TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI GROWTH SERIES
SEMIANNUAL REPORT
[LOGO]
TEMPLETON(R)
JUNE 30, 1998
PAGE
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ARE NOT FDIC INSURED;
- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION;
- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
- -------------------------------------------------------------------------------
PAGE
June 30, 1998
Dear Shareholder:
The investment climate in the first half of 1998 was meaningfully
influenced by the continued rapid deterioration of economic conditions and
corporate health in Asia. Investors seemed to have made the decision, with a
notable and brief exception early in the year when some Asian markets
temporarily advanced 50-60% in U.S. dollar terms, to evacuate the Asian equity
markets in view of the economic calamity that was unfolding there. The resulting
flow of money back into the U.S. and Europe did much to lift these markets to
valuation levels that many veteran investment managers would not have believed
possible earlier in their careers. Moreover, it was the world's most expensive
markets that seemed to benefit most from this trend while the cheaper markets
languished. Markets with
TOTAL RETURNS AS OF 6/30/98
<TABLE>
<CAPTION>
CUMULATIVE
ONE-YEAR THREE-YEAR FIVE-YEAR SINCE
AVERAGE AVERAGE AVERAGE INCEPTION(1),(3)
ANNUAL(1),(2) ANNUAL(1),(2) ANNUAL(1),(2) (05/03/93)
<S> <C> <C> <C> <C>
TIFI Growth Series 5.3% 15.8% 15.2% 104.5%
MSCI AC World
Free Index(4) 13.7% 18.0% 15.2% 105.7%
MSCI World Index(4) 17.5% 19.7% 16.2% 114.6%
</TABLE>
(1) The Fund's Investment Manager and Fund Administrator have agreed in
advance to waive a portion of their respective fees in order to limit the
total expenses of the Fund to an annual rate of 0.90% of average net
assets through April 30, 1999. If these fee waivers are insufficient to so
limit the Fund's expenses, the Fund Administrator has agreed to make
certain payments to reduce the Fund's expenses. After April 30, 1999,
these agreements may end at any time upon notice to the Board. These
voluntary agreements did not result in any fee waivers for the Fund for
the fiscal year ended December 31, 1997.
(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 period.
(4) The index is unmanaged, does not contain cash, and does not include
management or operating expenses. The index includes reinvested dividends.
One cannot invest directly in an index.
All calculations assume reinvestment of distributions at net asset value.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility, and the
economic, social, and political climates of the countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively
small size and lesser liquidity. You may have a gain or loss when you sell
your shares. Past performance is not predictive of future results.
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginnning on page 9 of
this report.
continued...
[PHOTO 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.
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC. GROWTH SERIES
letter continued...............................................................
price-to-earnings ratios greater than 20x performed significantly better than
those selling at less than 20x. The world's largest and most expensive stocks,
primarily located in the U.S. and Europe, generally were the best performers in
1998's first half. Only in Japan and Latin America did the least expensive
stocks generally outperform. In these regions, however, the absolute level of
performance still trailed well behind the pace set in Europe and North America.
Investors were willing to pay high prices for the relative "safety" of European
shares versus the alternative of exposing themselves to the systemic risks
brought about by owning "cheap" shares in seemingly imploding Asian markets, in
particular, and emerging markets, in general. By maintaining low weightings in
Asian markets, the Templeton Institutional Funds, Inc. Growth Series ("the
Fund") was impacted more indirectly than directly by the Asian market downturn
that continued during the first half of 1998. First, our Latin American holdings
were negatively affected by investor concerns surrounding emerging market
investments in general. Second, due to our strong value bent, our European
holdings tended toward the less expensive stocks that underperformed versus high
valuation European shares.
This was clearly a difficult period for Templeton's investment style,
which emphasizes diversification and purchasing those stocks selling at a price
we believe to be low in relation to long-term earnings potential. Diversifying
away from the expensive European and U.S. markets, which now represent 85.2% of
the Morgan Stanley Capital International ("MSCI") World Index, resulted in the
Fund's underperformance in 1998's first half. Our performance relative to the
MSCI All Country World Free Index was better than our performance relative to
the MSCI World Index during the reporting period. The MSCI All Country World
Free Index is also relevant to our investment approach as it includes the
emerging markets, while the MSCI World Index omits these markets. For the
quarter and year-to-date periods ended June 30, 1998, the Fund reported
cumulative total returns of -4.3% and 6.7%, respectively, compared to the
unmanaged MSCI All Country World Free Index cumulative total returns of 0.8% and
14.8% for these periods. The MSCI World Index reported cumulative total returns
of 2.1% and 16.9% for these periods. Please remember that the Fund's performance
differs from that of an index because, among other things, an index does not
contain cash (the Fund generally carries a certain percentage of cash at any
given time), is not managed according to any investment strategy, and includes
no management or operating expenses. Of course, one cannot invest directly in an
index. Looking forward, we are confident in our analytical team's diligent
efforts to identify long-term values. It also remains clear that developments in
Asia are likely to continue to have an influential role on the future
performance of the world's stock markets.
