TEMPLETON INSTITUTIONAL FUNDS, INC.
GROWTH SERIES
FOREIGN EQUITY SERIES - PRIMARY SHARES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
[LOGO (R)] TEMPLETON (R)
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030
1-800/321/8563
(INSTITUTIONAL SERVICES)
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This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated May 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/321-8563.
CONTENTS
Goals and Strategies...................................................2
Risks.................................................................15
Officers and Directors................................................19
Management and Other Services.........................................23
Portfolio Transactions................................................24
Distributions and Taxes...............................................25
Organization, Voting Rights and Principal Holders.....................27
Buying and Selling Shares.............................................28
Pricing Shares........................................................30
The Underwriter.......................................................31
Performance...........................................................31
Miscellaneous Information.............................................33
Description of Bond Ratings...........................................34
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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ZTIFI SAI 05/99
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GOALS AND STRATEGIES
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GROWTH SERIES The fund's investment goal is long-term capital growth. This goal
is fundamental, which means it may not be changed without shareholder approval.
Growth Series seeks long-term capital growth through a flexible policy of
investing in stocks and debt obligations of companies and governments of any
nation, including developing nations. Under normal market conditions, the fund
will invest primarily in the equity securities of companies located anywhere in
the world, including emerging markets. Under normal market conditions at least
65% of Growth Series' total assets will be invested in such securities. Although
Growth Series generally invests in common stock, it may also invest in preferred
stocks and debt securities that the manager believes offer the potential for
capital growth. In selecting securities for Growth Series, the manager attempts
to identify companies that offer above-average opportunities for capital
appreciation in various countries and industries where economic and political
factors, including currency movements, are favorable to capital growth.
Growth Series may invest up to 5% of its assets in warrants (not counting
warrants acquired in units or attached to other securities), and up to 10% of
its net assets in illiquid securities. Growth Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated at the
time of purchase lower than BBB by S&P or Baa by Moody's, (ii) structured
investments, and (iii) securities of Russian issuers. Growth Series may borrow
up to one-third of the value of its total assets and may lend portfolio
securities with an aggregate market value of up to one-third of its total
assets. Growth Series may purchase and sell put and call options on securities
or indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the fund's total
assets, and (ii) the fund will not purchase put or call options if the aggregate
premium paid for such options would exceed 5% of its total assets. Growth Series
may enter into forward foreign currency contracts and may purchase and write put
and call options on foreign currencies. For hedging purposes only, Growth Series
may buy and sell financial futures contracts, stock index futures contracts,
foreign currency futures contracts and options on any of these futures
contracts, provided that (i) the fund will not commit more than 5% of its total
assets to initial margin deposits on futures contracts and related options, and
(ii) the value of the underlying securities on which futures contracts will be
written at any one time will not exceed 25% of the total assets of the fund.
FOREIGN EQUITY SERIES The fund's investment goal is long-term capital growth.
This goal is fundamental, which means it may not be changed without shareholder
approval.
Foreign Equity Series seeks long-term capital growth through a flexible policy
of investing primarily in equity securities and debt obligations of companies
and governments outside the U.S. including emerging markets securities. Foreign
Equity Series normally will invest at least 65% of its total assets in foreign
equity securities. Under normal market conditions, the fund will invest
primarily in the equity securities of companies located outside the U.S.,
including emerging markets. Foreign Equity Series may also invest up to 35% of
its total assets in debt securities when, in the judgment of the manager, they
offer greater potential for capital appreciation than is available through
investment in stocks. In selecting securities for Foreign Equity Series, the
manager attempts to identify those companies that offer above-average
opportunities for capital appreciation in various countries and industries where
economic and political factors, including currency movements, are favorable to
capital growth.
Foreign Equity Series may invest up to 5% of its assets in warrants (not
counting warrants acquired in units or attached to other securities), and up to
10% of its net assets in illiquid securities. Foreign Equity Series will not
invest more than 5% of its total assets in any of the following: (i) debt
securities rated at the time of purchase lower than BBB by S&P or Baa by
Moody's, (ii) structured investments, and (iii) securities of Russian issuers.
Foreign Equity Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Foreign Equity Series may purchase and sell put
and call options on securities or indices, provided that (i) the value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the fund's total assets, and (ii) the fund will not purchase put
or call options if the aggregate premium paid for such options would exceed 5%
of its total assets. Foreign Equity Series may enter into forward foreign
currency contracts and may purchase and write put and call options on foreign
currencies. For hedging purposes only, Foreign Equity Series may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of these futures contracts, provided that
(i) the fund will not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options, and (ii) the value of the
underlying securities on which futures contracts will be written at any one time
will not exceed 25% of the total assets of the fund.
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EMERGING MARKETS SERIES The fund's investment goal is long-term capital growth.
This goal is fundamental, which means it may not be changed without shareholder
approval.
The fund seeks long-term capital growth by investing primarily in the equity
securities of developing market issuers. The fund may invest up to 100% of its
total assets in developing markets, including up to 5% of its total assets in
Russian securities. With respect to 75% of its total assets, the fund may invest
up to 5% of its total assets in securities issued by any one company or foreign
government. The fund may invest any amount of its assets in U.S. government
securities. The fund may invest in any industry although it will not concentrate
(invest more than 25% of its total assets) in any one industry. The fund may
invest up to 15% of its total assets in foreign securities that are not listed
on a recognized U.S. or foreign securities exchange, including up to 10% of its
total assets in restricted securities, securities that are not readily
marketable, repurchase agreements with more than seven days to maturity, and
over-the-counter options bought by the fund.
Emerging Markets Series may invest up to 5% of its assets in warrants (not
counting warrants acquired in units or attached to other securities), and up to
15% of its net assets in illiquid securities. Emerging Markets Series will not
invest more than 5% of its total assets in any of the following: (i) debt
securities rated at the time of purchase lower than BBB by S&P or Baa by
Moody's, (ii) structured investments, and (iii) securities of Russian issuers.
Emerging Markets Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Emerging Markets Series may purchase and sell put
and call options on securities or indices, provided that (i) the value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the fund's total assets, and (ii) the fund will not purchase put
or call options if the aggregate premium paid for such options would exceed 5%
of its total assets. Emerging Markets Series may enter into forward foreign
currency contracts and may purchase and write put and call options on foreign
currencies. For hedging purposes only, Emerging Markets Series may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of these futures contracts, provided that
(i) the fund will not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options, and (ii) the value of the
underlying securities on which futures contracts will be written at any one time
will not exceed 25% of the total assets of the fund.
EMERGING FIXED INCOME MARKETS SERIES The fund's investment goal is high total
return, consisting of current income and capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest at least 65% of total
assets in debt securities of companies, governments and government agencies
located in emerging market countries. The fund may invest up to 35% of total
assets in securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities.
Emerging Fixed Income Markets Series seeks high total return 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. For
purposes of this restriction, the fund uses the term "fixed income" generically
to mean debt obligations of all types, including debt obligations which pay a
variable or floating rate of interest as well as a fixed rate of interest. In
selecting investments for Emerging Fixed Income Markets Series, the manager will
draw on its experience in global investing in seeking to identify those markets
and issuers around the world which are anticipated to provide the opportunity
for high current income and capital appreciation. Debt securities issued in
emerging markets are generally rated below investment grade. Consequently, the
fund anticipates that a substantial percentage of its assets may be invested in
higher risk, lower quality debt securities, commonly known as "junk bonds."
These investments are speculative in nature.
