UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-6135
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TEMPLETON INSTITUTIONAL FUNDS, INC.
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/03
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ITEM 1. REPORTS TO STOCKHOLDERS.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
TIFI----------------------------------------------------------------------------
ANNUAL REPORT
Templeton
DECEMBER 31, 2003
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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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INVESTING IN EMERGING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH MAY INCLUDE
RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL, ECONOMIC, AND
POLITICAL DEVELOPMENTS, AND THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY.
THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S PROSPECTUS. THE
FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A WELL-DIVERSIFIED PORTFOLIO.
REGULATORY UPDATE
AS OF FEBRUARY 12, 2004
To Our Valued Shareholders:
In our efforts to fulfill our ongoing commitment to
providing you with timely and accurate information, we have prepared this
statement to give you an overview of current industry issues as they pertain to
Franklin Resources, Inc. (Franklin Templeton Investments) and our subsidiary
companies (the "Company"). Any further updates on these and other matters will
be disclosed on the Company's website at franklintempleton.com under "Statement
on Current Industry Issues."
On February 4, 2004, the Securities Division of the
Office of the Secretary of the Commonwealth of Massachusetts filed an
administrative complaint against Franklin Resources, Inc. and certain of its
subsidiaries, alleging violations of the Massachusetts Uniform Securities Act.
The complaint arises from activity that occurred in 2001 during which time an
officer of a Company subsidiary was negotiating an agreement with an investor
relating to investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within
Franklin Templeton Investments, has been named in shareholder class actions
related to the matter described above. The Company believes that the claims made
in the lawsuit are without merit and it intends to defend the allegations
vigorously. The Company and the Fund may be named in similar civil actions
related to the matter described above.
In addition, as part of ongoing investigations by the
U.S. Securities and Exchange Commission (the "SEC"), the U.S. Attorney for the
Northern District of California, the New York Attorney General, the California
Attorney General, the U.S. Attorney for the District of Massachusetts, the
Florida Department of Financial Services, and the Commissioner of Securities and
the Attorney General of the State of West Virginia, relating to certain
practices in the mutual fund industry, including late trading, market timing and
sales compensation arrangements, the Company and its subsidiaries, as well as
certain current or former executives and employees of the Company, have received
requests for information and/or subpoenas to testify or produce documents. The
Company and its current employees are providing documents and information in
response to these requests and subpoenas. In addition, the Company has responded
to requests for similar kinds of information from regulatory authorities in some
of the foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it
intends to recommend that the Commission authorize an action against an
affiliate of the Fund's adviser and a senior executive officer relating to the
frequent trading issues that are the subject of the SEC's investigation. These
issues were previously disclosed as being under investigation by government
authorities and the subject of an internal inquiry by the Company in its Annual
Report on Form 10-K and on its public website. The Company currently is in
discussions with the SEC Staff in an effort to resolve the issues raised in
their investigation. Such discussions are preliminary and the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on a fund is uncertain at this time. If we find that we bear responsibility for
any unlawful or improper conduct, we have committed to making a fund or its
shareholders whole, as appropriate.
December 31, 2003
We are pleased to bring you the annual report for the
Templeton Institutional Funds, Inc. (TIFI) Foreign Equity Series (the "Fund")
covering the 12-month period ended December 31, 2003.
PERFORMANCE OVERVIEW
The Fund posted a 42.61% cumulative total return for the
12-month period ended December 31, 2003. The Fund outperformed its benchmarks,
the MSCI AC World Free
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TOTAL RETURNS AS OF 12/31/03
ONE- THREE- FIVE- TEN- CUMULATIVE
YEAR YEAR YEAR YEAR SINCE
AVERAGE AVERAGE AVERAGE AVERAGE INCEPTION 1,3
ANNUAL 1,2 ANNUAL 1,2 ANNUAL 1,2 ANNUAL 1,2 (10/18/90)
TIFI Foreign Equity
Series - Primary Shares 42.61% 2.21% 5.06% 8.02% 237.59%
MSCI AC World
Free ex- U.S. Index 4 41.41% -0.96% 1.55% 4.66% 119.13%
MSCI EAFE Index 5 39.17% -2.57% 0.26% 4.78% 98.60%
1 Past fee waivers by the Fund's manager and administrator increased the Fund's
total returns. Without these waivers, the Fund's total returns would have been
lower.
2 Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3 Cumulative total return represents the change in value of an investment over
the indicated periods.
4 Source: Morgan Stanley Capital International (MSCI). The MSCI All Country (AC)
World Free ex-U.S. Index measures the performance of securities located in 48
countries, including emerging markets in Latin America, Asia, and Eastern
Europe. It includes reinvested dividends.
5 Source: Morgan Stanley Capital International (MSCI). The MSCI Europe,
Australasia, and Far East (EAFE) Index is a capitalization-weighted
(outstanding shares times price) equity index that measures the total returns
(gross dividends are reinvested) of equity securities in the developed markets
of Europe, Australasia, and the Far East.
Indices are unmanaged, do not contain cash, and do not include management or
other operating expenses. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
The performance table does not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of shares.
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[PHOTO OF GARY P. MOTYL OMITTED]
GARY P. MOTYL, CHIEF INVESTMENT OFFICER OF TEMPLETON INSTITUTIONAL GLOBAL
EQUITIES GROUP AND PRESIDENT OF TEMPLETON INVESTMENT COUNSEL, LLC, MANAGES
SEVERAL INSTITUTIONAL MUTUAL FUNDS AND SEPARATE ACCOUNT PORTFOLIOS AND HAS
RESEARCH RESPONSIBILITY FOR THE GLOBAL AUTOMOBILE INDUSTRY.
PRIOR TO JOINING TEMPLETON IN 1981, MR. MOTYL WORKED FROM 1974 TO 1979 AS A
SECURITY ANALYST WITH STANDARD & POOR'S CORPORATION. HE THEN WORKED AS A
RESEARCH ANALYST AND PORTFOLIO MANAGER FROM 1979 TO 1981 WITH LANDMARK FIRST
NATIONAL BANK. IN THIS CAPACITY, HE HAD RESPONSIBILITY FOR EQUITY RESEARCH AND
MANAGED SEVERAL PENSION AND PROFIT SHARING PLANS.
MR. MOTYL HOLDS A B.S. IN FINANCE FROM LEHIGH UNIVERSITY IN PENNSYLVANIA AND AN
M.B.A. FROM PACE UNIVERSITY IN NEW YORK. HE IS ALSO A CHARTERED FINANCIAL
ANALYST (CFA) CHARTERHOLDER.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 9.
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
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CONTINUED ...
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
LETTER CONTINUED................................................................
ex-U.S. Index 1 and the MSCI EAFE Index 2, which returned 41.41% and 39.17%,
respectively, during the same period.
ECONOMIC AND MARKET OVERVIEW
In March 2003, equity investors sparked a rally in
global markets that reversed the course of the previous three years and resulted
in the strongest annual gains in global equities since 1986. The rally's main
catalyst was an improving global economy, underpinned by years of expansionary
fiscal and monetary policies, corporate restructuring and consolidation, and
declining equity valuations that created opportunities for investors in Asia,
Europe, and the Americas.
In many countries, including the United States, China,
and Japan, gross domestic product (GDP) growth accelerated in 2003, particularly
in the second half of the year. In the United States, GDP grew at annualized
rates of 3.1% and 8.2% in the second and third quarters. Over the same periods,
consumer spending rose 3.3% and 6.9% (annualized), spurred largely by tax cuts,
car-buying incentives, and mortgage refinancing, as U.S. interest rates remained
at the lowest level in more than four decades. Industrial production increased
in the United States, China, Japan, and South Korea in the second half of the
year, as did consumer sentiment in the United States, the U.K., Germany, and
Sweden, and business sentiment in the United States, Australia, Germany, and
Japan. In short, a synchronized global economic recovery gained momentum in
2003.
Further evidence of this recovery was the continued rise
in the prices of base metals and other commodities. This was due, in part, to
greater demand in China. On December 31, 2003, contracts for aluminum and other
metals such as silver, gold, copper, and zinc ranged from 19% to 50% higher than
12 months before. While gold crossed the $400-an-ounce threshold for the first
time in more than seven years, agricultural commodi
GEOGRAPHIC DISTRIBUTION ON 12/31/03
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
[PIE CHART]
Europe Asia North America Australia/New Zealand Latin America
58.6% 21.2% 6.0% 4.7% 2.0%
Middle East/Africa Short-Term Investments & Other Net Assets
0.6% 6.9%
FUND ASSET ALLOCATION ON 12/31/03
[PIE CHART]
Equity* Short-Term Investments & Other Net Assets Fixed Income
93.0% 6.9% 0.1%
*EQUITY INCLUDES CONVERTIBLE AND PREFERRED SECURITIES.
1. Source: Morgan Stanley Capital International (MSCI). The MSCI All Country
(AC) World Free ex-U.S. Index measures the performance of securities located in
48 countries, including emerging markets in Latin America, Asia, and Eastern
Europe. It includes reinvested dividends.
2. Source: Morgan Stanley Capital International (MSCI). The MSCI Europe,
Australasia, and Far East (EAFE) Index is a capitalization-weighted (outstanding
shares times price) equity index that measures the total returns (gross
dividends are reinvested) of equity securities in the developed markets of
Europe, Australasia, and the Far East.
2 ANNUAL REPORT
.................................................................................
ties such as cotton and soybeans gained 47% and 39%, respectively. Despite
rising commodities prices, global inflation remained subdued throughout the
year.
In 2003, the value of the U.S. dollar fell against most
major currencies, including a 17% decline versus the euro. While the decline
magnified top-line and earnings-per-share growth in the United States, it had
the opposite effect in Europe. The dollar decline also benefited U.S. investors
in international equities because it increased the returns of investments
denominated in currencies that appreciated against the dollar, such as the euro.
Although the dollar's decline significantly affected equity market returns, it
was not the only reason for the past year's gains. Equity markets in many
countries, including emerging market countries, produced stronger gains than the
U.S. equity market, even in their local currencies. Last year, these countries
benefited from the improving economic and financial market conditions.
INVESTMENT STRATEGY
We employ a bottom-up, value-oriented, long-term
investment strategy. Our in-depth fundamental internal research evaluates a
company's potential to grow earnings, asset value and/or cash flow over a
five-year horizon. Stocks are selected for purchase or sale utilizing strict
valuation parameters, reflecting our focus on individual companies rather than
countries or sectors.
MANAGER'S DISCUSSION
In 2003, an improved investor outlook for the global
economy led to a stock market trend that favored materials, industrials, and
telecommunications services. These sectors are widely regarded in the markets as
likely beneficiaries in the early part of a recovery cycle, when demand for
materials, industrial commodities, and technology typically increases. The Fund
benefited from this trend in both relative and absolute terms. This resulted
from strong appreciation of portfolio holdings and the Fund's relative
overweight positions in the materials and industrial sectors versus the MSCI AC
World Free ex-U.S. Index, the Fund's benchmark.
SECTOR DIVERSIFICATION ON 12/31/03
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
Financials 18.1%
Materials 13.2%
Industrials 12.4%
Consumer Discretionary 9.6%
Telecommunication Services 8.8%
Energy 8.2%
Health Care 7.5%
Utilities 5.7%
Information Technology 5.5%
Consumer Staples 3.5%
Short-Term Investment & Other
Net Assets 7.5%
10 LARGEST EQUITY POSITIONS ON 12/31/03
(PERCENTAGE OF TOTAL NET ASSETS)
Samsung Electronic Co. Ltd. 2.0%
Alcan Inc. 1.9%
BHP Billiton Ltd., ADR 1.9%
E.ON AG, ORD & ADR 1.9%
Aventis SA, ORD & ADR 1.8%
ENI SpA, ORD & ADR 1.7%
Amersham PLC, ORD & ADR 1.7%
ICICI Bank Ltd., ORD & ADR 1.7%
Koninklijke Philips Electronic NV 1.6%
Telefonica SA, ORD & ADR 1.5%
ANNUAL REPORT 3
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
LETTER CONTINUED................................................................
These overweight positions developed over the past
three-plus years, as we applied our investment strategy of finding undervalued
securities from around the world, particularly non-U.S. securities. This
determination is based on five-year models we construct for each security.
Recall that in the late 1990s, investor interest shifted toward "new economy"
stocks and few wanted to hold the more traditional brick and mortar companies
often referred to as "old economy" stocks. This lack of interest led to
valuations that we considered very attractive among many companies in the latter
group of stocks. For example, the Fund held a position in Hanson PLC, a building
materials company from the U.K., and BHP Billiton, a mining and oil company with
dual headquarters in the U.K. and Australia. In the industrial sector the Fund
held Atlas Copco (Sweden), Komatsu, (Japan), and Deutsche Post (Germany), among
others. Despite their out of fashion status, we adhered to our investment
philosophy and were patient holders of these stocks. In 2003, our patience paid
off as these stocks provided annual gains anywhere from 68% to 102% (in U.S.
dollars). In addition, the Fund's overweight positions in the materials and
industrial sectors provided an advantage for relative performance.
In other areas, E.ON (Germany) and Iberdrola (Spain),
two utility companies, were major contributors to portfolio performance in 2003.
In this case also, an overweight position in utilities contributed to the Fund's
relative performance.
