TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI EMERGING FIXED INCOME MARKETS SERIES
ANNUAL REPORT
DECEMBER 31, 1998
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
/BULLET/ ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT;
/BULLET/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK;
/BULLET/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
INVESTING IN DEVELOPING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH INCLUDE
RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL, ECONOMIC, AND
POLITICAL DEVELOPMENTS, AND THE RELATIVELY SMALL SIZE AND LESSER LIQUIDITY OF
THESE MARKETS. THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S
PROSPECTUS. THE FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A
WELL-DIVERSIFIED PORTFOLIO.
<PAGE>
December 31, 1998
(PICTURE OF UMRAN DEMIRORS APPEARS HERE.)
Umran Demirors joined the Templeton organization in 1996, and is currently
executive vice president and chief investment officer for Templeton Global Bond
Managers. In this position, Dr. Demirors directs all investment strategies
within the Fixed Income Group and manages the portfolio team. In addition, Dr.
Demirors is manager of numerous Franklin Templeton mutual funds and corporate
pension accounts.
Dr. Demirors has extensive experience in analyzing international financial
markets, and developed and emerging economies. Prior to joining the Templeton
organization, Dr. Demirors was a principal and portfolio manager for Socimer
Advisory, Inc. in New York. Prior to that, Dr. Demirors was the head of research
and strategy at VestcorPartners Group in Miami, where he directed the firm's
overall investment research and strategy in both fixed income and equity markets
in Latin America. Dr. Demirors has also worked as a senior economic and
financial consultant with IMCA Group, as an economist in the International
Finance Department at the Federal Reserve Bank of New York, and as an economic
consultant for Project LINK at the United Nations.
Dr. Demirors has published research on international finance, macroeconomic
stabilization, macroeconometric models, and pricing models for global emerging
fixed income and derivative instruments.
Dr. Demirors holds a Ph.D. and master of arts degree in economics from New York
University, and a bachelor of arts degree in economics from the Bursa Academy of
Economics and Business Administration in Turkey.
<PAGE>
Dear Shareholder:
The Templeton Institutional Funds, Inc. Emerging Fixed Income Markets Series
(the "Fund") reported a cumulative total return of -3.98% for the one year
period ended December 31, 1998, compared to the unmanaged JP Morgan Emerging
Markets Bond Index plus ("EMBI+") one year cumulative total return of -14.36%.
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 or other
operating expenses. Of course, one cannot invest directly in an index nor is an
index representative of the Fund's portfolio.
(Insert performance chart below)
TOTAL RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
One-Year Cumulative
Average Since Inception
Annual /1/, /2/ (06/04/97) /1/, /3/
------------------ --------------------
<S> <C> <C>
TIFI Emerging Fixed Income Markets Series -3.98% 7.95%
JP Morgan EMBI+ 4 -14.36% -10.89%
</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 1.25% 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. Past expense waivers and reimbursements by the Fund's Investment
Manager and Fund Administrator increased the Fund's total returns. Without these
fee waivers and reimbursements, the Fund's total returns would have been lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated period.
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 or other 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 the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified series of an investment company, the Fund may invest in a
relatively small number of issuers and, as a result, be subject to greater risk
of loss with respect to its portfolio procedures. 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, beginning on page ____ of
this report.
<PAGE>
During the period under review, bond prices fell in most of the emerging market
countries that comprise the JP Morgan EMBI+. Within this index, Poland was the
best performer with a total return of 11.79% during the period, apparently
benefiting from a sound economy and a generally favorable global interest rate
environment. Other countries included in this index that generated positive
returns during the period were Panama, with a total return of 3.84%; Argentina,
with a total return of 3.57%; and Peru, with a total return of 2.40%./1/
Exceptions to this positive performance were Russia, Ecuador, and Venezuela,
which fell -82.57%, -25.46%, and -18.43%, respectively during the period./1/ All
three countries suffered from the recent decline in oil prices. Russia's poor
performance followed the devaluation of the ruble and the government's default
on domestic debt.