Capitalism, even in its purest form, can at times be quite cruel. Should a
nation, however, have the temerity to tinker with freely functioning markets,
the penalty it eventually pays for its iniquity is almost
GEOGRAPHIC DISTRIBUTION ON 6/30/98
(Equity Assets As a Percentage of Total Net Assets)
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Latin America/ Australia/ North
Caribbean New Zealand America Asia Europe
<S> <C> <C> <C> <C>
6.8% 6.3% 8.5% 9.8% 57.4%
</TABLE>
2
PAGE
................................................................................
assuredly severe. Moreover, the size and scope of the punishment is often linked
with the duration of the market interference. Asia's crony capitalism, Hong
Kong's tightly controlled property market, Korea's chaebols, China's centrally
controlled economy, and Japan's protectionist market policies have all been in
place for a long time. These attempts to twist market fundamentals, aided and
abetted in some cases by impressive quantities of U.S. dollar debt, finally
reached the point where they could no longer be sustained. The economic carnage
that has followed the collapse of these efforts to undermine free market forces
has been nothing short of horrific. The International Monetary Fund's (IMF)
attempts to restore capitalistic purity to these economic systems only increased
the pain in the short run. It is abundantly clear to us, however, that the
result of this process could be an Asian banking system in desperate need of new
capital and a corporate sector whose recapitalization needs may eventually be
measured in the hundreds of billions of U.S. dollars. The collateral damage from
what could go down in history as one of the world's most dramatic economic
events may be deep and long lasting. It is not clear that we have yet reached
what we at Templeton refer to as "the point of maximum pessimism" in Asia.
Templeton's security analysts, however, are not timid and are trained to
look most closely where the gloom is the deepest. To be sure, it is just such
cataclysmic share price declines that we rely on to create the bargain priced
shares that we seek to fuel our future performance. At the same time, however,
we do not buy stocks simply because the price has declined. Each security that
we purchase is closely evaluated to determine a conservative forecast of
earnings five years in the future. This process allows our analysts to "look
beyond" current problems and focus on future possibilities. As our team of 40
analysts pored over the possibilities, however, they have often been
disappointed with their findings due to the implications of the problems we are
attempting to look beyond. For example, while we might forecast that an IMF plan
may eventually stabilize an Asian nation's currency, leading to growth in GDP
and corporate sales, our analysis of an Asian company's earnings potential five
years from the present often shows that margins could also be unfavorably
impacted by still high debt loads. Alternatively, revenue growth may be reduced
by the sale of assets to help restore a company's balance sheet. Or, more
commonly, we may forecast improving sales, rising margins, and growing net
income but we also need to anticipate a greater number of shares outstanding due
to recapitalization needs. The resulting reduction in earnings per share often
leaves many Asian stocks still too expensive to meet our stringent value
criteria. Essentially, IMF economic plans can do much to restore long-term
economic health to a nation, but they may do nothing to prevent earnings
dilution at the company level. Accordingly, our purchases of Asian stocks have
been limited to those companies with strong balance sheets, and these have been
primarily found in Hong Kong.
FUND ASSET ALLOCATION ON 6/30/98
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Short-Term
Investments & Other
Net Assets Equity*
<S> <C>
11.2% 88.8%
</TABLE>
*Equity includes convertible and preferred securities.
3
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC. GROWTH SERIES
letter continued..............................................................
INDUSTRY DIVERSIFICATION ON 6/30/98
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Services 18.8%
Finance 18.5%
Energy 16.2%
Capital Equipment 12.6%
Materials 10.3%
Consumer Goods 9.7%
Multi-Industry 2.7%
</TABLE>
10 LARGEST POSITIONS ON 6/30/98
(Percent of Total Net Assets)
<TABLE>
<S> <C>
General Electric Co. Plc 2.8%
ING Groep NV 2.5%
Merita Ltd., A 2.5%
Rhone-Poulenc SA, A 2.4%
Repsol SA 2.3%
Societe Elf Aquitaine SA 2.3%
Telefonos de Mexico SA
(Telmex), L, ADR 2.3%
Volvo AB, B 2.3%
Thames Water Group Plc 2.2%
Banco Itau SA, pfd 2.2%
</TABLE>
Even here we have been hesitant, given the potential for balance sheet erosion
due to the potential decline in property prices and the possibility of a
devaluation of the Hong Kong dollar.
Throughout Asia, economic and stock market reforms that we believe could
help to sow the seeds of future prosperity are already being put in place.
Unfortunately, in most cases the reforms lead first to pain and later to gain.
Stock market pain following economic reform was already seen in Korea, Thailand,
and Indonesia. Now, Japan is facing a similar dilemma. Japanese authorities were
hesitant to provide greater transparency in the banking system for fear of a
loss of confidence in the financial system's integrity and bank runs.
Additionally, addressing the banking system's ills could require billions of
taxpayer funds from a country that is already squeezing its consumers with high
taxes and still running a large fiscal deficit. We believe Japan's protectionist
trade policies also need to be torn down. Doing so, however, could likely lead
to sharply increased unemployment, bankruptcies, and more bad loans for the
nation's banks. Already, the unemployment rate for workers aged 60-64 in Japan
is over 12% and the country's pension funds are badly underfunded. Unemployment
benefits could represent a further drain on the federal budget and add to the
already high level of government debt. Large-scale layoffs could also take place
if Japanese corporations decided to make the creation of shareholder wealth a
priority.
