TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI
Foreign Equity Series
ANNUAL REPORT
DECEMBER 31, 1998
[TEMPLETON LOGO]
PAGE
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT;
- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK;
- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
PAGE
December 31, 1998
Dear Shareholder:
Global stock market volatility in recent months has challenged the
resolve of many investors. With continued turmoil in Asia spreading to Russia
and Latin America, many investors sought refuge in the developed markets, and in
particular large, liquid growth stocks. For value investors like Templeton, 1998
was a difficult year. We positioned the portfolio for the longer term with the
opportunities created, but found our short-term performance negatively impacted
by the changes. When confronted with such circumstances, we believe it is
important to remind ourselves we have a distinct style, one which will not
always be in favor. At the same time, we wish to
TOTAL RETURNS AS OF 12/31/98
<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) (10/18/90)
<S> <C> <C> <C> <C>
TIFI Foreign
Equity Series 10.16% 14.28% 11.07% 163.69%
MSCI AC World
ex U.S. Free Index(4) 14.46% 7.60% 7.87% 102.93%
MSCI EAFE Index(4) 20.33% 9.31% 9.51% 96.05%
</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% 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 or reimbursements for the
Fund for the fiscal year ended December 31, 1998. Past expense waivers or
reimbursements by the Fund's Investment Manager and Fund Administrator
increased the Fund's total returns. Without these waivers or
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 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 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 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. 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 6 of
this report.
continued...
[PHOTO GARY MOTYL APPEARS HERE]
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. FOREIGN EQUITY SERIES
letter continued.......................................................
[PIE CHART]
GEOGRAPHIC DISTRIBUTION ON 12/31/98
(Equity Assets as a Percentage of Total Net Assets)
North America 3.7%
Australia/New Zealand 5.4%
Latin America/Caribbean 10.0%
Asia 10.6%
Europe 57.8%
[PIE CHART]
FUND ASSET ALLOCATION ON 12/31/98
Fixed Income 3.5%
Short-Term Investments & Other Net Assets 9.0%
Equity* 87.5%
*Equity includes convertible and preferred securities
reassure you that we have maintained the same discipline and followed the same
patient stock-picking methodologies in this period that we have relied on in the
past.
For the quarter and one year periods ended December 31, 1998,
Templeton Institutional Funds, Inc. Foreign Equity Series (the "Fund") reported
cumulative total returns of 14.16% and 10.16%, respectively, compared to the
unmanaged Morgan Stanley Capital International Europe, Australia, and the Far
East ("MSCI EAFE") Index, which reported cumulative total returns of 20.75% and
20.33% for these periods. The Morgan Stanley Capital International ("MSCI") All
Country World ex U.S. Free Index reported cumulative total returns of 20.42% and
14.46% 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 other operating expenses. Of course, one cannot invest directly in
an index.
The Fund's performance, and indeed that of many other value
investors, substantially lagged the benchmark indices in 1998. "Value" investing
is currently out of favor. In some ways this period may resemble that of the
late 1980s, when limited exposure to Japan caused value funds to underperform
benchmark indices and their peers. Like the Japanese market of the late 1980s,
securities markets in the U.S. and other developed countries in 1998 reached all
time highs and stock valuations that were not necessarily representative of
their long-term potential. As such, there were limited value investment
opportunities, and our low weighting in these highly valued markets caused our
funds to underperform. A good example is seen in the performance of our holdings
in the United Kingdom over the last quarter. During the year, industrial stocks
in the United Kingdom substantially underperformed the market. The market is
focused on the near term outlook for these companies, and included in their
pricing poor short-term earnings prospects. The valuations of these companies
are now at levels not seen in decades, presenting in our opinion good long-term
opportunities for the patient value manager. Not surprisingly, we have been
adding these stocks to the Fund's portfolio and they have provided volatile
short-term results, but we believe these stocks have the potential to provide
attractive returns as market expectations adjust over time.
Performance shortfalls may be explained in part by the early timing
of our purchases and our stock selection. As is customary at our organization,
we bought securities as they declined in price and offered what we believed to
be good long-term potential. By the same token, our lower performance can be
explained by what we did not buy. Internet stocks, for example, soared to move
some indices ahead, yet they are not value stocks. By not participating in
Internet or other growth stocks, the performance of our portfolios came up
short.
2
PAGE
Looking back on the world markets, 1998 was another turbulent
year in Asia. Progress is being made in the search for new capital,
restructuring, and the opening of economies. In our view, the region appears to
have passed the `point of maximum pessimism.' Templeton's analysts are trained
to search for bargains that often present themselves where gloom appears to be
deep-seated. Many bargains have been found throughout the region in companies
where we believe the problems are temporary and are not a reflection of their
future value. Hong Kong in particular is an area where we have found good value
as it is trading at roughly 18 times earnings, an extremely low figure when
compared to Japan. Japan remains a highly valued market, trading at 185 times
earnings. In the fourth quarter, the MSCI Japan Index was up 26.9%, and as such,
finding bargains there has been difficult. We have made a great effort to
identify long-term values in Japanese stocks throughout the year, have added a
few relatively small positions to the Fund's portfolio during the period, and
have laid the groundwork for adding Japanese stocks in the future as we see
bargains arise. Generally speaking, throughout Asia our purchases of stocks have
been limited to companies that, in our opinion, are cheap, large, well
diversified, have solid balance sheets, and have strong earnings potential.
Throughout 1998, stocks in Latin America declined significantly. The
devaluation of the real has improved Brazil's export potential and has made
stocks there cheaper. Given this climate, we have been able to identify many
opportunities throughout Latin America, and are proceeding with a cautious
accumulation of stocks in Brazil, Argentina, and Chile. Our analysts are
carefully researching new opportunities in Latin America under these conditions
and we believe we are well positioned to find companies that are trading at a
fraction of what we consider to be their future earnings potential.
In Europe, markets recovered from the sharp decline in late August
and early September, and with the help of low interest rates, the markets there
remained buoyant throughout the last quarter of 1998. On a country to country
basis, it has become more difficult to find value in Europe. One of the
opportunities, however, has been the stock market in the United Kingdom, which
has recently been trading at 18 times earnings as compared with the World Index
at 26 times earnings. Another area where we are finding value is in Scandinavia,
which is relatively inexpensive with multiples of 15 to 20 times earnings,
depending on the country.
In a volatile year like 1998, at times bargain stocks were in
abundance, and we were able to take advantage of some of these opportunities
around the globe. We reduced our holdings in expensive stocks, such as certain
banks and telecommunications, and purchased companies we consider world class
that met our valuation criteria without paying lofty premiums. Examples of
purchases would include insurance companies in Bermuda and telecommunication
firms in Latin America.