The overall performance of emerging market debt was positive during the first
quarter of 1998. However, as market concerns about the Japanese economy surfaced
during the second quarter, emerging market debt instruments began to sell off
while U.S. Treasury bonds rallied. As we expected, the prolonged recession in
Japan hurt the rest of the economies in Asia, which led to a reduced regional
demand for commodities. This, in turn, suppressed export revenues of emerging
market countries worldwide. During the third quarter, the emerging debt market
sold off following the Russian crisis and the EMBI(+) index was down by 21%.
However, during the fourth quarter, this market recovered due in part to the
Federal Reserve's easing of monetary policy in the U.S., and the International
Monetary Fund's (IMF) approval of a financial support package for Brazil. The
Federal Reserve's action helped stabilize financial markets by providing
liquidity, while the IMF's support program seemed to restore investor confidence
in Brazil temporarily. Comments by then president-elect Hugo Chavez regarding
future economic policy in Venezuela also helped stabilize the emerging debt
market, given concerns that he would devalue the bolivar and implement populist
economic measures. Furthermore, South Korea's credit rating was upgraded by
Standard and Poor's, as that government's economic adjustment package
contributed to an increase in hard currency reserves and hence, a strengthening
of its debt repayment capacity.
The governments of Mexico and Argentina adopted measures to address the changing
global environment by implementing new economic policies and making external
financing arrangements. However, a slowdown in economic activity in Argentina
and Mexico became apparent during the period. In our opinion, their prospects
for economic growth and financial stability will depend on that of their main
neighboring countries, namely the U.S. and Brazil. We expect that growth in
Argentina and Mexico will also depend on the outlook for global commodity
prices, the main source of export revenues for Mexico and Argentina. The latter
is largely dependent on the recovery prospects for the emerging Asian economies.
Fortunately, it appears that emerging Asian economies have gradually begun to
recover from the steep contractions of 1998, and the focus is now on structural
reform programs designed to secure this recovery over the long term.
- -----------------------------------
1 Source: JP Morgan. Returns are measured in U.S. dollars.
PAGE
In our opinion, Emerging Europe will be affected positively by the formation of
the European Monetary Union, as governments implement policies designed to
enable their economies to meet the criteria for eventual inclusion into the
Union. We believe the focus of attention will remain on macroeconomic policy
stances and structural reforms, and that several economies in the region will
have to implement such measures while being adversely affected by the slowdown
in Russia.
In the near future, we believe the Russian economy will continue to suffer from
uncertainty regarding economic policy and access to external financing.
Meanwhile, we believe Brazil could continue to experience an economic slowdown
if the government maintains high interest rates to defend its currency. Investor
confidence in the Brazilian government's exchange rate policy remains weak as
reflected by continued capital outflows and the subsequent erosion of the
country's foreign reserve position. This uncertainty stems from political
opposition in the Congress, which is preventing the government from moving
forward with its economic reform program. Hence, we expect market volatility to
continue in the near term.
The Fund had no exposure to Southeast Asia as of December 31, 1998. The Fund's
exposure to oil-dependent countries was reduced during the period and exposure
to Russia was kept relatively low at 2.9%. Venezuela's allocation was reduced
from 25.0% as of December 31, 1997 to 0% of the Fund's total net assets as of
December 31, 1998. Allocations to countries with fundamentals we believe are
improving, such as Mexico and Argentina, were kept high. Mexico's allocation was
increased from 12.1% of the Fund's total net assets as of December 31, 1997 to
17.9% at the end of the reporting period, and Argentina's was reduced slightly
but remained relatively high at 11.9%. Peru was added to the Fund with an
allocation of 5.9% of the Fund's total net assets, given economic fundamentals,
which appeared relatively sound. Brazil's allocation was 9.3% as of December 31,
1998, well below the EMBI+ weighting of 22.9%. During the reporting period, the
Fund had no exchange rate exposure since all of its assets were invested in U.S.
dollar-denominated debt. Given recent market volatility, the Fund's focus has
been on more liquid sovereign bonds and short-duration U.S. Treasury bonds. At
the close of the period, Sovereign Eurobonds and Brady Bonds represented 42.3%
and 21.2% of the Fund's total net assets, respectively. The Fund's holding of
U.S. Treasury securities was increased to 26.2% as of December 31, 1998 from
13.7% of total net assets as of June 30, 1998. There were no holdings of
corporate bonds. At the close of the period, the Fund's short-term investments
and other net assets were equivalent to 11.8% of total net assets.
