TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI Growth Series
ANNUAL REPORT
[Templeton Logo] December 31, 1997
<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
[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.
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. Growth Series (the "Fund") reported a
return of -7.1% and 12.3%, compared to the unmanaged Morgan Stanley Capital
International (MSCI) World Index returns of -2.4% and 16.2%, respectively. The
Fund produced three year and since inception
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF 12/31/97
ONE-YEAR THREE-YEAR CUMULATIVE
AVERAGE AVERAGE SINCE INCEPTION(1,3)
ANNUAL(1,2) ANNUAL(1,2) (5/03/93)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------
TIFI Growth Series 12.3% 17.4% 91.7%
MSCI World Index(4) 16.2% 17.1% 83.7%
</TABLE>
(1) The Investment Manager and Fund Administrator 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 December 31, 1997. These voluntary
agreements did not result in any fee waivers for the Fund for the fiscal year
ended December 31, 1997. Effective January 1, 1998, 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 an annual
rate of 0.90% of average net assets through December 31, 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 December 31, 1998, these agreements may end at any time upon
notice to the Board.
(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. GROWTH SERIES
LETTER CONTINUED
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION on 12/31/97
(Equity Assets As a Percentage
of Total Net Assets)
[Pie Chart]
<S> <C>
Latin America 4.0%
Australia/New Zealand 4.3%
Asia 7.1%
North America 7.3%
Europe 29.6%
</TABLE>
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION on 12/31/97
[Pie Chart]
<S> <C>
Short-term & Other 46.7%
Fixed Income 1.0%
Equity* 52.3%
</TABLE>
*Equity includes convertible
and preferred securities.
(May 3, 1993) average annual total returns of 17.4% and 15.0% versus MSCI World
Index returns of 17.1% and 13.9%, 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 Europe as well as in the services and finance sectors. In order to
meet an anticipated need for cash in early 1998, the Fund's cash position was
higher than usual at year end. The Fund's overall weighting in Asia at the end
of 1997 was 7.1%. 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
2
<PAGE>
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, 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 Asian-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.
How does one explain the virtual absence of inflation from the U.S. economy
despite nearly seven years of growth? There appears to be no historical
precedent for the prolonged period of economic growth and subdued inflation.
Historically, the basic rule has been that when a product or service is in short
supply, its price will rise. In the U.S., therefore, the assumption should be
that eventually either growth will slow or inflation will rise. Now, however,
some believe that technology-fueled growth in U.S. productivity will be
sufficient to obviate this and the need for the imposition of monetary
restraint. The recent performance of U.S. companies appears to substantiate this
view, if it were deemed sustainable.
The rise in profitability of U.S. companies has been remarkable. Return on
equity (RoE) during the past seven years soared to levels which are
distinguished by their rarity in the preceding sixty years. These were
occasioned by a currency which declined for an extended period, coupled with a
quantum leap in restructuring activity. In addition, U.S. companies have
generally increased the proportion of cash flow being returned to shareholders
versus being reinvested. We believe that unless the current return on equity is
maintained, then U.S. companies are overvalued.