Although the information technology (IT) sector remained
underweight versus the Fund's benchmark throughout last year, the Fund's returns
for IT holdings (in aggregate) were stronger in the portfolio than the benchmark
(64% versus 50%). Holdings such as NEC Corp. (Japan), Satyam Computer Services
(India), and Samsung Electronics (South Korea) contributed between 42 and 99
basis points each to the portfolio's performance. Despite these strong
contributors, the portfolio slightly lagged the benchmark in relative IT sector
performance. Similarly, the returns of portfolio holdings in the financial
sector were stronger in the Fund than the benchmark (50% versus 49%), yet the
Fund also lagged the benchmark's per-
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TEMPLETON FOREIGN EQUITY SERIES - PRIMARY SHARES
TOTAL RETURN INDEX COMPARISON
$5,000,000 INVESTMENT: 10/18/90 - 12/31/03
[LINE GRAPH]
TIFI - Foreign MSCI All Country MSCI EAFE CPI
Equity Series World Free ex US Index Index
INCEPTION $ 5,000,000 $ 5,000,000 $ 5,000,000 $ 5,000,000
Oct-90 $ 4,970,000 $ 5,277,872 $ 4,934,899 $ 5,010,497
Nov-90 $ 4,875,000 $ 4,984,504 $ 4,645,204 $ 5,021,531
Dec-90 $ 4,860,000 $ 5,075,508 $ 4,722,265 $ 5,021,531
Jan-91 $ 5,005,000 $ 5,234,135 $ 4,876,331 $ 5,051,810
Feb-91 $ 5,614,715 $ 5,796,297 $ 5,400,502 $ 5,059,211
Mar-91 $ 5,452,705 $ 5,477,302 $ 5,077,601 $ 5,066,613
Apr-91 $ 5,503,335 $ 5,536,810 $ 5,128,939 $ 5,074,014
May-91 $ 5,579,275 $ 5,615,435 $ 5,183,969 $ 5,088,817
Jun-91 $ 5,295,755 $ 5,224,874 $ 4,804,402 $ 5,104,293
Jul-91 $ 5,604,590 $ 5,475,926 $ 5,041,756 $ 5,111,694
Aug-91 $ 5,614,715 $ 5,381,896 $ 4,940,601 $ 5,126,497
Sep-91 $ 5,756,480 $ 5,655,734 $ 5,220,530 $ 5,149,374
Oct-91 $ 5,736,225 $ 5,754,624 $ 5,295,844 $ 5,156,776
Nov-91 $ 5,685,595 $ 5,498,299 $ 5,050,016 $ 5,171,579
Dec-91 $ 5,899,360 $ 5,783,736 $ 5,312,370 $ 5,175,616
Jan-92 $ 6,060,455 $ 5,703,139 $ 5,200,543 $ 5,183,017
Feb-92 $ 6,154,890 $ 5,528,007 $ 5,015,878 $ 5,201,857
Mar-92 $ 6,108,305 $ 5,193,699 $ 4,686,141 $ 5,228,099
Apr-92 $ 6,304,445 $ 5,210,754 $ 4,709,499 $ 5,235,500
May-92 $ 6,657,495 $ 5,527,136 $ 5,026,180 $ 5,242,901
Jun-92 $ 6,584,640 $ 5,260,405 $ 4,789,505 $ 5,261,741
Jul-92 $ 6,360,485 $ 5,148,495 $ 4,668,309 $ 5,273,180
Aug-92 $ 6,181,155 $ 5,423,066 $ 4,962,685 $ 5,287,983
Sep-92 $ 6,024,245 $ 5,311,798 $ 4,866,378 $ 5,302,786
Oct-92 $ 5,811,295 $ 5,078,534 $ 4,612,698 $ 5,321,626
Nov-92 $ 5,822,505 $ 5,106,638 $ 4,657,428 $ 5,329,027
Dec-92 $ 5,820,815 $ 5,149,274 $ 4,682,816 $ 5,325,663
Jan-93 $ 5,843,980 $ 5,148,678 $ 4,683,723 $ 5,351,904
Feb-93 $ 5,971,405 $ 5,306,251 $ 4,826,679 $ 5,370,610
Mar-93 $ 6,119,130 $ 5,743,162 $ 5,248,598 $ 5,389,584
Apr-93 $ 6,316,145 $ 6,250,447 $ 5,748,191 $ 5,404,387
May-93 $ 6,484,190 $ 6,389,589 $ 5,871,201 $ 5,411,923
Jun-93 $ 6,362,505 $ 6,313,118 $ 5,780,833 $ 5,419,392
Jul-93 $ 6,466,805 $ 6,522,955 $ 5,984,539 $ 5,419,190
Aug-93 $ 6,924,585 $ 6,873,034 $ 6,308,836 $ 5,434,396
Sep-93 $ 6,872,430 $ 6,731,737 $ 6,168,297 $ 5,445,431
Oct-93 $ 7,278,055 $ 6,975,225 $ 6,359,914 $ 5,468,376
Nov-93 $ 7,110,010 $ 6,444,008 $ 5,805,314 $ 5,472,009
Dec-93 $ 7,801,445 $ 6,946,617 $ 6,225,722 $ 5,471,740
Jan-94 $ 8,357,855 $ 7,517,903 $ 6,753,423 $ 5,487,014
Feb-94 $ 8,129,435 $ 7,461,054 $ 6,736,195 $ 5,506,056
Mar-94 $ 7,768,920 $ 7,119,319 $ 6,447,259 $ 5,524,896
Apr-94 $ 7,881,600 $ 7,360,835 $ 6,722,292 $ 5,532,297
May-94 $ 7,911,255 $ 7,363,310 $ 6,685,117 $ 5,535,661
Jun-94 $ 7,656,245 $ 7,415,529 $ 6,781,228 $ 5,554,501
Jul-94 $ 7,988,350 $ 7,536,104 $ 6,848,021 $ 5,569,304
Aug-94 $ 8,261,150 $ 7,789,677 $ 7,011,530 $ 5,592,249
Sep-94 $ 8,065,445 $ 7,596,849 $ 6,792,108 $ 5,607,052
Oct-94 $ 8,237,430 $ 7,801,047 $ 7,019,992 $ 5,611,089
Nov-94 $ 7,881,600 $ 7,424,744 $ 6,684,210 $ 5,618,490
Dec-94 $ 7,819,750 $ 7,407,368 $ 6,727,430 $ 5,618,490
Jan-95 $ 7,594,765 $ 7,071,410 $ 6,470,833 $ 5,640,627
Feb-95 $ 7,713,335 $ 7,032,716 $ 6,453,908 $ 5,663,168
Mar-95 $ 7,749,830 $ 7,430,062 $ 6,858,152 $ 5,681,941
Apr-95 $ 8,090,485 $ 7,719,900 $ 7,117,916 $ 5,700,713
May-95 $ 8,297,305 $ 7,685,791 $ 7,034,893 $ 5,711,950
Jun-95 $ 8,345,970 $ 7,579,474 $ 6,913,391 $ 5,723,187
Jul-95 $ 8,759,620 $ 8,009,875 $ 7,345,801 $ 5,723,052
Aug-95 $ 8,534,545 $ 7,731,957 $ 7,067,141 $ 5,738,528
Sep-95 $ 8,692,705 $ 7,864,085 $ 7,207,075 $ 5,749,294
Oct-95 $ 8,504,130 $ 7,653,973 $ 7,015,156 $ 5,768,201
Nov-95 $ 8,637,960 $ 7,833,735 $ 7,212,213 $ 5,764,164
Dec-95 $ 8,834,275 $ 8,143,470 $ 7,504,776 $ 5,760,396
Jan-96 $ 9,117,425 $ 8,255,334 $ 7,537,417 $ 5,794,173
Feb-96 $ 9,262,065 $ 8,255,655 $ 7,564,618 $ 5,812,946
Mar-96 $ 9,331,560 $ 8,409,331 $ 7,727,193 $ 5,842,955
Apr-96 $ 9,672,730 $ 8,664,463 $ 7,953,750 $ 5,865,429
May-96 $ 9,786,450 $ 8,534,352 $ 7,809,427 $ 5,876,665
Jun-96 $ 9,754,860 $ 8,577,631 $ 7,855,149 $ 5,880,433
Jul-96 $ 9,502,145 $ 8,292,469 $ 7,627,483 $ 5,891,603
Aug-96 $ 9,780,130 $ 8,341,112 $ 7,646,221 $ 5,902,839
Sep-96 $ 9,862,350 $ 8,548,244 $ 7,851,031 $ 5,921,612
Oct-96 $ 9,957,240 $ 8,462,613 $ 7,772,857 $ 5,940,385
Nov-96 $ 10,469,655 $ 8,789,081 $ 8,084,159 $ 5,951,622
Dec-96 $ 10,740,950 $ 8,687,303 $ 7,982,003 $ 5,951,622
Jan-97 $ 10,938,155 $ 8,527,714 $ 7,704,552 $ 5,970,327
Feb-97 $ 11,089,240 $ 8,684,094 $ 7,832,397 $ 5,988,225
Mar-97 $ 11,201,115 $ 8,665,893 $ 7,862,621 $ 6,003,162
Apr-97 $ 11,148,470 $ 8,738,972 $ 7,906,445 $ 6,010,362
May-97 $ 11,609,150 $ 9,278,761 $ 8,422,661 $ 6,006,729
Jun-97 $ 12,122,480 $ 9,790,723 $ 8,889,310 $ 6,013,928
Jul-97 $ 12,563,415 $ 9,988,960 $ 9,034,685 $ 6,021,128
Aug-97 $ 11,852,650 $ 9,203,166 $ 8,361,911 $ 6,032,566
Sep-97 $ 12,806,920 $ 9,700,732 $ 8,832,188 $ 6,047,638
Oct-97 $ 11,859,230 $ 8,874,822 $ 8,155,277 $ 6,062,778
Nov-97 $ 11,780,260 $ 8,763,921 $ 8,073,882 $ 6,059,144
Dec-97 $ 11,968,600 $ 8,864,782 $ 8,146,418 $ 6,051,877
Jan-98 $ 12,113,380 $ 9,129,955 $ 8,520,886 $ 6,062,778
Feb-98 $ 12,885,550 $ 9,739,155 $ 9,069,441 $ 6,074,889
Mar-98 $ 13,832,910 $10,075,664 $ 9,350,791 $ 6,087,068
Apr-98 $ 14,012,830 $10,147,826 $ 9,426,984 $ 6,098,035
May-98 $ 13,860,590 $ 9,963,800 $ 9,383,432 $ 6,109,003
Jun-98 $ 13,729,110 $ 9,926,344 $ 9,456,270 $ 6,116,337
Jul-98 $ 13,971,310 $10,020,745 $ 9,554,527 $ 6,123,671
Aug-98 $ 11,722,335 $ 8,607,545 $ 8,372,792 $ 6,131,005
Sep-98 $ 11,549,340 $ 8,425,720 $ 8,118,342 $ 6,138,339
Oct-98 $ 12,442,005 $ 9,308,295 $ 8,967,019 $ 6,153,075
Nov-98 $ 13,113,240 $ 9,808,520 $ 9,428,495 $ 6,153,075
Dec-98 $ 13,184,695 $10,146,450 $ 9,802,661 $ 6,149,374
Jan-99 $ 13,043,645 $10,135,585 $ 9,776,064 $ 6,164,379
Feb-99 $ 12,746,690 $ 9,908,647 $ 9,545,157 $ 6,170,569
Mar-99 $ 13,435,420 $10,387,049 $ 9,945,958 $ 6,189,275
Apr-99 $ 14,537,050 $10,906,612 $10,351,288 $ 6,234,289
May-99 $ 14,001,120 $10,394,325 $ 9,820,492 $ 6,234,289
Jun-99 $ 14,663,585 $10,871,948 $10,205,539 $ 6,234,289
Jul-99 $ 14,745,465 $11,126,938 $10,511,392 $ 6,250,572
Aug-99 $ 14,671,030 $11,165,540 $10,551,891 $ 6,269,345
Sep-99 $ 14,373,290 $11,241,049 $10,660,695 $ 6,296,864
Oct-99 $ 14,604,040 $11,659,622 $11,062,364 $ 6,309,380
Nov-99 $ 15,333,495 $12,125,829 $11,448,921 $ 6,311,936
Dec-99 $ 16,788,955 $13,282,292 $12,478,632 $ 6,311,936
Jan-00 $ 15,751,830 $12,561,548 $11,687,988 $ 6,329,498
Feb-00 $ 16,188,515 $12,900,854 $12,004,729 $ 6,365,765
Mar-00 $ 16,514,790 $13,386,362 $12,472,587 $ 6,417,104
Apr-00 $ 15,808,360 $12,639,271 $11,818,276 $ 6,422,083
May-00 $ 15,753,415 $12,315,956 $11,532,037 $ 6,427,062
Jun-00 $ 16,561,885 $12,840,245 $11,985,707 $ 6,462,118
Jul-00 $ 16,334,260 $12,333,313 $11,485,492 $ 6,475,912
Aug-00 $ 16,577,585 $12,485,902 $11,587,598 $ 6,475,912
Sep-00 $ 15,800,510 $11,793,308 $11,025,794 $ 6,509,689
Oct-00 $ 15,149,025 $11,418,472 $10,767,384 $ 6,520,859
Nov-00 $ 15,046,985 $10,906,190 $10,365,976 $ 6,524,627
Dec-00 $ 15,805,910 $11,278,642 $10,736,767 $ 6,519,580
Jan-01 $ 16,057,685 $11,447,823 $10,731,829 $ 6,562,105
Feb-01 $ 15,526,160 $10,541,495 $ 9,928,068 $ 6,589,625
Mar-01 $ 14,351,635 $ 9,796,362 $ 9,270,725 $ 6,605,908
Apr-01 $ 15,163,635 $10,462,640 $ 9,920,945 $ 6,629,660
May-01 $ 15,069,215 $10,173,719 $ 9,578,671 $ 6,658,458
Jun-01 $ 14,729,310 $ 9,783,525 $ 9,190,518 $ 6,672,251
Jul-01 $ 14,370,520 $ 9,565,848 $ 9,024,029 $ 6,651,056
Aug-01 $ 14,210,005 $ 9,328,275 $ 8,797,306 $ 6,653,613
Sep-01 $ 12,463,260 $ 8,338,645 $ 7,908,238 $ 6,681,133
Oct-01 $ 12,869,260 $ 8,572,276 $ 8,110,458 $ 6,658,592
Nov-01 $ 13,634,055 $ 8,964,350 $ 8,409,957 $ 6,647,356
Dec-01 $ 13,891,585 $ 9,079,827 $ 8,460,091 $ 6,621,114
Jan-02 $ 13,497,975 $ 8,690,962 $ 8,011,199 $ 6,638,676
Feb-02 $ 13,718,780 $ 8,753,542 $ 8,067,779 $ 6,664,985
Mar-02 $ 14,385,620 $ 9,229,055 $ 8,508,246 $ 6,700,040
Apr-02 $ 14,404,850 $ 9,289,022 $ 8,569,862 $ 6,738,864
May-02 $ 14,664,485 $ 9,390,204 $ 8,686,120 $ 6,737,586
Jun-02 $ 14,058,670 $ 8,984,742 $ 8,343,592 $ 6,742,565
Jul-02 $ 12,548,950 $ 8,109,132 $ 7,520,549 $ 6,750,034
Aug-02 $ 12,577,800 $ 8,109,636 $ 7,505,258 $ 6,771,296
Sep-02 $ 11,029,615 $ 7,250,254 $ 6,701,070 $ 6,782,533
Oct-02 $ 11,635,425 $ 7,639,211 $ 7,061,722 $ 6,796,326
Nov-02 $ 12,423,945 $ 8,006,574 $ 7,383,184 $ 6,795,115
Dec-02 $ 11,835,600 $ 7,747,912 $ 7,135,479 $ 6,780,110
Jan-03 $ 11,513,832 $ 7,475,908 $ 6,838,132 $ 6,810,658
Feb-03 $ 11,172,320 $ 7,324,433 $ 6,681,817 $ 6,863,141
Mar-03 $ 10,810,119 $ 7,182,357 $ 6,555,540 $ 6,904,185
Apr-03 $ 12,046,121 $ 7,874,446 $ 7,205,573 $ 6,890,055
May-03 $ 12,722,980 $ 8,376,046 $ 7,648,862 $ 6,876,598
Jun-03 $ 13,036,885 $ 8,609,173 $ 7,838,169 $ 6,883,999
Jul-03 $ 13,694,125 $ 8,838,173 $ 8,029,079 $ 6,890,728
Aug-03 $ 14,223,840 $ 9,100,641 $ 8,224,370 $ 6,918,315
Sep-03 $ 14,321,936 $ 9,355,452 $ 8,479,534 $ 6,939,174
Oct-03 $ 15,410,795 $ 9,961,902 $ 9,008,594 $ 6,932,445
Nov-03 $ 15,685,462 $10,179,120 $ 9,210,163 $ 6,911,587
Dec-03 $ 16,879,251 $10,956,300 $ 9,930,121 $ 6,904,858
SINCE
ONE- THREE- FIVE- TEN- INCEPTION
YEAR YEAR YEAR YEAR (10/18/90)
Average
Annual
Total
Return 1,2 42.61% 2.21% 5.06% 8.02% 9.65%
Cumulative
Total
Return 1,3 42.61% 6.79% 28.02% 116.36% 237.59%
1 PAST FEE WAIVERS BY THE FUND'S MANAGER AND ADMINISTRATOR INCREASED THE FUND'S
TOTAL RETURNS. WITHOUT THESE WAIVERS, THE PRIMARY SHARES TOTAL RETURNS WOULD
HAVE BEEN LOWER.
2 AVERAGE ANNUAL TOTAL RETURN REPRESENTS THE AVERAGE ANNUAL CHANGE IN VALUE OF
AN INVESTMENT OVER THE INDICATED PERIODS.
3 CUMULATIVE TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER
THE INDICATED PERIODS.
4 SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI). THE MSCI ALL COUNTRY (AC)
WORLD FREE EX-U.S. INDEX MEASURES THE PERFORMANCE OF SECURITIES LOCATED IN 48
COUNTRIES, INCLUDING EMERGING MARKETS IN LATIN AMERICA, ASIA, AND EASTERN
EUROPE. IT INCLUDES REINVESTED DIVIDENDS.
5 SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI). THE MSCI EUROPE,
AUSTRALASIA, AND FAR EAST (EAFE) INDEX IS A CAPITALIZATION-WEIGHTED
(OUTSTANDING SHARES TIMES PRICE) EQUITY INDEX THAT MEASURES THE TOTAL RETURNS
(GROSS DIVIDENDS ARE REINVESTED) OF EQUITY SECURITIES IN THE DEVELOPED MARKETS
OF EUROPE, AUSTRALASIA AND THE FAR EAST.
6 SOURCE: U.S. BUREAU OF LABOR STATISTICS.
INDICES ARE UNMANAGED, DO NOT CONTAIN CASH, AND DO NOT INCLUDE MANAGEMENT OR
OTHER OPERATING EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX, NOR IS AN
INDEX REPRESENTATIVE OF THE FUND'S PORTFOLIO.
ALL CALCULATIONS ASSUME REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE WITH MARKET CONDITIONS, CURRENCY VOLATILITY AND THE ECONOMIC,
SOCIAL, AND POLITICAL CLIMATES OF THE COUNTRIES WHERE THE FUND INVESTS.
EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER
LIQUIDITY. YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. PAST
PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
THE PERFORMANCE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES.
------------------------------------------------------------------------------
4 ANNUAL REPORT
.................................................................................
formance in financials also due, in part, to the Fund's underweight position
(21% versus 25%).
Although still positive, the lowest sector returns for
2003 (in both the Fund and the benchmark) occurred in the consumer staples
sector. These stocks were generally under pressure last year. The Fund's
performance lagged the benchmark due to a combination of stock selection and
relative weighting. The Fund was underweight in consumer staples (4% versus 8%).
In 2003, our investment strategy led us to initiate
portfolio positions in several companies. The largest transactions included two
integrated utilities: Suez, a France-based company that operates in more than
130 countries providing electricity, natural gas, water, and waste management
services, and National Grid Transco, the sole provider of electricity
transmission in England and Wales and the operator of natural gas transmission
in the U.K. We also initiated a position in Cadbury Schweppes, a U.K.-based
company that is one of the world's largest confectionary makers.
Other large additions to the portfolio included two
telecommunications companies. The first is Chunghwa Telecom, the largest
cellular operator and provider of local, domestic long distance, and
international long distance services in Taiwan. The second is Portugal Telecom,
the leading provider of local and broadband access telecom services in Portugal.
On the sell side, we liquidated the Fund's position in
TransCanada Pipelines. This stock performed well over the past two years and no
longer appeared undervalued to us. We also liquidated the positions in Alcatel
(France) and Banca Nazionale del Lavoro (Italy). After we reassessed the
earnings growth potential for these two companies, their valuations no longer
appeared attractive to us. We decided to reallocate these assets to other
holdings that might offer greater appreciation potential, based on our research.
It is important to note that investing in foreign
securities involves special risks related to market and currency volatility, and
economic, social, political, and other factors in the
ANNUAL REPORT 5
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES
LETTER CONTINUED................................................................
countries where the Fund invests. Emerging market securities involve heightened
risks related to the same factors, in addition to those associated with these
markets' relatively small size and lesser liquidity. Investing in any emerging
market means accepting a certain amount of volatility and, in some cases, the
consequences of severe market corrections. These special risks and other
considerations are discussed in the Fund's prospectus. The Fund's definition of
"emerging markets" as used by the Fund's manager may differ from the definition
of the same term used in managing other Franklin Templeton funds.
We thank you for your continued participation and look
forward to serving your investment needs.
Best regards,
/S/Gary P. Motyl
Gary P. Motyl, CFA
PRESIDENT
TEMPLETON INVESTMENT COUNSEL, LLC
CHIEF INVESTMENT OFFICER, TEMPLETON INSTITUTIONAL GLOBAL EQUITIES
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE BUT THE ADVISER MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
6 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Highlights
PRIMARY SHARES
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $12.13 $14.47 $16.95 $21.53 $17.76
-----------------------------------------------------------
Income from investment operations:
Net investment income a ................................... .25 .23 .25 .35 .37
Net realized and unrealized gains (losses) ................ 4.87 (2.37) (2.28) (1.66) 4.42
-----------------------------------------------------------
Total from investment operations ........................... 5.12 (2.14) (2.03) (1.31) 4.79
-----------------------------------------------------------
Less distributions from:
Net investment income ..................................... (.30) (.20) (.28) (.33) (.38)
Net realized gains ........................................ -- -- (.17) (2.94) (.64)
-----------------------------------------------------------
Total distributions ........................................ (.30) (.20) (.45) (3.27) (1.02)
-----------------------------------------------------------
Net asset value, end of year ............................... $16.95 $12.13 $14.47 $16.95 $21.53
-----------------------------------------------------------
Total return b ............................................. 42.61% (14.80)% (12.11)% (5.86)% 27.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $4,642,764 $3,164,910 $3,551,516 $4,344,727 $5,247,862
Ratios to average net assets:
Expenses .................................................. .83% .83% .84% .83% .84%
Net investment income ..................................... 1.85% 1.68% 1.62% 1.71% 1.88%
Portfolio turnover rate .................................... 8.93% 16.26% 15.38% 27.41% 10.56%
<FN>
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
</FN>
ANNUAL REPORT 7
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Highlights (CONTINUED)
SERVICE SHARES
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 C 2002 2001 2000 1999 D
-----------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $12.13 $14.47 $16.95 $21.53 $19.53
-----------------------------------------------
Income from investment operations:
Net investment income a ..................................... .25 .23 .25 .35 .25
Net realized and unrealized gains (losses) .................. 4.77 (2.37) (2.28) (1.66) 2.73
-----------------------------------------------
Total from investment operations ............................. 5.02 (2.14) (2.03) (1.31) 2.98
-----------------------------------------------
Less distributions from:
Net investment income ....................................... (.30) (.20) (.28) (.33) (.37)
Net realized gains .......................................... -- -- (.17) (2.94) (.61)
-----------------------------------------------
Total distributions .......................................... (.30) (.20) (.45) (3.27) (.98)
-----------------------------------------------
Net asset value, end of year ................................. $16.85 $12.13 $14.47 $16.95 $21.53
-----------------------------------------------
Total return b ............................................... 41.77% (14.80)% (12.11)% (5.86)% 15.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. -- $12 $15 $17 $22
Ratios to average net assets:
Expenses .................................................... .83% .83% .84% .83% .84%e
Net investment income ....................................... 1.85% 1.68% 1.62% 1.70% 1.91%e
Portfolio turnover rate ...................................... 8.93% 16.26% 15.38% 27.41% 10.56%
<FN>
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
c Per share data is for the period January 1, 2003 to December 30, 2003 due to
the liquidation of service shares on December 30, 2003. See Note 2.
d For the period May 3, 1999 (effective date) to December 31, 1999.
e Annualized.