Looking forward, we intend to continue to focus on bonds from countries that in
our analysis are experiencing positive economic growth, such as Mexico, and on
those countries that we believe show strong repayment capacities,
notwithstanding temporary problems. We are aware that the current volatility
could affect countries that face problems of currency overvaluation, but we
believe that these countries may possess long-term potential. Therefore, we will
attempt to position ourselves to take advantage of sovereign bonds with deep
discounts during a period when the market's pricing of sovereign risk spreads
overshoots their fair-value ranges.
PAGE
Of course, global investing involves special risks, such as market and currency
volatility and adverse economic, social and political developments in the
countries where the Fund invests. Emerging market securities involve heightened
risks related to the same factors, in addition to those associated with the
relatively small size and lesser liquidity of these markets. Investing in any
emerging market means accepting a certain amount of volatility and, in some
cases, severe market corrections. In addition, the Fund may also invest in
lower-rated "junk bonds," which entail greater credit risks than higher-rated
bonds. These special risks and other considerations are discussed in the Fund's
prospectus.
This discussion reflects our views, opinions, and portfolio holdings as of
December 31, 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 past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Best regards,
/s/DONALD F. REED
Donald F. Reed, CFA, CIC
President
Templeton Institutional Funds, Inc.
/s/UMRAN DEMIRORS
Umran Demirors, Ph. D.
Chief Investment Officer
Executive Vice President
Templeton Global Bond Managers
PAGE
INSERT THE FOLLOWING CHARTS ON PAGES 2 AND 3 AS INDICATED
Page 2, left side callout
Geographic Distribution on 12/31/98- pie chart
(Fixed Income Assets as a Percentage of Total Net Assets)
Asia 4.9%
Europe 12.1%
Latin America 45.0%
North America 26.2%
Fund Asset Allocation on 12/31/98 - pie chart
Short-Term Investments and Other Net Assets 11.8%
Fixed Income 88.2%
Page 3, right side callout
Insert shaded box-
10 Largest Positions on 12/31/98
(Percent of Total Net Assets)
U.S. Treasury Bond, 5.25%, 11/15/28 26.2%
United Mexican States, 8.625%, 3/12/08 17.9%
Republic of Argentina, 9.75%, 9/19/27 7.1%
Republic of Peru, FRN, 4.00%, 3/07/17 5.9%
Republic of Brazil, 8.00%, 4/15/14 5.6%
Republic of Bulgaria, FRN, 6.6875%, 7/28/11 5.4%
Republic of Turkey, 144A, 10.00%, 9/19/07 4.9%
Republic of Argentina, 8.75%, 5/09/02 4.8%
Republic of Bulgaria, FRN, 6.6875%, 7/28/24 3.8%
Republic of Brazil, 9.375%, 4/07/08 3.7%
PAGE
Insert Graph:
Total Return Index Comparison1
$5,000,000 Investment: 06/04/97-12/31/98
TIFI Emerging Fixed Income Markets Series /1/
JP Morgan EMBI+/4/
TIFI-Emerging Fixed JP Morgan Emerging
Income Market Series Markets Plus
6/4/97 $5,000,000.00 $5,000,000.00
6/30/97 $5,005,000.00 $5,099,666.67
7/31/97 $5,250,000.00 $5,311,302.83
8/31/97 $5,165,000.00 $5,289,526.49
9/30/97 $5,360,000.00 $5,451,386.00