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--once again led by the U.S.--returns, for the most part, were strongly
positive. Continental
<TABLE>
<CAPTION>
INDUSTRY DIVERSIFICATION ON 12/31/97
(Percent of Total Net Assets)
<S> <C>
Services 10.7%
Finance 10.0%
Energy 9.5%
Materials 8.0%
Capital Equipment 6.3%
Consumer Goods 5.3%
Multi-Industry 2.5%
</TABLE>
<TABLE>
<CAPTION>
10 LARGEST POSITIONS ON 12/31/97
(Percent of Total Net Assets)
<S> <C>
Nacional Financiera SA 1.4%
Telebras-Telecomunicacoes
Brasileiras SA 1.3%
Fiat SpA 1.2%
Owens Corning 1.2%
General Electric Co. Plc. 1.2%
Merita Ltd. 1.1%
Banco Itau SA 1.1%
Volvo AB 1.1%
New Holland NV 1.1%
Rhone-Poulenc SA 1.0%
</TABLE>
3
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC. GROWTH SERIES
letter continued----------------------------------------------------------------
Total Return Index Comparison(1)
$5,000,000 Investment: 05/03/93 - 12/31/97
<TABLE>
<CAPTION>
CPI TEMPLETON INST-G MSCI WORLD
--- ---------------- ----------
<S> <C> <C> <C>
5/3/93 $5,000,000.00 $ 5,000,000.00 $5,000,000.00
5/31/93 $5,006,322.58 $ 5,099,999.90 $5,116,064.50
6/30/93 $5,013,331.43 $ 5,039,999.96 $5,073,963.38
7/31/93 $5,013,331.43 $ 5,114,999.77 $5,179,304.44
8/31/93 $5,027,368.76 $ 5,445,000.17 $5,417,573.16
9/30/93 $5,037,926.23 $ 5,454,999.92 $5,318,339.47
10/31/93 $5,058,581.73 $ 5,724,999.90 $5,465,762.25
11/30/93 $5,062,122.74 $ 5,594,999.79 $5,157,438.61
12/31/93 $5,062,122.74 $ 6,002,076.22 $5,410,687.92
1/31/94 $5,075,790.47 $ 6,393,736.87 $5,768,451.28
2/28/94 $5,093,048.16 $ 6,175,017.48 $5,694,730.47
3/31/94 $5,110,364.52 $ 5,898,010.38 $5,450,175.95
4/30/94 $5,117,519.03 $ 5,995,710.42 $5,619,615.38
5/31/94 $5,121,101.30 $ 6,057,415.79 $5,635,042.46
6/30/94 $5,138,513.04 $ 5,882,583.67 $5,620,027.33
7/31/94 $5,152,387.03 $ 6,124,263.39 $5,728,185.88
8/31/94 $5,172,996.57 $ 6,386,511.57 $5,901,393.63
9/30/94 $5,186,963.66 $ 6,201,395.47 $5,747,432.16
10/31/94 $5,190,594.54 $ 6,257,958.60 $5,912,171.96
11/30/94 $5,197,342.31 $ 5,949,431.28 $5,656,594.68
12/31/94 $5,197,342.31 $ 5,922,780.09 $5,712,406.21
1/31/95 $5,218,131.68 $ 5,814,502.67 $5,627,731.21
2/28/95 $5,239,004.21 $ 5,957,970.68 $5,710,871.20
3/31/95 $5,256,292.92 $ 6,050,638.14 $5,987,234.54
4/30/95 $5,273,638.69 $ 6,301,385.32 $6,197,393.65
5/31/95 $5,284,185.97 $ 6,503,073.19 $6,251,280.67
6/30/95 $5,294,754.34 $ 6,579,387.21 $6,250,923.10
7/31/95 $5,294,754.34 $ 6,884,644.85 $6,564,910.71
8/31/95 $5,308,520.70 $ 6,748,369.22 $6,419,839.31
9/30/95 $5,319,137.74 $ 6,868,291.92 $6,608,078.00
10/31/95 $5,336,690.89 $ 6,661,152.90 $6,505,269.52
11/30/95 $5,332,955.21 $ 6,764,722.15 $6,732,380.19
12/31/95 $5,329,222.14 $ 6,964,375.28 $6,930,469.02
1/31/96 $5,360,664.55 $ 7,187,517.23 $7,057,076.22
2/29/96 $5,377,818.68 $ 7,242,850.46 $7,101,352.17
3/31/96 $5,405,783.34 $ 7,373,459.40 $7,220,823.19
4/30/96 $5,426,865.89 $ 7,622,803.48 $7,391,922.03
5/31/96 $5,437,176.94 $ 7,694,044.57 $7,399,639.42
6/30/96 $5,440,439.24 $ 7,688,107.67 $7,438,384.23
7/31/96 $5,450,776.08 $ 7,409,079.66 $7,176,856.51
8/31/96 $5,461,132.55 $ 7,646,550.51 $7,260,727.18
9/30/96 $5,478,608.18 $ 7,800,906.48 $7,546,351.99
10/31/96 $5,496,139.72 $ 7,937,451.75 $7,600,396.70
11/30/96 $5,506,582.39 $ 8,358,961.93 $8,027,663.65
12/31/96 $5,506,582.39 $ 8,536,003.47 $7,900,465.33
1/31/97 $5,524,203.45 $ 8,746,061.68 $7,997,034.29
2/28/97 $5,541,328.48 $ 8,847,496.66 $8,090,378.08
3/31/97 $5,555,181.80 $ 8,853,902.79 $7,931,741.94
4/30/97 $5,561,848.02 $ 8,821,870.34 $8,192,393.26
5/31/97 $5,558,510.91 $ 9,238,298.24 $8,700,244.63
6/30/97 $5,565,181.13 $ 9,705,978.78 $9,135,256.86
7/31/97 $5,571,859.34 $10,116,000.56 $9,557,305.73
8/31/97 $5,582,445.88 $ 9,558,627.58 $8,919,833.43
9/30/97 $5,596,401.99 $10,314,605.02 $9,405,964.36
10/31/97 $5,610,393.00 $ 9,552,220.85 $8,912,151.23
11/30/97 $5,607,026.76 $ 9,494,561.47 $9,071,678.74
12/31/97 $5,600,298.33 $ 9,583,925.54 $9,183,260.38
</TABLE>
Periods ended 12/31/97
<TABLE>
<CAPTION>
Since
Inception
One-Year (05/03/93)
<S> <C> <C>
Average Annual Total Return (1,2) 12.3% 15.0%
Cumulative Total Return (1,3) 12.3% 91.7%
</TABLE>
(1)The Investment Manager and Fund Administrator 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 December 31, 1997. These voluntary
agreements did not result in any fee waivers for the Fund for the fiscal
year ended December 31, 1997. Effective January 1, 1998, 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 an
annual rate of 0.90% of average net assets through December 31, 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 December 31, 1998, these agreements may end at any time upon
notice to the Board.
(2)Average annual total return represents the 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.
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 is likely to 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.