</FN>
See notes to financial statements.
8 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.7%
AUSTRALIA 3.8%
Alumina Ltd. ....................................... Metals & Mining 8,989,818 $ 44,501,031
Australia & New Zealand Banking Group Ltd. ......... Commercial Banks 3,384,161 45,080,330
a Australia & New Zealand Banking Group Ltd., 144A ... Commercial Banks 615,302 8,196,424
BHP Billiton Ltd., ADR ............................. Metals & Mining 19,825 362,005
Mayne Group Ltd. ................................... Health Care Providers & Services 9,050,000 22,229,003
Qantas Airways Ltd. ................................ Airlines 8,435,050 20,909,198
a WMC Resources Ltd. ................................. Metals & Mining 8,198,378 34,776,842
---------------
176,054,833
---------------
BERMUDA 1.6%
ACE Ltd. ........................................... Insurance 1,018,200 42,173,844
XL Capital Ltd., A ................................. Insurance 413,200 32,043,660
---------------
74,217,504
---------------
CANADA 4.4%
Alcan Inc. (CAD Traded) ............................ Metals & Mining 1,540,000 72,182,472
a Alcan Inc. (EUR Traded) ............................ Metals & Mining 378,573 18,145,527
BCE Inc. ........................................... Diversified Telecommunication Services 2,272,520 50,822,826
a Celestica Inc. ..................................... Electronic Equipment & Instruments 9,015 135,856
Husky Energy Inc. .................................. Oil & Gas 3,576,200 64,951,375
---------------
206,238,056
---------------
CHILE 1.1%
Cia de Telecomunicaciones de Chile SA, ADR ......... Diversified Telecommunication Services 3,415,550 51,062,472
---------------
CHINA .7%
a China Life Insurance Co. Ltd., H ................... Insurance 7,857,000 6,426,394
China Mobile (Hong Kong) Ltd. ...................... Wireless Telecommunication Services 7,797,000 23,952,605
---------------
30,378,999
---------------
DENMARK .4%
Vestas Wind Systems A/S ............................ Electrical Equipment 1,020,505 16,595,967
---------------
FINLAND 2.8%
M-real OYJ, B ...................................... Paper & Forest Products 2,118,000 18,780,954
Stora Enso OYJ, R (EUR/FIM Traded) ................. Paper & Forest Products 1,307,815 17,617,891
Stora Enso OYJ, R (SEK Traded) ..................... Paper & Forest Products 2,814,636 37,748,582
UPM-Kymmene Corp. .................................. Paper & Forest Products 3,010,000 57,405,651
---------------
131,553,078
---------------
FRANCE 6.2%
Accor SA ........................................... Hotels Restaurants & Leisure 454,010 20,558,727
Aventis SA ......................................... Pharmaceuticals 1,290,232 85,277,695
Aventis SA, A, ADR ................................. Pharmaceuticals 4,327 286,707
AXA ................................................ Insurance 2,422,126 51,845,961
AXA SA, ADR ........................................ Insurance 16,470 353,611
Michelin, B ........................................ Auto Components 1,232,040 56,535,842
Suez SA ............................................ Multi-Utilities & Unregulated Power 1,905,400 38,285,850
Suez SA, ADR ....................................... Multi-Utilities & Unregulated Power 7,250 146,523
Total SA, B ........................................ Oil & Gas 185,187 34,430,580
---------------
287,721,496
---------------
GERMANY 8.8%
BASF AG ............................................ Chemicals 807,090 45,556,607
BASF AG, ADR ....................................... Chemicals 6,430 358,473
Bayer AG, Br. ...................................... Chemicals 1,349,230 39,823,388
Celesio AG ......................................... Health Care Providers & Services 1,178,552 57,232,911
Deutsche Post AG ................................... Air Freight & Logistics 3,236,050 66,614,955
E.ON AG ............................................ Electric Utilities 1,340,800 87,825,106
E.ON AG, ADR ....................................... Electric Utilities 4,880 319,347
Merck KGAA ......................................... Pharmaceuticals 1,039,277 43,128,422
Muenchener Rueckversicherungs-Gesellschaft ......... Insurance 132,998 16,242,263
ANNUAL REPORT 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
GERMANY (CONT.)
Muenchener Rueckversicherungs-Gesellschaft,144A .... Insurance 37,999 $ 4,640,594
Volkswagen AG ...................................... Automobiles 812,870 45,472,735
---------------
407,214,801
---------------
HONG KONG 2.5%
Cheung Kong Holdings Ltd. .......................... Real Estate 50,000 397,689
Cheung Kong Holdings Ltd., ADR ..................... Real Estate 28,535 226,961
HSBC Holdings PLC .................................. Commercial Banks 2,988,171 47,149,640
HSBC Holdings PLC, ADR ............................. Commercial Banks 3,790 298,728
Hutchinson Whampoa Ltd., ADR ....................... Industrial Conglomerates 4,795 176,795
Hutchison Whampoa Ltd. ............................. Industrial Conglomerates 4,903,550 36,159,544
Swire Pacific Ltd., A .............................. Diversified Financial Services 4,993,000 30,805,902
Swire Pacific Ltd., B .............................. Diversified Financial Services 154,500 163,185
---------------
115,378,444
---------------
INDIA 3.2%
Housing Development Finance Corp. Ltd. ............. Thrifts & Mortgage Finance 3,368,410 47,571,178
ICICI Bank Ltd. .................................... Commercial Banks 6,433,958 41,699,099
ICICI Bank Ltd., ADR ............................... Commercial Banks 2,095,625 36,002,838
Satyam Computers Services Ltd. ..................... IT Services 2,801,066 22,552,802
Satyam Computers Services Ltd., ADR ................ IT Services 92,500 2,713,025
---------------
150,538,942
---------------
ISRAEL .6%
a Check Point Software Technologies Ltd. ............. Software 1,663,060 27,972,669
---------------
ITALY 2.2%
Eni SpA ............................................ Oil & Gas 4,312,910 81,383,872
ENI SpA, ADR ....................................... Oil & Gas 4,045 384,194
Riunione Adriatica di Sicurta SpA .................. Insurance 1,248,104 21,253,032
---------------
103,021,098
---------------
JAPAN 8.3%
East Japan Railway Co. ............................. Road & Rail 5,718 26,944,014
Hitachi Ltd. ....................................... Electronic Equipment & Instruments 4,242,000 25,569,954
Hitachi Ltd., ADR .................................. Electronic Equipment & Instruments 2,275 136,659
Komatsu Ltd. ....................................... Machinery 8,796,000 55,811,141
Komatsu Ltd., ADR .................................. Machinery 15,015 381,084
NEC Corp. .......................................... Computers & Peripherals 3,555,000 26,172,390
NEC Corp., ADR ..................................... Computers & Peripherals 14,625 109,819
Nintendo Co. Ltd. .................................. Software 237,800 22,189,046
Nippon Telegraph & Telephone Corp. ................. Diversified Telecommunication Services 9,285 44,791,873
Nippon Telegraph & Telephone Corp., ADR ............ Diversified Telecommunication Services 6,815 167,377
Nomura Holdings Inc. ............................... Capital Markets 1,728,000 29,426,145
Ono Pharmaceutical Co. Ltd. ........................ Pharmaceuticals 977,000 36,738,919
Seiko Epson Corp. .................................. Computers & Peripherals 701,700 32,737,706
Sompo Japan Insurance Inc. ......................... Insurance 5,700,000 46,857,329
Sony Corp. ......................................... Household Durables 1,037,200 35,905,683
Sony Corp., ADR .................................... Household Durables 4,405 152,721
---------------
384,091,860
---------------
MEXICO .9%
Telefonos de Mexico SA de CV (Telmex), L, ADR ...... Diversified Telecommunication Services 1,269,897 41,944,698
---------------
NETHERLANDS 5.6%
Akzo Nobel NV, ADR ................................. Chemicals 4,860 185,652
CNH Global NV ...................................... Machinery 636,240 10,561,584
IHC Caland NV ...................................... Energy Equipment & Services 603,625 32,739,499
ING Groep NV ....................................... Diversified Financial Services 2,338,840 54,547,366
ING Groep NV, ADR .................................. Diversified Financial Services 12,965 303,511
Koninklijke Philips Electronics NV ................. Household Durables 2,510,731 73,314,105
Koninklijke Philips Electronics NV (N.Y. shares) ... Household Durables 11,935 347,189
10 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
NETHERLANDS (CONT.)
Unilever NV ........................................ Food Products 1,003,670 $ 65,641,132
Unilever NV, ADR ................................... Food Products 2,540 164,846
Wolters Kluwer NV .................................. Media 1,376,695 21,532,566
---------------
259,337,450
---------------
NEW ZEALAND .6%
Carter Holt Harvey Ltd. ............................ Paper & Forest Products 3,149,000 3,886,863
Telecom Corp. of New Zealand Ltd. .................. Diversified Telecommunication Services 6,311,000 22,250,573
---------------
26,137,436
---------------
NORWAY .9%
Norsk Hydro ASA .................................... Oil & Gas 711,300 43,889,588
---------------
PORTUGAL .9%
Portugal Telecom SA, SGPS .......................... Diversified Telecommunication Services 4,128,550 41,556,293
---------------
SINGAPORE 1.0%
DBS Group Holdings Ltd. ............................ Commercial Banks 5,161,185 44,673,744
DBS Group Holdings Ltd., ADR ....................... Commercial Banks 7,605 263,307
---------------
44,937,051
---------------
SOUTH KOREA 5.2%
Kookmin Bank ....................................... Commercial Banks 900,573 33,747,868
Kookmin Bank, ADR .................................. Commercial Banks 216,498 8,192,284
Korea Electric Power Corp. ......................... Electric Utilities 1,052,160 18,897,376
Korea Electric Power Corp., ADR .................... Electric Utilities 12,195 126,706
KT Corp., ADR ...................................... Diversified Telecommunication Services 829,995 15,828,005
LG Electronics Inc. ................................ Household Durables 861,560 42,372,989
POSCO .............................................. Metals & Mining 205,600 28,126,563
POSCO, ADR ......................................... Metals & Mining 4,080 138,598
Samsung Electronics Co. Ltd. ....................... Semiconductors & Semiconductor Equipment 248,390 94,019,211
---------------
241,449,600
---------------
SPAIN 4.6%
Endesa SA .......................................... Electric Utilities 1,567,200 30,146,064
Iberdrola SA, Br. .................................. Electric Utilities 3,039,964 60,086,069
Repsol YPF SA ...................................... Oil & Gas 2,616,000 51,013,320
Repsol YPF SA, ADR ................................. Oil & Gas 13,905 271,843
Telefonica SA ...................................... Diversified Telecommunication Services 4,794,553 70,394,295
Telefonica SA, ADR ................................. Diversified Telecommunication Services 8,550 377,825
---------------
212,289,416
---------------
SWEDEN 7.4%
Atlas Copco AB, A .................................. Machinery 1,414,570 50,623,570
Autoliv Inc. ....................................... Auto Components 762,210 28,697,207
Autoliv Inc., SDR .................................. Auto Components 9,100 345,267
Electrolux AB, B ................................... Household Durables 2,122,000 46,596,528
Foreningssparbanken AB, A .......................... Commercial Banks 1,569,680 30,868,723
Nordea AB .......................................... Commercial Banks 43,193 323,409
Nordea AB, FDR ..................................... Commercial Banks 9,346,158 69,789,676
Securitas AB, B .................................... Commercial Services & Supplies 1,617,010 21,798,948
Svenska Cellulosa AB, B ............................ Paper & Forest Products 1,188,943 48,580,218
Volvo AB, B ........................................ Machinery 1,492,545 45,635,331
---------------
343,258,877
---------------
SWITZERLAND 3.5%
Adecco SA .......................................... Commercial Services & Supplies 946,680 60,853,899
a Clariant AG ........................................ Chemicals 1,115,000 16,453,406
Nestle SA .......................................... Food Products 123,730 30,913,742
Nestle SA, ADR ..................................... Food Products 2,120 132,420
Swiss Re ........................................... Insurance 799,580 53,984,176
ANNUAL REPORT 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SWITZERLAND (CONT.)
Swiss Reinsurance Co., ADR ......................... Insurance 3,295 $ 222,464
UBS AG ............................................. Capital Markets 4,365 296,776
---------------
162,856,883
---------------
TAIWAN .3%
Chunghwa Telecom Co. Ltd., ADR ..................... Diversified Telecommunication Services 1,096,900 15,905,050
---------------
UNITED KINGDOM 15.2%
Amersham PLC ....................................... Health Care Equipment & Supplies 5,816,520 80,435,281
Amersham PLC, A, ADR ............................... Health Care Equipment & Supplies 7,242 494,484
BAE Systems PLC .................................... Aerospace & Defense 5,157,318 15,533,534
BHP Billiton PLC ................................... Metals & Mining 10,220,211 89,283,453
BP PLC ............................................. Oil & Gas 2,783,560 22,573,042
Brambles Industries PLC ............................ Commercial Services & Supplies 7,121,727 25,944,245
a British Airways PLC ................................ Airlines 8,317,200 34,617,157
a British Airways PLC, ADR ........................... Airlines 8,225 343,311
Cable & Wireless PLC ............................... Diversified Telecommunication Services 13,770,000 32,908,380
Cable & Wireless PLC, ADR .......................... Diversified Telecommunication Services 29,955 209,984
Cadbury Schweppes PLC .............................. Food Products 4,241,790 31,152,223
a CellTech Group PLC ................................. Biotechnology 591,318 4,001,328
GKN PLC ............................................ Auto Components 3,309,156 15,816,843
Hanson PLC ......................................... Construction Materials 3,727,305 27,373,783
Hays PLC ........................................... Commercial Services & Supplies 117,415 252,230
Imperial Chemical Industries PLC ................... Chemicals 4,724,181 16,829,488
Imperial Chemical Industries PLC, ADR .............. Chemicals 16,991 243,311
a Invensys PLC ....................................... Machinery 16,791,659 5,485,898
J Sainsbury PLC .................................... Food & Staples Retailing 6,725,340 37,653,284
Kidde PLC .......................................... Electrical Equipment 12,291,130 23,433,260
Marks & Spencer Group PLC .......................... Multiline Retail 3,493,500 18,073,817
Marks & Spencer Group PLC, ADR ..................... Multiline Retail 7,269 225,639
National Grid Transco PLC .......................... Multi-Utilities & Unregulated Power 4,196,020 30,064,929
Rolls-Royce Group PLC .............................. Aerospace & Defense 12,447,144 39,495,467
Shell Transport & Trading Co. PLC .................. Oil & Gas 34,750 258,474
Shell Transport & Trading Co. PLC, ADR ............. Oil & Gas 1,144,530 51,538,186
a Shire Pharmaceuticals Group PLC .................... Pharmaceuticals 2,105,700 20,449,728
a Shire Pharmaceuticals Group PLC, ADR ............... Pharmaceuticals 8,590 249,540
Smiths Group PLC ................................... Industrial Conglomerates 1,692,380 20,025,835
Standard Chartered PLC ............................. Commercial Banks 2,493,430 41,177,014
WPP Group PLC ...................................... Media 2,186,000 21,464,367
---------------
707,607,515
---------------
TOTAL COMMON STOCKS (COST $3,241,616,598) .......... 4,303,210,076
---------------
PREFERRED STOCKS .3%
AUSTRALIA .3%
News Corp. Ltd., pfd. .............................. Media 2,001,558 15,080,717
---------------
BRAZIL
Cia Vale do Rio Doce, A, ADR, pfd. ................. Metals & Mining 3,705 190,845
---------------
TOTAL PREFERRED STOCKS (COST $7,970,362) ........... 15,271,562
---------------
PRINCIPAL
AMOUNT
---------------
BONDS & NOTES (COST $2,276,534) .1%
FRANCE
AXA, cvt., zero cpn., 12/21/04 Insurance 152,412 EUR 3,074,001
---------------
12 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
SHARES/
COUNTRY PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 7.2%
UNITED STATES
b Franklin Institutional Fiduciary Trust Money Market Portfolio United States $162,359,911 $ 162,359,911
U.S. Treasury Bills, 0.862% to 0.937%, with maturities to 3/18/04 United States 175,000,000 174,778,316
---------------
TOTAL SHORT TERM INVESTMENTS (COST $337,110,595) ... 337,138,227
---------------
TOTAL INVESTMENTS (COST $3,588,974,089) 100.3% ..... 4,658,693,866
OTHER ASSETS, LESS LIABILITIES (.3)% ............... (15,929,444)
---------------
NET ASSETS 100.0% .................................. $4,642,764,422
---------------
CURRENCY ABBREVIATIONS:
CAD-- Canadian Dollar
EUR-- Euro
FIM-- Finnish Markka
SEK-- Swedish Krona
<FN>
a Non-income producing.
b See Note 6 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio.
</FN>
See notes to financial statements.