10/31/97 $5,260,000.00 $4,823,386.33
11/30/97 $5,460,000.00 $5,052,497.18
12/31/97 $5,620,979.00 $5,226,303.09
1/31/98 $5,647,822.00 $5,215,850.48
2/28/98 $5,739,089.00 $5,365,023.80
3/31/98 $5,823,984.00 $5,498,612.90
4/30/98 $5,834,931.00 $5,511,809.57
5/31/98 $5,703,563.00 $5,323,856.86
6/30/98 $5,605,037.00 $5,169,997.40
7/31/98 $5,703,563.00 $5,193,262.39
8/31/98 $4,138,094.00 $3,709,547.32
9/30/98 $4,794,934.00 $4,072,341.05
10/31/98 $5,189,038.00 $4,335,821.52
11/30/98 $4,778,513.00 $4,591,201.40
12/31/98 $4,740,762.75 $4,476,421.37
Periods ended 12/31/98
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL HIGHLIGHTS
Year Ended December 31,
-----------------------
1998 1997+
-----------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year $10.47 $10.00
----------------------
Income from investment operations:
Net investment income .84 .44
Net realized and unrealized gains (losses) (1.27) .79
----------------------
Total from investment operations (.43) 1.23
----------------------
Less distributions from:
Net investment income (.86) (.44)
Net realized gains (.56) (.32)
Tax return of capital (.03) -
-----------------------
Total distributions (1.45) (.76)
-----------------------
Net asset value, end of year $8.59 $10.47
=======================
Total return * (3.98)% 12.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $1,881 $2,249
Ratios to average net assets:
Expenses 1.25% 1.25%**
Expenses, excluding waiver and
payments by affiliate 3.74% 6.40%**
Net investment income 8.55% 7.26%**
Portfolio turnover rate 525.94% 172.62%
*Total return is not annualized.
**Annualized.
+For the period June 4, 1997 (commencement of operations) to December 31, 1997.
See Notes to Financial Statements.
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
Principal
Amount* Value
- -------------------------------------------------------------------------------
LONG TERM SECURITIES 88.2%
ARGENTINA 11.9%
Republic of Argentina:
8.75%, 5/09/02 $100,000 $ 90,275
9.75%, 9/19/27 150,000 133,688
----------
223,963
----------
BRAZIL 9.3%
Republic of Brazil:
9.375%, 4/07/08 100,000 69,125
8.00%, 4/15/14 176,642 105,907
----------
175,032
----------
BULGARIA 9.2%
Republic of Bulgaria:
FRN, 6.6875%, 7/28/11 150,000 101,438
FRN, 6.6875%, 7/28/24 100,000 71,375
----------
172,813
MEXICO 17.9%
United Mexican States, 8.625%, 3/12/08 360,000 337,050
---------
PERU 5.9%
Republic of Peru, FRN, 4.00%, 3/07/17 175,000 110,688
---------
RUSSIA 2.9%
Minfin of Russia, Reg S, 10.00%, 6/26/07 175,000 49,875
Russia Federation, 6.625%, 12/15/15 49,940 5,433
---------
55,308
---------
TURKEY 4.9%
Republic of Turkey, 144A, 10.00%, 9/19/07 100,000 91,750
---------
UNITED STATES 26.2%
U. S. Treasury Bond, 5.25%, 11/15/28 480,000 492,149
---------
TOTAL LONG TERM INVESTMENTS(COST$1,853,408) 1,658,753
---------
SHORT TERM INVESTMENTS (COST $177,000)9.4%
Den Danske Bank, Time Deposit 177,000 177,000
---------
TOTAL INVESTMENTS (COST $2,030,408)97.6% 1,835,753
OTHER ASSETS, LESS LIABILITIES 2.4% 45,605
---------
TOTAL NET ASSETS 100.0% $1,881,358
==========
*Securities traded in U.S. dollars.