Capital flight increased in Japan as a result of looser regulations on
investing overseas. Some government officials are now calling for a return to
the old, constrictive regulations in order to stem the flow of money searching
for better investment returns and a safer currency. If these regulations are not
changed, the capital flight could have negative ramifications for the yen and
Japanese bond market which, with yields barely above 1% for long-term bonds as
of June 30, 1998, probably represents the world's biggest current investment
bubble. Higher bond yields would likely depress Japanese share prices which
could, in turn, reduce the capital of the Japanese banks further. A weaker yen
may also negatively impact bank capital. Is it any wonder that Japanese
government officials appear much like the proverbial deer caught in the
headlights? If they do what is right, the intermediate term economic and
political costs are likely to be severe and higher than those incurred by
continuing the "muddle through" policy for another decade. These are not
problems that temporary interventions in the currency market will solve. Should
capital continue to exit Japan, however, we believe the government may be forced
to more rapidly endorse a more free-market style of capitalism. Initially, the
consequences could be negative for investors in Japanese stocks and bonds, but
the long-term prospects for attractive returns could be enhanced.
Templeton's analysts have never made a greater effort to identify
long-term values in the Japanese stock market than in the past year. Given the
pressures that are coming to bear on Japan, we believe changes that could have
favorable long-term consequences for Japanese
4
PAGE
................................................................................
corporations are likely to be implemented in the intermediate term. While
recognizing that these changes may first cause pain, we began to be more
optimistic about increased profit margins and lower corporate tax rates in
formulating our long-term earnings estimates. We also began to see movement in
the direction of managing companies for the benefit of shareholders. Share
repurchases picked up and several companies are beginning to restructure and
focus their efforts and capital on those businesses where they have a true
competitive advantage. Moreover, corporate Japan, in general, has a strong
balance sheet. While our analytical team's efforts thus far have been largely
fruitless in identifying a substantial number of Templeton-defined bargains in
Japan, we have laid the groundwork for adding Japanese shares as soon as
valuations allow.
While Asia wallowed in economic gore, the U.S. and European markets
continued to soar. The "tax cut" these markets received from lower oil and other
commodity prices related to Asia's economic crisis actually spurred growth in
the western world. The strong performance of these markets is not unjustified.
Returns on invested capital moved sharply higher based largely on restructuring
initiatives, productivity improvements, and sounder management. Interest rates
plunged, as inflation remained subdued, thereby allowing the higher level of
earnings to be accorded enhanced P/E valuations. Additionally, there were signs
that management is becoming increasingly shareholder-friendly and many investors
showed greater interest in equity investments due to both demographics and a
lack of suitable investment alternatives. The "New Paradigm" was certainly
rewarding, but the question remains as to its sustainability. Thus far, the New
Paradigm has beaten off all skeptics, but the developments in Asia, noted above,
may represent its greatest challenge yet. As Asia works through its crisis,
there is little doubt that Asian demand for U.S. and European manufactured goods
will dramatically increase. There is already evidence of this trend, and the
impact on corporate profit margins in the industrial sector will likely be much
more than a rounding error. Declining demand from Asia also could undercut the
western world's economic growth. Profits may also be undermined, or at least
slowed, by the year 2000 computer glitch and the spending needed to correct it.
The move to the European Monetary Unit is also expected to have a negative
impact on the earnings of some sectors in Europe. Clearly, the risks are rising
regarding the sustainability of earnings at current above-average levels of
return on invested capital. Given the generally open nature of markets in the
western world, it seems sensible to assume that the forces of competition could
lead capital towards areas of high returns, thereby eventually eroding those
same high returns.
We believe inflation and interest rates should remain at low levels, given
the slowing of world economic growth, and might even move lower. This could
provide an offset to lower earnings. As Asia enters into the recapitalization
phase of its crisis, however, U.S. and European shares may suffer due to
attractively priced shares available in Asia.
Total Return Index Comparison
$5,000,000 Investment: 05/03/93 - 6/30/98
<TABLE>