ANNUAL REPORT 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
Assets:
Investments in securities:
Cost .............................................................................. $3,588,974,089
---------------
Value ............................................................................. 4,658,693,866
Cash ............................................................................... 15,131,023
Receivables:
Capital shares sold ............................................................... 15,666,905
Dividends and interest ............................................................ 5,095,420
---------------
Total assets .................................................................. 4,694,587,214
---------------
Liabilities:
Payables:
Investment securities purchased ................................................... 5,622,898
Funds advanced by custodian-foreign, at value and cost ............................ 9,002,255
Capital shares redeemed ........................................................... 24,719,998
Affiliates ........................................................................ 2,908,565
Deferred tax liability (Note 1f) ................................................... 8,991,444
Other liabilities .................................................................. 577,632
---------------
Total liabilities ............................................................. 51,822,792
---------------
Net assets, at value ................................................................ 4,642,764,422
---------------
Net assets consist of:
Undistributed net investment income ................................................ $ (13,659,162)
Net unrealized appreciation ........................................................ 1,061,016,366
Accumulated net realized (loss) .................................................... (359,059,602)
Capital shares ..................................................................... 3,954,466,820
---------------
Net assets, at value ................................................................ $4,642,764,422
---------------
PRIMARY SHARES:
Net asset value per share ($4,642,764,422 / 273,886,523 shares outsanding) ......... $16.95
---------------
Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
14 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
Investment Income:
(net of foreign taxes of $11,480,766)
Dividends ........................................................................... $ 94,590,234
Interest ............................................................................ 1,321,379
---------------
Total investment income ........................................................... 95,911,613
---------------
Expenses:
Management fees (Note 3) ............................................................... 24,627,107
Administrative fees (Note 3) ........................................................... 3,138,485
Transfer agent fees Note 3) ............................................................ 54,600
Custodian fees ......................................................................... 1,346,200
Reports to shareholders ................................................................ 28,500
Registration and filing fees ........................................................... 128,800
Professional fees ...................................................................... 114,700
Directors' fees and expenses ........................................................... 154,100
Other .................................................................................. 77,500
---------------
Total expenses .................................................................... 29,669,992
---------------
Net investment income ........................................................ 66,241,621
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................................... (151,508,148)
Foreign currency transactions ......................................................... (66,537)
---------------
Net realized gains (losses) ....................................................... (151,574,685)
Net unrealized appreciation (depreciation) on:
Investments ........................................................................... 1,446,782,516
Deferred taxes (Note 1f) .............................................................. (7,463,480)
Translation of assets and liabilities denominated in foreign currencies ............... 45,791
---------------
Net unrealized appreciation (depreciation) ........................................ 1,439,364,827
---------------
Net realized and unrealized gain (loss) ................................................. 1,287,790,142
---------------
Net increase (decrease) in net assets resulting from operations ......................... $1,354,031,763
---------------
See notes to financial statements.
ANNUAL REPORT 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Financial Statements (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
-------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................ $ 66,241,621 $ 57,461,819
Net realized gain (loss) from investments and foreign currency transactions .......... (151,574,685) (82,949,309)
Net unrealized appreciation (depreciation) on investments, deferred taxes, and
translation of assets and liabilities denominated in foreign currencies ............. 1,439,364,827 (505,707,735)
-------------------------------
Net increase in net assets resulting from operations .............................. 1,354,031,763 (531,195,225)
Distributions to shareholders from:
Net investment income:
Primary Shares ....................................................................... (80,683,825) (52,003,101)
Service Shares ....................................................................... (313) (209)
-------------------------------
Total distributions to shareholders ................................................... (80,684,138) (52,003,310)
Capital share transactions (Note 2):
Primary Shares ....................................................................... 204,511,702 196,590,387
Service Shares ....................................................................... (17,258) --
-------------------------------
Total capital share transactions ...................................................... 204,494,444 196,590,387
Net increase (decrease) in net assets ............................................. 1,477,842,069 (386,608,148)
Net assets:
Beginning of year ..................................................................... 3,164,922,353 3,551,530,501
-------------------------------
End of year ........................................................................... $4,642,764,422 $3,164,922,353
-------------------------------
Undistributed net investment income included in net assets:
End of year ........................................................................... $ (13,659,162) $ (5,848,138)
-------------------------------
See notes to financial statements.
16 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Equity Series (the Fund) is a separate, diversified series of Templeton
Institutional Funds, Inc. (the Company), which is an open-end investment company
registered under the Investment Company Act of 1940. The Fund seeks long-term
capital growth. Under normal conditions, the Fund invests at least 80% of its
net assets in the equity securities of companies located outside the United
States, including emerging markets. The following summarizes the Fund's
significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Investments in open-end mutual funds are
valued at the closing net asset value. Foreign securities are valued at the
close of trading of the foreign exchange or the NYSE, whichever is earlier. If
events occur that materially affect the values of securities after the prices or
foreign exchange rates are determined, or if market quotations are not readily
available, the securities will be valued at fair value as determined following
procedures approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of the net assets of each class.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
ANNUAL REPORT 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. DEFERRED TAXES
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities as reflected in the accompanying
financial statements.
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business, the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
The Fund offered two classes of shares: Primary and Service shares. Each class
of shares differed by its distribution fees, voting rights on matters affecting
a single class and its exchange privilege. On December 30, 2003, the Fund
liquidated all assets in the Service Share Class.
At December 31, 2003, there were 1.14 billion shares authorized ($0.01 par
value) for the Company, of which 555 million have been classified as Primary
shares. Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2003 2002
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
PRIMARY SHARES:
Shares sold ............................................ 68,564,860 $ 964,509,589 74,087,082 $986,687,055
Shares issued on reinvestment of distributions ......... 4,625,802 68,892,941 3,633,413 45,254,028
Shares redeemed ........................................ (60,226,673) (828,890,828) (62,330,273) (835,350,696)
-------------------------------------------------------
Net increase (decrease) ................................ 12,963,989 $ 204,511,702 15,390,222 $196,590,387
-------------------------------------------------------
PERIOD ENDED DECEMBER 30,
-------------------------------------------------------
2003 2002
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
SERVICE SHARES:
Shares liquidated ...................................... (1,024) $ (17,258) -- $ --
-------------------------------------------------------
3. TRANSACTIONS WITH AFFILIATES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, LLC (TIC), Franklin Templeton Services, LLC (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors), and Franklin/Templeton
Investor Services, LLC (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent,
respectively.
18 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Fund pays an investment management fee to TIC of .70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the aggregate average daily net
assets of certain funds within the Company as follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-------------------------------------------------------------
0.150% First $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
The Fund paid transfer agent fees of $54,600, of which $20,466 was paid to
Investor Services.
4. INCOME TAXES
At December 31, 2003, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments .............................. $3,625,941,104
---------------
Unrealized appreciation .......................... 1,396,867,361
Unrealized depreciation .......................... (364,114,599)
---------------
Net unrealized appreciation (depreciation) ....... $1,032,752,762
---------------
Distributable earnings - ordinary income ......... $ 23,278,120
---------------
The tax character of distributions paid during the years ended December 31, 2003
and 2002, was as follows:
Distributions paid from: 2003 2002
--------------------------
Ordinary Income .................... $80,684,138 $52,003,310
Net investment income differs for financial statement and tax purposes primarily
due to differing treatment of foreign currency transactions and passive foreign
investment company shares.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, and passive foreign investment company shares.
At December 31, 2003, the Fund had deferred foreign currency losses occurring
subsequent to October 31, 2003 of $77,910. For tax purposes, such losses will be
reflected in the year ending December 31, 2004.
At December 31, 2003, the Fund had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
Capital loss carryovers expiring in:
2009 ........................................... $ 99,069,404
2010 ........................................... 82,881,631
2011 ........................................... 177,000,923
------------
$358,951,958
------------
ANNUAL REPORT 19
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Notes to Financial Statements (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 2003 aggregated $394,048,845 and $297,108,546, respectively.
6. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Franklin Advisers Inc. (an affiliate of the Fund's investment manager).
Management fees paid by the Fund are reduced on assets invested in the Sweep
Money Fund, in an amount not to exceed the management fees paid by the Sweep
Money Fund. The Fund earned $1,119,999 of dividend income from investment in the
Sweep Money Fund.
7. REGULATORY MATTERS
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries (the "Company"),
alleging violations of the Massachusetts Uniform Securities Act. The complaint
arises from activity that occurred in 2001 during which time an officer of a
Company subsidiary was negotiating an agreement with an investor relating to
investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, has been named in shareholder class actions related to the matter
described above. The Company believes that the claims made in the lawsuit are
without merit and it intends to defend vigorously against the allegations. The
Company and the Fund may be named in similar civil actions related to the matter
described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Fund's management has been advised that the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on the Fund is uncertain at this time. If the Company finds that it bears
responsibility for any unlawful or improper conduct, it has committed to making
the Fund or its shareholders whole, as appropriate.
20 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Templeton Institutional Funds, Inc. - Foreign Equity Series
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Foreign Equity Series of Templeton
Institutional Funds, Inc. (the "Fund") at December 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2004, except for Note 7, as to which the date is February 12, 2004.
ANNUAL REPORT 21
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Tax Designation (unaudited)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby
designates up to maximum of $87,981,929 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2003. In January 2004, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2003. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
At December 31, 2003 more than 50% of the Templeton Institutional Funds, Inc.
Foreign Equity Series' total assets were invested in securities of foreign
issuers. In most instances, foreign taxes were withheld from dividends paid to
the Fund on these investments. As shown in the table below the Fund hereby
designates to shareholders the foreign source income and foreign taxes paid,
pursuant to Section 853 of the Internal Revenue Code. This designation will
allow shareholders of record on December 11, 2003, to treat their proportionate
share of foreign taxes paid by the Fund as having been paid directly by them.
The shareholder shall consider these amounts as foreign taxes paid in the tax
year in which they receive the Fund distribution.
The following tables provide a detailed analysis, by country, of Foreign Tax
Paid, Foreign Source Income, Foreign Qualified Dividends and Adjusted Foreign
Source Income as designated by the Fund, to Class Primary, and Class Service
shareholders of record. As a service to individual shareholders filing Form
1116, "Adjusted Foreign Source Income per Share" in column 4 below reports
foreign source income with the required adjustments to foreign source qualified
dividends. This information is provided to simplify your reporting of foreign
source income for line 1 of Form 1116.
CLASS PRIMARY
------------------------------------------------------------------------------------
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
-----------------------------------------------------------------------------------------------------------
Australia 0.0002 0.0112 0.0112 0.0048
Bermuda 0.0000 0.0045 0.0045 0.0019
Brazil 0.0002 0.0008 0.0000 0.0008
Canada 0.0035 0.0169 0.0169 0.0072
Chile 0.0000 0.0009 0.0009 0.0004
China 0.0000 0.0013 0.0000 0.0013
Finland 0.0032 0.0156 0.0119 0.0088
France 0.0036 0.0189 0.0189 0.0081
Germany 0.0051 0.0289 0.0289 0.0124
Hong Kong 0.0000 0.0108 0.0000 0.0108
India 0.0000 0.0075 0.0053 0.0045
Italy 0.0020 0.0175 0.0048 0.0148
Japan 0.0011 0.0079 0.0079 0.0034
Mexico 0.0000 0.0040 0.0040 0.0017
Netherlands 0.0047 0.0228 0.0228 0.0098
New Zealand 0.0006 0.0028 0.0028 0.0012
Norway 0.0006 0.0029 0.0029 0.0012
Philippines 0.0000 0.0001 0.0001 0.0000
Singapore 0.0007 0.0024 0.0000 0.0024
South Korea 0.0028 0.0121 0.0016 0.0112
Spain 0.0026 0.0146 0.0145 0.0063
Sweden 0.0053 0.0268 0.0268 0.0115
Switzerland 0.0009 0.0045 0.0045 0.0019
United Kingdom 0.0073 0.0519 0.0495 0.0236
--------------------------------------------------------------------------------------
TOTAL $0.0444 $0.2876 $0.2407 $0.1500
--------------------------------------------------------------------------------------
22
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Tax Designation (unaudited) (CONTINUED)
CLASS SERVICE
------------------------------------------------------------------------------------
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
-----------------------------------------------------------------------------------------------------------
Australia 0.0002 0.0112 0.0112 0.0048
Bermuda 0.0000 0.0045 0.0045 0.0019
Brazil 0.0002 0.0008 0.0000 0.0008
Canada 0.0035 0.0169 0.0169 0.0072
Chile 0.0000 0.0009 0.0009 0.0004
China 0.0000 0.0013 0.0000 0.0013
Finland 0.0032 0.0156 0.0119 0.0088
France 0.0036 0.0189 0.0189 0.0081
Germany 0.0051 0.0289 0.0289 0.0124
Hong Kong 0.0000 0.0108 0.0000 0.0108
India 0.0000 0.0075 0.0053 0.0045
Italy 0.0020 0.0175 0.0048 0.0148
Japan 0.0011 0.0079 0.0079 0.0034
Mexico 0.0000 0.0040 0.0040 0.0017
Netherlands 0.0047 0.0228 0.0228 0.0098
New Zealand 0.0006 0.0028 0.0028 0.0012
Norway 0.0006 0.0029 0.0029 0.0012
Philippines 0.0000 0.0001 0.0001 0.0000
Singapore 0.0007 0.0024 0.0000 0.0024
South Korea 0.0028 0.0121 0.0016 0.0112
Spain 0.0026 0.0146 0.0145 0.0063
Sweden 0.0053 0.0268 0.0268 0.0115
Switzerland 0.0009 0.0045 0.0045 0.0019
United Kingdom 0.0073 0.0519 0.0495 0.0236
--------------------------------------------------------------------------------------
TOTAL $0.0444 $0.2876 $0.2407 $0.1500
--------------------------------------------------------------------------------------
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the fund's distribution to which the foreign taxes relate).
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends without adjustment for the lower U.S.
tax rates. Generally, this is the foreign source income to be reported by
certain trusts and corporate shareholders.
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the fund. If you are an individual shareholder who
does not meet the qualified dividend holding period requirements, you may find
this information helpful to calculate the foreign source income adjustment
needed to complete line 1 of Form 1116.
Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per
share of foreign source income the fund paid to you. These amounts reflect the
Foreign Source Income reported in column 2 adjusted for the tax rate
differential on foreign source qualified dividends that may be required for
certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B).
If you are an individual shareholder who meets the qualified dividend holding
period requirements, generally, these Adjusted Foreign Source Income amounts may
be reported directly on line 1 of Form 1116 without additional adjustment.
In January 2004, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2003. The Foreign Source Income reported on Form 1099-DIV has been
reduced to take into account the tax rate differential on foreign source
qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B).
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their 2003 individual income tax returns.
23
BOARD MEMBERS AND OFFICERS
The name, age, and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of U.S registered portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton (71) Director Since 1992 142 Director, Bar-S Foods (meat packing company).
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
- -----------------------------------------------------------------------------------------------------------------------------------
Frank J. Crothers (59) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice
Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric
Utility Services Corporation (Chairman until 2002); director of various other business and nonprofit organizations; and
FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato (71) Director Since 1992 143 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- -----------------------------------------------------------------------------------------------------------------------------------
Edith E. Holiday (51) Director Since 1996 96 Director, Amerada Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas); Beverly Enterprises,
Suite 2100 Inc. (health care); H.J. Heinz Company (processed
Fort Lauderdale, FL 33394-3091 foods and allied products); RTI International
Metals, Inc. (manufacture and distribution of
titanium); and Canadian National Railway
(railroad).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Betty P. Krahmer (74) Director Since 1995 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government.
- -----------------------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (75) Director Since 1993 142 Director, White Mountains Insurance Group, Ltd.
500 East Broward Blvd. (holding company); Martek Biosciences Corporation;
Suite 2100 MedImmune, Inc. (biotechnology); and Overstock.com
Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI
Communication Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom, Inc.)
(communications services) (1988-2002) and
Spacehab, Inc. (aerospace services) (1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River
Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and
President, National Association of Securities Dealers, Inc. (1970-1987).
- -----------------------------------------------------------------------------------------------------------------------------------
24
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (74) Director Since 1992 28 None
500 East Broward Blvd.
Suite 2100 Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Frank A. Olson (71) Director Since 2003 20 Director, Becton, Dickinson and Co. (medical
500 East Broward Blvd. technology); White Mountains Insurance Group Ltd.
Suite 2100 (holding company); and Amerada Hess Corporation
Fort Lauderdale, FL 33394-3091 (exploration and refining of oil and gas).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief Executive Officer 1977-1999); and
FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
Constantine D.
Tseretopoulos (49) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology
Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**Nicholas F. Brady (73) Director Since 1993 21 Director, Amerada Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas); and C2, Inc.
Suite 2100 (operating and investment business); and FORMERLY,
Fort Lauderdale, FL 33394-3091 Director, H.J. Heinz Company (processed foods and
allied products)(1987-1988;1993-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group,
LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund;
and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States
Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until
1988); and U.S. Senator, New Jersey (April 1982-December 1982).
- -----------------------------------------------------------------------------------------------------------------------------------
**Charles B. Johnson (70) Director, Director and 142 None
One Franklin Parkway Vice Vice President
San Mateo, CA 94403-1906 President since 1993 and
and Chairman Chairman of
of the Board the Board since
1995
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin
Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Harmon E. Burns (58) Vice Since 1996 Not None
One Franklin Parkway President Applicable
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries
of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
25
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Jeffrey A. Everett (39) Vice Since 2001 Not Applicable None
PO Box N-7759 President
Lyford Cay, Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989).
- -----------------------------------------------------------------------------------------------------------------------------------
Martin L. Flanagan (43) Vice Since 1990 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide,
Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director,
Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services,
LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill (56) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL Officer -
33394-3091 Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the
investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
David P. Goss (56) Vice Since 2000 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust
(until 2000).
- -----------------------------------------------------------------------------------------------------------------------------------
Barbara J. Green (56) Vice Vice Not Applicable None
One Franklin Parkway President President
San Mateo, CA 94403-1906 and since 2000
Secretary and Secretary
since 1996
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President,
Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment
Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin
Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton
Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries
of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
- -----------------------------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Jr. Vice Since 1996 Not Applicable None
(63) President
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may
be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
26
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Kay (63) Vice Since 1994 Not Applicable None
500 East Broward Blvd. President
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Michael O. Magdol (66) Vice Since 2002 Not Applicable Director, FTI Banque, Arch Chemicals, Inc. and Lingnan
600 Fifth Avenue President Foundation.
Rockefeller Center - AML
New York, NY 10048-0772 Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Mark Mobius (67) Vice Since 1993 Not Applicable None
17th Floor, President
The Chater House
8 Connaught Road
Central Hong Kong
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.;
Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may
be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton
Investments; 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 (59) President President Not Applicable None
1 Adelaide Street East, and Chief since 1993
Suite 2101 Executive and Chief
Toronto, Ontario Canada Officer - Executive
M5C 3B8 Investment Officer -
Management Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel,
LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as
the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of
FTTrust Company.