Emerging Fixed Income Markets Series' investments in sovereign or
sovereign-related debt obligations may consist of (i) bonds, notes, bills,
debentures or other fixed income or floating rate securities issued or
guaranteed by governments, governmental agencies or instrumentalities, or
government owned, controlled or sponsored entities, including central banks,
located in emerging market countries (including loans and participations in and
assignments of portions of loans between governments and financial
institutions), (ii) debt securities issued by entities organized and operated
for the purpose of restructuring the investment characteristics of securities
issued by any of the entities described above, including indexed or
currency-linked securities, and (iii) debt securities issued by supra-national
organizations such as the Asian Development Bank, the Inter-American Development
Bank, and the Corporacion Andina de Fomento, among others. These securities may
be issued in either registered or bearer form. These securities may include
Brady Bonds which are discussed below.
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Emerging Fixed Income Markets Series' investments in debt obligations of private
sector companies in emerging market countries may take the form of bonds, notes,
bills, debentures, convertible securities, warrants, indexed or currency-linked
securities, bank debt obligations, short-term paper, loan participations, loan
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of instruments issued by
emerging market country issuers. Emerging market country debt securities held by
Emerging Fixed Income Markets Series may or may not be listed or traded on a
securities exchange. Emerging Fixed Income Markets Series will not be subject to
any restrictions on the maturities of the emerging market country debt
securities it holds; those maturities may range from overnight to more than 30
years.
With respect to up to 35% of its total assets, Emerging Fixed Income Markets
Series may (i) invest in dividend-paying common stock of U.S. and foreign
corporations; (ii) invest in preferred equity securities, including those debt
securities which may have equity features, such as conversion or exchange
rights, or which carry warrants to purchase common stock or other equity
interests; and (iii) engage in transactions involving the various investment
techniques described below.
Emerging Fixed Income Markets Series may invest up to 5% of its assets in
warrants (not counting warrants acquired in units or attached to other
securities), and up to 15% of its net assets in illiquid securities. Emerging
Fixed Income Markets Series will not invest more than 5% of its total assets in
securities of Russian issuers. Emerging Fixed Income Markets Series may invest
in debt securities rated below BBB by S&P or Baa by Moody's (or unrated debt
securities determined by the fund's manager to be of comparable quality).
Emerging Fixed Income Markets Series may borrow up to one-third of the value of
its total assets and may lend portfolio securities with an aggregate market
value of up to one-third of its total assets. Emerging Fixed Income Markets
Series may purchase and sell put and call options on securities or indices,
provided that (i) the value of the underlying securities on which options may be
written at any one time will not exceed 25% of the fund's total assets, and (ii)
the fund will not purchase put or call options if the aggregate premium paid for
such options would exceed 5% of its total assets. Emerging Fixed Income Markets
Series may enter into forward foreign currency contracts and may purchase and
write put and call options on foreign currencies. For hedging purposes only
(including anticipatory hedges where the manager seeks to anticipate an intended
shift in maturity, duration or asset allocation), Emerging Fixed Income Markets
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the fund. Emerging Fixed Income Markets Series may enter into swap
agreements, provided that the fund will not enter into an agreement with any
single party if the amount owed or to be received under any existing contracts
with that party would exceed 5% of the fund's assets.
With the exception of the investment objectives and restrictions specifically
identified as fundamental, all investment policies and practices described in
the prospectus and this SAI may be changed by the board of directors without
shareholder approval. Each fund's policies and restrictions discussed in the
prospectus and this SAI are considered at the time the fund makes an investment.
The funds are generally not required to sell a security because of a change in
circumstances.
Each fund is authorized to engage in certain investment techniques and
strategies. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
funds in some of the markets in which the funds will invest and may not be
available for extensive use in the future.
The following is a description of the various types of securities the funds may
buy.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price. A warrant is typically a long-term
option issued by a corporation that gives the holder the privilege of buying a
specified
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number of shares of the underlying common stock at a specified
exercise price at any time on or before the expiration date. Stock index
warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If a fund does not exercise or dispose of a warrant before its expiration, it
will expire worthless.
DEPOSITARY RECEIPTS Depositary receipts are certificates that give their holders
the right to receive securities (a) of a foreign issuer deposited in a U.S. bank
or trust company (American Depositary Receipts, "ADRs"); or (b) of a foreign or
U.S. issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs"). Generally, depositary
receipts in registered form are designed for use in the U.S. securities market
and depositary receipts in bearer form are designed for use in securities
markets outside the U.S. Depositary receipts may not necessarily be denominated
in the same currency as the underlying securities into which they may be
converted. Depositary receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of depositary receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored depositary
receipts and there may not be a correlation between such information and the
market value of the depositary receipts. Depositary receipts also involve the
risks of investments in foreign securities, as discussed below. For purposes of
the funds' investment policies, the funds' investments in depositary receipts
will be deemed to be investments in the underlying securities.
DEBT SECURITIES A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The funds are not limited as to the type of debt securities in which they may
invest. For example, bonds may include Eurobonds, Global Bonds, Yankee Bonds,
bonds sold under SEC Rule 144A, restructured external debt such as Brady Bonds,
as well as restructured external debt that has not undergone a Brady-style debt
exchange, or other types of instruments structured or denominated as bonds.
Issuers of debt securities may include the U.S. government, its agencies or
instrumentalities; a foreign government, its agencies or instrumentalities;
supranational organizations; local governments, their agencies or
instrumentalities; U.S. or foreign corporations; and U.S. or foreign banks,
savings and loan associations, and bank holding companies. Eurobonds are
generally issued in bearer form, carry a fixed or floating rate of interest, and
typically amortize principal through a bullet payment with semiannual interest
payments in the currency in which the bond was issued. Yankee bonds are foreign
bonds denominated in U.S. dollars and registered with the Securities and
Exchange Commission for sale in the U.S. A Global Bond is a certificate
representing the total debt of an issue. Such bonds are created to control the
primary market distribution of an issue in compliance with selling restrictions
in certain jurisdictions or because definitive bond certificates are not
available. A global bond is also known as a global certificate.
Debt securities purchased by the funds may be rated below BBB by S&P or Baa by
Moody's or, if unrated, of comparable quality as determined by each fund's
manager. Each fund except Emerging Fixed Income Markets Series will limit its
investment in such debt securities to 5% of its total assets. The board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a different level of investment in high risk, lower
quality debt securities would be consistent with the interests of the funds and
their shareholders. The funds may buy debt securities rated as low as C by
Moody's or S&P (or comparable unrated securities as determined by each fund's
manager). Debt securities rated C by Moody's are the lowest rated class of bonds
and may be regarded as having extremely poor prospects of ever attaining any
real investment standing. Debt securities rated C by S&P are typically
subordinated to senior debt which is vulnerable to default and is dependent on
favorable conditions to meet timely payment of interest and repayment of
principal. Debt securities rated C are therefore risky and speculative
investments.
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Each fund may invest a portion of its assets, and may invest without limit for
defensive purposes, in commercial paper which, at the date of investment, must
be rated Prime-1 by Moody's or A-1 by S&P or, if not rated, be issued by a
company which at the date of investment has an outstanding debt issue rated Aaa
or Aa by Moody's or AAA or AA by S&P.
Certain debt securities can provide the potential for capital appreciation based
on various factors such as changes in interest rates, economic and market
conditions, improvement in an issuer's ability to repay principal and pay
interest, and ratings upgrades. Each of the funds may invest in debt or
preferred securities which have equity features, such as conversion or exchange
rights, or which carry warrants to purchase common stock or other equity
interests. Such equity features may enable the holder of the bond or preferred
security to benefit from increases in the market price of the underlying equity.