INDUSTRY DIVERSIFICATION ON 12/31/98
(Percent of Total Net Assets)
Finance 25.6%
Services 20.6%
Energy 14.3%
Materials 11.1%
Capital Equipment 6.6%
Consumer Goods 7.3%
Multi-Industry 2.0%
10 LARGEST POSITIONS ON 12/31/98
(Percent of Total Net Assets)
Nokia Corp., A 2.5%
Zurich Allied AG 1.9%
Development Bank of
Singapore Ltd., fgn. 1.8%
Rhone-Poulenc SA, A 1.8%
AXA-UAP 1.6%
Banque Nationale de Paris BNP,
ADR, 144A 1.5%
Compania de Telecomunicaciones
de Chile SA, ADR 1.5%
Thames Water Group Plc. 1.3%
Merita AS 1.3%
Svenska Handelsbanken, A 1.3%
3
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
letter continued..............................................................
Total Return Index Comparison
$5,000,000 Investment: 10/18/90-12/31/98
[LINE GRAPH]
<TABLE>
<CAPTION>
TIFI- MS EAFE MSCI AC S CPI
Foreign Equity World Free ex U
Series
<S> <C> <C> <C> <C>
10/18/90 $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00
10/31/90 $4,970,000.00 $5,030,345.00 $5,278,000.00 $5,012,580.65
11/30/90 $4,875,000.00 $4,735,063.75 $4,984,543.20 $5,023,608.32
12/31/90 $4,860,000.00 $4,813,665.81 $5,075,760.34 $5,023,608.32
1/31/91 $5,005,000.00 $4,970,591.31 $5,234,631.64 $5,053,749.97
2/28/91 $5,614,715.00 $5,504,929.88 $5,796,831.08 $5,061,330.60
3/31/91 $5,452,703.00 $5,175,735.07 $5,478,005.37 $5,068,922.59
4/30/91 $5,503,332.00 $5,228,010.00 $5,537,715.63 $5,076,525.98
5/31/91 $5,579,275.00 $5,283,949.70 $5,616,351.19 $5,091,755.56
6/30/91 $5,295,754.00 $4,897,164.58 $5,225,453.15 $5,106,521.65
7/31/91 $5,604,589.00 $5,139,084.51 $5,476,274.90 $5,114,181.43
8/31/91 $5,614,715.00 $5,035,788.92 $5,382,082.97 $5,129,012.55
9/30/91 $5,756,475.00 $5,321,318.15 $5,656,030.99 $5,151,580.21
10/31/91 $5,736,223.00 $5,397,945.13 $5,755,011.53 $5,159,307.58
11/30/91 $5,685,595.00 $5,147,480.47 $5,498,913.52 $5,174,269.57
12/31/91 $5,899,356.00 $5,415,149.46 $5,784,307.13 $5,177,891.56
1/31/92 $6,060,450.00 $5,300,889.81 $5,703,905.26 $5,185,658.40
2/29/92 $6,154,884.00 $5,112,708.22 $5,528,795.37 $5,204,326.77
3/31/92 $6,108,304.00 $4,776,803.29 $5,194,303.25 $5,230,868.84
4/30/92 $6,304,442.00 $4,800,687.30 $5,211,444.45 $5,238,192.05
5/31/92 $6,657,491.00 $5,123,293.49 $5,527,779.13 $5,245,525.52
6/30/92 $6,584,639.00 $4,881,986.37 $5,260,787.40 $5,264,409.41
7/31/92 $6,360,482.00 $4,758,472.11 $5,148,732.63 $5,275,464.67
8/31/92 $6,181,155.00 $5,058,731.70 $5,423,160.08 $5,290,235.97
9/30/92 $6,024,245.00 $4,960,592.31 $5,311,985.29 $5,305,048.63
10/31/92 $5,811,295.00 $4,701,649.39 $5,078,789.14 $5,323,616.30
11/30/92 $5,822,502.00 $4,747,255.39 $5,106,722.48 $5,331,069.37
12/31/92 $5,820,811.00 $4,773,365.29 $5,149,108.28 $5,327,337.62
1/31/93 $5,843,979.00 $4,774,319.97 $5,148,593.37 $5,353,441.57
2/28/93 $5,971,400.00 $4,919,936.73 $5,306,140.32 $5,372,178.62
3/31/93 $6,119,128.00 $5,350,431.19 $5,742,835.67 $5,390,981.24
4/30/93 $6,316,145.00 $5,859,792.24 $6,249,928.06 $5,406,075.99
5/31/93 $6,484,189.00 $5,985,191.79 $6,389,301.46 $5,413,644.50
6/30/93 $6,362,502.00 $5,893,019.84 $6,312,629.84 $5,421,223.60
7/31/93 $6,466,806.00 $6,100,454.14 $6,522,209.15 $5,421,223.60
8/31/93 $6,924,581.00 $6,431,098.75 $6,872,451.78 $5,436,403.03
9/30/93 $6,872,430.00 $6,287,685.25 $6,730,879.28 $5,447,819.47
10/31/93 $7,278,054.00 $6,482,603.49 $6,974,537.10 $5,470,155.53
11/30/93 $7,110,009.00 $5,917,320.47 $6,443,077.38 $5,473,984.64
12/31/93 $7,801,439.00 $6,345,734.47 $6,945,637.41 $5,473,984.64
1/31/94 $8,357,848.00 $6,883,852.75 $7,516,568.81 $5,488,764.40
2/28/94 $8,129,428.00 $6,865,954.73 $7,459,442.89 $5,507,426.20
3/31/94 $7,768,919.00 $6,571,405.28 $7,117,800.40 $5,526,151.45
4/30/94 $7,881,598.00 $6,852,004.28 $7,359,093.83 $5,533,888.06
5/31/94 $7,911,250.00 $6,814,318.26 $7,361,301.56 $5,537,761.78
6/30/94 $7,656,240.00 $6,912,444.44 $7,413,566.80 $5,556,590.17
7/31/94 $7,988,347.00 $6,980,186.40 $7,534,407.94 $5,571,592.96
8/31/94 $8,261,148.00 $7,147,012.85 $7,787,564.05 $5,593,879.34
9/30/94 $8,065,443.00 $6,923,311.35 $7,594,432.46 $5,608,982.81
10/31/94 $8,237,426.00 $7,155,242.28 $7,798,722.69 $5,612,909.10
11/30/94 $7,881,598.00 $6,813,221.70 $7,422,824.26 $5,620,205.88
12/31/94 $7,819,892.00 $6,857,507.64 $7,405,751.77 $5,620,205.88
1/31/95 $7,594,903.00 $6,595,550.85 $7,069,530.63 $5,642,686.70
2/28/95 $7,713,478.00 $6,578,402.42 $7,030,648.22 $5,665,257.45
3/31/95 $7,749,977.00 $6,990,868.25 $7,427,879.84 $5,683,952.80
4/30/95 $8,090,635.00 $7,255,822.15 $7,717,567.15 $5,702,709.84
5/31/95 $8,297,464.00 $7,170,929.03 $7,683,609.86 $5,714,115.26
6/30/95 $8,346,129.00 $7,046,871.96 $7,577,576.04 $5,725,543.49
7/31/95 $8,759,786.00 $7,487,301.46 $8,007,982.36 $5,725,543.49
8/31/95 $8,534,708.00 $7,203,532.73 $7,730,105.37 $5,740,429.91
9/30/95 $8,692,871.00 $7,346,162.68 $7,862,290.18 $5,751,910.77