<CAPTION>
TIFI Growth Series(1) CPI Index(5) MSCI World Index(4) MSCI AC World Free Index (4)
-------------------- ------------- ------------------- ----------------------------
<S> <C> <C> <C> <C>
5/3/93 $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00
5/31/93 $5,099,999.90 $5,006,322.58 $5,116,064.50 $5,106,000.00
6/30/93 $5,039,999.96 $5,013,331.43 $5,073,963.38 $5,072,811.00
7/31/93 $5,114,999.77 $5,013,331.43 $5,179,304.44 $5,177,818.19
8/31/93 $5,445,000.17 $5,027,368.76 $5,417,573.16 $5,423,246.77
9/30/93 $5,454,999.92 $5,037,926.23 $5,318,339.47 $5,332,136.22
10/31/93 $5,724,999.90 $5,058,581.73 $5,465,762.25 $5,489,967.46
11/30/93 $5,594,999.79 $5,062,122.74 $5,157,438.61 $5,204,489.15
12/31/93 $6,002,076.22 $5,062,122.74 $5,410,687.92 $5,486,052.01
1/31/94 $6,393,736.87 $5,075,790.47 $5,768,451.28 $5,849,777.26
2/28/94 $6,175,017.48 $5,093,048.16 $5,694,730.47 $5,764,955.49
3/31/94 $5,898,010.38 $5,110,364.52 $5,450,175.95 $5,506,108.99
4/30/94 $5,995,710.42 $5,117,519.03 $5,619,615.38 $5,655,875.15
5/31/94 $6,057,415.79 $5,121,101.30 $5,635,042.46 $5,689,244.82
6/30/94 $5,882,583.67 $5,138,513.04 $5,620,027.33 $5,661,367.52
7/31/94 $6,124,263.39 $5,152,387.03 $5,728,185.88 $5,786,483.74
8/31/94 $6,386,511.57 $5,172,996.57 $5,901,393.63 $5,992,482.56
9/30/94 $6,201,395.47 $5,186,963.66 $5,747,432.16 $5,851,659.22
10/31/94 $6,257,958.60 $5,190,594.54 $5,912,171.96 $6,001,461.70
11/30/94 $5,949,431.28 $5,197,342.31 $5,656,594.68 $5,740,998.26
12/31/94 $5,922,780.09 $5,197,342.31 $5,712,406.21 $5,761,091.75
1/31/95 $5,814,502.67 $5,218,131.68 $5,627,731.21 $5,643,565.48
2/28/95 $5,957,970.68 $5,239,004.21 $5,710,871.20 $5,703,951.63
3/31/95 $6,050,638.14 $5,256,292.92 $5,987,234.54 $5,965,192.62
4/30/95 $6,301,385.32 $5,273,638.69 $6,197,393.65 $6,182,325.63
5/31/95 $6,503,073.19 $5,284,185.97 $6,251,280.67 $6,250,331.21
6/30/95 $6,579,387.21 $5,294,754.34 $6,250,923.10 $6,251,581.27
7/31/95 $6,884,644.85 $5,294,754.34 $6,564,910.71 $6,554,157.81
8/31/95 $6,748,369.22 $5,308,520.70 $6,419,839.31 $6,410,621.75
9/30/95 $6,868,291.92 $5,319,137.74 $6,608,078.00 $6,586,913.85
10/31/95 $6,661,152.90 $5,336,690.89 $6,505,269.52 $6,476,912.39
11/30/95 $6,764,722.15 $5,332,955.21 $6,732,380.19 $6,680,935.13
12/31/95 $6,964,375.28 $5,329,222.14 $6,930,469.02 $6,882,031.28
1/31/96 $7,187,517.23 $5,360,664.55 $7,057,076.22 $7,034,812.37
2/29/96 $7,242,850.46 $5,377,818.68 $7,101,352.17 $7,064,358.58
3/31/96 $7,373,459.40 $5,405,783.34 $7,220,823.19 $7,173,149.71
4/30/96 $7,622,803.48 $5,426,865.89 $7,391,922.03 $7,348,174.56
5/31/96 $7,694,044.57 $5,437,176.94 $7,399,639.42 $7,355,522.73
6/30/96 $7,688,107.67 $5,440,439.24 $7,438,384.23 $7,395,978.11
7/31/96 $7,409,079.66 $5,450,776.08 $7,176,865.51 $7,119,368.53
8/31/96 $7,646,550.51 $5,461,132.55 $7,260,727.18 $7,206,936.76
9/30/96 $7,800,906.48 $5,478,608.18 $7,546,351.99 $7,472,872.73
10/31/96 $7,937,451.75 $5,496,139.72 $7,600,396.70 $7,502,764.22
11/30/96 $8,358,961.93 $5,506,582.39 $8,027,663.65 $7,904,162.10
12/31/96 $8,536,003.47 $5,506,582.39 $7,900,465.33 $7,789,551.75
1/31/97 $8,746,061.68 $5,524,203.45 $7,997,034.29 $7,920,416.22
2/28/97 $8,847,496.66 $5,541,328.48 $8,090,378.08 $8,028,133.88
3/31/97 $8,853,902.79 $5,555,181.80 $7,931,741.94 $7,867,571.20
4/30/97 $8,821,870.34 $5,561,848.02 $8,192,393.26 $8,120,120.24
5/31/97 $9,238,298.24 $5,558,510.91 $8,700,244.63 $8,604,891.42
6/30/97 $9,705,978.78 $5,565,181.13 $9,135,256.86 $9,045,461.86
7/31/97 $10,116,000.56 $5,571,859.34 $9,557,305.73 $9,454,316.73
8/31/97 $9,558,627.58 $5,582,445.88 $8,919,833.43 $8,790,623.70
9/30/97 $10,314,605.02 $5,596,401.99 $9,405,964.36 $9,259,163.94
10/31/97 $9,552,220.85 $5,610,393.00 $8,912,151.23 $8,708,243.69
11/30/97 $9,494,561.47 $5,607,026.76 $9,071,678.74 $8,841,479.82
12/31/97 $9,583,404.67 $5,600,298.33 $9,183,260.38 $8,957,303.20
1/31/98 $9,513,042.34 $5,610,714.38 $9,440,632.18 $9,154,363.87
2/28/98 $10,061,871.50 $5,621,129.88 $10,080,757.74 $9,780,522.36
3/31/98 $10,686,557.32 $5,631,545.89 $10,507,968.66 $10,198,150.67
4/30/98 $10,826,800.72 $5,641,961.83 $10,612,218.43 $10,294,013.28
5/31/98 $10,448,143.20 $5,652,377.74 $10,480,780.37 $10,098,427.03
6/30/98 $10,225,278.00 $5,659,324.51 $10,731,037.93 $10,280,198.72
</TABLE>
Periods ended June 30, 1998
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE-YEAR FIVE-YEAR (05/03/93)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual
Total Return(1),(2) 5.3% 15.2% 14.9%
Cumulative
Total Return(1),(3) 5.3% 102.9% 104.5%
</TABLE>
(1) The Fund's Investment Manager and Fund Administrator have agreed in
advance to waive a portion of their respective fees in order to limit the
total expenses of the Fund to an annual rate of 0.90% of average net
assets through April 30, 1999. If these fee waivers are insufficient to so
limit the Fund's expenses, the Fund Administrator has agreed to make
certain payments to reduce the Fund's expenses. After April 30, 1999,
these agreements may end at any time upon notice to the Board. These
voluntary agreements did not result in any fee waivers for the Fund for
the fiscal year ended December 31, 1997.
