
3/31/94 $ 7,768,919.31 $6,571,514.52 $5,526,151.45
4/30/94 $ 7,881,598.04 $6,851,461.04 $5,533,888.06
5/31/94 $ 7,911,250.51 $6,813,778.00 $5,537,761.78
6/30/94 $ 7,656,240.01 $6,911,896.40 $5,556,590.17
7/31/94 $ 7,988,346.72 $6,979,632.99 $5,571,592.96
8/31/94 $ 8,261,148.48 $7,146,446.22 $5,593,879.34
9/30/94 $ 8,065,442.93 $6,922,762.45 $5,608,982.81
10/31/94 $ 8,237,426.62 $7,154,674.99 $5,612,909.10
11/30/94 $ 7,881,598.04 $6,812,681.53 $5,620,205.88
12/31/94 $ 7,819,891.47 $6,856,963.96 $5,620,205.88
1/31/95 $ 7,594,902.43 $6,595,027.93 $5,642,686.70
2/28/95 $ 7,713,478.10 $6,577,880.86 $5,665,257.45
3/31/95 $ 7,749,976.88 $6,989,656.20 $5,683,952.80
4/30/95 $ 8,090,635.47 $7,254,564.17 $5,702,709.84
5/31/95 $ 8,297,463.83 $7,169,685.77 $5,714,115.26
6/30/95 $ 8,346,129.26 $7,045,650.21 $5,725,543.49
7/31/95 $ 8,759,785.41 $7,486,003.35 $5,725,543.49
8/31/95 $ 8,534,707.65 $7,202,283.82 $5,740,429.91
9/30/95 $ 8,692,870.59 $7,344,889.04 $5,751,910.77
10/31/95 $ 8,504,291.62 $7,149,514.99 $5,770,892.07
11/30/95 $ 8,638,121.84 $7,350,416.36 $5,766,852.45
12/31/95 $ 8,834,439.23 $7,648,108.22 $5,762,815.65
1/31/96 $ 9,117,594.21 $7,680,995.09 $5,796,816.26
2/29/96 $ 9,262,240.88 $7,708,646.67 $5,815,366.08
3/31/96 $ 9,331,739.67 $7,874,382.58 $5,845,605.98
4/30/96 $ 9,672,913.59 $8,105,101.98 $5,868,403.84
5/31/96 $ 9,786,637.83 $7,957,589.13 $5,879,553.81
6/30/96 $ 9,755,047.53 $8,004,538.90 $5,883,081.54
7/31/96 $ 9,502,326.33 $7,772,407.28 $5,894,259.40
8/31/96 $ 9,780,319.65 $7,791,061.05 $5,905,458.49
9/30/96 $ 9,862,544.30 $7,999,861.49 $5,924,355.96
10/31/96 $ 9,957,437.04 $7,919,862.88 $5,943,313.90
11/30/96 $10,469,858.82 $8,236,657.39 $5,954,606.19
12/31/96 $10,741,158.03 $8,132,875.51 $5,954,606.19
1/31/97 $10,938,363.61 $7,849,851.44 $5,973,660.93
2/28/97 $11,089,454.94 $7,980,158.97 $5,992,179.28
3/31/97 $11,201,336.73 $8,011,281.59 $6,007,159.73
4/30/97 $11,148,686.55 $8,055,343.64 $6,014,368.32
5/31/97 $11,609,375.31 $8,581,357.58 $6,010,759.70
6/30/97 $12,122,715.50 $9,056,764.79 $6,017,972.61
7/31/97 $12,563,661.23 $9,205,295.73 $6,025,194.18
8/31/97 $11,852,883.18 $8,519,501.20 $6,036,642.05
9/30/97 $12,807,167.84 $8,998,297.17 $6,051,733.65
10/31/97 $11,859,464.61 $8,309,027.61 $6,066,862.99
11/30/97 $11,780,488.71 $8,225,937.33 $6,063,222.87
12/31/97 $11,972,340.37 $8,299,970.77 $6,055,947.00
</TABLE>
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE-YEAR (10/18/90)
<S> <C> <C>
Average Annual Total Return (1,2) 11.4% 12.9%
Cumulative Total Return (1,3) 11.4% 139.4%
</TABLE>
(1) The Investment Manager and Fund Administrator have agreed in advance to
waive a portion of their respective fees in order to limit the total
expenses of the Fund to 1% of average net assets through April 30, 1998. If
these fee waivers are insufficient to so limit the Fund's expenses, the
Fund Administrator has agreed to make certain payments to reduce the Fund's
expenses. After April 30, 1998, these agreements may end at any time upon
notice to the Board. These voluntary agreements did not result in any fee
waivers for the Fund for the fiscal year ended December 31, 1997. Past
expense waivers by the Fund's manager increased the Fund's total returns.