- -----------------------------------------------------------------------------------------------------------------------------------
Kimberley H. Monasterio Treasurer Treasurer Not Applicable None
(40) and Chief and Chief
One Franklin Parkway Financial Financial
San Mateo, CA 94403-1906 Officer Officer
since 2003
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton
Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
27
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Murray L. Simpson (66) Vice Since 2000 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of
some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia)
Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
- -----------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered
investment companies within the Franklin Templeton Investments fund complex.
These portfolios have a common investment adviser or affiliated investment
advisers.
**Charles B. Johnson is considered an interested person of the Fund under the
federal securities laws due to his position as officer and director and major
shareholder of Franklin Resources, Inc. (Resources), which is the parent company
of the Fund's adviser and distributor. Nicholas F. Brady is considered an
interested person of the Fund under the federal securities laws due to his
business affiliations with Resources, and Templeton Global Advisors Limited. On
October 1, 2003, Resources acquired all of the shares of Darby Overseas
Investments, Ltd. (Darby Investments) and the remaining portion of the limited
partner interests not currently owned by Resources of Darby Overseas Partners,
L.P. (Darby Partners). Mr. Brady, formerly a shareholder of Darby Investments
and a partner of Darby Partners, will continue as Chairman of Darby Investments,
which is the corporate general partner of Darby Partners. In addition, Darby
Partners and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P. (DEMF). Mr. Brady will also continue to serve as
Chairman of the corporate general partner of DEMF, and Darby Partners and Darby
Investments own 100% of the stock of the general partner of DEMF. Resources also
is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby
Partners is a significant investor and for which Darby Partners has the right to
appoint a majority of the directors. Templeton Global Advisors Limited also is a
limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. (DBVA), a
private equity fund in which Darby Partners is a significant investor, and the
general partner of which Darby Partners controls jointly with an unaffiliated
third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd.
(TCAL), which serves as investment manager to certain unregistered funds. TCAL
and Templeton Global Advisors Limited are both indirect subsidiaries of
Resources.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT
ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE
SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK
BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR.
OLSON, WHO CURRENTLY SERVES AS CHAIRMAN OF THE BOARD OF THE HERTZ CORPORATION
AND WAS ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT
COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE
GROUP, LTD. AND A FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UNITED
AIRLINES. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS
BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS
THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND SECURITIES
AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
28
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
Proxy Voting Policies and Procedures
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group.
ANNUAL REPORT 29
This page intentionally left blank.
- ---------------------
PRSRT STD
U.S. POSTAGE
PAID
So. San Francisco, CA
Permit No. 655
- ---------------------
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc. Foreign Equity Series, which contains more
complete information, including risk factors, charges, and expenses. Like any
investment in securities, the value of the Fund's portfolio will be subject to
the risk of loss from market, currency, economic, political, and other factors.
The Fund and its investors are not protected from such losses by the Investment
Manager. Therefore, investors who cannot accept this risk should not invest in
shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
identified by the presence of a regular beeping tone.
PRINCIPAL UNDERWRITER:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES: 1-800-321-8563
ZT454 A 02/04
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
TIFI --------------------------------------------------------------------------
ANNUAL REPORT
TEMPLETON
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INVESTING IN EMERGING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH MAY INCLUDE
RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL, ECONOMIC, AND
POLITICAL DEVELOPMENTS, AND THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY.
THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S PROSPECTUS. THE
FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A WELL-DIVERSIFIED PORTFOLIO.
REGULATORY UPDATE
AS OF FEBRUARY 12, 2004
To Our Valued Shareholders:
In our efforts to fulfill our ongoing commitment to
providing you with timely and accurate information, we have prepared this
statement to give you an overview of current industry issues as they pertain to
Franklin Resources, Inc. (Franklin Templeton Investments) and our subsidiary
companies (the "Company"). Any further updates on these and other matters will
be disclosed on the Company's website at franklintempleton.com under "Statement
on Current Industry Issues."
On February 4, 2004, the Securities Division of the
Office of the Secretary of the Commonwealth of Massachusetts filed an
administrative complaint against Franklin Resources, Inc. and certain of its
subsidiaries, alleging violations of the Massachusetts Uniform Securities Act.
The complaint arises from activity that occurred in 2001 during which time an
officer of a Company subsidiary was negotiating an agreement with an investor
relating to investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within
Franklin Templeton Investments, has been named in shareholder class actions
related to the matter described above. The Company believes that the claims made
in the lawsuit are without merit and it intends to defend the allegations
vigorously. The Company and the Fund may be named in similar civil actions
related to the matter described above.
In addition, as part of ongoing investigations by the
U.S. Securities and Exchange Commission (the "SEC"), the U.S. Attorney for the
Northern District of California, the New York Attorney General, the California
Attorney General, the U.S. Attorney for the District of Massachusetts, the
Florida Department of Financial Services, and the Commissioner of Securities and
the Attorney General of the State of West Virginia, relating to certain
practices in the mutual fund industry, including late trading, market timing and
sales compensation arrangements, the Company and its subsidiaries, as well as
certain current or former executives and employees of the Company, have received
requests for information and/or subpoenas to testify or produce documents. The
Company and its current employees are providing documents and information in
response to these requests and subpoenas. In addition, the Company has responded
to requests for similar kinds of information from regulatory authorities in some
of the foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it
intends to recommend that the Commission authorize an action against an
affiliate of the Fund's adviser and a senior executive officer relating to the
frequent trading issues that are the subject of the SEC's investigation. These
issues were previously disclosed as being under investigation by government
authorities and the subject of an internal inquiry by the Company in its Annual
Report on Form 10-K and on its public website. The Company currently is in
discussions with the SEC Staff in an effort to resolve the issues raised in
their investigation. Such discussions are preliminary and the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on a fund is uncertain at this time. If we find that we bear responsibility for
any unlawful or improper conduct, we have committed to making a fund or its
shareholders whole, as appropriate.
December 31, 2003
We are pleased to bring you the annual report for the
Templeton Institutional Funds, Inc. (TIFI) Emerging Markets Series (the "Fund")
covering the 12-month period ended December 31, 2003.
PERFORMANCE OVERVIEW
The Fund posted a 53.84% cumulative total return for the
12-month period ended December 31, 2003. The Fund underperformed its benchmarks,
the IFC Investable
- ------------------------------------------------------------------------------------------
TOTAL RETURNS AS OF 12/31/03
CUMULATIVE
ONE-YEAR THREE-YEAR FIVE-YEAR TEN-YEAR SINCE
AVERAGE AVERAGE AVERAGE AVERAGE INCEPTION
ANNUAL 1,2 ANNUAL 1,2 ANNUAL 1,2 ANNUAL 1,2 (05/03/93) 1,3
TIFI Emerging
Markets Series 53.84% 14.22% 9.67% 1.84% 59.46%
IFC Investable
Composite Index 4 57.15% 15.40% 11.87% 0.27% 68.93%
MSCI Emerging
Markets Free Index 5 56.28% 12.78% 10.62% 0.18% 66.43%
1 Past fee waivers by the Fund's manager and administrator increased the Fund's
total returns. Without these waivers, the Fund's total returns would have been
lower.
2 Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3 Cumulative total return represents the change in value of an investment over
the indicated periods.
4 Source: International Finance Corporation (IFC). The IFC Investable Composite
Index measures the performance of emerging market stocks. The index tracks
approximately 2,000 stocks in countries such as Brazil, Mexico, China, and
South Korea. It includes reinvested dividends.
5 Source: Morgan Stanley Capital International (MSCI). The MSCI Emerging Markets
Free Index measures the performance of securities located in 25 emerging
market countries such as Brazil, China, Korea, and Poland. It includes
reinvested dividends.
Indices are unmanaged, do not contain cash, and do not include management or
other operating expenses. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions; currency volatility; and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
The performance table does not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of shares.
- -----------------------------------------------------------------------------------------
[PHOTO OF MARK MOBIUS OMITTED]
MARK MOBIUS, PH.D., MANAGING DIRECTOR, JOINED TEMPLETON IN 1987 AS PRESIDENT OF
THE TEMPLETON EMERGING MARKETS FUND, INC. HE CURRENTLY DIRECTS THE ANALYSTS
BASED IN TEMPLETON'S 11 EMERGING MARKETS OFFICES AND MANAGES THE EMERGING
MARKETS PORTFOLIOS. DR. MOBIUS HAS SPENT MORE THAN 30 YEARS WORKING IN EMERGING
MARKETS ALL OVER THE WORLD. HE WAS APPOINTED JOINT CHAIRMAN OF THE WORLD BANK
AND ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT'S GLOBAL CORPORATE
GOVERNANCE FORUM INVESTOR RESPONSIBILITY TASKFORCE.
DR. MOBIUS HAS RECEIVED THE FOLLOWING AWARDS: (1) "EMERGING MARKETS EQUITY
MANAGER OF THE YEAR 2001" BY INTERNATIONAL MONEY MARKETING, (2) "TEN TOP MONEY
MANAGERS OF THE 20TH CENTURY" IN A SURVEY BY THE CARSON GROUP IN 1999, (3)
"NUMBER ONE GLOBAL EMERGING MARKET FUND" IN THE 1998 REUTERS SURVEY, (4) "1994
FIRST IN BUSINESS MONEY MANAGER OF THE YEAR" BY CNBC, (5) "CLOSED-END FUND
MANAGER OF THE YEAR" IN 1993 BY MORNINGSTAR, AND (6) "INVESTMENT TRUST MANAGER
OF THE YEAR 1992" BY SUNDAY TELEGRAPH.
DR. MOBIUS HOLDS BACHELOR'S AND MASTER'S DEGREES FROM BOSTON UNIVERSITY, AND A
PH.D. IN ECONOMICS AND POLITICAL SCIENCE FROM THE MASSACHUSETTS INSTITUTE OF
TECHNOLOGY. HE IS THE AUTHOR OF THE BOOKS TRADING WITH CHINA, THE INVESTOR'S
GUIDE TO EMERGING MARKETS, MOBIUS ON EMERGING MARKETS, AND PASSPORT TO PROFITS.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 7.
-----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-----------------------------------------------------
CONTINUED ...
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES
LETTER CONTINUED................................................................
Composite Index 1 and the MSCI Emerging Markets Free Index 2, which returned
56.28% and 57.15%, respectively, during the same period.
ECONOMIC AND MARKET OVERVIEW
The year started off on a low note with most markets
experiencing losses in the first quarter as concerns over
the military conflicts in Afghanistan and Iraq and high oil prices rattled
investor confidence. However, a quicker-than-expected end to the war in Iraq in
April relieved market concerns and many emerging markets rebounded in the second
quarter. The severe acute respiratory syndrome (SARS) outbreak in March/April
greatly impacted Asian markets' performance and tourism in the region suffered,
with the airline and hospitality sectors being the worst affected. However, the
containment of the virus in the following few months set the mood for the rest
of the year as concerns subsided and investors returned from the sidelines. As a
result, for the 12-month fiscal period, emerging markets outperformed the U.S.,
European, and Japanese markets.
Looking at the emerging markets regions, Latin American
markets were the strongest performers as political and financial issues that
engulfed the region last year subsided. Brazil and Argentina both saw renewed
investor interest as their governments strived to implement key structural
reforms and sealed agreements with the International Monetary Fund. Asian
markets rebounded sharply in the second half of the year as the flow of strong
macroeconomic data continued. In Africa, South Africa ended years of ongoing
debate with the government agreeing to provide AIDS-drug treatments free of
charge, making the program the largest one in the world. Eastern European
markets continued on an upward trend as prospective European Union candidates
continued to successfully pass referendums for accession into the body next
year. In Russia, the investigation against, and subsequent arrest of, Michail
Khodorkovsky, the CEO and major shareholder of Yukos, as well as the break-up of
the Sibneft-Yukos merger, led to some severe market fluctuations during the last
GEOGRAPHIC DISTRIBUTION ON 12/31/03
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
[PIE CHART OMITTED]
Short-Term Investments
Asia Europe Latin America Middle-East/Africa and Other Net Assets
52.8% 17.5% 14.2% 11.3% 4.2%
FUND ASSET ALLOCATION ON 12/31/03
[PIE CHART OMITTED]
Equity* Short-Term Investments & Other Net Assets
95.8% 4.2%
*EQUITY INCLUDES CONVERTIBLE AND PREFERRED SECURITIES.
1. Source: International Finance Corporation (IFC). The IFC Investable Composite
Index measures the performance of emerging market stocks.The index tracks
approximately 2,000 stocks in countries such as Brazil, Mexico, China, and South
Korea. It includes reinvested dividends.
2. Source: Morgan Stanley Capital International (MSCI). The MSCI Emerging
Markets Free Index measures the performance of securities located in 25 emerging
market countries such as Brazil, China, Korea, and Poland. It includes
reinvested dividends.
2 ANNUAL REPORT
.................................................................................
quarter. Though for the year, the Russian market still outperformed regional
peers. To the south, Turkish markets took recent terrorist attacks in stride and
continued on an upward trend, as investor confidence in Turkey generally
remained unshaken.
INVESTMENT STRATEGY
Our investment strategy employs a bottom-up,
value-oriented, long-term approach. We focus on the market price of a company's
securities relative to our evaluation of the company's long-term earnings, asset
value, and cash flow potential. As we look for investments, we focus on specific
companies and undertake in-depth research to construct an "action list" from
which we make our buy decisions. Before we make a purchase, we generally look at
the company's potential for earnings and growth over a five-year horizon. During
our analysis, we also consider the company's position in its sector, the
economic framework, and political environment.
MANAGER'S DISCUSSION
During the period, investments in Asia were made in
Taiwan, Singapore, and China "H" and "Red Chip" shares. Key investments included
China Mobile, a dominant wireless telecommunications operator in China; China
Telecom and Taiwan Cellular, key integrated telecommunications services provides
in China and Taiwan, respectively; and Singapore Telecommunications, one of
Asia's leading communications companies. We also made selective sales in strong
performers, including Indonesia and Thailand, as some stock valuations became,
in our opinion, expensive.
In Latin America, we increased investments in Mexico
mainly via purchases in Telefonos de Mexico, the country's largest integrated
telecommunication services provider. The Fund repositioned holdings in Brazil
with purchases of Embraer, one of the world's largest aircraft manufacturers. We
reduced the Fund's exposure to Vale Do Rio Doce in order to take profits.
We increased our investments in Europe, mainly through
purchases of issues in Denmark, Greece, and Poland. Key stocks included telecom
operators TPSA (Poland), OTE Hellenic Telecom (Greece), and Cesky Telecom (Czech
Republic). As a result of these purchases as well as the investments in Asian
telecoms, the Fund's exposure to the integrated telecommunications sector
increased
Industry Diversification on 12/31/03
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
Energy 16.2%
Industrials 15.1%
Consumer Staples 14.2%
Telecommunication Services 13.0%
Financials 9.8%
Consumer Discretionary 8.3%
Materials 7.0%
Information Technology 6.4%
Utilities 3.5%
Health Care 2.3%
Short-Term Investments & Other
Net Assets 4.2%
10 Largest Equity Positions on 12/31/03
(PERCENTAGE OF TOTAL NET ASSETS)
Anglo American PLC 3.9%
SABMiller PLC 2.5%
Citic Pacific Ltd. 2.1%
Hyundai Motor Co. Ltd. 2.1%
China Mobile (Hong Kong) Ltd. 2.0%
Lukoil Holdings, ADR 1.9%
Embraer-Empresa Brasileira de
Aeronautica SA, ADR 1.7%
Petroleo Brasileiro SA, ADR, pfd. 1.7%
Telefonos de Mexico SA de CV
(Telemex), L, ADR 1.7%
Banco Bradesco SA, ADR, pfd. 1.6%
ANNUAL REPORT 3
TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES
LETTER CONTINUED................................................................
during the period. We divested some holdings in Russia. The Fund sold
investments in Turkey before the terrorist attacks, locking in gains. In South
Africa, we reduced the Fund's investments in Barloworld.
In terms of performance, the Fund derived positive
attribution from its underweight positions, relative to the MSCI Emerging
Markets Free Index, in South Korea and Malaysia, as well as its overweight
positions in Turkey and Austria. However, the Fund's overweight position in the
Philippines detracted from performance. Underweight positions in Brazil and
Russia also impacted the Fund's performance negatively. Poor liquidity continues
to make additional investments in Russia difficult while Brazil's strong market
performance has led to increasingly expensive valuations.
By industry, the Fund's holdings in the banking,
retailing, and industrial conglomerates sectors yielded the greatest relative
contribution, relative to the MSCI Emerging Markets Free Index, during the
period. Strong financial contributors included Kookmin Bank (Korea) and Banco
Bradesco (Brazil). With respect to the conglomerates, Keppel Corporation
(Singapore) and Grasim Industries (India) contributed the greatest relative
returns. The Fund's investment in Dairy Farm, one of the leading food retailers
in the Asia Pacific region, led performance in the retail sector. Alternatively,
the Fund's holdings in the beverages and household products sectors
underperformed relative to the MSCI Emerging Markets Free Index.