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 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
4
<PAGE>
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, call 1-800-362-6243.
(1). Source: Bloomberg. Based on quarterly percentage price change over the 15
years ended December 31, 1997.
5
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH 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.......................... $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.
See Notes to Financial Statements.
6
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 47.9%
AUTOMOBILES 2.3%
Fiat SpA.................................................... Italy 508,500 $ 1,474,909
Volvo AB, B................................................. Switzerland 49,000 1,314,500
------------
2,789,409
------------
BANKING 5.6%
Banque Nationale de Paris, ADR, 144A........................ France 20,000 1,063,056
BPI Socieda de Gestora de Participacoes Socias SA........... Portugal 48,047 1,168,217
Daegu Bank Co. Ltd.......................................... South Korea 113,915 256,729
Deutsche Bank AG............................................ Germany 15,200 1,062,902
HSBC Holdings Plc. ......................................... Hong Kong 31,069 765,799
Komercni Banka AS, GDR, 144A................................ Czech Republic 27,000 330,750
Merita Ltd., A.............................................. Finland 242,000 1,323,424
PT Bank Pan Indonesia TBK................................... Indonesia 2,952,600 429,469
*PT Bank Pan Indonesia TBK, wts............................. Indonesia 421,800 3,604
Thai Farmers Bank Public Co. Ltd., fgn. .................... Thailand 200,000 373,932
------------
6,777,882
------------
BUILDING MATERIALS & COMPONENTS 1.9%
Owens Corning............................................... United States 42,900 1,463,963
Pioneer International Ltd. ................................. Australia 320,000 873,867
------------
2,337,830
------------
BUSINESS & PUBLIC SERVICES 1.0%
Esselte AB, A............................................... Switzerland 42,000 793,461
SGS Societe Generale de Surveillance Holdings Ltd., br. .... Switzerland 220 421,442
------------
1,214,903
------------
CHEMICALS 1.8%
Akzo Nobel NV............................................... Netherlands 5,000 862,082
Rhone-Poulenc SA, A......................................... France 27,863 1,248,129
------------
2,110,211
------------
ELECTRICAL & ELECTRONICS 2.4%
ABB AB, A................................................... Switzerland 70,250 831,686
Alcatel Alsthom Cie Generale D'Electricite SA............... France 5,416 688,417
*General Electric Co. Plc. ................................. United Kingdom 212,084 1,389,790
------------
2,909,893
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.5%
BICC Plc. .................................................. United Kingdom 193,861 547,630
------------
ENERGY SOURCES 2.6%
Repsol SA................................................... Spain 27,600 1,177,552
Saga Petroleum AS, A........................................ Norway 44,000 757,695
Societe Elf Aquitaine SA.................................... France 10,628 1,236,122
------------
3,171,369
------------
FINANCIAL SERVICES 1.4%
AXA SA...................................................... France 9,600 742,830
*Capital Portugal Fund...................................... Portugal 1,059 163,985
Industrial Credit & Inv. Corp. of India, GDR, 144A.......... India 60,100 776,794
------------
1,683,609
------------
FOOD & HOUSEHOLD PRODUCTS 2.2%
Albert Fisher Group Plc. ................................... United Kingdom 914,593 548,263
Archer-Daniels Midland Co. ................................. United States 30,500 661,469
Hillsdown Holdings Plc. .................................... United Kingdom 259,539 632,991
IBP Inc. ................................................... United States 40,200 841,688
------------
2,684,411
------------
</TABLE>
7
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER 2.2%
Carter Holt Harvey Ltd. .................................... New Zealand 166,000 $ 256,392
Georgia Pacific Corp. ...................................... United States 18,000 1,093,500
*Georgia-Pacific Timber Group............................... United States 18,000 408,375
Metsa Serla OY, B........................................... Finland 45,000 350,969
PT Barito Pacific Timber TBK................................ Indonesia 465,000 133,159
Stora Kopparbergs Bergslags AB, B........................... Switzerland 31,000 384,577
------------
2,626,972
------------
HEALTH & PERSONAL CARE 0.8%
Astra AB, A................................................. Switzerland 57,600 997,494
------------
INDUSTRIAL COMPONENTS 1.7%