(2) Average annual total return represents the average annual change in value
of an investment over the specified periods.
(3) Cumulative total return represents the change in value of an investment
over the indicated periods.
(4) Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
(5) Source: U.S. Bureau of Labor Statistics (7/14/98).
All calculations assume reinvestment of distributions at net asset value.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility, and the
economic, social, and political climates of the countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively
small size and lesser liquidity. You may have a gain or loss when you sell
your shares. Past performance is not predictive of future results.
5
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC. GROWTH SERIES
letter continued...............................................................
Investors may also become less enamored with shares in general due to earnings
disappointments, the potential for increased political risk (highlighted
recently by Indonesia, India, and Pakistan), and demographic changes (baby
boomers' preference for fixed income investments may grow as they approach
retirement). Veteran investment managers are also having a difficult time
ignoring the obvious speculative fever that is apparent in the NASDAQ's
valuation levels and most apparent in the meteoric movements in shares of
internet-related businesses. Additionally, the surge in mega-mergers, often
accompanied by grandiose projections of future market domination and nearly
always financed with the expensive stock of the acquiring firm, is another
symptom of the extreme optimism that often ushers in a bull market's final
stages. Overall, the possibility that returns in the western world over the next
five years may not be able to keep up with recent experience is at the forefront
of our thinking. Indeed, if the western world were to continue to grow at its
recent pace, and Asia does not recover, there would most likely be unsavory
political and economic consequences for investors in both regions.
The Fund increased its Latin American holdings during the period. Share
prices in this region were found guilty by association. As Asian markets
declined, Latin American markets also fell as numerous investors withdrew funds
from emerging markets. While Latin American economies are certainly feeling some
pain as a result of the Asian crisis, the decline in share prices seems to be
overdone in our opinion. Many Latin American companies have little, if any,
debt. In many cases the debt that is on the balance sheet is not
dollar-denominated. Moreover, capital investment was generally accomplished at a
careful pace as economic conditions were generally poor over the last twenty
years. Economic reforms and privatization are also well underway in the region,
and banking systems are generally soundly capitalized if not overcapitalized.
This stands in stark contrast to the situation in Asia. With valuations on
trailing twelve-month earnings in Brazil at less than one-third the level in
Germany, it does not appear to be difficult to identify bargains. Even if a
currency devaluation were to occur in Brazil, we believe it is unlikely that
many companies would need to issue new shares in order to rescue their balance
sheets. Indeed, many companies could benefit due to improved export potential.
These are the ingredients that lead to attractive long-term investment
opportunities, and our analytical team is carefully researching this region to
find what we believe are the best positioned companies at least expensive share
price relative to future earnings potential.
This discussion reflects our views, opinions, and portfolio holdings as of
June 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the Fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
6
PAGE
................................................................................
Of course, it should be remembered that investing in foreign securities
involves special risks related to market and currency volatility, and economic,
social, political, and other factors in the countries where the Fund is
invested. Emerging markets involve heightened risks related to the same factors,
in addition to those associated with their relatively small size and lesser
liquidity. Investing in any emerging market means accepting a certain amount of
volatility and, in some cases, severe market corrections. While short-term
volatility can be disconcerting, declines of as much as 40% to 50% are not
unusual in emerging markets. For example, the Hong Kong equity market has
increased 785% in the last 15 years, but has suffered six quarterly declines of
more than 20% during that time.(1) These special risks and other considerations
are discussed in the Fund's prospectus.
We would be surprised if the world's most expensive stocks continue their
stellar performance over the longer term. As the Asian crisis moves forward,
there will come a time when the point of maximum pessimism has been reached.
This will likely be quickly followed by a mass exodus of investors from the
western world's expensive markets into the markets of Latin America and Asia.
While it is always difficult to pinpoint when we have arrived at the point of
maximum pessimism, it is usually not too difficult to determine when we are near
it. The Templeton investment process is designed to highlight the value in
individual stocks that often occurs when other market participants are suffering
from undue levels of pessimism. Our team of security analysts has consistently
and diligently applied this process, in a wide variety of market conditions,
over the years with a focus on long-term success. Therefore, we look forward to
a bright future with confidence that the relationship we have enjoyed with you
will continue to grow stronger.
Thank you for allowing us to serve your investment management needs.
Best regards,
/s/DONALD F. REED
- -------------------------------
Donald F. Reed, CFA, CIC
President
Templeton Institutional Funds, Inc.
/s/ GARY P. MOTYL
- -------------------------------
Gary P. Motyl, CFA
Executive Vice President
Templeton Investment Counsel, Inc.