It is important to note that there are special risks
associated with foreign investments in smaller companies, and these risks are
heightened in emerging markets. These include political, social and economic
uncertainties, price volatility, illiquidity, currency fluctuation and limited
product lines, markets, or financial and management resources. In addition,
emerging markets are relatively small and less liquid. Investing in any emerging
market means accepting a certain amount of volatility and, in some cases, the
consequences of severe market corrections. The short-term price volatility of
smaller companies and emerging markets can be disconcerting and substantial
declines are not unusual in emerging markets. The special risks of
- --------------------------------------------------------------------------------
TOTAL RETURN INDEX COMPARISON 1
$5,000,000 INVESTMENT: 5/03/93-12/31/03
[LINE CHART OMITTED]
TIFI - Emerging IFC Investable MSCI Emerging
Markets Series Composite Markets Free
INCEPTION $ 5,000,000 $ 5,000,000 $ 5,000,000
May-93 $ 5,010,000 $ 5,099,783 $ 5,187,256
Jun-93 $ 5,030,000 $ 5,242,393 $ 5,341,071
Jul-93 $ 5,040,000 $ 5,406,123 $ 5,482,149
Aug-93 $ 5,415,000 $ 5,846,426 $ 5,945,053
Sep-93 $ 5,590,000 $ 6,083,170 $ 6,162,494
Oct-93 $ 5,840,000 $ 6,605,741 $ 6,715,410
Nov-93 $ 6,040,000 $ 7,024,521 $ 7,012,583
Dec-93 $ 6,646,555 $ 8,224,541 $ 8,171,735
Jan-94 $ 6,726,995 $ 8,280,459 $ 8,320,410
Feb-94 $ 6,596,275 $ 8,066,645 $ 8,172,393
Mar-94 $ 6,256,985 $ 7,251,412 $ 7,432,880
Apr-94 $ 5,912,190 $ 7,113,428 $ 7,284,205
May-94 $ 5,917,260 $ 7,281,382 $ 7,533,503
Jun-94 $ 5,775,290 $ 7,022,914 $ 7,325,849
Jul-94 $ 5,993,320 $ 7,526,979 $ 7,781,358
Aug-94 $ 6,485,155 $ 8,495,283 $ 8,747,126
Sep-94 $ 6,556,145 $ 8,705,276 $ 8,846,534
Oct-94 $ 6,373,605 $ 8,417,843 $ 8,686,957
Nov-94 $ 6,130,220 $ 8,101,014 $ 8,235,284
Dec-94 $ 5,889,315 $ 7,237,937 $ 7,573,856
Jan-95 $ 5,458,515 $ 6,270,438 $ 6,768,071
Feb-95 $ 5,342,935 $ 6,189,378 $ 6,594,477
Mar-95 $ 5,516,645 $ 6,173,284 $ 6,636,375
Apr-95 $ 5,706,150 $ 6,433,364 $ 6,934,093
May-95 $ 5,895,650 $ 6,673,125 $ 7,302,982
Jun-95 $ 5,937,765 $ 6,712,549 $ 7,324,583
Jul-95 $ 6,211,490 $ 6,926,766 $ 7,488,997
Aug-95 $ 6,043,045 $ 6,741,112 $ 7,312,592
Sep-95 $ 5,995,670 $ 6,692,033 $ 7,277,886
Oct-95 $ 5,779,845 $ 6,437,588 $ 6,999,288
Nov-95 $ 5,742,995 $ 6,405,405 $ 6,874,468
Dec-95 $ 5,817,160 $ 6,628,271 $ 7,179,365
Jan-96 $ 6,374,525 $ 7,192,880 $ 7,689,687
Feb-96 $ 6,271,475 $ 7,024,523 $ 7,567,424
Mar-96 $ 6,347,425 $ 7,127,106 $ 7,626,365
Apr-96 $ 6,515,605 $ 7,412,527 $ 7,931,287
May-96 $ 6,624,110 $ 7,349,972 $ 7,895,872
Jun-96 $ 6,634,960 $ 7,436,262 $ 7,945,177
Jul-96 $ 6,331,150 $ 6,948,288 $ 7,402,175
Aug-96 $ 6,461,355 $ 7,163,108 $ 7,591,646
Sep-96 $ 6,580,705 $ 7,268,909 $ 7,657,412
Oct-96 $ 6,564,430 $ 7,112,622 $ 7,453,189
Nov-96 $ 6,776,010 $ 7,217,819 $ 7,578,073
Dec-96 $ 6,914,455 $ 7,249,801 $ 7,612,348
Jan-97 $ 7,425,405 $ 7,761,711 $ 8,131,584
Feb-97 $ 7,708,425 $ 8,141,268 $ 8,479,822
Mar-97 $ 7,552,475 $ 7,940,729 $ 8,257,075
Apr-97 $ 7,624,880 $ 7,805,360 $ 8,271,662
May-97 $ 7,986,905 $ 8,070,667 $ 8,508,400
Jun-97 $ 8,276,530 $ 8,419,450 $ 8,963,744
Jul-97 $ 8,655,265 $ 8,504,131 $ 9,097,554
Aug-97 $ 7,886,655 $ 7,417,958 $ 7,939,897
Sep-97 $ 8,254,250 $ 7,653,496 $ 8,159,896
Oct-97 $ 6,717,020 $ 6,400,776 $ 6,820,959
Nov-97 $ 6,221,320 $ 6,094,235 $ 6,572,079
Dec-97 $ 6,131,710 $ 6,181,129 $ 6,730,453
Jan-98 $ 5,635,020 $ 5,774,216 $ 6,202,581
Feb-98 $ 6,190,840 $ 6,363,163 $ 6,849,980
Mar-98 $ 6,433,870 $ 6,612,378 $ 7,147,242
Apr-98 $ 6,445,740 $ 6,629,677 $ 7,069,384
May-98 $ 5,537,640 $ 5,802,979 $ 6,100,591
Jun-98 $ 5,003,460 $ 5,211,401 $ 5,460,662
Jul-98 $ 5,039,075 $ 5,417,371 $ 5,633,800
Aug-98 $ 3,869,820 $ 3,894,722 $ 4,004,844
Sep-98 $ 4,065,685 $ 4,079,572 $ 4,258,891
Oct-98 $ 4,677,020 $ 4,551,855 $ 4,707,360
Nov-98 $ 5,181,520 $ 4,893,998 $ 5,098,863
Dec-98 $ 5,026,100 $ 4,819,173 $ 5,024,969
Jan-99 $ 4,784,170 $ 4,702,913 $ 4,943,895
Feb-99 $ 4,784,170 $ 4,787,392 $ 4,991,985
Mar-99 $ 5,452,930 $ 5,340,333 $ 5,649,880
Apr-99 $ 6,518,095 $ 6,074,503 $ 6,348,889
May-99 $ 6,342,585 $ 5,964,478 $ 6,311,954
Jun-99 $ 6,959,900 $ 6,616,381 $ 7,028,309
Jul-99 $ 6,651,240 $ 6,520,235 $ 6,837,382
Aug-99 $ 6,415,210 $ 6,592,043 $ 6,899,589
Sep-99 $ 6,130,760 $ 6,409,405 $ 6,666,093
Oct-99 $ 6,306,275 $ 6,520,436 $ 6,808,032
Nov-99 $ 6,838,855 $ 7,103,950 $ 7,418,471
Dec-99 $ 7,870,005 $ 8,055,958 $ 8,361,953
Jan-00 $ 7,516,160 $ 8,054,751 $ 8,411,790
Feb-00 $ 7,247,725 $ 8,046,906 $ 8,522,885
Mar-00 $ 7,342,660 $ 8,177,448 $ 8,564,479
Apr-00 $ 6,707,885 $ 7,331,644 $ 7,752,629
May-00 $ 6,170,765 $ 7,127,484 $ 7,432,120
Jun-00 $ 6,628,535 $ 7,329,230 $ 7,693,916
Jul-00 $ 6,347,770 $ 6,976,828 $ 7,298,221
Aug-00 $ 6,469,845 $ 7,003,178 $ 7,334,105
Sep-00 $ 5,835,065 $ 6,376,820 $ 6,693,721
Oct-00 $ 5,346,775 $ 5,860,488 $ 6,208,426
Nov-00 $ 5,066,010 $ 5,342,747 $ 5,665,624
Dec-00 $ 5,350,535 $ 5,497,425 $ 5,802,391
Jan-01 $ 5,956,020 $ 6,203,436 $ 6,601,353
Feb-01 $ 5,486,460 $ 5,725,521 $ 6,084,459
Mar-01 $ 4,973,650 $ 5,232,320 $ 5,486,847
Apr-01 $ 5,233,145 $ 5,542,079 $ 5,757,962
May-01 $ 5,418,495 $ 5,709,832 $ 5,826,690
Jun-01 $ 5,393,780 $ 5,606,445 $ 5,707,087
Jul-01 $ 5,078,680 $ 5,223,268 $ 5,346,453
Aug-01 $ 5,097,215 $ 5,152,265 $ 5,293,716
Sep-01 $ 4,460,835 $ 4,353,528 $ 4,474,357
Oct-01 $ 4,596,765 $ 4,623,461 $ 4,752,031
Nov-01 $ 4,874,795 $ 5,165,138 $ 5,248,159
Dec-01 $ 5,083,225 $ 5,594,778 $ 5,664,733
Jan-02 $ 5,347,450 $ 5,794,312 $ 5,856,699
Feb-02 $ 5,341,160 $ 5,906,147 $ 5,952,916
Mar-02 $ 5,661,385 $ 6,317,684 $ 6,310,992
Apr-02 $ 5,850,515 $ 6,375,412 $ 6,351,953
May-02 $ 5,812,690 $ 6,266,795 $ 6,250,747
Jun-02 $ 5,447,030 $ 5,819,455 $ 5,781,804
Jul-02 $ 5,157,030 $ 5,450,961 $ 5,342,059
Aug-02 $ 5,144,420 $ 5,521,562 $ 5,424,373
Sep-02 $ 4,766,155 $ 4,908,078 $ 4,839,132
Oct-02 $ 4,892,240 $ 5,223,268 $ 5,153,132
Nov-02 $ 5,289,420 $ 5,585,928 $ 5,507,840
Dec-02 $ 5,182,605 $ 5,374,773 $ 5,324,839
Jan-03 $ 5,125,078 $ 5,379,154 $ 5,301,655
Feb-03 $ 5,118,680 $ 5,220,050 $ 5,158,564
Mar-03 $ 4,933,425 $ 5,028,361 $ 5,012,295
Apr-03 $ 5,447,323 $ 5,541,878 $ 5,458,750
May-03 $ 5,768,510 $ 5,927,267 $ 5,850,684
Jun-03 $ 5,961,221 $ 6,294,151 $ 6,183,981
Jul-03 $ 6,218,171 $ 6,632,472 $ 6,571,104
Aug-03 $ 6,513,662 $ 7,110,990 $ 7,012,330
Sep-03 $ 6,706,374 $ 7,188,631 $ 7,063,737
Oct-03 $ 7,226,696 $ 7,772,347 $ 7,664,844
Nov-03 $ 7,374,442 $ 7,872,315 $ 7,759,048
Dec-03 $ 7,973,163 $ 8,446,375 $ 8,321,537
Periods ended December 31, 2003
SINCE
ONE- THREE- FIVE- TEN- INCEPTION
YEAR YEAR YEAR YEAR (05/03/93)
Average
Annual
Total
Return 1,2 53.84% 14.22% 9.67% 1.84% 4.47%
Cumulative
Total
Return 1,3 53.84% 49.01% 58.63% 19.96% 59.46%
1 PAST FEE WAIVERS BY THE FUND'S MANAGER AND ADMINISTRATOR INCREASED THE FUND'S
TOTAL RETURNS. WITHOUT THESE WAIVERS, THE FUND'S TOTAL RETURNS WOULD HAVE BEEN
LOWER.
2 AVERAGE ANNUAL TOTAL RETURN REPRESENTS THE AVERAGE ANNUAL CHANGE IN VALUE OF
AN INVESTMENT OVER THE INDICATED PERIODS.
3 CUMULATIVE TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER
THE INDICATED PERIODS.
4 SOURCE: INTERNATIONAL FINANCE CORPORATION. (IFC) THE IFC INVESTABLE COMPOSITE
INDEX MEASURES THE PERFORMANCE OF EMERGING MARKET STOCKS.THE INDEX TRACKS
APPROXIMATELY 2,000 STOCKS IN COUNTRIES SUCH AS BRAZIL, MEXICO, CHINA, AND
SOUTH KOREA. IT INCLUDES REINVESTED DIVIDENDS.
5 SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI). THE MSCI EMERGING
MARKETS FREE INDEX MEASURES THE PERFORMANCE OF SECURITIES LOCATED IN 25
EMERGING MARKET COUNTRIES SUCH AS BRAZIL, CHINA, KOREA, AND POLAND. IT INCLUDES
REINVESTED DIVIDENDS.
INDICES ARE UNMANAGED, DO NOT CONTAIN CASH, AND DO NOT INCLUDE MANAGEMENT OR
OTHER OPERATING EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX, NOR IS AN
INDEX REPRESENTATIVE OF THE FUND'S PORTFOLIO.
ALL CALCULATIONS ASSUME REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE. SINCE
MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE WITH MARKET CONDITIONS, CURRENCY VOLATILITY, AND THE ECONOMIC,
SOCIAL, AND POLITICAL CLIMATES OF THE COUNTRIES WHERE THE FUND INVESTS.
EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER
LIQUIDITY. YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. PAST
PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
THE PERFORMANCE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES.
- --------------------------------------------------------------------------------
4 ANNUAL REPORT
.................................................................................
investing in smaller companies and emerging markets, as well as other
considerations, are discussed in the Fund's prospectus.
As always, we will continue in our search for investment
opportunities within emerging markets using Templeton's bottom-up, value
approach to search for bargain stocks.
We thank you for your continued participation and look
forward to serving your investment needs.
Best regards,
/S/Donald F. Reed
Donald F. Reed, CFA, CIC
PRESIDENT
TEMPLETON INSTITUTIONAL FUNDS, INC.
For the Investment Adviser,
/S/Mark Mobius
Mark Mobius, Ph.D.
MANAGING DIRECTOR
TEMPLETON ASSET MANAGEMENT LTD.
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES
NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
ANNUAL REPORT 5
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Highlights
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $8.10 $8.08 $8.66 $12.90 $8.31
-------------------------------------------------------
Income from investment operations:
Net investment incomea .......................... .24 .14 .15 .13 .10
Net realized and unrealized gains (losses) ...... 4.10 .02 (.58) (4.26) 4.59
-------------------------------------------------------
Total from investment operations ................. 4.34 .16 (.43) (4.13) 4.69
-------------------------------------------------------
Less distributions from net investment income .... (.26) (.14) (.15) (.11) (.10)
-------------------------------------------------------
Net asset value, end of year ..................... $12.18 $8.10 $8.08 $8.66 $12.90
-------------------------------------------------------
Total returnb .................................... 53.84% 1.96% (5.00)% (32.01)% 56.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $2,092,229 $1,234,595 $1,274,579 $1,676,028 $2,608,708
Ratios to average net assets:
Expenses ........................................ 1.46% 1.49% 1.45% 1.47% 1.43%
Net investment income ........................... 2.52% 1.67% 1.85% 1.21% 1.02%
Portfolio turnover rate .......................... 46.83% 53.36% 64.92% 82.86% 49.35%
<FN>
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
</FN>
See notes to financial statements.
6 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.3%
ARGENTINA .9%
Tenaris SA ............................................ Energy Equipment & Services 880,633 $ 2,942,951
Tenaris SA, ADR ....................................... Energy Equipment & Services 500,049 16,661,632
-------------
19,604,583
-------------
AUSTRIA 2.9%
a Bank Austria Creditanstalt, Reg S ..................... Commercial Banks 406,000 20,740,414
OMV AG ................................................ Oil & Gas 187,342 27,902,804
Wienerberger AG ....................................... Building Products 431,950 11,539,734
-------------
60,182,952
-------------
BRAZIL 3.7%
Centrais Eletricas Brasileiras SA (Non-Taxable) ....... Electric Utilities 251,562,000 4,229,031
Centrais Eletricas Brasileiras SA (Taxable) ........... Electric Utilities 669,013,000 11,246,838
Embraer-Empresa Brasileira de Aeronautica SA, ADR ..... Aerospace & Defense 1,017,163 35,631,232
Souza Cruz SA (Non-Taxable) ........................... Tobacco 1,212,100 12,717,597
Unibanco Uniao de Bancos Brasileiros SA, GDR .......... Commercial Banks 531,316 13,256,334
-------------
77,081,032
-------------
CHINA 7.5%
China Mobile (Hong Kong) Ltd. ......................... Wireless Telecommunication Services 13,502,000 41,478,528
China Petroleum & Chemical Corp., H ................... Oil & Gas 71,948,000 32,204,042
China Telecom Corp. Ltd., H ........................... Diversified Telecommunication Services 62,068,000 25,583,183
Huadian Power International Corp. Ltd. ................ Electric Utilities 22,848,000 9,564,635
PetroChina Co. Ltd., H ................................ Oil & Gas 49,722,000 28,500,039
Shanghai Industrial Holdings Ltd. ..................... Industrial Conglomerates 7,303,000 16,696,926
Travelsky Technology Ltd., H .......................... IT Services 3,373,000 3,627,769
-------------
157,655,122
-------------
CROATIA .8%
Pliva D D, GDR, Reg S ................................. Pharmaceuticals 948,200 15,455,660
-------------
CZECH REPUBLIC .6%
a Cesky Telecom AS ...................................... Diversified Telecommunication Services 474,800 5,399,479
CEZ AS ................................................ Electric Utilities 1,272,500 7,250,373
-------------
12,649,852
-------------
DENMARK .9%
Carlsberg AS, B ....................................... Beverages 397,100 18,297,214
-------------
EGYPT .3%
Commercial International Bank Ltd. .................... Commercial Banks 1,491,782 5,323,472
-------------
GREECE 1.2%
Coca-Cola Hellenic Bottling Co. SA .................... Beverages 451,505 9,408,253
Hellenic Telecommunications Organization SA (OTE) ..... Diversified Telecommunication Services 1,232,130 16,287,490
-------------
25,695,743
-------------
HONG KONG 8.1%
Beijing Enterprises Holdings Ltd. ..................... Industrial Conglomerates 4,712,000 5,523,108
Cheung Kong Holdings Ltd. ............................. Real Estate 2,114,000 16,814,300
Cheung Kong Infrastructure Holdings Ltd. .............. Construction Materials 2,404,000 5,387,913
China Resources Enterprise Ltd. ....................... Distributors 17,032,000 19,305,683
China Travel International Investment Hong Kong Ltd. .. Hotels Restaurants & Leisure 45,818,000 8,675,416
Citic Pacific Ltd. .................................... Industrial Conglomerates 17,363,000 44,281,957
Dairy Farm International Holdings Ltd. ................ Food & Staples Retailing 8,793,619 14,729,312
Guoco Group Ltd. ...................................... Diversified Financial Services 520,000 3,817,816
Hang Lung Group Ltd. .................................. Real Estate 5,526,000 6,904,297
Henderson Investment Ltd. ............................. Real Estate 5,938,000 6,845,419
Hong Kong Land Holdings Ltd. .......................... Real Estate 2,761,000 4,693,700
aHopewell Highway Infrastructure Ltd., wts., 8/05/06 ... Transportation Infrastructure 124,500 24,215
Hopewell Holdings Ltd. ................................ Transportation Infrastructure 1,142,000 1,757,806
HSBC Holdings PLC ..................................... Commercial Banks 206,800 3,263,048
MTR Corp. Ltd. ........................................ Road & Rail 5,839,061 7,709,101
ANNUAL REPORT 7
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HONG KONG (CONT.)