10/31/95 $8,504,292.00 $7,150,754.75 $7,652,367.03 $5,770,892.07
11/30/95 $8,638,122.00 $7,351,690.96 $7,832,197.65 $5,766,852.45
12/31/95 $8,834,439.00 $7,649,434.45 $8,141,569.46 $5,762,815.65
1/31/96 $9,117,594.00 $7,682,327.02 $8,253,108.96 $5,796,816.26
2/29/96 $9,262,241.00 $7,709,983.39 $8,253,108.96 $5,815,366.08
3/31/96 $9,331,739.00 $7,875,748.04 $8,406,616.79 $5,845,605.98
4/30/96 $9,672,913.00 $8,106,507.45 $8,661,337.28 $5,868,403.84
5/31/96 $9,786,638.00 $7,958,969.02 $8,531,417.22 $5,879,553.81
6/30/96 $9,755,048.00 $8,005,926.93 $8,574,927.45 $5,883,081.54
7/31/96 $9,502,326.00 $7,773,755.05 $8,290,239.86 $5,894,259.40
8/31/96 $9,780,320.00 $7,792,412.07 $8,339,152.27 $5,905,458.49
9/30/96 $9,862,544.00 $8,001,248.71 $ 8,545,963.25 $5,924,355.96
10/31/96 $9,957,437.00 $7,921,236.22 $ 8,460,503.61 $5,943,313.90
11/30/96 $10,469,859.00 $8,238,085.67 $ 8,787,079.05 $5,954,606.19
12/31/96 $10,741,158.00 $8,134,285.79 $ 8,685,148.94 $5,954,606.19
1/31/97 $10,938,364.00 $7,851,212.65 $ 8,525,342.20 $5,973,660.93
2/28/97 $11,089,455.00 $7,981,542.78 $ 8,681,355.96 $5,992,179.28
3/31/97 $11,201,336.00 $8,012,670.79 $ 8,663,125.11 $6,007,159.73
4/30/97 $11,148,686.00 $8,056,740.48 $ 8,735,895.36 $6,014,368.32
5/31/97 $11,609,376.00 $8,582,845.64 $ 9,275,773.70 $6,010,759.70
6/30/97 $12,122,715.00 $9,058,335.28 $ 9,787,796.40 $6,017,972.61
7/31/97 $12,563,661.00 $9,206,891.98 $ 9,985,509.89 $6,025,194.18
8/31/97 $11,852,883.00 $8,520,978.53 $ 9,199,650.26 $6,036,642.05
9/30/97 $12,807,168.00 $8,999,857.52 $ 9,697,351.34 $6,051,733.65
10/31/97 $11,859,464.00 $8,310,468.44 $ 8,872,106.74 $6,066,862.99
11/30/97 $11,780,489.00 $8,227,363.75 $ 8,761,205.41 $6,063,222.87
12/31/97 $11,968,833.00 $8,301,410.03 $ 8,861,959.27 $6,055,947.00
1/31/98 $12,113,617.00 $8,683,274.89 $ 9,126,931.85 $6,067,453.30
2/28/98 $12,885,800.00 $9,242,477.79 $ 9,735,698.21 $6,078,981.46
3/31/98 $13,833,182.00 $9,528,994.60 $10,072,553.36 $6,090,531.53
4/30/98 $14,013,103.00 $9,606,179.46 $10,145,075.75 $6,101,494.48
5/31/98 $13,860,862.00 $9,561,991.03 $ 9,961,449.88 $6,112,477.17
6/30/98 $13,729,381.00 $9,636,574.56 $ 9,923,596.37 $6,119,812.15
7/31/98 $13,971,583.00 $9,736,794.94 $10,017,870.53 $6,127,155.92
8/31/98 $11,722,566.00 $8,532,353.40 $ 8,605,350.79 $6,134,508.51
9/30/98 $11,549,565.00 $8,272,969.86 $ 8,423,777.89 $6,141,869.92
10/31/98 $12,442,252.00 $9,137,495.21 $ 9,305,747.43 $6,156,610.41
11/30/98 $13,113,497.00 $9,608,076.21 $ 9,805,466.07 $6,156,610.41
12/31/98 $13,184,500.00 $9,989,516.84 $10,143,754.65 $6,152,916.44
</TABLE>
Periods ended December 31, 1998
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE-YEAR FIVE-YEAR (10/18/90)
<S> <C> <C> <C>
Average Annual
Total Return (1),(2) 10.16% 11.07% 12.55%
Cumulative Total
Return(1),(3) 10.16% 69.00% 163.69%
</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% 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 or reimbursements for the
Fund for the fiscal year ended December 31, 1998. Past expense waivers or
reimbursements by the Fund's Investment Manager and Fund Administrator
increased the Fund's total returns. Without these waivers or
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 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 (1/13/99).
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. You may have a gain or loss when you sell your
shares. Past performance is not predictive of future results.
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.
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
invests. Emerging markets securities 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 in excess of 50% are not
unusual in emerging markets. For example, the Hong Kong equity market has
increased 1049% in the last 15 years, but has suffered five declines of more
than 50% during the time.(1) These special risks and other considerations are
discussed in the Fund's prospectus.
We believe that going forward, we are well positioned for the long
term, regardless of what short-term market movements lie ahead. We also believe
that no one style, whether value or growth, can outperform the market all the
time. We will therefore continue to follow our value style and disciplined
approach that has worked for us throughout the years, and that we believe will
achieve the Fund's goal of long-term growth of capital. Thank you for allowing
us to serve your investment management needs.
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, CFA
Executive Vice President
Templeton Investment Counsel, Inc.
(1) Source: Bloomberg. Based on quarterly percentage price change over 15
years ended December 31, 1998. Market returns are measured in Hong Kong
dollars.
For the most current portfolio information, please call 1-800-362-6243.