To the extent a fund invests in debt securities, it may accrue and report
interest on high yield bonds structured as zero coupon bonds or pay-in-kind
securities as income even though it receives no corresponding cash payment until
a later time, generally the security's maturity date. In order to qualify for
beneficial tax treatment, a fund must distribute substantially all of its net
investment income to shareholders on an annual basis (see Distributions and
Taxes). Thus, a fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or leverage itself by borrowing
cash, so that it may satisfy the distribution requirement.
BRADY BONDS AND OTHER SOVEREIGN-RELATED DEBT Emerging Fixed Income Markets
Series may invest a portion of its assets in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, the Ivory Coast, Jordan, Mexico,
Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela and
Vietnam. In addition, some countries have negotiated and others are expected to
negotiate similar restructurings to the Brady Plan and, in some cases, their
external debts have been restructured into new loans or promissory notes:
namely Bolivia, Russia, Macedonia and Bosnia.
Brady Bonds have been issued relatively recently, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
have been actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds which have the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are considered
speculative.
LOAN PARTICIPATIONS AND ASSIGNMENTS Emerging Fixed Income Markets Series may
invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a sovereign, sovereign-related or corporate entity and one
or more financial institutions ("Lenders"). Emerging Fixed Income Markets Series
may invest in such Loans in the form of participations ("Participations") in
Loans and assignments ("Assignments") of all or a portion of Loans from third
parties. Participations typically will result in Emerging Fixed Income Markets
Series having a contractual relationship only with the Lender, not with the
borrower. Emerging Fixed Income Markets Series will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations,
Emerging Fixed Income Markets Series generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and Emerging Fixed Income
Markets Series may not benefit directly from any collateral supporting the Loan
in which it has purchased the Participation. As a result, Emerging Fixed Income
Markets Series will assume the credit risk of both the borrower and the Lender
that is selling the Participation.
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In the event of the insolvency of the Lender selling a Participation, Emerging
Fixed Income Markets Series may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Emerging Fixed Income Markets Series will acquire Participations only if the
Lender interpositioned between Emerging Fixed Income Markets Series and the
borrower is believed by the manager to be creditworthy. When Emerging Fixed
Income Markets Series purchases Assignments from Lenders, Emerging Fixed Income
Markets Series will acquire direct rights against the borrower on the Loan,
except that under certain circumstances such rights may be more limited than
those held by the assigning Lender.
Emerging Fixed Income Markets Series may have difficulty disposing of
Assignments and Participations. Because the market for such instruments is not
highly liquid, Emerging Fixed Income Markets Series anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market will have an adverse impact on the
value of such instruments and on the ability of Emerging Fixed Income Markets
Series to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower.
STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the funds may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such as
Brady Bonds) and the issuance by that entity of one or more classes of
securities ("structured investments") backed by, or representing interests in,
the underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued structured investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the funds anticipate investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The funds are permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the purchase
of subordinated structured investments would have a similar economic effect to
that of borrowing against the underlying securities, the purchase will not be
deemed to be leveraged for purposes of the limitations placed on the extent of
assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (1940 Act). As a
result, a fund's investment in these structured investments may be limited by
the restrictions contained in the 1940 Act. Structured investments are typically
sold in private placement transactions, and there currently is no active trading
market for structured investments. To the extent such investments are illiquid,
they will be subject to the fund's restrictions on investments in illiquid
securities. Each of the funds, except Emerging Fixed Income Markets Series, will
limit its investment in structured investments to 5% of its total assets.
MORTGAGE-BACKED SECURITIES Mortgage-backed securities represent an ownership
interest in a pool of residential and commercial mortgage loans. Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor. The mortgagee's monthly payments to his/her lending
institution are passed through to investors such as a fund. Most issuers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual loan,
title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various governmental, government-related and private organizations.
A fund may invest in securities issued or guaranteed by the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Fannie Mae, and other government agencies. If there is no guarantee provided by
the issuer, mortgage-backed securities purchased by a fund will be those which
at the time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the manager to be of investment grade quality.
REPURCHASE AGREEMENTS Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. Each fund's manager will monitor the value
of such securities daily to determine that the value equals or exceeds the
repurchase price. Repurchase agreements may involve
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risks in the event of default or insolvency of the seller, including possible
delays or restrictions upon the fund's ability to dispose of the underlying
securities. The funds will enter into repurchase agreements only with parties
who meet creditworthiness standards approved by the board, i.e., banks or
broker-dealers which have been determined by the manager to present no serious
risk of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES The funds may lend to qualified securities dealers
and other institutional investors portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. The fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. The fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower fail.
BORROWING Each fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities to meet redemption
requests, to pay expenses or for other temporary needs. Under the Investment
Company Act of 1940, the fund is required to maintain continuous asset coverage
of 300% with respect to such borrowings and to sell (within three days)
sufficient portfolio holdings to restore such coverage if it should decline to
less than 300% due to market fluctuations or otherwise, even if such
liquidations of the fund's holdings may be disadvantageous from an investment
standpoint. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on a fund's net asset
value, and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income or gains received from the
securities purchased with borrowed funds.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES Each fund may purchase securities on
a when-issued or delayed delivery basis. Securities purchased on a when-issued
or delayed delivery basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a when-issued or delayed delivery basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. The funds will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date to attempt to "lock" in gains or avoid losses, or if
otherwise deemed advisable by the manager.
Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities has
made a commitment to issue the securities as of a specified future date, there
can be no assurance that the securities will be issued and that the trade will
settle. In the event settlement does not occur, any appreciation in the value of
the when-issued security would be lost, including the amount of any appreciation
"locked" in by the sale of an appreciated security prior to settlement. Each
fund will establish a segregated account in which it will maintain liquid assets
in an amount at least equal in value to the fund's net commitments to purchase
securities on a when-issued or delayed delivery basis. If the value of these
assets declines, the fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, for example, it may invest
the fund's portfolio in a temporary defensive manner.
Under such circumstances, each fund may invest up to 100% of its total assets in
the following money market securities, denominated in U.S. dollars or in the
currency of any foreign country, issued by entities organized in the United
States or any foreign country: short-term (less than twelve months to maturity)
and medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. government or the governments of foreign countries, their
agencies or instrumentalities; finance company and corporate commercial paper,
and other short-term corporate obligations, in each case rated Prime-1 by
Moody's or A or better by S&P or, if unrated, of comparable quality as
determined by each fund's manager; obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks having total assets in
excess of $1 billion; and repurchase agreements with banks and broker-dealers
with respect
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to such securities. In addition, for temporary defensive purposes, each fund may
invest up to 25% of its total assets in obligations (including certificates of
deposit, time deposits and bankers' acceptances) of U.S. foreign banks; provided
that a fund will limit its investment in time deposits for which there is a
penalty for early withdrawal to 10% of its total assets.
ILLIQUID INVESTMENTS Growth Series' and Foreign Equity Series' policy is not to
invest more than 10% of net assets, at the time of purchase, in illiquid
securities. Emerging Markets Series' and Emerging Fixed Income Markets Series'
policy is not to invest more than 15% of net assets, at the time of purchase, in
illiquid securities. Illiquid securities are generally securities that cannot be
sold within seven days in the normal course of business at approximately the
amount at which a fund has valued them. Illiquid securities also include
securities which are not publicly traded or which cannot be readily resold
because of legal or contractual restrictions, or which are not otherwise readily
marketable (including repurchase agreements having more than seven days
remaining to maturity).