(1.) Source: Bloomberg. Based on quarterly percentage price changes over 15
years ended June 30, 1998. Market returns are measured in Hong Kong dollars.
For the most current portfolio information, call 1-800-362-6243.
7
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993+
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period................ $13.62 $13.41 $11.86 $10.94 $11.80 $10.00
-------------------------------------------------------------------------
Income from investment operations:
Net investment income.............................. .13 .73 .30 .27 .20 .06
Net realized and unrealized gains (losses)......... .79 .89 2.32 1.62 (.36) 1.94
-------------------------------------------------------------------------
Total from investment operations.................... .92 1.62 2.62 1.89 (.16) 2.00
-------------------------------------------------------------------------
Less distributions from:
Net investment income.............................. (.02) (.87) (.29) (.27) (.20) (.05)
Net realized gains................................. (7.23) (.54) (.74) (.70) (.50) (.15)
In excess of net realized gains.................... -- -- (.04) -- -- --
-------------------------------------------------------------------------
Total distributions................................. (7.25) (1.41) (1.07) (.97) (.70) (.20)
-------------------------------------------------------------------------
Net asset value, end of period...................... $7.29 $13.62 $13.41 $11.86 $10.94 $11.80
=========================================================================
Total Return*....................................... 6.68% 12.27% 22.57% 17.59% (1.32)% 20.04%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)................... $64,795 $120,370 $268,158 $226,963 $194,059 $184,013
Ratios to average net assets:
Expenses........................................... .89%** .86% .87% .88% .95% 1.00%**
Net investment income.............................. 3.11%** 2.15% 2.34% 2.28% 1.69% 1.19%**
Portfolio turnover rate............................. 7.18% 16.73% 15.61% 30.20% 17.23% 17.32%
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period May 3, 1993 (commencement of operations) to December 31, 1993.
See Notes to Financial Statements.
8
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 83.9%
AUTOMOBILES 4.2%
*Circuit City Stores Inc., Carmax Group..................... United States 69,000 $ 702,938
Fiat SpA.................................................... Italy 128,500 564,155
Volvo AB, B................................................. Sweden 49,000 1,459,266
-----------
2,726,359
-----------
BANKING 7.8%
Banque Nationale de Paris, ADR, 144A........................ France 10,000 817,069
*Daegu Bank Co. Ltd......................................... South Korea 14,725 15,551
Deutsche Bank AG............................................ Germany 15,200 1,287,158
HSBC Holdings Plc. ......................................... Hong Kong 31,069 759,824
Komercni Banka AS, GDR, 144A................................ Czech Republic 27,000 339,525
Merita Ltd., A.............................................. Finland 242,000 1,596,734
PT Bank Pan Indonesia TBK................................... Indonesia 2,952,600 69,825
*PT Bank Pan Indonesia TBK, wts. ........................... Indonesia 421,800 1,311
Thai Farmers Bank Public Co. Ltd., fgn. .................... Thailand 200,000 176,123
-----------
5,063,120
-----------
BUILDING MATERIALS & COMPONENTS 1.1%
Pioneer International Ltd. ................................. Australia 320,000 762,914
-----------
BUSINESS & PUBLIC SERVICES 1.8%
Danka Business Systems Plc. ................................ United Kingdom 63,500 200,245
Esselte AB, A............................................... Sweden 42,000 932,175
SGS Societe Generale de Surveillance Holdings Ltd., br. .... Switzerland 35 59,326
-----------
1,191,746
-----------
CHEMICALS 4.4%
Akzo Nobel NV............................................... Netherlands 20,000 1,111,493
Beijing Yanhua Petrochemical Company Ltd., ADR.............. China 34,000 204,000
Rhone-Poulenc SA, A......................................... France 27,863 1,571,499
-----------
2,886,992
-----------
DATA PROCESSING & REPRODUCTION 1.4%
*3com Corp.................................................. United States 12,500 383,594
*Bay Networks Inc........................................... United States 16,800 541,800
-----------
925,394
-----------
ELECTRICAL & ELECTRONICS 6.0%
ABB AB, A................................................... Sweden 70,250 995,404
Alcatel Alsthom Cie Generale D'Electricite SA............... France 5,416 1,102,728
General Electric Co. Plc. .................................. United Kingdom 212,084 1,831,239
-----------
3,929,371
-----------
ELECTRONIC COMPONENTS & INSTRUMENTS .7%
BICC Plc. .................................................. United Kingdom 193,861 423,729
-----------
ENERGY SOURCES 5.7%
Repsol SA................................................... Spain 27,600 1,519,812
Saga Petroleum AS, A........................................ Norway 44,000 676,614
Societe Elf Aquitane SA..................................... France 10,628 1,494,178
-----------
3,690,604
-----------
FINANCIAL SERVICES 3.0%
Axa-UAP..................................................... France 9,600 1,079,722
Housing Development Finance Corp. Ltd. ..................... India 3,600 225,133
Industrial Credit & Inv. Corp. of India, GDR, 144A.......... India 60,100 609,264
-----------
1,914,119
-----------
FOOD & HOUSEHOLD PRODUCTS 3.7%
Albert Fisher Group Plc. ................................... United Kingdom 914,593 350,980
Archer-Daniels Midland Co. ................................. United States 30,500 590,938
</TABLE>
9
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS (CONT.)