4
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year......................... $17.36 $16.34 $14.04 $12.86 $13.32
------------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .42 .42 .45 .31 .20
Net realized and unrealized gains (losses)................ 1.29 1.43 2.54 1.35 (.16)
------------------------------------------------------------------
Total from investment operations........................... 1.71 1.85 2.99 1.66 .04
------------------------------------------------------------------
Less distributions from:
Net investment income..................................... (.40) (.43) (.45) (.31) (.19)
In excess of net investment income........................ -- -- (.02) -- --
Net realized gains........................................ (.91) (.40) (.14) (.17) (.31)
In excess of net realized gains........................... -- -- (.08) -- --
------------------------------------------------------------------
Total distributions........................................ (1.31) (.83) (.69) (.48) (.50)
------------------------------------------------------------------
Net asset value, end of year............................... $17.76 $17.36 $16.34 $14.04 $12.86
------------------------------------------------------------------
------------------------------------------------------------------
Total Return............................................... 10.16% 11.43% 21.58% 13.00% 0.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................ $4,551,663 $3,706,006 $2,857,591 $1,817,883 $1,093,227
Ratios to average net assets:
Expenses.................................................. .83% .84% .87% .88% .95%
Net investment income..................................... 2.33% 2.49% 3.20% 2.70% 2.03%
Portfolio turnover rate.................................... 15.40% 15.25% 7.39% 20.87% 7.90%
</TABLE>
See Notes to Financial Statements.
5
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 83.0%
AEROSPACE & MILITARY TECHNOLOGY
Rolls-Royce Plc. ........................................... United Kingdom 10,000 $ 41,344
--------------
APPLIANCES & HOUSEHOLD DURABLES .8%
Sony Corp. ................................................. Japan 504,800 36,830,709
--------------
AUTOMOBILES 2.8%
Autoliv Inc. ............................................... Sweden 750,000 27,890,625
Fiat SpA.................................................... Italy 9,264,120 32,169,932
Volkswagen AG............................................... Germany 304,000 24,603,266
Volvo AB, B................................................. Sweden 1,895,125 43,486,547
--------------
128,150,370
--------------
BANKING 13.7%
Argentaria Caja Postal y Banco Hipotecaria SA, ADR.......... Spain 868,000 44,702,000
Australia & New Zealand Banking Group Ltd. ................. Australia 3,384,161 22,168,217
*Banca Nazionale del Lavoro SpA............................. Italy 5,199,900 15,543,487
Banco Bradesco SA, ADR...................................... Brazil 319,900 1,773,913
*Banco Bradesco SA BBD, rts. ............................... Brazil 128,823,932 73,355
Banco Pinto & Sotto Mayor SA................................ Portugal 356,800 6,764,765
Bank Handlowy W Warszawie SA, GDR, 144A..................... Poland 1,160,000 15,022,000
Banque Nationale de Paris................................... France 4,352 358,525
Banque Nationale de Paris, ADR, 144A........................ France 833,500 68,665,050
BPI Socieda de Gestora de Participacoes Socias SA........... Portugal 681,408 23,124,424
Canadian Imperial Bank of Commerce.......................... Canada 1,555,200 38,475,000
Credit Suisse Group......................................... Switzerland 296,100 46,349,836
Deutsche Bank AG, br. ...................................... Germany 713,900 42,124,215
Development Bank of Singapore Ltd., fgn. ................... Singapore 9,099,300 82,169,436
Foreningssparbanken AB, A................................... Sweden 702,120 18,190,086
HSBC Holdings Plc. ......................................... Hong Kong 1,588,457 39,571,745
*Kookmin Bank............................................... South Korea 202,969 1,655,821
Kookmin Bank, GDR, Reg S.................................... South Korea 339,683 2,742,941
Merita AS................................................... Finland 9,113,000 57,952,878
National Bank of Canada..................................... Canada 1,154,200 18,635,521
*Philippine National Bank................................... Philippines 2,058,512 3,175,083
PT Bank Pan Indonesia TBK................................... Indonesia 14,316,000 720,302
Svenska Handelsbanken, A.................................... Sweden 1,354,450 57,146,969
*Thai Farmers Bank Public Co. Ltd., fgn. ................... Thailand 8,000,000 14,091,097
Unibanco Uniao de Bancos Brasileiros SA, GDR................ Brazil 275,000 3,970,313
Unidanmark AS, A............................................ Denmark 3,500 316,207
--------------
625,483,186
--------------
BROADCASTING & PUBLISHING
Television Broadcasts Ltd. ................................. Hong Kong 886,000 2,287,263
--------------
BUILDING MATERIALS & COMPONENTS 1.1%
Okumura Corp. .............................................. Japan 492,000 2,185,213
Pioneer International Ltd. ................................. Australia 12,477,632 26,403,395
*Siam City Cement Public Co. Ltd., fgn. .................... Thailand 815,746 1,829,732
Svedala Industri, A......................................... Sweden 1,355,000 19,725,382
--------------
50,143,722
--------------
BUSINESS & PUBLIC SERVICES .8%
Esselte AB, A............................................... Sweden 63,000 1,010,388
Esselte AB, B............................................... Sweden 929,400 15,249,599
Hyder Plc. ................................................. United Kingdom 1,083,333 13,653,186
Lex Service Plc. ........................................... United Kingdom 11,400 72,453
SGS Societe Generale de Surveillance Holdings Ltd., br. .... Switzerland 100 97,925
TNT Post Group NV........................................... Netherlands 200,000 6,447,488
--------------
36,531,039
--------------
CHEMICALS 4.7%
Akzo Nobel NV............................................... Netherlands 522,256 23,793,301
BASF AG..................................................... Germany 660,000 25,181,916
</TABLE>
6
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
CHEMICALS (CONT.)