The managers, based on a continuing review of the trading markets, may consider
certain restricted securities which may otherwise be deemed to be illiquid, that
are offered and sold to "qualified institutional buyers," to be liquid. The
board has adopted guidelines and delegated to the managers the daily function of
determining and monitoring the liquidity of restricted securities. The board,
however, will oversee and be ultimately responsible for the determinations. If
the fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in a fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
FUTURES CONTRACTS Although the funds have the authority to buy and sell
financial futures contracts, they presently have no intention of entering into
such transactions. For hedging purposes only (including anticipatory hedges
where the manager seeks to anticipate an intended shift in maturity, duration or
asset allocation), the funds may buy and sell covered financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date. When a fund enters into a futures contract, it
must make an initial deposit, known as "initial margin," as a partial guarantee
of its performance under the contract. As the value of the security, index or
currency fluctuates, either party to the contract is required to make additional
margin payments, known as "variation margin," to cover any additional obligation
it may have under the contract. In addition, when a fund enters into a futures
contract, it will segregate assets or "cover" its position in accordance with
the Investment Company Act of 1940. Although some financial futures contracts
call for making or taking delivery of the underlying securities, in most cases
these obligations are closed out before the settlement date. The closing of a
contractual obligation is accomplished by purchasing or selling an identical
offsetting futures contract. Other financial futures contracts by their terms
call for cash settlements.
A fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of a fund.
At the time a fund purchases a futures contract, an amount of liquid assets
equal to the market value of the futures contract will be segregated. When
writing a futures contract, a fund will segregate liquid assets that, when added
to the amounts deposited with a futures commission merchant or broker as margin,
are equal to the market value of the instruments underlying the contract.
Alternatively, a fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or holding a call option permitting the fund to
purchase the same futures contract at a price no higher than the price of the
contract written by the fund (or at a higher price if the fund maintains the
difference in liquid assets).
OPTIONS ON SECURITIES OR INDICES Although the funds have the authority to write
(i.e., sell) covered put and call options in order to hedge a portion of its
portfolio and/or to generate income to offset operating expenses and buy put and
call options on securities or securities indices in order to hedge against
market shifts, they presently have no intention of entering into such
transactions. Options purchased or written by a fund will be traded on U.S. and
foreign exchanges or in the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
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option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
A fund may write a call or put option only if the option is "covered." A call
option on a security written by a fund is "covered" if the fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional consideration that is segregated) upon conversion or exchange of
other securities held in its portfolio. A call option on a security is also
covered if a fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the fund in cash or segregated liquid assets. A put option on a security written
by a fund is "covered" if the fund maintains cash or liquid assets with a value
equal to the exercise price in a segregated account, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
A fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the fund's manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where a fund covers a call option
on a stock index through ownership of securities, such securities may not match
the composition of the index. In that event, a fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. A fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
A fund will receive a premium from writing a put or call option, which increases
the fund's gross income in the event the option expires unexercised or is closed
out at a profit. If the value of a security or an index on which a fund has
written a call option falls or remains the same, the fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the portfolio securities being
hedged. If the value of the underlying security or index rises, however, a fund
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the fund's investments. By writing a put
option, a fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase a fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
A fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, a fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of a fund's investments does not decline as
anticipated, or if the value of the option does not increase, the fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security or index and
the changes in value of a fund's security holdings being hedged.
A fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the fund anticipates purchasing in the
future. Similarly, a fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options, a
fund will bear the risk of losing all or a portion of the premium paid if the
value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when a fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although a fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the fund may experience losses in some cases as a result of
such inability.
The value of the underlying securities on which options may be written at any
one time will not exceed 25% of the total assets of a fund. A fund will not
purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets at the time of purchase.
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FOREIGN CURRENCY HEDGING TRANSACTIONS In order to hedge against foreign currency
exchange rate risks, the funds may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The funds may also
conduct their foreign currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market.
A fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The funds will
generally not enter into forward contracts with terms of greater than one year.
A forward contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. A fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when a fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the fund's portfolio
securities denominated in such foreign currency, or when a fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." A fund's forward transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. The
funds have no specific limitation on the percentage of assets they may commit to
forward contracts, subject to their stated investment objectives and policies,
except that a fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
fund's ability to meet redemption requests. Because in connection with a fund's
forward foreign currency transactions an amount of the fund's assets equal to
the amount of the purchase will be held aside or segregated to be used to pay
for the commitment, a fund will always have those liquid assets available
sufficient to cover any commitments under these contracts or to limit any
potential risk. In addition, when the fund sells a forward contract, it will
cover its obligation under the contract by segregating liquid assets, or by
owning securities denominated in the corresponding currency and with a market
value equal to or greater than the fund's obligation. The segregated assets will
be marked-to-market on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission, it may in the future
assert authority to regulate forward contracts. In such event, a fund's ability
to utilize forward contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a fund
than if it had not engaged in such contracts.
The funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to a fund's position, the fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies written or purchased by a fund will be traded on U.S. and foreign
exchanges or over-the-counter.
The funds may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of a
fund's portfolio securities or adversely affect the prices of securities that a
fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of a fund's manager to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, a fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
SWAP AGREEMENTS Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the fund
than if the fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return)
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earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the return on or increase in value of
a particular dollar amount invested at a particular interest rate, in a
particular foreign currency, or in a "basket" of securities representing a
particular index. The "notional amount" of the swap agreement is only a fictive
basis on which to calculate the obligations which the parties to a swap
agreement have agreed to exchange. Emerging Fixed Income Markets Series'
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
Emerging Fixed Income Markets Series' obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the fund's portfolio. Emerging Fixed Income Markets Series will not enter into a
swap agreement with any single party if the net amount that would be owed or
received under contracts with that party would exceed 5% of the fund's assets.
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Whether Emerging Fixed Income Markets Series' use of swap agreements will be
successful in furthering its investment objective will depend on the ability of
the manager correctly to predict whether certain types of investments are likely
to produce greater returns than other investments. Because they are two-party
contracts and may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, Emerging Fixed Income Markets Series bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
manager will cause Emerging Fixed Income Markets Series to enter into swap
agreements only with counterparties that would be eligible for consideration as
repurchase agreement counterparties under the funds' repurchase agreement
guidelines. Certain restrictions imposed on Emerging Fixed Income Markets Series
by the Code may limit its ability to use swap agreements. The swap market is a
relatively new market and is largely unregulated. It is possible that
developments in the swap market and the laws relating to swaps, including
potential government regulation, could adversely affect Emerging Fixed Income
Markets Series' ability to terminate existing swap agreements, to realize
amounts to be received under such agreements, or to enter into swap agreements,
or could have adverse tax consequences.
CLOSED-END AND OPEN-END INVESTMENT COMPANIES Some countries have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. The Investment Company Act of 1940 limits
the amount each fund may invest in securities of closed-end investment
companies, including those that invest principally in securities that a fund may
purchase. These restrictions may limit opportunities for a fund to invest
indirectly in certain emerging markets. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their net asset values. Investment by a fund in shares of closed-end
investment companies would involve duplication of fees, in that shareholders
would bear both their proportionate share of expenses of the fund (including
management and advisory fees) and, indirectly, the expenses of such closed-end
investment companies. Emerging Fixed Income Markets Series may invest in
open-end investment companies as well, subject to the above restrictions, and
subject to a maximum of 10% of its total assets in closed and open-end funds
combined.