(2) Average annual total return represents the average annual change in value
of an investment over the indicated periods.
(3) Cumulative total return represents the change in value of an investment
over the indicated periods.
(4) Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
(5) Source: U.S. Bureau of Labor Statistics (1/13/98).
All calculations assume reinvestment of dividends and capital gains at net
asset value. Investment return and principal value will fluctuate with
market conditions, currency volatility, and the economic, social, and
political climates of the countries where investments are made. Emerging
markets involve heightened risks related to the same factors, in addition
to those associated with the relatively small size and lesser liquidity of
these markets. You may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.
portfolio. We believe safety is not found in the so-called 'flight to quality'
if that flight consists of buying high quality companies which are heavily
overvalued. High quality companies can sustain sharp share price declines and
one only has to consider the experience of Japanese blue chips since 1989 to
bear this out. There are certainly overvalued securities in the world, but
equally there are undervalued ones.
This discussion reflects our views and opinions as of December 31, 1997,
the end of the reporting period. However, market and economic conditions are
changing constantly, which may affect our strategies and portfolio holdings.
Although historic performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
Of course, it should be remembered that investing in foreign securities
involves special risks related to market and currency volatility, and economic,
social, political, and other factors in the countries where the Fund is
invested. Emerging markets involve heightened risks related to the same
factors, in addition to those associated with the relatively small size and
lesser liquidity of these markets. While short-term volatility can be
disconcerting, declines of as much as 40% to 50% are not unusual in emerging
markets. For example, the Hong Kong market has increased 1,268% in the last 15
years, but has suffered five declines of more than 20% during that time.(1)
These special risks and other considerations are discussed in the Fund's
prospectus.
We believe that we are currently in a global bear market, and, if this is
the case, there could be further declines. We have already seen bear markets in
Asia, and the early stages of undervaluation have appeared as the pessimism
deepens. History provides a guide as to the appropriate course of action during
these times: be patient, search for value, and invest in a diversified
portfolio. This is the target we have always set for ourselves at Templeton,
and in 1998, we believe more than ever it is the principle which should guide
us.
Best regards,
/s/Donald F. Reed
Donald F. Reed, C.F.A., C.I.C.
President
Templeton Institutional Funds, Inc.
/s/Gary P. Motyl
Gary P. Motyl, C.F.A.
Executive Vice President
Templeton Investment Counsel, Inc.
For the most current portfolio information, please call 1-800-362-6243.
1. Source: Bloomberg. Based on quarterly percentage price change over the 15
years ended December 31, 1997.
4
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Highlights
<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.......................... $16.34 $14.04 $12.86 $13.32 $10.05
----------------------------------------------------------------
Income from investment operations:
Net investment income .42 .45 .31 .20 .23
Net realized and unrealized gain (loss).................... 1.43 2.54 1.35 (.16) 3.19
----------------------------------------------------------------
Total from investment operations............................ 1.85 2.99 1.66 .04 3.42
----------------------------------------------------------------
Less distributions from:
Net investment income...................................... (.43) (.45) (.31) (.19) (.09)
In excess of net investment income......................... -- (.02) -- -- --
Net realized gains......................................... (.40) (.14) (.17) (.31) (.06)
In excess of net realized gains............................ -- (.08) -- -- --
----------------------------------------------------------------
Total distributions......................................... (.83) (.69) (.48) (.50) (.15)
----------------------------------------------------------------
Net asset value, end of year................................ $17.36 $16.34 $14.04 $12.86 $13.32
================================================================
Total Return................................................ 11.43% 21.58% 13.00% 0.24% 34.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $3,706,006 $2,857,591 $1,817,883 $1,093,227 $407,970
Ratios to average net assets:
Expenses................................................... .84% .87% .88% .95% 1.00%
Expenses, excluding waiver and payments by affiliate....... .84% .87% .88% .95% 1.03%
Net investment income...................................... 2.49% 3.20% 2.70% 2.03% 1.73%
Portfolio turnover rate..................................... 15.25% 7.39% 20.87% 7.90% 42.79%
Average commission rate paid*............................... $.0013 $.0021 -- -- --
</TABLE>
*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.