Bayer AG, br. .............................................. Germany 899,230 $ 37,764,853
Imperial Chemical Industries Plc. .......................... United Kingdom 2,887,000 24,928,924
Rhone-Poulenc SA, A......................................... France 1,567,712 80,712,107
Solvay SA................................................... Belgium 311,370 23,474,826
Solvay SA, ADR.............................................. Belgium 1,615 121,758
Yule Catto & Company Plc. .................................. United Kingdom 42,500 176,774
--------------
216,154,459
--------------
CONSTRUCTION & HOUSING .4%
Daito Trust Construction Co. Ltd. .......................... Japan 1,151,300 9,992,223
*Fairview Holdings Plc. .................................... United Kingdom 1,816,252 2,659,183
Fletcher Challenge Building Ltd. ........................... New Zealand 1,403,250 2,171,915
Kyudenko Corp. ............................................. Japan 909,000 6,156,702
--------------
20,980,023
--------------
DATA PROCESSING & REPRODUCTION .3%
*Newbridge Networks Corp. .................................. Canada 478,800 14,526,094
--------------
ELECTRICAL & ELECTRONICS 3.8%
ABB AB, A................................................... Sweden 185,100 1,975,271
ABB AG, br. ................................................ Switzerland 25,679 30,100,612
Alcatel SA.................................................. France 251,087 30,744,246
General Electric Co. Plc. .................................. United Kingdom 3,625,000 32,568,006
Hitachi Ltd. ............................................... Japan 4,242,000 26,324,468
Philips Electronics NV...................................... Netherlands 764,400 51,321,149
--------------
173,033,752
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
BICC Plc. .................................................. United Kingdom 6,281,099 7,367,398
--------------
ENERGY EQUIPMENT & SERVICES .1%
Transcanada Pipelines Ltd. ................................. Canada 189,800 2,799,550
--------------
ENERGY SOURCES 4.9%
Fletcher Challenge Energy Ltd. ............................. New Zealand 1,405,000 2,671,893
MOL Magyar Olay - Es Gazipari RT, GDS, 144A................. Hungary 1,339,742 37,010,373
Norsk Hydro AS.............................................. Norway 306,300 10,271,643
Perez Companc SA, B......................................... Argentina 3,034,500 12,847,498
*Ranger Oil Ltd. ........................................... Canada 32,600 144,663
*Renaissance Energy Ltd. ................................... Canada 1,210,200 13,748,691
Repsol SA................................................... Spain 763,100 40,768,161
Saga Petroleum AS........................................... Norway 1,194,500 10,896,148
Shell Transport & Trading Co. Plc. ......................... United Kingdom 34,750 212,761
Shell Transport & Trading Co. Plc., ADR..................... United Kingdom 670,000 24,915,625
Societe Elf Aquitaine SA, br. .............................. France 467,659 54,081,077
YPF Sociedad Anonima, ADR................................... Argentina 502,000 14,024,625
--------------
221,593,158
--------------
FINANCIAL SERVICES 3.8%
AXA-UAP..................................................... France 498,707 72,312,604
Chile Fund Inc. ............................................ Chile 359,100 3,254,344
Housing Development Finance Corp. Ltd. ..................... India 216,022 11,074,011
ICICI Ltd. ................................................. India 12,867,916 14,246,797
ICICI Ltd., GDR, 144A....................................... India 1,676,500 11,148,725
*India Fund, B.............................................. India 4,211,265 5,430,048
ING Groep NV................................................ Netherlands 890,890 54,354,401
--------------
171,820,930
--------------
FOOD & HOUSEHOLD PRODUCTS 1.5%
Albert Fisher Group Plc. ................................... United Kingdom 30,658,920 2,805,491
Express Dairies Plc. ....................................... United Kingdom 635,905 1,412,417
Hillsdown Holdings Plc. .................................... United Kingdom 3,652,245 4,618,095
Northern Foods Plc. ........................................ United Kingdom 2,771,811 6,479,319
Panamerican Beverages Inc., A............................... Mexico 1,444,100 31,499,431
</TABLE>
7
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS (CONT.)
Tate & Lyle Plc. ........................................... United Kingdom 3,049,575 $ 16,997,049
*Terranova Foods Plc. ...................................... United Kingdom 1,826,122 3,372,424
--------------
67,184,226
--------------
FOREST PRODUCTS & PAPER 2.7%
Aracruz Celulose SA, ADR.................................... Brazil 1,500,000 12,000,000
*Asia Pacific Resources International Hldgs. Ltd., A........ Indonesia 103,250 70,984
*Asia Pulp & Paper Co. Ltd., ADR............................ Indonesia 185,100 1,515,506
Assidomaen AB............................................... Sweden 200,000 3,158,232
Carter Holt Harvey Ltd. .................................... New Zealand 3,149,000 2,827,885
Cartiere Burgo SpA.......................................... Italy 1,217,760 7,878,424
Fletcher Challenge Ltd. Forestry Division................... New Zealand 20,122,398 6,696,695
Fletcher Challenge Paper Ltd. .............................. New Zealand 2,732,500 1,833,176
Metsa Serla OY, B........................................... Finland 1,418,000 11,341,984
*PT Tjiwi Kimia TBK......................................... Indonesia 2,530,782 660,550
*PT Tjiwi Kimia TBK, wts. .................................. Indonesia 351,495 41,118
Stora Enso OY, R............................................ Finland 54,000 543,903
Stora Kopparbergs Bergslags AB, B........................... Sweden 1,250,250 13,881,727
Svenska Cellulosa AB, B..................................... Sweden 600,000 13,101,730
+Unipapel SA................................................ Spain 619,386 8,982,909
UPM-Kymmene Corp. .......................................... Finland 1,305,000 36,597,938
--------------
121,132,761
--------------
HEALTH & PERSONAL CARE 2.1%
Astra AB, A................................................. Sweden 1,533,066 31,301,343
Astra AB, B................................................. Sweden 10,133 206,265
Internatio-Muller NV........................................ Netherlands 423,200 10,485,853
Medeva Plc. ................................................ United Kingdom 1,739,171 3,067,168
Nycomed Amersham Plc. ...................................... United Kingdom 7,558,121 52,576,505
Ono Pharmaceutical Co. Ltd. ................................ Japan 7,000 214,716
--------------
97,851,850
--------------
INDUSTRIAL COMPONENTS 1.0%
BTR Plc. ................................................... United Kingdom 9,269,000 18,968,256
BTR Plc., A................................................. United Kingdom 1,164,751 2,286,081
Granges AB.................................................. Sweden 11,355 163,899
Lucas Varity Plc. .......................................... United Kingdom 6,850,000 22,565,510
SKF AB, A................................................... Sweden 11,000 124,849
--------------
44,108,595
--------------
INSURANCE 5.3%
Ace Ltd. ................................................... Bermuda 1,009,500 34,764,656
Aegon NV, ADR............................................... Netherlands 4,018 491,201
Exel Ltd. .................................................. Bermuda 440,400 33,030,000
GIO Australia Holdings Ltd. ................................ Australia 7,831,605 25,746,848
Istituto Nazionale Delle Assicurazioni SpA.................. Italy 6,104,000 16,180,426
Muenchener Rueckversicherungs-Gesellschaft, PP.............. Germany 44,019 21,539,076
Muenchener Rueckversicherungs-Gesellschaft, br. ............ Germany 480 157,925
*Muenchener Rueckversicherungs-Gesellschaft, wts. .......... Germany 19 890
Reinsurance Australia Corporation Ltd. ..................... Australia 1,600,000 2,454,382
Skandia Foersaekrings AB.................................... Sweden 1,500,000 22,946,532
Zurich Allied AG............................................ Switzerland 114,155 84,525,399
--------------
241,837,335
--------------
LEISURE & TOURISM .6%
Kuoni Reisen Holding AG, B.................................. Switzerland 6,793 26,954,387
Toei Co. Ltd. .............................................. Japan 49,000 145,089
--------------
27,099,476
--------------
MACHINERY & ENGINEERING .8%
Makita Corp. ............................................... Japan 316,000 3,526,986
New Holland NV.............................................. Netherlands 1,382,100 18,917,494
</TABLE>
8
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MACHINERY & ENGINEERING (CONT.)