Hillsdown Holdings Plc. .................................... United Kingdom 259,539 $ 701,527
IBP Inc. ................................................... United States 40,200 728,625
-----------
2,372,070
-----------
FOREST PRODUCTS & PAPER 2.2%
Carter Holt Harvey Ltd. .................................... New Zealand 166,000 144,767
Fletcher Challenge Ltd. Forestry Division................... New Zealand 625,000 350,393
Metsa Serla OY, B........................................... Finland 45,000 434,707
PT Barito Pacific Timber TBK................................ Indonesia 125,000 2,111
Stora Kopparbergs Bergslags AB, B........................... Sweden 31,000 489,787
-----------
1,421,765
-----------
HEALTH & PERSONAL CARE 1.8%
Astra AB, A................................................. Sweden 57,600 1,177,294
-----------
INDUSTRIAL COMPONENTS 2.2%
BTR Plc. ................................................... United Kingdom 221,000 630,544
Exide Corp. ................................................ United States 46,600 783,463
-----------
1,414,007
-----------
INSURANCE 4.1%
ING Groep NV................................................ Netherlands 25,055 1,640,609
Presidential Life Corp. .................................... United States 32,400 692,550
Zuerich Versicherung, new................................... Switzerland 520 331,857
-----------
2,665,016
-----------
MACHINERY & ENGINEERING 2.3%
New Holland NV.............................................. Netherlands 48,000 942,000
VA Technologie AG........................................... Austria 4,600 572,329
-----------
1,514,329
-----------
MERCHANDISING 2.9%
Dairy Farm International Holdings Ltd. ..................... Hong Kong 112,186 120,039
Safeway Plc. ............................................... United Kingdom 66,000 433,327
Storehouse Plc. ............................................ United Kingdom 312,100 1,307,056
-----------
1,860,422
-----------
METALS & MINING 2.6%
RGC Ltd. ................................................... Australia 738,459 731,664
WMC Ltd. ................................................... Australia 308,560 928,626
-----------
1,660,290
-----------
MULTI-INDUSTRY 2.7%
Foster Wheeler Corp. ....................................... United States 9,200 197,225
Hicom Holdings Bhd. ........................................ Malaysia 440,000 111,392
Hutchison Whampoa Ltd. ..................................... Hong Kong 123,000 649,240
Jardine Matheson Holdings Ltd. ............................. Hong Kong 97,531 263,334
Swire Pacific Ltd., A....................................... Hong Kong 132,000 498,284
-----------
1,719,475
-----------
REAL ESTATE 1.4%
*Catellus Development Corp. ................................ United States 50,000 884,375
-----------
TELECOMMUNICATIONS 10.0%
Compania De Telecomunicaciones De Chile SA, Spons. ADR...... Chile 32,000 650,000
*Digital Telecommunications Philippines Inc. ............... Philippines 5,015,000 156,343
Nokia AB, A................................................. Finland 16,000 1,181,092
Philippine Long Distance Telephone Co., ADR................. Philippines 23,211 525,149
PT Indosat TBK, ADR......................................... Indonesia 500 5,563
Rostelecom, ADR............................................. Russia 21,500 287,563
Telecom Italia SpA, di Risp................................. Italy 167,400 814,516
Telefonica del Peru SA, B................................... Peru 115,000 236,690
Telefonica SA............................................... Spain 22,200 1,028,140
</TABLE>
10
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 30,900 $ 1,485,131
Videsh Sanchar Nigam Ltd., GDR, 144A........................ India 7,700 79,695
-----------
6,449,882
-----------
TRANSPORTATION .8%
Mayne Nickless Ltd., A...................................... Australia 97,783 517,720
-----------
UTILITIES ELECTRICAL & GAS 10.5%
Centrais Eletricas Brasileiras SA (Electrobras)............. Brazil 7,000,000 205,776
*Centrais Geradoras Do Sul Do Brasil SA (Gerasul)........... Brazil 7,000,000 9,563
*Centrica Plc. ............................................. United Kingdom 244,000 412,203
*CEZ AS..................................................... Czech Republic 17,315 478,577
Endesa SA, br. ............................................. Spain 33,600 736,351
Evn Energie-Versorgung Niederoesterreich AG................. Austria 6,200 927,803
Guangdong Electric Power Development Co Ltd., B, 144A....... China 728,000 270,583
Hong Kong Electric Holdings Ltd............................. Hong Kong 272,000 842,475
Iberdrola SA................................................ Spain 57,600 936,861
Korea Electric Power Corp................................... South Korea 51,220 546,521
Thames Water Group Plc. .................................... United Kingdom 80,689 1,454,001
-----------
6,820,714
-----------
WHOLESALE & INTERNATIONAL TRADE .6%
Brierley Investments Ltd.................................... New Zealand 765,889 381,670
-----------
TOTAL COMMON STOCKS (COST $46,916,370)...................... 54,373,377
-----------
PREFERRED STOCKS 4.9%
Banco Itau SA, pfd. ........................................ Brazil 2,450,000 1,398,063
News Corp. Ltd., pfd. ...................................... Australia 158,353 1,121,805
Telecomunicacoes Brasileiras SA (Telebras), pfd., ADR....... Brazil 6,000 655,125
-----------
TOTAL PREFERRED STOCKS (COST $2,083,602).................... 3,174,993
-----------
PRINCIPAL
AMOUNT**
--------
SHORT TERM INVESTMENTS (COST $6,785,421) 10.5%
U.S. Treasury Bills, 4.85% to 5.07% with maturities to
10/15/98.................................................. United States $6,812,000 6,786,980
-----------
TOTAL INVESTMENTS (COST $55,785,393) 99.3%.................. 64,335,350
OTHER ASSETS, LESS LIABILITIES .7%.......................... 459,311
-----------
TOTAL NET ASSETS 100.0%..................................... $64,794,661
-----------
-----------
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
See Notes to Financial Statements.