Tack Fat Group International Ltd. .................... Specialty Retail 20,768,000 $ 2,113,288
TCL International Holdings Inc. ...................... Household Durables 27,180,000 11,990,765
Tingyi (Cayman Islands) Holding Corp. ................ Food Products 25,638,000 6,010,248
VTech Holdings Ltd. .................................. Communications Equipment 138,000 196,416
-------------
170,043,808
-------------
HUNGARY 2.8%
Egis RT .............................................. Pharmaceuticals 202,220 8,228,541
Gedeon Richter Ltd. .................................. Pharmaceuticals 162,308 19,214,812
Matav RT ............................................. Diversified Telecommunication Services 1,962,693 7,475,422
MOL Magyar Olaj-Es Gazipari RT ....................... Oil & Gas 788,604 24,009,804
-------------
58,928,579
-------------
INDIA 4.1%
Container Corp. of India Ltd. ........................ Road & Rail 144,478 2,107,241
HCL Technologies Ltd. ................................ IT Services 530,100 3,559,948
Hero Honda Motors Ltd. ............................... Automobiles 1,176,400 11,573,198
Hindustan Petroleum Corp. Ltd. ....................... Oil & Gas 1,423,000 13,645,206
a Indraprastha Gas Ltd. ................................ Gas Utilities 320,000 1,040,482
ITC Ltd. ............................................. Tobacco 193,794 4,181,915
Mahanagar Telephone Nigam Ltd. ....................... Diversified Telecommunication Services 6,587,915 19,882,869
a Maruti Udyog Ltd. .................................... Automobiles 992,211 8,183,430
Nestle India Ltd. .................................... Food Products 47,935 724,409
Satyam Computers Services Ltd. ....................... IT Services 1,873,825 15,087,115
a Union Bank of India Ltd. ............................. Commercial Banks 3,487,000 3,916,904
Videsh Sanchar Nigam Ltd. ............................ Diversified Telecommunication Services 593,746 1,919,508
-------------
85,822,225
-------------
INDONESIA 2.0%
PT Gudang Garam TBK .................................. Tobacco 6,550,500 10,577,239
PT Indosat (Persero) TBK ............................. Diversified Telecommunication Services 11,592,000 20,644,702
a PT Perusahaan Gas Negara, 144A ....................... Oil & Gas 6,930,000 1,275,334
PT Telekomunikasi Indonesia TBK, B ................... Diversified Telecommunication Services 12,668,240 10,152,641
-------------
42,649,916
-------------
ISRAEL .1%
Elbit Systems Ltd. ................................... Aerospace & Defense 49,384 888,800
-------------
MALAYSIA .4%
Tanjong PLC .......................................... Hotels Restaurants & Leisure 53,000 150,632
YTL Power International Bhd. ......................... Electric Utilities 9,031,300 7,985,570
-------------
8,136,202
-------------
MEXICO 5.0%
Alfa SA .............................................. Industrial Conglomerates 26,500 79,472
Embotelladoras Arca SA ............................... Food & Staples Retailing 403,000 771,052
Embotelladoras Arca SA, 144A ......................... Food & Staples Retailing 1,229,524 2,352,423
Fomento Economico Mexicano SA de CV Femsa, ADR ....... Beverages 343,020 12,650,578
Grupo Bimbo SA de CV, A .............................. Food Products 1,919,400 3,604,026
Grupo Carso SA de CV ................................. Industrial Conglomerates 2,870,400 10,089,728
Grupo Continental SA ................................. Beverages 1,410,020 2,384,069
Grupo Televisa SA, de CV, ADR ........................ Media 134,100 5,345,226
Kimberly Clark de Mexico SA de CV, A ................. Household Products 12,654,300 32,431,764
Telefonos de Mexico SA de CV (Telmex), L, ADR ........ Diversified Telecommunication Services 1,045,214 34,523,418
-------------
104,231,756
-------------
PERU
Credicorp Ltd. ....................................... Commercial Banks 15,600 208,260
-------------
8 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
PHILIPPINES 1.1%
San Miguel Corp., B .................................. Beverages 19,431,544 $ 22,399,474
-------------
POLAND 2.6%
a BRE Bank SA .......................................... Commercial Banks 134,275 3,318,399
Polski Koncern Naftowy Orlen SA ...................... Oil & Gas 3,778,078 25,234,965
Telekomunikacja Polska SA ............................ Diversified Telecommunication Services 6,568,003 26,585,067
-------------
55,138,431
-------------
RUSSIA 2.0%
Aeroflot ............................................. Airlines 99,300 68,517
Lukoil Holdings, ADR ................................. Oil & Gas 428,950 39,926,666
Yuzhnaya Telecommunication Co. ....................... Diversified Telecommunication Services 13,982,100 1,356,264
-------------
41,351,447
-------------
SINGAPORE 6.0%
Comfortdelgro Corp. Ltd. ............................. Road & Rail 15,412,000 7,396,090
DBS Group Holdings Ltd. .............................. Commercial Banks 1,313,000 11,364,953
Fraser & Neave Ltd. .................................. Beverages 3,998,318 29,664,257
Keppel Corp. Ltd. .................................... Industrial Conglomerates 7,908,053 28,404,359
MobileOne (Asia) Ltd. ................................ Wireless Telecommunication Services 2,451,000 2,164,812
Singapore Airlines Ltd. .............................. Airlines 2,825,000 18,630,395
Singapore Technologies Engineering Ltd. .............. Aerospace & Defense 5,209,000 6,257,057
Singapore Telecommunications Ltd. .................... Diversified Telecommunication Services 19,104,000 22,047,836
-------------
125,929,759
-------------
SOUTH AFRICA 11.0%
Anglo American PLC ................................... Metals & Mining 3,780,924 80,999,570
Barloworld Ltd. ...................................... Industrial Conglomerates 832,991 8,754,205
Imperial Holdings Ltd. ............................... Air Freight & Logistics 1,257,968 12,626,795
Nampak Ltd. .......................................... Containers & Packaging 1,159,300 2,257,813
Nedcor Ltd. .......................................... Commercial Banks 376,200 3,495,983
Old Mutual PLC ....................................... Insurance 11,285,470 18,586,549
Remgro Ltd. .......................................... Industrial Conglomerates 2,723,589 28,806,799
SABMiller PLC ........................................ Beverages 5,134,226 52,311,417
Sasol Ltd. ........................................... Oil & Gas 1,613,970 22,970,360
-------------
230,809,491
-------------
SOUTH KOREA 11.9%
CJ Corp. ............................................. Food Products 251,880 13,127,778
Dong-A Pharmaceutical Co. Ltd. ....................... Pharmaceuticals 232,193 3,614,922
Hite Brewery Co. Ltd. ................................ Beverages 190,910 14,003,805
Hyundai Development Co. .............................. Construction & Engineering 1,863,300 19,313,265
Hyundai Motor Co. Ltd. ............................... Automobiles 1,033,280 43,794,075
Kangwon Land Inc. .................................... Hotels Restaurants & Leisure 2,416,477 28,798,971
Korea Electric Power Corp. ........................... Electric Utilities 1,239,115 22,255,192
Korea Gas Corp. ...................................... Gas Utilities 372,280 7,733,051
KT Corp. ............................................. Diversified Telecommunication Services 288,796 10,810,157
KT&G Corp. ........................................... Tobacco 277,380 4,818,939
LG Card Co. Ltd. ..................................... Consumer Finance 591,428 1,511,455
LG Chem Ltd. ......................................... Chemicals 1,800 83,089
LG Home Shopping Inc. ................................ Internet & Catalog Retail 47,068 2,378,089
LG Household & Health Care Ltd. ...................... Household Products 364,310 9,509,057
LG International Corp. ............................... Trading Companies & Distributors 218,000 1,463,701
Poongsan Corp. ....................................... Metals & Mining 83,630 884,379
POSCO ................................................ Metals & Mining 66,510 9,098,724
Samsung Corp. ........................................ Trading Companies & Distributors 1,062,490 8,828,075
Samsung Fine Chemicals ............................... Chemicals 912,720 12,524,525
Samsung Heavy Industries Co. Ltd. .................... Machinery 3,123,840 17,277,470
SK Corp. ............................................. Oil & Gas 718,910 16,532,215
-------------
248,360,934
-------------
ANNUAL REPORT 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
TAIWAN 9.6%
Acer Inc. ............................................ Computers & Peripherals 6,738,000 $ 10,022,651
Amtran Technology Co. Ltd. ........................... Computers & Peripherals 3,368,000 2,837,255
Cheng Shin Rubber Industry Co. Ltd. .................. Auto Components 1,317,000 1,679,708
Chinatrust Financial Holding Co. Ltd. ................ Commercial Banks 9,131,610 9,171,956
Chunghwa Telcom Co. Ltd. ............................. Diversified Telecommunication Services 5,387,000 7,822,654
D-Link Corp. ......................................... Communications Equipment 14,877,000 19,850,607
Delta Electronics Inc. ............................... Electronic Equipment & Instruments 13,935,630 17,855,667
Elan Microelectronics Corp. .......................... Software 10,613,000 9,534,506
Elite Semiconductor Memory Technology Inc. ........... Electrical Equipment 3,167,280 6,110,658
Fubon Financial Holding Co. Ltd. ..................... Diversified Financial Services 5,504,000 5,268,925
Lite-on Technology Corp. ............................. Computers & Peripherals 16,051,000 17,020,206
Mega Financial Holdings Co. Ltd. ..................... Commercial Banks 14,863,032 8,930,953
Micro-Star International Co. Ltd. .................... Computers & Peripherals 603,000 888,071
Phoenixtec Power Co. Ltd. ............................ Electrical Equipment 6,067,165 7,112,612
President Chain Store Corp. .......................... Food & Staples Retailing 5,183,000 7,938,615
Sunplus Technology Co. Ltd. .......................... Semiconductors & Semiconductor Equipment 14,178,100 26,518,685
Taiwan Cellular Corp. ................................ Wireless Telecommunication Services 20,822,878 18,093,517
Taiwan Glass Industrial Corp. ........................ Building Products 260,000 196,819
aTatung Co. Ltd. ...................................... Industrial Conglomerates 17,995,000 4,558,380
Tsann Kuen Enterprise Co. Ltd. ....................... Household Durables 3,565,000 5,187,364
UNI-President Enterprises Corp. ...................... Food Products 11,169,180 4,589,398
Yuanta Core Pacific Securities Co. ................... Diversified Financial Services 14,858,656 8,884,557
-------------
200,073,764
-------------
THAILAND 2.1%
Delta Electronics Public Co. Ltd., fgn. .............. Electronic Equipment & Instruments 4,271,200 2,899,748
Hana Microelectronics Co. Ltd., fgn. ................. Electronic Equipment & Instruments 1,373,000 4,331,504
Krung Thai Bank Public Co. Ltd., fgn. ................ Commercial Banks 4,680,000 1,452,811
National Finance Public Co. Ltd., fgn. ............... Consumer Finance 6,744,700 2,842,741
PTT Exploration & Production Public Co. Ltd., fgn. ... Oil & Gas 3,987,600 26,971,463
Shin Corporation Public Co. Ltd., fgn. ............... Wireless Telecommunication Services 1,040,000 1,023,661
Siam City Cement Public Co. Ltd., fgn. ............... Construction Materials 227,400 1,308,529
Siam Makro Public Company Ltd., fgn. ................. Food & Staples Retailing 195,000 226,386
Thai Airways International Public Co. Ltd., fgn. ..... Airlines 1,594,100 1,840,623
aThai Military Bank Public Company Limited, fgn. ...... Commercial Banks 6,680,000 1,154,849
Thai Union Frozen Products Ltd., fgn. ................ Food Products 207,400 167,501
-------------
44,219,816
-------------
TURKEY 3.2%
Akbank ............................................... Commercial Banks 1,981,326,010 10,364,950
Arcelik AS, Br. ...................................... Household Durables 4,393,860,210 24,392,954
Migros Turk T.A.S. ................................... Food & Staples Retailing 554,561,000 7,933,578
Tupras-Turkiye Petrol Rafineleri AS .................. Oil & Gas 2,946,723,295 24,538,544
-------------
67,230,026
-------------
UNITED KINGDOM .5%
BHP Billiton PLC ..................................... Metals & Mining 1,275,900 11,086,472
-------------
TOTAL COMMON STOCKS (COST $1,413,757,132) ............ 1,909,454,790
-------------
PREFERRED STOCKS 4.5%
BRAZIL 4.5%
Banco Bradesco SA, ADR, pfd. ......................... Commercial Banks 1,269,817 33,535,867
Cia Vale do Rio Doce, A, ADR, pfd. ................... Metals & Mining 426,630 21,975,711
aCompanhia Paranaense de Energia-Copel, ADR, pfd. ..... Electric Utilities 244,800 1,167,696
Duratex SA, pfd. ..................................... Building Products 104,493,639 3,006,591
Petroleo Brasileiro SA, ADR, pfd. .................... Oil & Gas 1,322,986 35,270,807
-------------
TOTAL PREFERRED STOCKS (COST $65,080,108) ............ 94,956,672
-------------
10 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
PRINCIPAL
COUNTRY AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $86,100,404) 4.1%
U.S. Treasury Bills, 0.847% to 0.912%, with
maturities to 3/25/04 ...................................... United States $86,240,000 $ 86,112,372
--------------
TOTAL INVESTMENTS (COST $1,564,937,644) 99.9% .............. 2,090,523,834
OTHER ASSETS, LESS LIABILITIES .1% ......................... 1,705,076
--------------
NET ASSETS 100.0% .......................................... $2,092,228,910
==============
<FN>
a Non-income producing.
</FN>
See notes to financial statements.
ANNUAL REPORT 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
Assets:
Investments in securities:
Cost ................................................................................ $1,564,937,644
---------------
Value ............................................................................... 2,090,523,834
Foreign currency, at value (cost $4,390,920) ......................................... 4,394,788
Receivables:
Investment securities sold .......................................................... 7,981,166
Capital shares sold ................................................................. 1,272,919
Dividends and interest .............................................................. 4,017,678
---------------
Total assets .................................................................... 2,108,190,385
---------------
Liabilities:
Payables:
Investment securities purchased ..................................................... 4,047,402
Capital shares redeemed ............................................................. 307,192
Affiliates .......................................................................... 2,278,489
Deferred tax liability (Note 1f) .................................................... 8,658,169
Other liabilities .................................................................... 670,223
---------------
Total liabilities ............................................................... 15,961,475
---------------
Net assets, at value .................................................................. 2,092,228,910
---------------
Net assets consist of:
Undistributed net investment income .................................................. $ (12,907,170)
Net unrealized appreciation .......................................................... 517,377,759
Accumulated net realized (loss) ...................................................... (633,851,881)
Capital shares ....................................................................... 2,221,610,202
---------------
Net assets, at value .................................................................. $2,092,228,910
---------------
Net asset value per share ($2,092,228,910 / 171,843,732 shares outstanding) ........... $12.18
---------------
See notes to financial statements.
12 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
Investment Income:
(net of foreign taxes $5,555,870)
Dividends ........................................................................ $ 59,089,088
Interest ......................................................................... 327,184
-------------
Total investment income ..................................................... 59,416,272
-------------
Expenses:
Management fees (Note 3) ......................................................... 18,638,160
Administrative fees (Note 3) ..................................................... 1,306,425
Custodian fees ................................................................... 1,561,500
Registration and filing fees ..................................................... 154,400
Professional fees ................................................................ 79,165
Directors' fees and expenses ..................................................... 61,370
Other ............................................................................ 31,800
-------------
Total expenses .............................................................. 21,832,820
-------------
Net investment income ..................................................... 37,583,452
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (net of foreign taxes $1,162,189) (Note 1f) ......................... 88,851,907
Foreign currency transactions ................................................... (2,258,134)
-------------
Net realized gain (loss) .................................................... 86,593,773
-------------
Net unrealized appreciation (depreciation) on:
Investments ..................................................................... 576,758,450
Translation of assets and liabilities denominated in foreign currencies ......... 61,596
Deferred taxes (Note 1f) ........................................................ (8,658,169)
-------------
Net unrealized appreciation (depreciation) .................................. 568,161,877
-------------
Net realized and unrealized gain (loss) ........................................... 654,755,650
-------------
Net increase (decrease) in net assets resulting from operations ................... $692,339,102
-------------
See notes to financial statements.
ANNUAL REPORT 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Statements (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002
--------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................... $ 37,583,452 $ 21,643,099
Net realized gain (loss) from investments and foreign currency transactions ............. 86,593,773 (36,923,606)
Net unrealized appreciation (depreciation) on investments, translation of assets and
liabilities denominated in foreign currencies, and deferred taxes ....................... 568,161,877 50,286,763
--------------------------------
Net increase (decrease) in net assets resulting from operations ..................... 692,339,102 35,006,256
Distributions to shareholders from net investment income .................................. (43,484,955) (21,460,806)
Capital share transactions (Note 2) ....................................................... 208,779,714 (53,529,712)
--------------------------------
Net increase (decrease) in net assets ............................................... 857,633,861 (39,984,262)
Net assets:
Beginning of year ........................................................................ 1,234,595,049 1,274,579,311
--------------------------------
End of year .............................................................................. $2,092,228,910 $1,234,595,049
--------------------------------
Undistributed net investment income included in net assets:
End of year .............................................................................. $ (12,907,170) $ (3,444,506)
--------------------------------
See notes to financial statements.
14 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Emerging Market Series (the Fund) is a separate, diversified series of Templeton
Institutional Funds, Inc. (the Company), which is an open-end investment company
registered under the Investment Company Act of 1940. The Fund seeks to achieve
long-term capital growth by investing at least 80% of its total assets in equity
securities of developing markets issuers. The following summarizes the Fund's
significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Investments in open-end mutual funds are
valued at the closing net asset value. Foreign securities are valued at the
close of trading of the foreign exchange or the NYSE, whichever is earlier. If
events occur that materially affect the values of securities after the prices or
foreign exchange rates are determined, or if market quotations are not readily
available, the securities will be valued at fair value as determined following
procedures approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
F. DEFERRED TAXES
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities as reflected in the accompanying
financial statements.