Tata Engineering & Locomotive Co. Telco, GDR, 144A.......... India 200,000 $ 800,000
VA Technologie AG........................................... Austria 116,610 10,110,233
VA Technologie AG, 144A..................................... Austria 28,000 2,427,635
--------------
35,782,348
--------------
MERCHANDISING 1.6%
Best Denki Co. Ltd. ........................................ Japan 36,000 272,872
House of Fraser Plc. ....................................... United Kingdom 1,750,000 1,514,017
Matsuzakaya Co. Ltd. ....................................... Japan 100,000 523,936
Safeway Plc. ............................................... United Kingdom 4,650,000 23,190,042
*Sobeys Canada Inc. ........................................ Canada 5,371 59,445
Somerfield Plc. ............................................ United Kingdom 3,110,228 20,724,504
Storehouse Plc. ............................................ United Kingdom 11,238,000 25,615,273
--------------
71,900,089
--------------
METALS & MINING 2.3%
Boehler-Uddeholm AG......................................... Austria 22,450 1,045,447
Boehler-Uddeholm AG, 144A................................... Austria 60,750 2,828,993
Elkem ASA, A................................................ Norway 872,300 10,418,598
Grupo Mexico SA de CV, B.................................... Mexico 3,400,000 8,938,322
Industrias Penoles SA....................................... Mexico 33,900 102,831
Pechiney SA, A.............................................. France 568,000 18,556,443
Pohang Iron & Steel Co. Ltd. ............................... South Korea 205,600 13,095,780
*RGC Ltd. .................................................. Australia 7,429,095 12,530,751
Union Miniere............................................... Belgium 326,270 12,422,550
WMC Ltd. ................................................... Australia 8,137,578 24,556,630
--------------
104,496,345
--------------
MISC MATERIALS & COMMODITIES .2%
Golden Hope Plantations Bhd. ............................... Malaysia 1,960,000 1,688,147
Unitor ASA.................................................. Norway 818,735 7,952,013
--------------
9,640,160
--------------
MULTI-INDUSTRY 2.0%
Alfa SA de CV, A............................................ Mexico 900,400 2,535,505
Brierley Investments Ltd. .................................. New Zealand 33,843,199 7,687,411
Cheung Kong Holdings Ltd. .................................. Hong Kong 21,000 151,118
DESC SA de CV DESC, B....................................... Mexico 143,000 122,613
Hicom Holdings Bhd. ........................................ Malaysia 4,800,000 1,593,194
Hutchison Whampoa Ltd. ..................................... Hong Kong 5,525,500 39,048,840
Jardine Matheson Holdings Ltd. ............................. Hong Kong 3,286,341 8,478,760
Jardine Strategic Holdings Ltd. ............................ Hong Kong 5,115,130 7,416,939
La Cemento Nacional CA, GDR, 144A........................... Ecuador 200 21,600
La Cemento Nacional SA, GDR, Reg S.......................... Ecuador 400 43,200
Swire Pacific Ltd., A....................................... Hong Kong 4,993,000 22,363,690
Swire Pacific Ltd., B....................................... Hong Kong 154,500 102,704
--------------
89,565,574
--------------
REAL ESTATE .9%
Bail Investissement......................................... France 60,929 8,878,344
Inversiones y Representacion SA............................. Argentina 76,214 209,014
Taylor Woodrow Plc. ........................................ United Kingdom 11,078,810 27,740,802
*Unione Immobiliare SpA..................................... Italy 6,104,000 3,188,814
--------------
40,016,974
--------------
TELECOMMUNICATIONS 12.1%
British Telecommunications Plc. ............................ United Kingdom 2,930,000 44,190,084
*Cable & Wireless Optus Ltd. ............................... Australia 13,200,000 27,770,043
Compania de Telecomunicaciones de Chile SA, ADR............. Chile 3,292,750 68,118,766
*Digital Telecommunications Philippines Inc. ............... Philippines 57,462,500 1,403,326
Hong Kong Telecommunications Ltd. .......................... Hong Kong 4,505,500 7,880,154
*Jasmine International Public Co. Ltd., fgn. ............... Thailand 3,969,000 994,025
</TABLE>
9
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
Koninklijke KPN NV.......................................... Netherlands 406,400 $ 20,355,731
Nokia Corp., A.............................................. Finland 922,400 112,945,452
Northern Telecom, Ltd. ..................................... Canada 4,080 204,510
Philippine Long Distance Telephone Co., ADR................. Philippines 709,905 18,413,161
PT Indosat, ADR............................................. Indonesia 158,300 1,929,281
Rostelecom, ADR............................................. Russia 690,000 2,889,375
SK Telecom Co. Ltd., ADR.................................... South Korea 383,057 3,902,393
Tele Danmark AS, B.......................................... Denmark 2,400 323,922
Telecom Argentina Stet-France SA, ADR....................... Argentina 1,115,400 30,673,500
Telecom Italia SpA, di Risp................................. Italy 7,307,900 45,927,492
Telefonica de Argentina SA, B, ADR.......................... Argentina 1,526,166 42,637,263
Telefonica SA............................................... Spain 1,170,795 52,137,952
*Telefonica SA, rts. ....................................... Spain 1,170,795 1,041,107
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 990,006 48,200,917
Videsh Sanchar Nigam Ltd. .................................. India 928,400 16,100,969
Videsh Sanchar Nigam Ltd., GDR, 144A........................ India 127,600 1,563,100
--------------
549,602,523
--------------
TEXTILES & APPAREL .1%
Courtaulds Textiles Plc. ................................... United Kingdom 1,500,000 3,918,143
--------------
TRANSPORTATION 2.9%
*Autostrade Concessioni e Costruzioni SpA, A................ Italy 6,865,000 37,869,156
British Airways Plc. ....................................... United Kingdom 3,657,624 24,767,540
Canadian National Railway Co. .............................. Canada 240,000 12,460,938
Helikopter Services Group ASA............................... Norway 11,200 52,920
Koninklijke Nedlloyd Groep NV............................... Netherlands 7,800 105,984
Kvaerner ASA, A............................................. Norway 454,600 8,949,993
Mayne Nickless Ltd., A...................................... Australia 8,264,770 30,668,649
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 21,200 250,428
Qantas Airways Ltd., ADR, 144A.............................. Australia 827,500 16,860,313