BTR Plc. ................................................... United Kingdom 272,000 833,136
Exide Corp. ................................................ United States 46,600 1,205,775
------------
2,038,911
------------
INSURANCE 1.1%
ING Groep NV................................................ Netherlands 25,055 1,055,260
Zuerich Versicherung, new................................... Switzerland 520 247,611
------------
1,302,871
------------
MACHINERY & ENGINEERING 1.7%
Hitachi Koki Co. Ltd. ...................................... Japan 7,000 21,712
New Holland NV.............................................. Netherlands 48,000 1,269,000
VA Technologie AG........................................... Australia 4,600 698,476
------------
1,989,188
------------
MERCHANDISING 1.9%
*Circuit City Stores Inc., Carmax Group..................... United States 69,000 621,000
Dairy Farm International Holdings Ltd. ..................... Hong Kong 459,186 495,921
Storehouse Plc. ............................................ United Kingdom 312,100 1,217,379
------------
2,334,300
------------
METALS & MINING 2.1%
RGC Ltd. ................................................... Australia 738,459 1,126,221
*Union Miniere NPV.......................................... Belgium 5,264 365,131
WMC Ltd. ................................................... Australia 308,560 1,075,907
------------
2,567,259
------------
MULTI-INDUSTRY 2.5%
Hicom Holdings BHD.......................................... Malaysia 440,000 253,400
Hutchison Whampoa Ltd. ..................................... Hong Kong 123,000 771,429
Jardine Matheson Holdings Ltd. ............................. Hong Kong 97,531 497,408
Jardine Strategic Holdings Ltd. ............................ Hong Kong 215,353 568,532
PT Bimantara Citra.......................................... Indonesia 852,500 162,750
Swire Pacific Ltd., A....................................... Hong Kong 132,000 723,964
------------
2,977,483
------------
REAL ESTATE 0.8%
*Catellus Development Corp. ................................ United States 50,000 1,000,000
------------
</TABLE>
8
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS 3.6%
*Digital Telecommunications Philippines Inc. ............... Philippines 5,015,000 $ 180,788
Nokia AB, A................................................. Finland 15,800 1,104,713
Philippine Long Distance Telephone Co., ADR................. Philippines 23,211 522,248
PT Indosat TBK, ADR......................................... Indonesia 500 9,656
Telecom Italia SpA, di Risp................................. Italy 267,400 1,174,958
Telefonica de Espana SA..................................... Spain 32,200 919,396
Telefonica del Peru SA, B................................... Peru 115,000 257,009
Videsh Sanchar Nigam Ltd., GDR, 144A........................ Indonesia 7,700 107,223
------------
4,275,991
------------
TRANSPORTATION 0.4%
Mayne Nickless Ltd., A...................................... Australia 97,783 516,851
------------
UTILITIES ELECTRICAL & GAS 6.9%
BG Plc. .................................................... United Kingdom 216,235 973,073
*Centrica Plc............................................... United Kingdom 244,000 352,647
*CEZ AS..................................................... Czech Republic 17,315 568,222
Endesa SA, br. ............................................. Spain 33,600 596,574
Evn Energie-Versorgung Niederoesterreich AG................. Australia 6,200 814,788
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 272,000 1,033,733
Iberdrola SA................................................ Spain 57,600 758,044
Illinova Corp. ............................................. United States 35,000 942,813
Korea Electric Power Corp. ................................. South Korea 51,220 472,916
Nova Corp. ................................................. Canada 56,300 538,369
Thames Water Group Plc. .................................... United Kingdom 80,689 1,207,261
------------
8,258,440
------------
WHOLESALE & INTERNATIONAL TRADE 0.5%
Brierley Investments Ltd. .................................. New Zealand 765,889 546,997
------------
TOTAL COMMON STOCKS (COST $53,146,413)................ 57,659,904
------------
PREFERRED STOCKS 4.4%
Banco Itau SA, pfd. ........................................ Brazil 2,450,000 1,317,145
Nacional Financiera SA, 11.25%, conv., pfd., 5/15/98........ Mexico 30,900 1,730,400
News Corp. Ltd., pfd. ...................................... Australia 158,353 783,751
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR......... Brazil 13,000 1,513,688
------------
TOTAL PREFERRED STOCKS (COST $3,377,709).............. 5,344,984
------------
<CAPTION>
PRINCIPAL
AMOUNT**
---------
<S> <C> <C> <C>
BONDS (COST $1,178,232) 1.0%