See Notes to Financial Statements.
5
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 78.9%
AEROSPACE & MILITARY TECHNOLOGY
Hong Kong Aircraft Engineering Co. Ltd...................... Hong Kong 195,600 $ 492,218
--------------
APPLIANCES & HOUSEHOLD DURABLES 1.2%
Sony Corp................................................... Japan 502,300 44,624,952
--------------
AUTOMOBILES 2.5%
Bertrand Faure SA........................................... France 150,000 10,664,617
Fiat SpA.................................................... Italy 13,522,000 39,220,679
Volvo AB, B................................................. Sweden 1,586,075 42,548,895
--------------
92,434,191
--------------
BANKING 13.0%
Argentaria Corporacion Bancaria de Espana SA, ADR........... Spain 1,468,000 44,865,750
Australia & New Zealand Banking Group Ltd................... Australia 3,384,161 22,365,067
Banco di Sardegna SpA, di Risp.............................. Italy 983,450 8,990,034
Banco Totta & Acores SA..................................... Portugal 444,000 8,718,370
Banque Nationale de Paris, ADR, 144A........................ France 929,500 49,405,508
Barclays Plc................................................ United Kingdom 49,500 1,312,943
BPI Socieda de Gestora de Participacoes Socias SA........... Portugal 681,408 16,567,785
Canadian Imperial Bank of Commerce.......................... Canada 1,555,200 48,537,084
Cho Hung Bank Co. Ltd., GDR................................. South Korea 600,000 1,140,000
*Commercial Bank of Korea Co. Ltd........................... South Korea 615,000 1,044,956
Credit Suisse Group, reg.................................... Switzerland 296,100 45,782,917
Daegu Bank Co. Ltd.......................................... South Korea 951,843 2,145,157
Deutsche Bank AG............................................ Germany 710,200 49,662,679
HSBC Holdings Plc........................................... Hong Kong 1,478,930 36,453,172
Komercni Banka AS........................................... Czech Republic 141,500 5,339,082
Komercni Banka AS, GDR, 144A................................ Czech Republic 326,500 3,999,625
Kookmin Bank, GDR, Reg S.................................... South Korea 203,747 1,166,452
Korea Long Term Credit Bank................................. South Korea 254,892 1,563,939
Merita Ltd., A.............................................. Finland 8,113,000 44,367,503
National Bank of Canada..................................... Canada 1,154,200 19,060,999
National Westminster Bank Plc............................... United Kingdom 58,300 966,592
*Philippine National Bank................................... Philippines 1,970,605 4,330,465
PT Bank Pan Indonesia TBK................................... Indonesia 14,316,000 2,082,327
*PT Bank Pan Indonesia TBK, wts............................. Indonesia 2,045,142 17,477
PT Lippo Bank, fgn.......................................... Indonesia 7,252,000 791,127
Sparbanken AB, A............................................ Sweden 464,320 10,555,518
Svenska Handelsbanken, A.................................... Sweden 1,354,450 46,826,349
Thai Farmers Bank Public Co. Ltd., fgn...................... Thailand 2,650,000 4,954,594
--------------
483,013,471
--------------
BROADCASTING & PUBLISHING 0.2%
News Corp. Ltd.............................................. Australia 1,317,422 7,272,597
--------------
BUILDING MATERIALS & COMPONENTS 1.4%
Pioneer International Ltd................................... Australia 10,469,572 28,590,660
Siam City Cement Public Co. Ltd., fgn....................... Thailand 815,746 871,524
Svedala Industri, A......................................... Sweden 1,355,000 22,356,075
Unione Cementi Marchino Emiliane (Unicem), di Risp.......... Italy 200 709
--------------
51,818,968
--------------
BUSINESS & PUBLIC SERVICES 1.5%
Adecco SA................................................... Switzerland 944 266,645
Esselte AB, A............................................... Sweden 63,000 1,190,191
Esselte AB, B............................................... Sweden 929,400 18,845,754
Hyder Plc................................................... United Kingdom 1,083,333 17,187,289
SGS Societe Generale de Surveillance Holdings Ltd., br...... Switzerland 6,420 12,298,430
*Waste Management International Plc......................... United Kingdom 1,764,960 5,101,711
--------------
54,890,020
--------------
</TABLE>
6
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
CHEMICALS 4.3%
Akzo Nobel NV............................................... Netherlands 130,564 $ 22,511,368
Bayer AG.................................................... Germany 899,230 33,364,982
Courtaulds Plc. ............................................ United Kingdom 1,285,000 6,278,536
European Vinyls Corporation Evc International NV............ Netherlands 36,636 813,069
Imperial Chemical Industries Plc. .......................... United Kingdom 387,000 5,974,576
Rhone-Poulenc SA, A......................................... France 1,561,412 69,943,786
Solvay SA................................................... Belgium 311,370 19,580,905