11
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $55,785,393)..... $64,335,350
Receivables:
Investment securities sold................................ 576,155
Capital shares sold....................................... 42,052
Dividends and interest.................................... 360,266
-----------
Total assets........................................... 65,313,823
-----------
Liabilities:
Payables:
Investment securities purchased........................... 163,605
Capital shares redeemed................................... 123,813
To affiliates............................................. 41,745
Funds advanced by custodian................................ 134,073
Accrued liabilities........................................ 55,926
-----------
Total liabilities...................................... 519,162
-----------
Net assets, at value........................................ $64,794,661
===========
Net assets consist of:
Undistributed net investment income........................ $ 967,789
Net unrealized appreciation................................ 8,549,957
Accumulated net realized gain.............................. 1,192,423
Capital shares............................................. 54,084,492
-----------
Net assets, at value........................................ $64,794,661
===========
Net asset value per share ($64,794,661 divided by 8,885,584
shares outstanding)....................................... $7.29
===========
</TABLE>
See Notes to Financial Statements.
12
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $107,067)
Dividends.................................................. $1,176,369
Interest................................................... 186,488
----------
Total investment income................................ $1,362,857
Expenses:
Management fees (Note 3)................................... 238,170
Administrative fees (Note 3)............................... 28,539
Transfer agent fees (Note 3)............................... 100
Custodian fees............................................. 8,466
Reports to shareholders.................................... 1,500
Registration and filing fees............................... 11,000
Professional fees.......................................... 13,000
Directors' fees and expenses............................... 350
Amortization of organization costs......................... 501
Other...................................................... 1,540
----------
Total expenses......................................... 303,166
----------
Net investment income................................ 1,059,691
----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 1,632,868
Foreign currency transactions............................. (9,071)
----------
Net realized gain...................................... 1,623,797
Net unrealized appreciation on investments............. 2,055,636
----------
Net realized and unrealized gain............................ 3,679,433
----------
Net increase in net assets resulting from operations........ $4,739,124
==========
</TABLE>
See Notes to Financial Statements.
13
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
--------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 1,059,691 $ 5,989,235
Net realized gain from investments and foreign currency
transactions............................................ 1,623,797 75,507,706
Net unrealized appreciation (depreciation) on
investments............................................. 2,055,636 (49,401,146)
----------------------------------------
Net increase in net assets resulting from operations.... 4,739,124 32,095,795
Distributions to shareholders from:
Net investment income..................................... (74,969) (7,267,170)
Net realized gains........................................ (36,160,346) (5,222,663)
Capital share transactions (Note 2)........................ (24,078,815) (167,394,086)
----------------------------------------
Net decrease in net assets.............................. (55,575,006) (147,788,124)
Net assets:
Beginning of period........................................ 120,369,667 268,157,791
----------------------------------------
End of period.............................................. $ 64,794,661 $ 120,369,667
========================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ 967,789 $ (16,933)
========================================
</TABLE>
See Notes to Financial Statements.
14
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Notes to Financial Statements (unaudited)
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 through a flexible policy of investing in stocks and
debt obligations of companies and governments of any nation, including
developing nations. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
15
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK
At June 30, 1998, there were 700 million shares authorized ($0.01 par value), of
which 50 million have been classified as Fund shares. Transactions in the Fund's
shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................. 973,963 $ 8,712,631 2,784,905 $ 40,329,111
Shares issued on reinvestment of distributions.............. 4,919,668 35,913,875 914,805 12,348,992
Shares redeemed............................................. (5,848,350) (68,705,321) (14,852,462) (220,072,189)
---------------------------------------------------------------
Net increase (decrease)..................................... 45,281 $(24,078,815) (11,152,752) $(167,394,086)
================================================================
</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 0.90% of average net assets through December 31, 1998. For the
six months ended June 30, 1998, no reimbursement was necessary under the
agreement.
Legal fees of $3,728 were paid to a law firm in which a partner is an officer of
the Fund.
4. INCOME TAXES
At June 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $56,080,378 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 18,787,275
Unrealized depreciation..................................... (10,532,303)
------------
Net unrealized appreciation................................. $ 8,254,972
============
</TABLE>
16
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
Notes to Financial Statements (unaudited) (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1998 aggregated $4,476,848 and $13,619,711, respectively.
17
PAGE
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This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc., which contains more complete information,
including risk factors, charges, and expenses. Like any investment in
securities, the value of the Fund's portfolio will be subject to the risk of
loss from market, currency, economic, political, and other factors, as well as
investment decisions by the Investment Manager, which will not always be
profitable or wise. The Fund and its investors are not protected from such
losses by the Investment Manager. Therefore, investors who cannot accept this
risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
department may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
Institutional Services: 1-800-321-8563
[RECYCLE LOGO]
ZT455 S 6/98 Fund Information: 1-800-362-6243