U.S. Treasury Note, 5.125%, 4/30/98......................... United States $ 1,181,000 1,180,263
------------
SHORT TERM INVESTMENTS (COST $53,069,440) 44.1%
U.S. Treasury Bills, 4.85% to 5.37%, with maturities to
3/26/98................................................... United States 53,648,000 53,080,964
------------
TOTAL INVESTMENTS (COST $110,771,794) 97.4%.......... 117,266,115
OTHER ASSETS, LESS LIABILITIES 2.6%.................. 3,103,552
------------
TOTAL NET ASSETS 100.0%.............................. $120,369,667
============
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
See Notes to Financial Statements.
9
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $110,771,794).... $117,266,115
Cash....................................................... 743,894
Receivables:
Investment securities sold................................ 2,172,298
Capital shares sold....................................... 133,027
Dividends and interest.................................... 363,002
Organization costs......................................... 501
------------
Total assets........................................... 120,678,837
------------
Liabilities:
Payables:
Capital shares redeemed................................... 84,599
To affiliates............................................. 76,066
Other liabilities.......................................... 148,505
------------
Total liabilities...................................... 309,170
------------
Net assets, at value........................................ $120,369,667
============
Net assets consist of:
Distributions in excess of net investment income........... $ (16,933)
Net unrealized appreciation................................ 6,494,321
Accumulated net realized gain.............................. 35,728,972
Capital shares............................................. 78,163,307
------------
Net assets, at value........................................ $120,369,667
============
Net asset value per share ($120,369,667 / 8,840,303 shares
outstanding).............................................. $13.62
=====
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH 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 $655,232)
Dividends.................................................. $ 6,618,060
Interest................................................... 1,749,559
-----------
Total investment income................................ $ 8,367,619
Expenses:
Management fees (Note 3)................................... 1,946,728
Administrative fees (Note 3)............................... 236,356
Transfer agent fees (Note 3)............................... 505
Custodian fees............................................. 125,386
Reports to shareholders.................................... 3,000
Registration and filing fees............................... 23,800
Professional fees (Note 3)................................. 26,885
Directors' fees and expenses............................... 7,150
Amortization of organization costs......................... 1,420
Other...................................................... 7,154
-----------
Total expenses......................................... 2,378,384
-------------
Net investment income.................................. 5,989,235
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) from:
Investments............................................... 75,720,379
Foreign currency transactions............................. (212,673)
-----------
Net realized gain...................................... 75,507,706
Net unrealized depreciation on investments............. (49,401,146)
-------------
Net realized and unrealized gain............................ 26,106,560
-------------
Net increase in net assets resulting from operations........ $ 32,095,795
=============
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH 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..................................... $ 5,989,235 $ 5,530,209
Net realized gain from investments and foreign currency
transactions............................................ 75,507,706 13,242,428
Net unrealized appreciation (depreciation) on
investments............................................. (49,401,146) 30,278,191
-----------------------------
Net increase in net assets resulting from operations.... 32,095,795 49,050,828
-----------------------------
Distributions to shareholders from:
Net investment income...................................... (7,267,170) (5,396,197)
Net realized gains......................................... (5,222,663) (13,667,361)
In excess of net realized gains............................ -- (717,828)
Capital share transactions (Note 2)......................... (167,394,086) 11,925,340
-----------------------------
Net increase (decrease) in net assets................... (147,788,124) 41,194,782