Solvay SA, ADR.............................................. Belgium 1,615 101,561
--------------
158,568,783
--------------
CONSTRUCTION & HOUSING 0.4%
Daito Trust Construction Co. Ltd. .......................... Japan 1,135,400 6,930,488
Fletcher Challenge Building Ltd. ........................... New Zealand 1,403,250 2,868,082
Kyudenko Corp. ............................................. Japan 909,000 4,587,815
--------------
14,386,385
--------------
DATA PROCESSING & REPRODUCTION 0.5%
*Newbridge Networks Corp. .................................. Canada 475,800 16,664,071
--------------
ELECTRICAL & ELECTRONICS 4.1%
ABB AB, A................................................... Sweden 164,000 1,941,586
ABB AG, br. ................................................ Switzerland 19,679 24,705,617
Alcatel Alsthom Cie Generale D'Electricite SA............... France 216,154 27,474,921
*General Electric Co. Plc. ................................. United Kingdom 3,300,000 21,624,951
Hitachi Ltd. ............................................... Japan 4,242,000 30,214,138
Philips Electronics NV...................................... Netherlands 760,000 45,577,886
--------------
151,539,099
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.5%
BICC Plc. .................................................. United Kingdom 6,281,099 17,743,218
--------------
ENERGY SOURCES 3.9%
Fletcher Challenge Energy Ltd. ............................. New Zealand 1,405,000 4,919,348
MOL Magyar Olay-Es Gazipari RT, GDS 144A.................... Hungary 1,339,742 32,555,731
Repsol SA................................................... Spain 756,900 32,293,075
Saga Petroleum AS, A........................................ Norway 1,194,500 20,569,695
Societe Elf Aquitaine SA.................................... France 465,808 54,177,220
YPF Sociedad Anonima, ADR................................... Argentina 46,000 1,572,625
--------------
146,087,694
--------------
FINANCIAL SERVICES 2.1%
AXA SA...................................................... France 594,754 46,020,925
*Capital Portugal Fund...................................... Portugal 2,830 438,223
Chile Fund Inc. ............................................ Chile 359,100 6,396,469
India Fund, B............................................... India 4,211,265 6,224,771
Industrial Credit & Inv. Corp. of India, GDR, 144A.......... India 1,359,500 17,571,538
*Korea International Trust.................................. South Korea 92 724,960
*Korea International Trust, IDR............................. South Korea 2 19,500
London Pacific Group Ltd. .................................. United Kingdom 535,190 1,555,785
--------------
78,952,171
--------------
FOOD & HOUSEHOLD PRODUCTS 1.4%
Albert Fisher Group Plc. ................................... United Kingdom 30,658,920 18,378,836
Hillsdown Holdings Plc. .................................... United Kingdom 7,265,010 17,718,664
Northern Foods Plc. ........................................ United Kingdom 1,271,811 5,493,468
Tate & Lyle Plc. ........................................... United Kingdom 1,450,000 11,954,737
--------------
53,545,705
--------------
</TABLE>
7
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER 2.9%
*Asia Pacific Resources International Hldgs. Ltd., A........ Indonesia 103,250 $ 193,594
Asia Pulp & Paper Co. Ltd., ADR............................. Indonesia 185,100 1,862,569
Assidomaen AB............................................... Sweden 200,000 5,063,036
Carter Holt Harvey Ltd. .................................... New Zealand 3,149,000 4,863,716
Cartiere Burgo SpA.......................................... Italy 2,218,760 13,228,526
Enso OY, R.................................................. Finland 54,000 419,181
Fletcher Challenge Ltd. Forestry Division................... New Zealand 4,552,398 3,779,986
Fletcher Challenge Paper Ltd. .............................. New Zealand 2,732,500 3,569,904
Metsa Serla OY, B........................................... Finland 1,418,000 11,059,422
PT Tjiwi Kimia TBK.......................................... Indonesia 2,530,782 621,192
*PT Tjiwi Kimia TBK, wts. .................................. Indonesia 351,495 20,451
PT Barito Pacific Timber TBK................................ Indonesia 3,852,000 1,103,073
Sappi Ltd. ................................................. South Africa 227,255 1,144,097
Stora Kopparbergs Bergslags AB, B........................... Sweden 1,241,500 15,401,674
Svenska Cellulosa AB, B..................................... Sweden 600,000 13,488,835
+Unipapel SA................................................ Spain 309,693 6,484,547
UPM-Kymmene Corp............................................ Finland 1,305,000 26,343,316
--------------
108,647,119
--------------
HEALTH & PERSONAL CARE 2.3%
Astra AB, A................................................. Sweden 1,533,066 26,549,021
Medeva Plc. ................................................ United Kingdom 1,739,171 4,612,996
*Nycomed Amersham Plc., fgn. ............................... United Kingdom 523,974 19,822,203
*Nycomed Amersham Plc., fgn., non-voting.................... United Kingdom 969,835 35,242,818