See Notes to Financial Statements
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
Assets:
Investments in securities, at value (cost $2,030,408) $1,835,753
Cash 31
Receivables:
Interest 35,058
From affiliates 36,712
----------
Total assets 1,907,554
----------
Liabilities:
Accrued expenses 26,196
----------
Net assets, at value $1,881,358
==========
Net assets consist of:
Net unrealized depreciation (194,655)
Accumulated net realized loss (111,671)
Capital shares 2,187,684
----------
Net assets, at value $1,881,358
==========
Net asset value per share ($1,881,358/218,947 shares outstanding) $8.59
=====
SEE NOTES TO FINANCIAL STATEMENTS
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
Investment Income $211,888
Expenses:
Management fees (Note 3) $15,136
Administrative fees (Note 3) 1,818
Transfer agent fees (Note 3) 50
Custodian fees 500
Reports to shareholders 12,700
Registration and filing fees 26,134
Professional fees 22,975
Directors' fees and expenses 80
Other 1,543
---------
Total expenses 80,936
Expenses waived/paid by affiliate (Note 3) (53,908)
--------
Net expenses 27,028
--------
Net investment income 184,860
--------
Realized and unrealized losses:
Net realized loss from:
Investments (28,546)
Foreign currency transactions (205)
Net realized loss (28,751)
Net unrealized depreciation on investments (251,468)
--------
Net realized and unrealized loss (280,219)
--------
Net decrease in net assets resulting from operations $ (95,359)
SEE NOTES TO FINANCIAL STATEMENT
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 4, 1997
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED DECEMBER 31, TO DECEMBER 31,
1998 1997
----------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 184,860 $ 87,942
Net realized gain (loss)from investments and
foreign currency transactions (28,751) 104,550
Net unrealized appreciation (depreciation) on
investments (251,468) 56,813
-------------------------------------------
Net increase (decrease) in net assets
resulting from operations (95,359) 249,305
Distributions to shareholders from:
Net investment income (186,928) (87,000)
Net realized gains (122,344) (64,000)
Tax return of capital (7,339) -
Capital share transactions (Note 2): 44,023 2,151,000
-------------------------------------------
Net increase (decrease) in net assets (367,947)
Net assets:
Beginning of year 2,249,305 -
-------------------------------------------
End of year $1,881,358 $2,249,305
===========================================
Undistributed net investment income included in net assets:
End of year $ - $ 942
==========================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Emerging Fixed Income Markets Series (the Fund) is a separate, non-diversified
series of Templeton Institutional Funds, Inc. (the Company), which is an
open-end investment company registered under the Investment Company Act of 1940.
The Fund seeks high total return consisting of current income and capital
appreciation, by investing at least 65% of its total assets in a portfolio of
"fixed income" or debt obligations of sovereign or sovereign-related entities of
emerging market countries, as well as debt obligations of emerging market
companies. 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 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 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.
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.):
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.
2. CAPITAL STOCK
At December 31, 1998, there were 940 million shares authorized ($0.01 par
value), of which 140 million have been classified as Fund shares. Transactions
in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997*
-------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares sold - $ - 200,000 $2,000,000
Shares issued on reinvestment of distributions 14,746 151,000
4,201 44,023
-------------- ----------------- -------------- --------------
Net increase 4,201 $ 44,023 214,746 $2,151,000
-------------- ----------------- -------------- --------------
</TABLE>
* Commencement of sales was June 4, 1997.
Templeton Global Investors, Inc., a subsidiary of Franklin Resources, is the
record owner of 100% of the Fund shares as of December 31, 1998.
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:
ANNUALIZED FEE
RATE AVERAGE DAILY NET ASSETS
- ----------------- ---------------------------------------------------------
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
TICI and FT Services have agreed in advance to limit total expenses of the Fund
to an annual rate of 1.25% of average daily net assets through April 30, 1999,
as noted in the Statement of Operations.
Legal fees of $489 were paid to a law firm in which a partner is an officer of
the Fund.
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
At December 31, 1998, the net unrealized depreciation based on the cost of
investments for income tax purposes of $2,050,364 was as follows:
Unrealized appreciation $ 6,132
Unrealized depreciation (220,743)
--------------
Net unrealized depreciation $ (214,611)
--------------
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $9,418,331 and $9,102,467 respectively
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Emerging Fixed Income Markets Series
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Emerging Fixed Income Markets Series of
Templeton Institutional Funds, Inc. as of December 31, 1998, and the related
statement of operations for the year then ended, the statement of changes in net
assets for the year then ended and the period from June 4, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our 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, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
Emerging Fixed Income Markets Series of Templeton Institutional Funds, Inc. as
of December 31, 1998, 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 28, 1999
PAGE
(Back Cover)
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
departments 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
Fund Information: 1-800-362-6243
For the most current portfolio information,
please call 1-800-362-6243.
ZT453 A 12/98