-----------------------------
Net assets:
Beginning of year.......................................... 268,157,791 226,963,009
-----------------------------
End of year................................................ $ 120,369,667 $268,157,791
=============================
Undistributed net investment income/(distributions in excess
of net investment income) included in net assets:
End of year................................................ $ (16,933) $ 134,012
=============================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Growth 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 to achieve
long-term capital growth by investing in stocks and debt obligations of
companies and governments of any nation. 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. ORGANIZATION COSTS:
Organization costs are amortized on a straight line basis over five years.
13
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. 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.
2. CAPITAL STOCK
At December 31, 1997, there were 700 million shares authorized ($0.01 par
value), of which 50 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................................................. 2,784,905 $ 40,329,111 2,056,255 $ 26,562,455
Shares issued on reinvestment of distributions.............. 914,805 12,348,992 1,531,208 19,697,616
Shares redeemed............................................. (14,852,462) (220,072,189) (2,735,648) (34,334,731)
----------------------------------------------------------------
Net increase/(decrease)..................................... (11,152,752) $ (167,394,086) 851,815 $ 11,925,340
================================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Company's aggregate average daily
net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
TICI and FT Services agreed in advance to limit total expenses of the Fund to an
annual rate of 1.00% of average net assets through December 31, 1997. For the
year ended December 31, 1997, no reimbursement was necessary under the
agreement.
Effective January 1, 1998, TICI and FT Services have agreed to limit total
expenses of the Fund to an annual rate of .90% of average net assets through
December 31, 1998.
Included in professional fees are legal fees of $2,547 that were paid to a law
firm in which a partner is an officer of the Fund.
14
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Notes to Financial Statements (continued)
4. INCOME TAXES
At December 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $111,190,456 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 15,230,356
Unrealized depreciation..................................... (9,154,697)
------------
Net unrealized appreciation................................. $ 6,075,659
============
</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 and securities disposed of in payment of
redemptions in kind.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997, aggregated $39,826,977 and $246,505,567, respectively.
Included in proceeds of sales is approximately $116 million representing the
value of securities disposed of in payment of redemptions in kind resulting in a
realized gain of $32,711,253.
15
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Growth Series
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Growth 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 the four years
in the period then ended and the period May 3, 1993 (commencement of operations)
to December 31, 1993. 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
Growth 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.
/s/ McGladrey & Pullen, LLP
New York, New York
January 30, 1998
16
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
8.21% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
17
<PAGE>
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18
<PAGE>
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19
<PAGE>
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20
<PAGE>
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc., which contains more complete information
including risk factors, charges, and expenses.
Investors should be aware that the value of investments made for the Fund may
go up as well as down and that the Investment Manager may make errors in
selecting the securities for the Fund's portfolio. Like any investment in
securities, the Fund's portfolio will be subject to the risk of loss from
market, currency, economic, political, and other factors. The Fund and Fund
investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not
invest in shares of the Fund.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
700 Central Avenue
St. Petersburg, Florida 33701-3628
Institutional Services: 1-800-321-8563
Fund Information: 1-800-362-6243
ZT455 A 12/97
[recycle logo]
<PAGE>