--------------
86,227,038
--------------
INDUSTRIAL COMPONENTS 1.5%
*BTR Plc. .................................................. United Kingdom 11,408,000 34,942,714
BTR Plc., fgn. ............................................. United Kingdom 1,375,780 4,070,859
Lucas Varity Plc. .......................................... United Kingdom 4,600,000 16,280,712
--------------
55,294,285
--------------
INSURANCE 6.1%
Ace Ltd. ................................................... Bermuda 336,500 32,472,250
Aegon NV.................................................... Netherlands 468,889 41,740,174
GIO Australia Holdings Ltd. ................................ Australia 7,735,003 19,776,982
ING Groep NV................................................ Netherlands 886,952 37,356,398
Istituto Nazionale Delle Assicurazioni SpA.................. Italy 12,104,000 24,550,114
Skandia Foersaekrings AB.................................... Sweden 300,000 14,150,052
Zuerich Versicherung, new................................... Switzerland 113,655 54,119,577
--------------
224,165,547
--------------
LEISURE & TOURISM 0.7%
Kuoni Reisen Holding AG, B.................................. Switzerland 6,765 25,340,112
--------------
MACHINERY & ENGINEERING 1.6%
Hitachi Koki Co. Ltd. ...................................... Japan 164,000 508,693
New Holland NV.............................................. Netherlands 1,372,000 36,272,250
VA Technologie AG........................................... Australia 114,450 17,378,387
VA Technologie AG, 144A..................................... Australia 28,000 4,251,593
--------------
58,410,923
--------------
MERCHANDISING 1.8%
Dairy Farm International Holdings Ltd. ..................... Hong Kong 6,211,430 6,708,344
House of Fraser Plc. ....................................... United Kingdom 1,750,000 5,762,630
Kwik Save Group Plc. ....................................... United Kingdom 2,665,910 12,697,311
Storehouse Plc. ............................................ United Kingdom 10,162,600 39,640,282
Wessel & Vett AS, C......................................... Denmark 23,400 1,499,234
--------------
66,307,801
--------------
</TABLE>
8
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING 2.2%
Boehler Uddeholm AG......................................... Australia 20,450 $ 1,198,846
Boehler Uddeholm AG, 144A................................... Australia 60,000 3,517,397
Elkem AS.................................................... Norway 872,300 11,591,241
Pechiney SA, A.............................................. France 568,000 22,423,660
RGC Ltd. ................................................... Australia 7,378,895 11,253,521
*Union Miniere NPV.......................................... Belgium 261,270 18,122,693
WMC Ltd. ................................................... Australia 4,050,528 14,123,640
--------------
82,230,998
--------------
MISCELLANEOUS MATERIALS & COMMODITIES 0.1%
Golden Hope Plantations Bhd., fgn. ......................... Malaysia 1,960,000 2,267,644
--------------
MULTI-INDUSTRY 2.6%
Alfa SA de CV, A............................................ Mexico 450,000 3,049,997
Compagnie Generale Industrie de Participation............... France 25,000 8,972,335
Hicom Holdings Bhd. ........................................ Malaysia 4,800,000 2,764,366
Hutchison Whampoa Ltd. ..................................... Hong Kong 3,333,500 20,906,969
Jardine Matheson Holdings Ltd. ............................. Hong Kong 3,286,341 16,760,339
Jardine Strategic Holdings Ltd. ............................ Hong Kong 5,115,130 13,503,943
*Jardine Strategic Holdings Ltd., wts. ..................... Hong Kong 345,687 13,827
Marine Wendel SA............................................ France 29,105 3,307,771
PT Bimantara Citra.......................................... Indonesia 4,280,000 817,091
Swire Pacific Ltd., A....................................... Hong Kong 4,993,000 27,384,501
--------------
97,481,139
--------------
REAL ESTATE 1.7%
Bail Investissement......................................... France 92,800 12,319,880
Hang Lung Development Co. Ltd. ............................. Hong Kong 4,684,050 6,588,740
New World Development Co. Ltd. ............................. Hong Kong 3,269,719 11,308,358
Taylor Woodrow Plc. ........................................ United Kingdom 11,078,810 32,478,774
--------------
62,695,752
--------------
TELECOMMUNICATIONS 7.8%
British Telecommunications Plc. ............................ United Kingdom 2,930,000 23,086,117
Compania De Telecomunicaciones De Chile SA, Spons. ADR...... Chile 357,010 10,665,674
*Digital Telecommunications Philippines Inc. ............... Philippines 56,566,500 2,039,187
Hong Kong Telecommunications Ltd. .......................... Hong Kong 255,500 525,903
Jasmine International Public Co. Ltd., fgn. ................ Thailand 3,969,000 848,077
Koninklijke Ptt Nederland NV................................ Netherlands 200,000 8,344,635
Nokia AB, A................................................. Finland 611,200 42,734,200