CONVERTIBLE SECURITIES As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security,
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
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A fund uses the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt security. A convertible preferred stock is
treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The funds may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred stock which
generally features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price. Most
PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock. If,
however, the issuer's common stock is trading at a price above that set by the
capital appreciation limit, the holder of the PERCS would receive less than one
full share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The funds may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to a fund. The funds may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a fund's ability to dispose of particular securities, when
necessary, to meet a fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for a fund to obtain market quotations based on actual trades
for purposes of valuing the fund's portfolio. Each fund, however, intends to
acquire liquid securities, though there can be no assurances that this will be
achieved.
CONCENTRATION AND DIVERSIFICATION Each fund reserves the right to invest more
than 25% of its assets in any one country, but will not invest more than 25% of
its total assets in any one industry (excluding the U.S. government). Under
normal circumstances, each fund will invest at least 65% of its assets in
issuers domiciled in at least three different nations (one of which may be the
United States). Each fund, except Emerging Fixed Income Markets Series, may
invest no more than 5% of its total assets in securities issued by any one
company or government, exclusive of U.S. government securities.
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PORTFOLIO TURNOVER Growth Series, Foreign Equity Series and Emerging Markets
Series each invests for long-term growth of capital and does not intend to place
emphasis upon short-term trading profits. Accordingly, each of these funds
expects to have a portfolio turnover rate of less than 50%. The manager may
engage in short-term trading in the portfolio of Emerging Fixed Income Markets
Series when such trading is considered consistent with the fund's investment
objective. Also, a security may be sold and another of comparable quality
simultaneously purchased to take advantage of what the manager believes to be a
temporary disparity in the normal yield relationship between the two securities.
As a result of its investment policies, under certain market conditions, the
portfolio turnover rate of Emerging Fixed Income Markets Series may be higher
than
14
PAGE
that of other mutual funds, and is expected to be between 400% and 500%. Because
a higher turnover rate increases transaction costs and may increase capital
gains, the manager carefully weighs the anticipated benefits of short-term
investment against these consequences.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
Each fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although a fund may invest
in marketable securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein); invest in other open-end investment companies except as permitted by
the Investment Company Act of 1940 (1940 Act); invest in interests (other than
debentures or equity stock interests) in oil, gas or other mineral exploration
or development programs; or purchase or sell commodity contracts (except futures
contracts as described in this SAI).
2. Purchase or retain securities of any company in which directors or officers
of Templeton Institutional Funds, Inc. or a fund's manager, individually owning
more than of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the fund's total
assets (i) more than 5% of the fund's total assets would then be invested in
securities of any single issuer, or (ii) the fund would then own more than 10%
of the voting securities of any single issuer; provided, however, that this
restriction does not apply to the Emerging Fixed Income Markets Series.
4. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short (but a fund
may make margin payments in connection with options on securities or securities
indices and foreign currencies; futures contracts and related options; and
forward contracts and related options).
5. Loan money apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although a fund may buy from a bank or broker-dealer U.S. government obligations
with a simultaneous agreement by the seller to repurchase them within no more
than seven days at the original purchase price plus accrued interest and loan
its portfolio securities. Emerging Fixed Income Markets Series may invest in
debt instruments of all types consistent with its investment objectives and
policies.
6. Borrow money, except that a fund may borrow money from banks in an amount not
exceeding 33% of the value of its total assets (including the amount borrowed).
7. Invest more than 5% of the value of its total assets in securities of issuers
which have been in continuous operation less than three years; provided that
this restriction does not apply to Emerging Fixed Income Markets Series.
8. Invest more than 5% of its total assets in warrants, whether or not listed on
the NYSE or the American Stock Exchange, including no more than 2% of its total
assets which may be invested in warrants that are not listed on those exchanges;
provided that this restriction does not apply to Emerging Fixed Income Markets
Series. Warrants acquired by a fund in units or attached to securities are not
included in this restriction.
9. Invest more than 25% of its total assets in a single industry./1/
10. Participate on a joint or a joint and several basis in any trading account
in securities; (See "Risks" below and "Goals and Strategies" above as to
transactions in the same securities for a fund and/or other mutual funds with
the same or affiliated advisers.)
A fund also may be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
/1/ The SEC considers each foreign government to be a separate industry.
14
PAGE
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
If a fund receives from an issuer of securities held by the fund subscription
rights to purchase securities of that issuer, and if the fund exercises such
subscription rights at a time when the fund's portfolio holdings of securities
of that issuer would otherwise exceed the limits set forth in Investment
Restrictions 3 or 9 above, it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after announcement of
such rights, the fund has sold at least as many securities of the same class and
value as it would receive on exercise of such rights.
RISKS
- -------------------------------------------------------------------------------
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the funds, nor can
there be any assurance that a fund's investment goal will be attained. As with
any investment in securities, the value of, and income from, an investment in
the funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the funds' portfolio
securities, including general economic conditions and market factors.
Additionally, investment decisions made by the managers will not always be
profitable or prove to have been correct. In addition to the factors which
affect the value of individual securities, a shareholder may anticipate that the
value of the shares of the funds will fluctuate with movements in the broader
equity and bond markets, as well. A decline in the stock market of any country
or region in which a fund is invested in equity securities may also be reflected
in declines in the price of the shares of the fund. Changes in prevailing rates
of interest in any of the countries or regions in which a fund is invested in
fixed income securities will likely affect the value of such holdings and thus
the value of fund shares. Increased rates of interest which frequently accompany
inflation and/or a growing economy are likely to have a negative effect on the
value of a fund's shares. In addition, changes in currency valuations will
affect the price of the shares of a fund. History reflects both decreases and
increases in stock markets and interest rates in individual countries and
throughout the world and in currency valuations, and these may occur
unpredictably in the future. The funds are not intended as a complete investment
program.
FOREIGN SECURITIES RISK You should consider carefully the substantial risks
involved in securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic investments. There may
be less publicly available information about foreign companies comparable to the
reports and ratings published about companies in the U.S. Foreign companies are
not generally subject to uniform accounting or financial reporting standards,
and auditing practices and requirements may not be comparable to those
applicable to U.S. companies. A fund, therefore, may encounter difficulty in
obtaining market quotations for purposes of valuing its portfolio and
calculating its net asset value. Foreign markets have substantially less volume
than the New York Stock Exchange (NYSE) and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the U.S.
EMERGING MARKETS. Investments in companies domiciled in developing countries may
be subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies that may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in many developing countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in some developing countries may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S.
15
PAGE
economy in such respects as growth of gross domestic product, rate of inflation,
currency depreciation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, the Communist governments
of a number of Eastern European countries expropriated large amounts of private
property in the past, in many cases without adequate compensation, and there can
be no assurance that such expropriation will not occur in the future. In the
event of such expropriation, a fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to fund shareholders.
RUSSIAN SECURITIES. Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with investing in the
U.S. securities markets, and should be considered highly speculative. Such risks
include, together with Russia's continuing political and economic instability
and the slow-paced development of its market economy, the following: (a) delays
in settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be impossible
or more difficult than in other countries to obtain and/or enforce a judgment;
(c) pervasiveness of corruption, insider trading, and crime in the Russian
economic system; (d) currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (f) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on a
fund's ability to exchange local currencies for U.S. dollars; (g) the risk that
the government of Russia or other executive or legislative bodies may decide not
to continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by a
fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for the fund to lose its registration
through fraud, negligence or even mere oversight. While the fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the fund of its ownership rights
16
PAGE
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
CURRENCY RISK Each fund's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread on currency
exchange (to cover service charges) may be incurred, particularly when the fund
changes investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would prevent the fund
from transferring cash out of the country, withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign tax on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in those nations.
The funds may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the funds may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. Through
each fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the funds, each fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
INTEREST RATE RISK To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of a fund's shares. Of course, interest rates have increased
and decreased, sometimes very dramatically, in the past. These changes are
likely to occur again in the future at unpredictable times.