Stolt Nielsen SA, ADR....................................... Norway 2,000 20,500
--------------
132,006,421
--------------
UTILITIES ELECTRICAL & GAS 9.5%
BG Plc. .................................................... United Kingdom 4,983,308 31,485,088
British Energy Ltd. ........................................ United Kingdom 2,704,500 31,137,410
Centrais Eletricas Brasileiras SA (Eletrobras), ADR......... Brazil 3,348,700 28,823,902
*Centrais Geradoras Do Sul Do Brasil SA, ADR................ Brazil 117,000 764,990
*Centrica Plc. ............................................. United Kingdom 6,482,150 13,022,537
*CEZ AS..................................................... Czech Republic 480,663 10,622,891
Endesa SA, br. ............................................. Spain 1,567,200 41,586,853
*Evn AG..................................................... Austria 158,336 22,429,549
Gener SA, ADR............................................... Chile 711,800 11,388,800
Guangdong Electric Power Development Co. Ltd., B, 144A...... China 2,455,129 668,666
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 4,261,800 12,927,465
Iberdrola SA, br. .......................................... Spain 3,010,329 56,405,607
Korea Electric Power Corp. ................................. South Korea 639,410 15,845,670
National Power Plc. ........................................ United Kingdom 3,069,416 27,116,877
Nova Corporation............................................ Canada 37,960 495,853
Shandong Huaneng Power Development Co. Ltd., ADR............ China 5,682,965 25,928,528
Thames Water Group Plc. .................................... United Kingdom 3,152,655 61,002,209
VEBA AG..................................................... Germany 659,500 39,080,602
--------------
430,733,497
--------------
TOTAL COMMON STOCKS (COST $3,054,256,915)................... 3,774,619,314
--------------
PREFERRED STOCKS 4.5%
+ABN Amro Holding NV cvt., pfd. ............................ Netherlands 457,188 37,759,972
Banco Bradesco SA, pfd. .................................... Brazil 3,108,000,000 17,234,513
Banco Itau SA, pfd. ........................................ Brazil 54,025,000 26,380,476
Cia Vale do Rio Doce, A, ADR, pfd. ......................... Brazil 335,000 4,297,538
*Embratel Participacoes SA, ADR, pfd. ...................... Brazil 1,129,800 15,746,588
</TABLE>
10
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS (CONT.)
*Lojas Americanas SA, pfd. ................................. Brazil 396,729,153 $ 1,920,849
News Corp. Ltd., pfd. ...................................... Australia 5,534,958 33,711,034
*Tele Celular Sul Participacoes SA, ADR, pfd. .............. Brazil 112,980 1,970,089
*Tele Centro Oeste Celular Participacoes SA, ADR, pfd. ..... Brazil 376,600 1,106,263
*Tele Centro Sul Participacoes SA, ADR, pfd. ............... Brazil 225,960 9,447,953
*Tele Leste Celular Participacoes SA, ADR, pfd. ............ Brazil 22,596 641,162
*Tele Nordeste Celular Participacoes SA, ADR, pfd. ......... Brazil 56,490 1,045,065
*Tele Norte Celular Participacoes SA, ADR, pfd. ............ Brazil 22,596 509,822
*Tele Norte Leste Participacoes SA, ADR, pfd. .............. Brazil 1,129,800 14,051,888
*Tele Sudeste Celular Participacoes SA, ADR, pfd. .......... Brazil 225,960 4,674,548
Telecomunicacoes Brasileiras SA (Telebras), ADR, pfd. ...... Brazil 1,129,800 123,572
*Telemig Celular Participacoes SA, ADR, pfd. ............... Brazil 56,490 1,200,413
*Telesp Celular Participacoes SA, ADR, pfd. ................ Brazil 451,920 7,908,600
*Telesp Participacoes SA, ADR, pfd. ........................ Brazil 1,129,800 24,996,825
Usinas Siderugicas de Minas Gerais, ADR, Reg S, pfd. ....... Brazil 26,900 59,444
--------------
TOTAL PREFERRED STOCKS (COST $217,982,211).................. 204,786,614
--------------
PRINCIPAL
AMOUNT**
--------
BONDS 3.5%
Government of Australia, 6.75%, 11/15/06.................... Australia 76,630,000AUD 52,499,204
Government of New Zealand, 7.00%, 7/15/09................... New Zealand 90,000,000NZD 53,350,328
United Kingdom, 7.25%, 12/07/07............................. United Kingdom 27,000,000GBP 54,362,965
--------------
TOTAL BONDS (COST $150,777,157)............................. 160,212,497
--------------
SHORT TERM INVESTMENTS (COST $397,318,228) 8.7%
U.S. Treasury Bills, 3.75% to 8.785%, with maturities to
5/27/99................................................... United States 400,685,000 397,544,968
--------------
TOTAL INVESTMENTS (COST $3,820,334,511) 99.7%............... 4,537,163,393
OTHER ASSETS, LESS LIABILITIES .3%.......................... 14,499,894
--------------
TOTAL NET ASSETS 100.0%..................................... $4,551,663,287
--------------
--------------
</TABLE>
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C>
AUD -- Australian Dollar
GBP -- British Pound
NZD -- New Zealand Dollar
</TABLE>
*Non income producing.
**Securities traded in U.S. dollars unless otherwise indicated.
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in affiliated companies at December
31, 1998 were $46,742,881.
See Notes to Financial Statements.
11
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$3,820,334,511)........................................... $4,537,163,393
Cash....................................................... 4,205,849
Receivables:
Investment securities sold................................ 873,419
Capital shares sold....................................... 34,547,354
Dividends and interest.................................... 16,392,446
--------------
Total assets........................................... 4,593,182,461
--------------
Liabilities:
Payables:
Investment securities purchased........................... 12,772,704
Capital shares redeemed................................... 25,348,314
To affiliates............................................. 2,972,769
Accrued expenses........................................... 425,387
--------------
Total liabilities...................................... 41,519,174
--------------
Net assets, at value........................................ $4,551,663,287
--------------
--------------
Net assets consist of:
Undistributed net investment income........................ $ 4,984,472
Net unrealized appreciation................................ 716,898,913
Accumulated net realized gain.............................. 8,240,605
Capital shares............................................. 3,821,539,297
--------------
Net assets, at value........................................ $4,551,663,287
--------------
--------------
Net asset value per share ($4,551,663,287 / 256,310,677
shares outstanding)....................................... $17.76
--------------
--------------
</TABLE>
See Notes to Financial Statements.