Philippine Long Distance Telephone Co., ADR................. Philippines 709,905 15,972,863
PT Indosat TBK, ADR......................................... Indonesia 140,700 2,717,269
*SPT Telecom AS............................................. Czech Republic 5,100 545,596
Tele Danmark AS, B.......................................... Denmark 85,000 5,272,260
Telecom Argentina Stet-France SA, ADR....................... Argentina 1,115,400 39,875,550
Telecom Italia Mobile SpA, di Risp.......................... Italy 332,000 939,322
Telecom Italia SpA.......................................... Italy 36,950 236,363
Telecom Italia SpA, di Risp................................. Italy 15,924,000 69,970,182
Telefonica de Argentina SA, B, ADR.......................... Argentina 242,200 9,021,950
Telefonica de Espana SA..................................... Spain 1,966,245 56,141,554
Videsh Sanchar Nigam Ltd., GDR, 144A........................ Indonesia 127,600 1,776,830
--------------
290,713,532
--------------
TEXTILES & APPAREL 0.2%
Courtaulds Textiles Plc. ................................... United Kingdom 1,500,000 8,782,519
--------------
</TABLE>
9
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION 1.3%
Mayne Nickless Ltd., A...................................... Australia 4,416,318 $ 23,343,309
Qantas Airways Ltd., ADR, 144A.............................. Australia 827,500 14,605,375
Unitor ASA.................................................. Norway 818,735 9,991,342
--------------
47,940,026
--------------
UTILITIES ELECTRICAL & GAS 8.4%
BG Plc. .................................................... United Kingdom 7,483,308 33,675,378
British Energy Ltd., fgn. .................................. United Kingdom 3,000,000 21,161,805
*Centrica Plc. ............................................. United Kingdom 6,482,150 9,368,500
*CEZ AS..................................................... Czech Republic 480,663 15,773,796
Endesa SA, br. ............................................. Spain 1,567,200 27,825,901
Evn Energie-Versorgung Niederoesterreich AG................. Australia 133,338 17,522,735
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 2,799,800 10,640,613
Iberdrola SA................................................ Spain 2,999,043 39,468,863
Korea Electric Power Corp. ................................. South Korea 628,810 5,805,827
National Power Plc. ........................................ United Kingdom 3,069,416 30,372,539
Nova Corp. ................................................. Canada 365,000 3,490,313
Shandong Huaneng Power Development Co. Ltd., ADR............ China 1,032,965 7,101,634
Thames Water Group Plc. .................................... United Kingdom 3,439,260 51,457,855
VEBA AG..................................................... Germany 544,500 37,076,848
--------------
310,742,607
--------------
WHOLESALE & INTERNATIONAL TRADE 0.7%
Brierley Investments Ltd. .................................. New Zealand 33,843,199 24,170,766
--------------
TOTAL COMMON STOCKS (COST $2,373,754,295)............. 2,923,451,351
--------------
PREFERRED STOCKS 7.0%
ABN Amro NV, conv., pfd. ................................... Netherlands 457,188 34,497,948
Banco Bradesco SA, pfd. .................................... Brazil 2,401,200,000 23,666,682
*Banco Bradesco SA, pfd., rts. ............................. Brazil 73,590,202 263,752
Cia de Inversiones en Telecomun SA, 7.00%, conv. 3/03/98,
pfd. ..................................................... Argentina 639,390 44,757,300
Concessioni e Costruzioni Autostrade SpA, B, pfd. .......... Italy 8,865,000 24,780,907
*Lojas Americanas SA, pfd. ................................. Brazil 396,729,153 1,848,476
Nacional Financiera SA, 11.25%, conv., pfd., 5/15/98, PRIDE
4........................................................... Mexico 177,000 9,912,000
Nacional Financiera SA, 11.25%, conv., pfd., 5/15/98, PRIDE
EURO TRANCHE................................................ Mexico 580,306 32,497,136
News Corp. Ltd., pfd. ...................................... Australia 5,481,457 27,129,877
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR......... Brazil 467,800 54,469,463
Vale do Rio Doce, pfd., ADR................................. Brazil 335,000 6,738,721
--------------
TOTAL PREFERRED STOCKS (COST $163,513,571)............ 260,562,262
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS (COST $519,147,704) 14.0%
U.S. Treasury Bills, 4.85% to 5.37%, with maturities to
3/26/98................................................... United States $ 522,015,000 519,305,427
--------------
TOTAL INVESTMENTS (COST $3,056,415,570) 99.9%........ 3,703,319,040
OTHER ASSETS, LESS LIABILITIES 0.1%.................. 2,687,104
--------------
TOTAL NET ASSETS 100.0%.............................. $3,706,006,144
==============
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investment in affiliated companies at December
31, 1997, were $6,484,547.
See Notes to Financial Statements.
10
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$3,056,415,570)........................................... $3,703,319,040
Receivables:
Investment securities sold................................ 370,923
Capital shares sold....................................... 9,905,327
Dividends and interest.................................... 12,546,169
--------------
Total assets........................................... 3,726,141,459
--------------
Liabilities:
Payables:
Investment securities purchased........................... 5,922,605
Capital shares redeemed................................... 8,910,696
To affiliates............................................. 2,455,419
Distributions to shareholders.............................. 117,739
Funds advanced by custodian................................ 1,313,335
Other liabilities.......................................... 1,415,521
--------------
Total liabilities...................................... 20,135,315
--------------
Net assets, at value........................................ $3,706,006,144
==============
Net assets consist of:
Accumulated distributions in excess of net investment
income................................................... $ (675,469)
Net unrealized appreciation................................ 646,903,470
Accumulated net realized gain.............................. 11,780,326
Capital shares............................................. 3,047,997,817
--------------
Net assets, at value........................................ $3,706,006,144
==============
Net asset value per share ($3,706,006,144 / 213,429,570
shares outstanding)....................................... $17.36
=====
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income: (net of foreign taxes of $10,528,250)
Dividends.................................................. $ 87,085,786
Interest................................................... 26,537,854
------------
Total investment income................................ $113,623,640
Expenses:
Management fees (Note 4)................................... 23,912,568
Administrative fees (Note 4)............................... 2,903,341
Transfer agent fees (Note 4)............................... 12,200
Custodian fees............................................. 1,394,879
Reports to shareholders.................................... 34,700
Registration and filing fees............................... 167,387
Professional fees (Note 4)................................. 118,459
Directors' fees and expenses............................... 77,500
Other...................................................... 37,800
------------
Total expenses......................................... 28,658,834
------------
Net investment income.................................. 84,964,806
------------
Realized and unrealized gain (loss):
Net realized gain (loss) from:
Investments............................................... 114,099,101
Foreign currency transactions............................. (2,675,976)
------------
Net realized gain.......................................... 111,423,125
Net unrealized appreciation on investments................. 161,093,064
-----------
Net realized and unrealized gain............................ 272,516,189
------------
Net increase in net assets resulting from operations........ $357,480,995
============
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 84,964,806 $ 75,619,375
Net realized gain from investments and foreign currency
transactions............................................ 111,423,125 19,801,000
Net unrealized appreciation on investments................ 161,093,064 367,862,740
--------------------------------
Net increase in net assets resulting from operations.... 357,480,995 463,283,115
--------------------------------
Distributions to shareholders from:
Net investment income..................................... (86,272,005) (76,624,372)
In excess of net investment income........................ -- (2,669,031)
Net realized gains........................................ (82,399,083) (21,922,688)
In excess of net realized gains........................... -- (13,512,324)
Capital share transactions (Note 3)......................... 659,605,504 691,152,726
--------------------------------
Net increase in net assets.............................. 848,415,411 1,039,707,426
--------------------------------
Net assets:
Beginning of year.......................................... 2,857,590,733 1,817,883,307
--------------------------------
End of year................................................ $3,706,006,144 $2,857,590,733
================================
Accumulated distributions in excess of net investment income
included in net assets:
End of year................................................ $ (675,469) $ (2,669,031)
================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Equity Series (the Fund) is a separate, diversified series of Templeton
Institutional Funds, Inc. (the Company), which is an open-end investment company
registered under the Investment Company Act of 1940. The Fund seeks long-term
capital growth through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the United States. The
following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the recorded amounts of
dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