LOW-RATED SECURITIES RISK Bonds which are rated C by Moody's are the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing. Bonds rated C by
S&P are obligations on which no interest is being paid.
Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded.
17
PAGE
The existence of limited markets for particular securities may diminish a fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for a fund
to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the fund to achieve its investment
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if a fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, a fund may incur additional expenses to seek
recovery. A fund will not invest more than 5% of its total assets in defaulted
debt securities, which may be illiquid.
The table below shows the percentage of the Emerging Fixed Income Markets
Series' assets invested in securities rated by S&P in the rating categories
shown. A credit rating by a rating agency evaluates the safety of principal and
interest based on an evaluation of the security's credit quality, but does not
consider the market risk or the risk of fluctuation in the price of the
security. The information shown is based on a dollar-weighted average of the
fund's portfolio composition based on month-end assets for each of the 12 months
in the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
S&P RATING AVERAGE WEIGHTED
PERCENTAGE OF ASSETS
<S> <C>
AAA 23.83%
BBB- 1.44%
BB+ 1.48%
BB 35.86%
BB- 13.26%
B+ 12.00%
B 9.97%
B- 1.29%
CCC- 0.87%
</TABLE>
MORTGAGE-BACKED SECURITIES RISK Mortgage securities differ from conventional
debt securities because principal is paid back over the life of the security
rather than at maturity. A fund may receive unscheduled prepayments of principal
prior to the security's maturity date due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. To the fund this means a loss
of anticipated interest, and a portion of its principal investment represented
by any premium the fund may have paid. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest rates. An
unexpected rise in interest rates could reduce the rate of principal prepayments
on mortgage securities and extend the life of these securities. This could cause
the price of these securities and a fund's share price to fall and would make
these securities more sensitive to interest rate changes. This is called
"extension risk."
SMALLER COMPANIES RISK Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.
DERIVATIVE SECURITIES RISK A fund's ability to reduce or eliminate its futures
and related options positions will depend upon the liquidity of the secondary
markets for such futures and options. Each fund intends to purchase or sell
futures and related options only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any
18
PAGE
particular contract or at any particular time. Use of stock index futures and
related options for hedging may involve risks because of imperfect correlations
between movements in the prices of the futures or related options and movements
in the prices of the securities being hedged. Successful use of futures and
related options by a fund for hedging purposes also depends upon the manager's
ability to predict correctly movements in the direction of the market, as to
which no assurance can be given.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, a fund may incur a loss upon disposition of the security.
If the other party to the agreement becomes insolvent and subject to liquidation
or reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by a fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that a fund may not be able
to substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement.
LEVERAGE RISK Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on a fund's net asset
value and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds.
OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
Templeton Institutional Funds, Inc. (Company) has a board of directors. The
board is responsible for the overall management of the funds, including general
supervision and review of each fund's investment activities. The board, in turn,
elects the officers of the funds who are responsible for administering the
funds' day-to-day operations. The board also monitors the Foreign Equity Series
to ensure no material conflicts exist among share classes. While none is
expected, the board will act appropriately to resolve any material conflict that
may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the funds, and principal occupations during
the past five years are shown below.
Harris J. Ashton (66)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Nicholas F. Brady (69)
16 North Washington Street, Easton, MD 21601
DIRECTOR
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 20 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).
Frank J. Crothers (54)
P.O. Box N-3238, Nassau, Bahamas
DIRECTOR
Chairman, Atlantic Equipment & Power Ltd.; Vice Chairman, Caribbean Utilities
Co., Ltd.; President, Provo Power Corporation; director of various other
business and non-profit organizations; and director or trustee, as the case may
be, of six of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
DIRECTOR
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
John Wm. Galbraith (77)
360 Central Avenue, Suite 1300
St. Petersburg, FL 33701
DIRECTOR
President, Galbraith Properties, Inc. (personal investment company); Director
Emeritus, Gulf West Banks, Inc. (bank holding company) (1995-present); director
or trustee, as the case may be, of 19 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, Mercantile Bank
19
PAGE
(1991-1995), Vice Chairman, Templeton, Galbraith & Hansberger Ltd. (1986-1992),
and Chairman, Templeton Funds Management, Inc. (1974-1991).
Andrew H. Hines, Jr. (76)
150 2nd Avenue N., St. Petersburg, FL 33701
DIRECTOR
Consultant, Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 21 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 24 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 49 of the investment
companies in the Franklin Templeton Group of Funds.
Betty P. Krahmer (69)
2201 Kentmere Parkway, Wilmington, DE 19806
DIRECTOR
Director or trustee of various civic associations; director or trustee, as the
case may be, of 20 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (70)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (70)
2665 NE 37th Drive, Fort Lauderdale, FL 33308
DIRECTOR
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 21 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Constantine Dean Tseretopoulos (45)
Lyford Cay Hospital, P.O. Box N-7776
Nassau, Bahamas
DIRECTOR
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Cardiology
Fellow, University of Maryland (1985-1987) and Internal Medicine Intern, Greater
Baltimore Medical Center (1982-1985).
James R. Baio (45)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
TREASURER
Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
21 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
20
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Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services, LLC; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Barbara J. Green (51)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
SECRETARY
Senior Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 20 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Mark G. Holowesko (39)
Lyford Cay, Nassau, Bahamas
VICE PRESIDENT
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 20 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 33 of the investment companies in
the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
John R. Kay (58)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; officer of 25 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
21
PAGE
Elizabeth M. Knoblock (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President - COMPLIANCE
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of 20 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton Inc. (1988),
Vice President and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel, Division of Investment Management, U.S.
Securities and Exchange Commission (1984-1986).
J. Mark Mobius (62)
Two Exchange Square, 39th Floor, Suite 3905-08
Hong Kong
VICE PRESIDENT
Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; officer of eight of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, President, International
Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987) and Director, Vickers da Costa, Hong Kong (1983-1986).
Donald F. Reed (54)
1 Adelaide Street East, Suite 2101
Toronto, Ontario Canada M5C 3B8
PRESIDENT
Executive Vice President, Templeton Worldwide, Inc.; President, Templeton
Investment Counsel, Inc.; President and Chief Executive Officer, Templeton
Management Limited; Co-founder and Director, International Society of Financial
Analysts; Chairman, Canadian Council of Financial Analysts; and FORMERLY,
President and Director, Reed Monahan Nicholishen Investment Counsel (1982-1989).
*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and Templeton Global Advisors
Limited. Mr. Brady and Franklin Resources, Inc. are both limited partners of
Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby Overseas and
Templeton Global Advisors Limited are limited partners of Darby Emerging Markets
Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The Company pays noninterested board members and Mr. Brady an annual retainer of
$12,000 and a fee of $900 per board meeting attended. Board members who serve on
the audit committee of the Company and other funds in the Franklin Templeton
Group of Funds receive a flat fee of $2,000 per committee meeting attended, a
portion of which is allocated to the Company. Members of a committee are not
compensated for any committee meeting held on the day of a board meeting.
Noninterested board members also may serve as directors or trustees of other
funds in the Franklin Templeton Group of Funds and may receive fees from these
funds for their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the Company and by the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH
NAME FUND(1) OF FUNDS(2) EACH SERVES(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton $16,500 $361,157 48
Nicholas F. Brady 16,500 140,975 20
Frank J. Crothers 17,903 47,700 6
S. Joseph Fortunato 16,500 367,835 50
John Wm. Galbraith 15,700 134,425 19
Andrew H. Hines, Jr 16,500 208,075 21
Edith E. Holiday 16,500 211,400 24
Betty P. Krahmer 16,500 141,075 20
Gordon S. Macklin 16,500 361,157 48
Fred R. Millsaps 17,394 210,075 21
Constantine D. Tseretopoulos 18,803 51,500 6
</TABLE>
1. For the fiscal year ended December 31, 1998.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 163 U.S.
based funds or series.