12
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $12,714,887)
Dividends.................................................. $ 98,219,682
Interest................................................... 38,493,282
------------
Total investment income............................... $136,712,964
Expenses:
Management fees (Note 3)................................... 30,272,145
Administrative fees (Note 3)............................... 3,636,696
Transfer agent fees (Note 3)............................... 26,800
Custodian fees............................................. 1,521,056
Reports to shareholders.................................... 38,500
Registration and filing fees............................... 303,000
Professional fees.......................................... 22,400
Directors' fees and expenses............................... 112,000
Other...................................................... 29,214
------------
Total expenses........................................ 35,961,811
------------
Net investment income........................... 100,751,153
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 211,996,856
Foreign currency transactions............................. (1,520,798)
------------
Net realized gain..................................... 210,476,058
Net unrealized appreciation on:
Investments............................................... 69,925,412
Translation of assets and liabilities denominated in
foreign currencies...................................... 70,031
------------
Net unrealized appreciation........................... 69,995,443
------------
Net realized and unrealized gain............................ 280,471,501
------------
Net increase in net assets resulting from operations........ $381,222,654
------------
------------
</TABLE>
See Notes to Financial Statements.
13
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 100,751,153 $ 84,964,806
Net realized gain from investments and foreign currency
transactions............................................. 210,476,058 111,423,125
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign
currencies............................................... 69,995,443 161,093,064
--------------------------------
Net increase in net assets resulting from operations.... 381,222,654 357,480,995
Distributions to shareholders from:
Net investment income..................................... (95,131,004) (86,272,005)
Net realized gains........................................ (213,861,645) (82,399,083)
Capital share transactions (Note 2)........................ 773,427,138 659,605,504
--------------------------------
Net increase in net assets.............................. 845,657,143 848,415,411
Net assets:
Beginning of year.......................................... 3,706,006,144 2,857,590,733
--------------------------------
End of year................................................ $4,551,663,287 $3,706,006,144
--------------------------------
--------------------------------
Undistributed net investment income/(distributions in excess
of net investment income) included in net assets:
End of year................................................ $ 4,984,472 $ (675,469)
--------------------------------
--------------------------------
</TABLE>
See Notes to Financial Statements.
14
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Equity Series (the Fund) is a separate, diversified series of Templeton
Institutional Funds, Inc. (the Company), which is an open-end investment company
registered under the Investment Company Act of 1940. The Fund seeks long-term
growth of capital through a flexible policy of investing primarily in equity
securities and debt obligations of companies and governments outside the United
States including emerging markets securities. 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.
FOREIGN EQUITY SERIES
Notes to Financial Statements (continued)
2. CAPITAL STOCK
At December 31, 1998, there were 940 million shares authorized ($0.01 par
value), of which 355 million have been classified as Fund shares. Transactions
in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
-------------1998----------------------------------1997-------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................ 94,164,555 $ 1,756,499,486 60,131,124 $1,060,228,157
Shares issued on reinvestment of distributions............. 16,340,500 278,597,990 8,887,806 151,119,277
Shares redeemed............................................ (67,623,948) (1,261,670,338) (30,430,203) (551,741,930)
--------------------------------------------------------------------
Net increase............................................... 42,881,107 $ 773,427,138 38,588,727 $ 659,605,504
--------------------------------------------------------------------
--------------------------------------------------------------------
</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:
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 agreed in advance to limit total expenses of the Fund to an
annual rate of 1.00% of average daily net assets through April 30, 1999. For the
year ended December 31, 1998, no fee waiver or reimbursement was necessary under
the agreement.
Legal fees of $58,483 were paid to a law firm in which a partner is an officer
of the Fund.
4. INCOME TAXES
At December 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $3,820,467,511 was as follows:
Unrealized appreciation..................................... $1,221,473,425
Unrealized depreciation..................................... (504,777,543)
--------------
Net unrealized appreciation................................. $ 716,695,882
==============
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 wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $1,237,634,141 and $563,628,958 respectively.
16
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Foreign Equity Series
We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Foreign Equity Series of Templeton
Institutional Funds, Inc. as of December 31, 1998, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Foreign Equity Series of Templeton Institutional Funds, Inc. as of December 31,
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.
McGladrey & Pullen, LLP
New York, New York
January 28, 1999
17
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Templeton Foreign
Equity Series Fund hereby designates $202,889,668 as a capital gain dividend for
the fiscal year ended December 31, 1998.
At December 31, 1998, more than 50% of the Templeton Foreign Equity Series
Fund's total assets were invested in securities of foreign issuers. In most
instances, foreign taxes were withheld from dividends paid to the Fund on these
investments. As in prior years, the Fund intends to make an election under
Section 853 of the Internal Revenue Code. This election will allow shareholders
to treat their proportionate share of foreign taxes paid by the Fund as having
been paid directly by them.
In January 1999, shareholders will receive Form 1099-DIV, which will include
their share of taxes withheld and foreign source income distributed during the
calendar year 1998.
The following table provides a breakdown by country of foreign source income and
foreign taxes paid to shareholders in December 1998.
<TABLE>
<CAPTION>
FOREIGN TAXES FOREIGN SOURCE
COUNTRY WITHHELD PER SHARE INCOME PER SHARE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina................................................... $0.0000 $0.0193
Australia................................................... 0.0048 0.0345
Austria..................................................... 0.0003 0.0017
Belgium..................................................... 0.0007 0.0035
Bermuda..................................................... 0.0000 0.0017
Brazil...................................................... 0.0030 0.0156
Canada...................................................... 0.0012 0.0090
Chile....................................................... 0.0009 0.0061
China....................................................... 0.0000 0.0032
Denmark..................................................... 0.0001 0.0007
Finland..................................................... 0.0026 0.0133
France...................................................... 0.0047 0.0272
Germany..................................................... 0.0010 0.0077
Hong Kong................................................... 0.0000 0.0140
Hungary..................................................... 0.0001 0.0016
India....................................................... 0.0001 0.0041
Indonesia................................................... 0.0000 0.0002
Italy....................................................... 0.0020 0.0108
Japan....................................................... 0.0004 0.0021
Malaysia.................................................... 0.0002 0.0005
Mexico...................................................... 0.0000 0.0076
Netherlands................................................. 0.0028 0.0146
New Zealand................................................. 0.0009 0.0047
Norway...................................................... 0.0016 0.0086
Philippines................................................. 0.0001 0.0003
Portugal.................................................... 0.0004 0.0019
Singapore................................................... 0.0001 0.0048
South Korea................................................. 0.0002 0.0009
Spain....................................................... 0.0036 0.0190
Sweden...................................................... 0.0037 0.0192
Switzerland................................................. 0.0020 0.0104
United Kingdom.............................................. 0.0152 0.0908
--------------------------------------
TOTAL....................................................... $0.0527 $0.3596
======================================
</TABLE>
18
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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 Funds.
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
ZT 454 A 12/98 [RECYCLE LOGO]