14
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (continued)
2. MERGER OF TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY (SOUTH AFRICA
FREE) SERIES
On January 29, 1996, the Fund acquired the net assets of the Company's Foreign
Equity (South Africa Free) Series pursuant to a plan of reorganization approved
by Foreign Equity (South Africa Free) Series shareholders. The merger was
accomplished by a tax-free exchange of 1,243,044 shares of the Fund (valued at
$17,800,619) for the net assets of the Foreign Equity (South Africa Free) Series
which aggregated $17,800,619, including $1,537,866 of unrealized appreciation.
The merger was accounted for as a pooling-of-interest without restatement for
financial reporting purposes. The combined net assets of the Fund immediately
after the merger were $1,911,308,133.
3. CAPITAL STOCK
At December 31, 1997, there were 700 million shares authorized ($0.01 par
value), of which 355 million have been classified as Fund shares. Transactions
in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
-------------1997---------------------------------1996-------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................. 60,131,124 $1,060,228,157 57,725,609 $ 882,382,585
Shares issued on reinvestment of distributions.............. 8,887,806 151,119,277 6,311,870 97,071,255
Shares issued on merger..................................... -- -- 1,243,044 17,800,619
Shares redeemed............................................. ( 30,430,203) (551,741,930) (19,936,059) (306,101,733)
-------------------------------------------------------------------
Net increase................................................ 38,588,727 $ 659,605,504 45,344,464 $ 691,152,726
===================================================================
</TABLE>
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Company's aggregate average daily
net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
TICI and FT Services agreed in advance to limit total expenses of the Fund to an
annual rate of 1.00% of average net assets through May 1, 1998. For the year
ended December 31, 1997, no reimbursement was necessary under the agreement.
Included in professional fees are legal fees of $11,660 that were paid to a law
firm in which a partner is an officer of the Fund.
15
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (continued)
5. INCOME TAXES
At December 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $3,057,682,655 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 885,110,270
Unrealized depreciation..................................... (239,473,885)
-------------
Net unrealized appreciation................................. $ 645,636,385
=============
</TABLE>
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies.
6. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $808,872,227 and $444,941,111, respectively.
16
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Foreign Equity Series
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Foreign Equity Series of Templeton
Institutional Funds, Inc. as of December 31, 1997, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Foreign Equity Series of Templeton Institutional Funds, Inc. as of December 31,
1997, the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 30, 1998
17
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
18
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
20
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$3,056,415,570)........................................... $3,703,319,040
Receivables:
Investment securities sold................................ 370,923
Capital shares sold....................................... 9,905,327
Dividends and interest.................................... 12,546,169
--------------
Total assets........................................... 3,726,141,459
--------------
Liabilities:
Payables:
Investment securities purchased........................... 5,922,605
Capital shares redeemed................................... 8,910,696
To affiliates............................................. 2,455,419
Distributions to shareholders.............................. 117,739
Funds advanced by custodian................................ 1,313,335
Other liabilities.......................................... 1,415,521
--------------
Total liabilities...................................... 20,135,315
--------------
Net assets, at value........................................ $3,706,006,144
==============
Net assets consist of:
Accumulated distributions in excess of net investment
income................................................... $ (675,469)
Net unrealized appreciation................................ 646,903,470
Accumulated net realized gain.............................. 11,780,326
Capital shares............................................. 3,047,997,817
--------------
Net assets, at value........................................ $3,706,006,144
==============
Net asset value per share ($3,706,006,144 / 213,429,570
shares outstanding)....................................... $17.36
=====
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