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest
22
PAGE
one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The Growth Series and Foreign Equity Series'
manager is Templeton Investment Counsel, Inc. The Emerging Markets Series
investment manager is Templeton Asset Management Ltd. - Hong Kong. The Emerging
Fixed Income Markets Series' manager is Templeton Investment Counsel, Inc.,
through its Global Bond Managers division. The managers are wholly owned
subsidiaries of Franklin Resources, Inc. (Resources), a publicly owned company
engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
The managers provide investment research and portfolio management services, and
select the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and its
officers, directors and employees are covered by fidelity insurance. Templeton
Asset Management Ltd. - Hong Kong renders its services to the Emerging Fixed
Income Markets Series from outside the U.S.
The Templeton organization has been investing globally since 1940. The managers
and their affiliates have offices in Argentina, Australia, Bahamas, Brazil, the
British Virgin Islands, Canada, China, Cyprus, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, United
Kingdom and the U.S.
The managers and their affiliates manage numerous other investment companies and
accounts. The managers may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from action
taken by the managers on behalf of the funds. Similarly, with respect to the
funds, the managers are not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the managers and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The managers are
not obligated to refrain from investing in securities held by the funds or other
funds it manages. Of course, any transactions for the accounts of the managers
and other access persons will be made in compliance with the funds' code of
ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT FEES Growth Series, Foreign Equity Series and Emerging Fixed Income
Markets Series pay their respective managers a monthly fee equal on an annual
basis to 0.70% of their average daily net assets during the year. Emerging
Markets Series pays its manager a monthly fee equal on an annual basis to 1.25%
of its average daily net assets during the year.
For the last three fiscal years ended December 31, the funds paid the following
management fees:
<TABLE>
<CAPTION>
MANAGEMENT FEES PAID ($)
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Series 434,268 1,946,728 1,656,913
Foreign Equity Series 30,272,145 23,912,568 16,525,094
Emerging Markets Series 23,147,831 25,766,850 15,676,692
Emerging Fixed Income
Markets Series 0(1) 0(2) --
</TABLE>
1. For the period January 1, 1998 through December 31, 1998, management fees,
before any advance waiver, totaled $15,136. Under an agreement by the manager to
waive its fees, the fund paid no management fees.
2. For the period June 4, 1997 (inception) through December 31, 1997, management
fees, before any advance waiver, totaled $8,484. Under an agreement by the
manager to waive its fees, the fund paid no management fees.
23
PAGE
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Company to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' managers and principal underwriter. The
administrative services FT Services provides include preparing and maintaining
books, records, and tax and financial reports, and monitoring compliance with
regulatory requirements.
ADMINISTRATION FEES The Company pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the funds' combined average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended December 31, the Company paid the
following administration fees:
<TABLE>
<CAPTION>
ADMINISTRATION FEES PAID ($)
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Series 52,170 236,356 211,998
Foreign Equity Series 3,636,696 2,903,341 2,117,449
Emerging Markets Series 1,557,264 1,751,904 1,127,833
Emerging Fixed Income
Markets Series 0(2) 0(3) --
</TABLE>
1. Before October 1, 1996, Templeton Global Investors, Inc. provided
administrative services to the funds.
2. For the period January 1, 1998 through December 31, 1998, administration
fees, before any advance waiver, totaled $1,818. Under an agreement by FT
Services to waive its fees, the fund paid no administration fees.
3. For the period June 4, 1997 (inception) through December 31, 1997,
administration fees, before any advance waiver, totaled $1,030. Under an
agreement by FT Services to waive its fees, the fund paid no administration
fees.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. The funds
also may reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the funds. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the funds' assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
funds' independent auditor. The auditor gives an opinion on the financial
statements included in the funds' Annual Report to Shareholders and reviews the
funds' registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The managers select brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreements
and any directions that the board may give.
When placing a portfolio transaction, the managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The managers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the managers' overall responsibilities to client
24
PAGE
accounts over which it exercises investment discretion. The services that
brokers may provide to the managers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national or
transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and appropriate
assistance to the managers in carrying out their investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the managers in carrying out their overall
responsibilities to its clients.
Since most purchases by the Emerging Fixed Income Markets Series are principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker. Purchases of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask prices. The
fund seeks to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and statistical
information, as well as for special services provided by the dealers in the
execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the managers to supplement their own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
the funds' officers are satisfied that the best execution is obtained, the sale
of fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, also may be considered a factor in the selection of broker-dealers to
execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the funds,
any portfolio securities tendered by the funds will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the managers will be reduced by the amount of any fees received
by Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the managers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the managers, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
Sale or purchase of securities, without payment of brokerage commissions, fees
(except customary transfer fees) or other remuneration in connection therewith,
may be effected between any of these funds, or between funds and private
clients, under procedures adopted by the Company's Board pursuant to Rule 17a-7
under the 1940 Act.
During the last three fiscal years ended December 31, the funds paid the
following brokerage commissions:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS ($)
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Series 81,134 391,067 173,658
Foreign Equity Series 3,863,065 2,666,430 2,138,850
Emerging Markets Series 5,522,111 6,813,142 3,832,003
Emerging Fixed Income
Markets Series 0 0(1) --
</TABLE>
1. For the period June 4, 1997 (inception) through December 31, 1997.
As of December 31, 1998, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of a fund, constitutes a fund's net investment income
from which dividends may be paid to you. Any distributions by a fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
25
PAGE
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce a fund's ordinary income
distributions to you, and may cause some or all of a fund's previously
distributed income to be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the fund. If
this election is made, the year-end statement you receive from a fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in such fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
a fund. In doing so, all or a portion of the sales charge that you paid for your
original shares in a fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
26
PAGE
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 3.03% of the dividends paid by the Growth
Series for the most recent fiscal year qualified for the dividends-received
deduction. In some circumstances, you will be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to pay
on these dividends. The dividends-received deduction will be available only with
respect to dividends designated by a fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
Because the Emerging Market Series' and Foreign Equity Series' income is derived
primarily from investments in foreign rather than domestic U.S securities, no
portion of their distributions generally will be eligible for the corporate
dividends-received deduction. None of the dividends paid by these funds for the
most recent fiscal year qualified for such deduction, and it is anticipated that
none of the current year's dividends will so qualify.
Because the Emerging Fixed Income Markets Series' income consists of interest
rather than dividends, no portion of its distributions will generally be
eligible for the corporate dividends-received deduction. None of the dividends
paid by this fund for the most recent fiscal year qualified for such deduction,
and it is anticipated that none of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund and/or defer a fund's ability to recognize losses, and, in limited
cases, subject a fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
Each fund is a series of Templeton Institutional Funds, Inc. (Company), which is
an open-end management investment company, commonly called a mutual fund. The
Company was organized as a Maryland corporation on July 6, 1990, and is
registered with the SEC.
Certain funds in the Franklin Templeton Funds offer multiple classes of shares.
The different classes have proportionate interests in the same portfolio of
investment securities. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans. Shares of the funds (except Foreign Equity
Series - Service Shares) are considered Advisor Class shares for redemption,
exchange and other purposes. Foreign Equity Series - Service Shares are
considered Class A shares for redemption, exchange and other purposes. Before
January 1, 1999, the funds' shares were considered Class I shares.
The Foreign Equity Series currently offers two classes of shares, Primary Shares
and Service Shares. Before May 1, 1999, Primary Shares did not have a class
designation. The fund began offering Service Shares on May 1, 1999. The fund may
offer additional classes of shares in the future. The full title of each class
is:
o Foreign Equity Series - Primary Shares
o Foreign Equity Series - Service Shares
Shares of each class of the Foreign Equity Series represent proportionate
interests in the fund's assets. On matters that affect the fund as a whole, each
class has the same voting and other rights and preferences as any other class.
On matters that affect only one class, only shareholders of that class may vote.
Each class votes separately on matters affecting only that class, or expressly
required to be voted on separately by state or federal law. Shares of each class
of a series have the same voting and other rights and preferences as the other
classes and series of the Company for matters that affect the Company as a
whole. Additional series may be offered in the future.
The Company has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The Company does not intend to hold annual shareholder meetings. The Company or
a fund may hold
27
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special meetings, however, for matters requiring shareholder approval. A meeting
may be called by the board to consider the removal of a board member if
requested in writing by shareholders holding at least 10% of the outstanding
shares. In certain circumstances, we are required to help you communicate with
other shareholders about the removal of a board member. A special meeting also
may be called by the board in its discretion.
As of February 5, 1999, the principal shareholders of the funds, beneficial or
of record, were:
NAME AND ADDRESS PERCENTAGE (%)
- -------------------------------------------------------------------------------
EMERGING FIXED INCOME MARKETS SERIES
Templeton Global Investors Inc.(1)
Corporate Accounting Attn. Michael Corcoran
555 Airport Blvd. 4th Fl. Burlingame, CA 94010 100
GROWTH SERIES
Peter Norton TTEE
Norton Family Cru Trust
DTD 2-15-92
225 Arizona Ave. 2nd Fl. W
Santa Monica, CA 90401-1210 35.31
Peter Norton TTEE
Norton Family Foundation Trust
DTD 12-12-88
225 Arizona Ave. 2nd Fl. W
Santa Monica, CA 90401-1210 12.23
Northern Trust Company Cust.
FBO Peter Norton
DTD 4-28-89
P.O. Box 92956
Chicago, IL 60675-2956 6.95
National City Bank
Cust. Mt. Union College
Attn. Mutual Funds
P.O. Box 94984 8.69
T Rowe Price TTEE
FBO Honeywell
10090 Red Run Blvd.
Owings Mills, MD 21117 28.42
EMERGING MARKETS SERIES
New York State Common
Retirement Fund
Alfred E. Smith
State Office Building Sixth Fl.
Albany, NY 12236 19.02
1. Templeton Global Investors, Inc. is a Delaware corporation and is wholly
owned subsidiary of Templeton Worldwide, Inc., which is a wholly owned
subsidiary of Franklin Resources, Inc.
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of February 5, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The funds continuously offer its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid to
a fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares,
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o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates provide financial support
to various securities dealers that sell shares of the Franklin Templeton Group
of Funds. This support is based primarily on the amount of sales of fund shares.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the funds might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the funds' general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the funds' investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
REDEMPTIONS IN KIND The funds have committed themselves to pay in cash (by
check) all requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the funds' net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities and
Exchange Commission (SEC). In the case of redemption requests in excess of these
amounts, the board reserves the right to make payments in whole or in part in
securities or other assets of the funds, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the existing
shareholders of the funds. In these circumstances, the securities distributed
would be valued at the price used to compute the funds' net assets and you may
incur brokerage fees in converting the securities to cash. The funds do not
intend to redeem illiquid securities in kind. If this happens, however, you may
not be able to recover your investment in a timely manner.
SUBSTANTIAL REDEMPTIONS A number of fund shareholders are institutions with
significant shareholdings that may be redeemed at any time. If a substantial
number or amount of redemptions should occur within a relatively short period of
time, a fund may have to sell portfolio securities it would otherwise hold and
incur the additional transactions costs. The sale of portfolio securities may
result in the recognition of capital gains, which will be distributed annually
and generally will be taxable to shareholders as ordinary income or capital
gains. Shareholders are notified annually regarding the federal tax status of
distributions they receive (see Distribution and Taxes).
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless
29
PAGE
you specifically request them. This eliminates the costly problem of replacing
lost, stolen or destroyed certificates. If a certificate is lost, stolen or
destroyed, you may have to pay an insurance premium of up to 2% of the value of
the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares. The certificates should be properly endorsed. You
can do this either by signing the back of the certificate or by completing a
share assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to a fund marked "unable to
forward" by the postal service, we will consider this a request by you to change
your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. A fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
30
PAGE
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which a fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.
An explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended December 31,
1998, were:
31
PAGE
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Series 5/3/93 2.98% 10.46% 12.76%
Foreign Equity Series 10/18/90 10.16% 11.07% 12.55%
Emerging Markets Series 5/3/93 -18.03% -5.44% 0.09%
Emerging Fixed Income
Markets Series 6/4/97 -3.98% -- 4.97%
</TABLE>
The following SEC formula was used to calculate these figures:
P(1T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
net asset value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total returns for the indicated periods ended
December 31, 1998, were:
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Series 5/3/93 2.98% 64.42% 97.37%
Foreign Equity Series 10/18/90 10.16% 69.01% 163.70%
Emerging Markets Series 5/3/93 -18.03% -24.38% 0.52%
Emerging Markets Fixed
Income Series 6/4/97 -3.98% -- 7.95%
</TABLE>
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the fund
as a potential investment for IRAs, business retirement plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, the funds and the managers also may refer to the following
information: The manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
o The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a
similar financial organization.
o The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.
o The geographic and industry distribution of the fund's portfolio and
each fund's top ten holdings.
o The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange
32
PAGE
controls, and improving communication technology, of various countries as
published by various statistical organizations.
o To assist investors in understanding the different returns and risk
characteristics of various investments, a fund may show historical returns
of various investments and published indices (E.G., Ibbotson Associates,
Inc. Charts and Morgan Stanley EAFE Index).
o The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o The funds' portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.
o A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type
of stocks or other securities.
o Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
*Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
in October 1992 and resigned from the board on April 16, 1995. He is no longer
involved with the investment management process.
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a CD issued by
a bank. For example, as the general level of interest rates rise, the value of
the fund's fixed-income investments, if any, as well as the value of its shares
that are based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the value of a fund's shares
can be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to a fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by a fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
funds cannot guarantee that these goals will be met.
Templeton Institutional Funds, Inc. is a member of the Franklin Templeton Group
of Funds, one of the largest mutual fund organizations in the U.S., and may be
considered in a program for diversification of assets. Founded in 1947, Franklin
is one of the oldest mutual fund organizations and now services more than 3
million shareholder accounts. In 1992, Franklin, a leader in managing
fixed-income mutual funds and an innovator in creating domestic equity funds,
joined forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity investing,
became part of the organization four years later. Together, the Franklin
Templeton Group has over $216 billion in assets under management for
approximately 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 114 U.S. based open-end investment
companies to the public. Each fund may identify itself by its NASDAQ symbol or
CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
You will receive the funds' financial reports every six months. If you would
like to receive an interim report of the funds' portfolio holdings, please call
1-800/DIAL BEN(R).
DESCRIPTION OF BOND RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
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adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied
CCC-rating. The C rating also may reflect the filing of a bankruptcy petition
under circumstances where debt service payments are continuing. The C1 rating is
reserved for income bonds on which no interest is being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
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