ANNUAL REPORT 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Notes to Financial Statements (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2003, there were 1.14 billion shares authorized ($0.01 par
value) for the Company, of which 325 million have been classified as Fund
shares. Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2003 2002
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
Shares sold ............................................ 50,763,689 $ 484,473,625 38,663,749 $ 323,170,107
Shares issued on reinvestment of distributions ......... 3,654,518 40,669,079 2,401,584 20,008,397
Shares redeemed ........................................ (34,900,576) (316,362,990) (46,538,950) (396,708,216)
-----------------------------------------------------------
Net increase (decrease) ................................ 19,517,631 $ 208,779,714 (5,473,617) $ (53,529,712)
-----------------------------------------------------------
3. TRANSACTIONS WITH AFFILIATES
Certain officers of the Company are also officers or directors of Templeton
Asset Management Ltd. (TAML), Franklin Templeton Services, LLC (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors), and Franklin/Templeton
Investor Services, LLC (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter, and transfer agent, respectively.
The Fund pays an investment management fee to TAML of 1.25% per year of the
average daily net assets of the Fund.
The Fund pays its allocated share of an administrative fee to FT Services based
on the aggregate average daily net assets of certain funds within the Company as
follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-------------------------------------------------------------
0.150% First $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
4. INCOME TAXES
At December 31, 2003, the cost of investments, net unrealized appreciation
(depreciation) and undistributed ordinary income for income tax purposes were as
follows:
Cost of investments ............................... $1,592,102,818
---------------
Unrealized appreciation ........................... 534,586,809
Unrealized depreciation ........................... (36,165,793)
---------------
Net unrealized appreciation (depreciation) ........ $ 498,421,016
---------------
Distributable earnings--ordinary income ........... $ 7,606,046
---------------
16 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Notes to Financial Statements (CONTINUED)
The tax character of distributions paid during the years ended December 31, 2003
and 2002 was as follows:
2003 2002
------------------------
Distributions paid from ordinary income .... $43,484,955 $21,460,806
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and passive foreign
investment company shares.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, passive foreign investment company shares, and taxes on net
realized gains.
At December 31, 2003 the Fund had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
Capital loss carryovers expiring in:
2006 ............................ $ 12,118,296
2007 ............................ 248,064,895
2008 ............................ 30,672,686
2009 ............................ 248,561,095
2010 ............................ 87,334,612
------------
$626,751,584
------------
At December 31, 2003 the Fund had deferred foreign currency losses occurring
subsequent to October 31, 2003 of $448,340. For tax purposes, such losses will
be reflected in the year ending December 31, 2004.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 2003 aggregated $809,825,271 and $683,327,191, respectively.
6. REGULATORY MATTERS
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries (the "Company"),
alleging violations of the Massachusetts Uniform Securities Act. The complaint
arises from activity that occurred in 2001 during which time an officer of a
Company subsidiary was negotiating an agreement with an investor relating to
investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, has been named in shareholder class actions related to the matter
described above. The Company believes that the claims made in the lawsuit are
without merit and it intends to defend vigorously against the allegations. The
Company and the Fund may be named in similar civil actions related to the matter
described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Fund management has been advised that the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on the Fund is uncertain at this time. If the Company finds that it bears
responsibility for any unlawful or improper conduct, it has committed to making
the Fund or its shareholders whole, as appropriate.
ANNUAL REPORT 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Templeton Institutional Funds, Inc. - Emerging Markets Series
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Emerging Markets Series of
Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2003, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2004, except for Note 6, as to which the date is February 12, 2004.
18
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Tax Designation (unaudited)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby
designates up to maximum of $29,188,027 as qualified dividends for purposes of
the maximum rate under Section1(h)(11) of the Code for the fiscal year ended
December 31, 2003. In January 2004, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2003. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
At December 31, 2003, more than 50% of the Templeton Institutional Funds, Inc.
Emerging Markets Series total assets were invested in securities of foreign
issuers. In most instances, foreign taxes were withheld from dividends paid to
the Fund on these investments. As shown in the table below the Fund hereby
designates to shareholders the foreign source income and foreign taxes paid,
pursuant to Section 853 of the Internal Revenue Code. This designation will
allow shareholders of record on December 11, 2003, to treat their proportionate
share of foreign taxes paid by the Fund as having been paid directly by them.
The shareholder shall consider these amounts as foreign taxes paid in the tax
year in which they receive the Fund distribution.
The following table provides a detailed analysis, by country, of Foreign Tax
Paid, Foreign Source Income, Foreign Qualified Dividends and Adjusted Foreign
Source Income as designated by the Fund, to shareholders of record. As a service
to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per
Share" in column 4 below reports foreign source income with the required
adjustments to foreign source qualified dividends. This information is provided
to simplify your reporting of foreign source income for line 1 of Form 1116.
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
-------------------------------------------------------------------------------------------------
Austria 0.0012 0.0051 0.0051 0.0022
Bermuda 0.0000 0.0001 0.0000 0.0001
Brazil 0.0050 0.0292 0.0122 0.0222
Chile 0.0001 0.0002 0.0000 0.0002
China 0.0000 0.0085 0.0054 0.0054
Croatia 0.0000 0.0015 0.0000 0.0015
Czech Republic 0.0002 0.0008 0.0008 0.0003
Egypt 0.0000 0.0015 0.0015 0.0006
Greece 0.0000 0.0070 0.0070 0.0030
Hong Kong 0.0000 0.0339 0.0000 0.0339
Hungary 0.0006 0.0021 0.0021 0.0009
India 0.0037 0.0100 0.0074 0.0058
Indonesia 0.0029 0.0126 0.0126 0.0054
Israel 0.0000 0.0001 0.0001 0.0000
Luxembourg 0.0000 0.0015 0.0015 0.0006
Malaysia 0.0009 0.0022 0.0000 0.0022
Mexico 0.0000 0.0152 0.0149 0.0067
Philippines 0.0007 0.0018 0.0018 0.0008
Poland 0.0002 0.0007 0.0007 0.0003
Portugal 0.0000 0.0001 0.0001 0.0000
Russia 0.0004 0.0018 0.0018 0.0008
Singapore 0.0044 0.0226 0.0000 0.0226
South Africa 0.0016 0.0334 0.0195 0.0223
South Korea 0.0081 0.0332 0.0038 0.0310
Switzerland 0.0000 0.0001 0.0000 0.0001
Taiwan 0.0055 0.0134 0.0000 0.0134
Thailand 0.0004 0.0057 0.0057 0.0024
Turkey 0.0000 0.0078 0.0078 0.0033
United Kingdom 0.0001 0.0008 0.0008 0.0003
----------------------------------------------------------------------------
TOTAL $0.0360 $0.2529 $0.1126 $0.1883
----------------------------------------------------------------------------
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the fund's distribution to which the foreign taxes relate).
19
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Tax Designation (unaudited)
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends without adjustment for the lower U.S.
tax rates. Generally, this is the foreign source income to be reported by
certain trusts and corporate shareholders.
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the fund. If you are an individual shareholder who
does not meet the qualified dividend holding period requirements, you may find
this information helpful to calculate the foreign source income adjustment
needed to complete line 1 of Form 1116.
Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per
share of foreign source income the fund paid to you. These amounts reflect the
Foreign Source Income reported in column 2 adjusted for the tax rate
differential on foreign source qualified dividends that may be required for
certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B).
If you are an individual shareholder who meets the qualified dividend holding
period requirements, generally, these Adjusted Foreign Source Income amounts may
be reported directly on line 1 of Form 1116 without additional adjustment.
In January 2004, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2003. The Foreign Source Income reported on Form 1099-DIV has been
reduced to take into account the tax rate differential on foreign source
qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B).
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their 2003 individual income tax returns.
20
BOARD MEMBERS AND OFFICERS
The name, age, and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of U.S registered portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton (71) Director Since 1992 142 Director, Bar-S Foods (meat packing company).
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
- -----------------------------------------------------------------------------------------------------------------------------------
Frank J. Crothers (59) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice
Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric
Utility Services Corporation (Chairman until 2002); director of various other business and nonprofit organizations; and
FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato (71) Director Since 1992 143 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- -----------------------------------------------------------------------------------------------------------------------------------
Edith E. Holiday (51) Director Since 1996 96 Director, Amerada Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas); Beverly Enterprises,
Suite 2100 Inc. (health care); H.J. Heinz Company (processed
Fort Lauderdale, FL 33394-3091 foods and allied products); RTI International
Metals, Inc. (manufacture and distribution of
titanium); and Canadian National Railway
(railroad).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Betty P. Krahmer (74) Director Since 1995 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government.
- -----------------------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (75) Director Since 1993 142 Director, White Mountains Insurance Group, Ltd.
500 East Broward Blvd. (holding company); Martek Biosciences Corporation;
Suite 2100 MedImmune, Inc. (biotechnology); and Overstock.com
Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI
Communication Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom, Inc.)
(communications services) (1988-2002) and
Spacehab, Inc. (aerospace services) (1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River
Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and
President, National Association of Securities Dealers, Inc. (1970-1987).
- -----------------------------------------------------------------------------------------------------------------------------------
21
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (74) Director Since 1992 28 None
500 East Broward Blvd.
Suite 2100 Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Frank A. Olson (71) Director Since 2003 20 Director, Becton, Dickinson and Co. (medical
500 East Broward Blvd. technology); White Mountains Insurance Group Ltd.
Suite 2100 (holding company); and Amerada Hess Corporation
Fort Lauderdale, FL 33394-3091 (exploration and refining of oil and gas).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief Executive Officer 1977-1999); and
FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
Constantine D.
Tseretopoulos (49) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology
Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**Nicholas F. Brady (73) Director Since 1993 21 Director, Amerada Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas); and C2, Inc.
Suite 2100 (operating and investment business); and FORMERLY,
Fort Lauderdale, FL 33394-3091 Director, H.J. Heinz Company (processed foods and
allied products)(1987-1988;1993-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group,
LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund;
and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States
Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until
1988); and U.S. Senator, New Jersey (April 1982-December 1982).
- -----------------------------------------------------------------------------------------------------------------------------------
**Charles B. Johnson (70) Director, Director and 142 None
One Franklin Parkway Vice Vice President
San Mateo, CA 94403-1906 President since 1993 and
and Chairman Chairman of
of the Board the Board since
1995
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin
Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Harmon E. Burns (58) Vice Since 1996 Not None
One Franklin Parkway President Applicable
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries
of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
22
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Jeffrey A. Everett (39) Vice Since 2001 Not Applicable None
PO Box N-7759 President
Lyford Cay, Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989).
- -----------------------------------------------------------------------------------------------------------------------------------
Martin L. Flanagan (43) Vice Since 1990 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide,
Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director,
Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services,
LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill (56) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL Officer -
33394-3091 Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the
investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
David P. Goss (56) Vice Since 2000 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust
(until 2000).
- -----------------------------------------------------------------------------------------------------------------------------------
Barbara J. Green (56) Vice Vice Not Applicable None
One Franklin Parkway President President
San Mateo, CA 94403-1906 and since 2000
Secretary and Secretary
since 1996
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President,
Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment
Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin
Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton
Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries
of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
- -----------------------------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Jr. Vice Since 1996 Not Applicable None
(63) President
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may
be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
23
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Kay (63) Vice Since 1994 Not Applicable None
500 East Broward Blvd. President
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Michael O. Magdol (66) Vice Since 2002 Not Applicable Director, FTI Banque, Arch Chemicals, Inc. and Lingnan
600 Fifth Avenue President Foundation.
Rockefeller Center - AML
New York, NY 10048-0772 Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Mark Mobius (67) Vice Since 1993 Not Applicable None
17th Floor, President
The Chater House
8 Connaught Road
Central Hong Kong
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.;
Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may
be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton
Investments; 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 (59) President President Not Applicable None
1 Adelaide Street East, and Chief since 1993
Suite 2101 Executive and Chief
Toronto, Ontario Canada Officer - Executive
M5C 3B8 Investment Officer -
Management Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel,
LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as
the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of
FTTrust Company.
- -----------------------------------------------------------------------------------------------------------------------------------
Kimberley H. Monasterio Treasurer Treasurer Not Applicable None
(40) and Chief and Chief
One Franklin Parkway Financial Financial
San Mateo, CA 94403-1906 Officer Officer
since 2003
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton
Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
24
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Murray L. Simpson (66) Vice Since 2000 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of
some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia)
Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
- -----------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered
investment companies within the Franklin Templeton Investments fund complex.
These portfolios have a common investment adviser or affiliated investment
advisers.
**Charles B. Johnson is considered an interested person of the Fund under the
federal securities laws due to his position as officer and director and major
shareholder of Franklin Resources, Inc. (Resources), which is the parent company
of the Fund's adviser and distributor. Nicholas F. Brady is considered an
interested person of the Fund under the federal securities laws due to his
business affiliations with Resources, and Templeton Global Advisors Limited. On
October 1, 2003, Resources acquired all of the shares of Darby Overseas
Investments, Ltd. (Darby Investments) and the remaining portion of the limited
partner interests not currently owned by Resources of Darby Overseas Partners,
L.P. (Darby Partners). Mr. Brady, formerly a shareholder of Darby Investments
and a partner of Darby Partners, will continue as Chairman of Darby Investments,
which is the corporate general partner of Darby Partners. In addition, Darby
Partners and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P. (DEMF). Mr. Brady will also continue to serve as
Chairman of the corporate general partner of DEMF, and Darby Partners and Darby
Investments own 100% of the stock of the general partner of DEMF. Resources also
is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby
Partners is a significant investor and for which Darby Partners has the right to
appoint a majority of the directors. Templeton Global Advisors Limited also is a
limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. (DBVA), a
private equity fund in which Darby Partners is a significant investor, and the
general partner of which Darby Partners controls jointly with an unaffiliated
third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd.
(TCAL), which serves as investment manager to certain unregistered funds. TCAL
and Templeton Global Advisors Limited are both indirect subsidiaries of
Resources.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT
ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE
SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK
BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR.
OLSON, WHO CURRENTLY SERVES AS CHAIRMAN OF THE BOARD OF THE HERTZ CORPORATION
AND WAS ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT
COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE
GROUP, LTD. AND A FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UNITED
AIRLINES. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS
BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS
THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND SECURITIES
AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
25
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Proxy Voting Policies and Procedures
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention:
Proxy Group.
26 ANNUAL REPORT
- ---------------------
PRSRT STD
U.S. POSTAGE
PAID
So. San Francisco, CA
Permit No. 655
- ---------------------
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc. Emerging Markets Series, which contains more
complete information, including risk factors, charges and expenses. Like any
investment in securities, the value of the Fund's portfolio will be subject to
the risk of loss from market, currency, economic, political and other factors.
The Fund and its investors are not protected from such losses by the Investment
Manager. Therefore, investors who cannot accept this risk should not invest in
shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
identified by the presence of a regular beeping tone.
PRINCIPAL UNDERWRITER:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES: 1-800-321-8563
ZT456 A 02/04
TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI EMERGING FIXED INCOME MARKETS SERIES
ANNUAL REPORT
DECEMBER 31, 2003
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
INVESTING IN EMERGING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH INCLUDE
RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL, ECONOMIC, AND
POLITICAL DEVELOPMENTS, AND THE RELATIVELY SMALL SIZE AND LESSER LIQUIDITY OF
THESE MARKETS. THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S
PROSPECTUS. THE FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A
WELL-DIVERSIFIED PORTFOLIO.
REGULATORY UPDATE
As of February 12, 2004
To Our Valued Shareholders:
In our efforts to fulfill our ongoing commitment to providing you with timely
and accurate information, we have prepared this statement to give you an
overview of current industry issues as they pertain to Franklin Resources, Inc.
(Franklin Templeton Investments) and our subsidiary companies (the "Company").
Any further updates on these and other matters will be disclosed on the
Company's website at franklintempleton.com under "Statement on Current Industry
Issues."
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries, alleging violations of
the Massachusetts Uniform Securities Act. The complaint arises from activity
that occurred in 2001 during which time an officer of a Company subsidiary was
negotiating an agreement with an investor relating to investments in a mutual
fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, has been named in shareholder class actions related to the matter
described above. The Company believes that the claims made in the lawsuit are
without merit and it intends to defend the allegations vigorously. The Company
and the Fund may be named in similar civil actions related to the matter
described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Company cannot predict the likelihood of whether those
discussions will result in a settlement and, if so, the terms of such
settlement. The impact, if any, of these matters on a fund is uncertain at this
time. If we find that we bear responsibility for any unlawful or improper
conduct, we have committed to making a fund or its shareholders whole, as
appropriate.
Alexander C. Calvo joined the Templeton organization in 1995 and is currently
Senior Vice President, Director, and Portfolio Manager for Franklin Templeton
Investments International Bond Department. In this position, Mr. Calvo directs
all investment strategies within the Fixed Income Group and manages the
portfolio management team.
Prior to joining the Templeton organization, Mr. Calvo was an account executive
with Fleishman-Hillard. While there, he served as consultant to firms investing
in Latin America.
Mr. Calvo holds an M.A. in international affairs from the Fletcher School of Law
and Diplomacy at Tufts University and has completed course work for a Ph.D. in
economics at Boston University. He holds a B.A. in political science from the
State University of New York at Binghamton and studied electronic engineering at
the Universidad Nacional de San Juan in Argentina. He has also received the
Investment Management Certificate from the Investment Management Authority
(IMRO) in the U.K. and holds the National Association of Securities Dealers
Series 6 License in the U.S.
[BOTTOM OF EVERY PAGE: ANNUAL REPORT]
We are pleased to bring you the annual report for the Templeton Institutional
Funds, Inc. (TIFI) Emerging Fixed Income Markets Series (the "Fund") covering
the 12-month period ended December 31, 2003.
PERFORMANCE OVERVIEW
The Fund posted a 21.08% cumulative total return for the 12-month period ended
December 31, 2003. The Fund underperformed its benchmark, the JP Morgan Emerging
Markets Bond Index Global (EMBIG)/1/ which delivered a 25.66% cumulative total
return for the same period.
(Insert performance chart below)
TOTAL RETURNS AS OF 12/31/03
One-Year Three-Year Five-Year Cumulative Since
Average Average Average Inception
Annual/1/,/2/ Annual/1/,/2/ Annual/1/,/2/ (06/04/97) /1/,/3/
-------------------------------------------------------------------------
TIFI Emerging Fixed Income
Markets Series 21.08% 13.68% 12.95% 98.64%
JP Morgan EMBIG/4/ 25.66% 12.95% 15.40% 87.58%
1. The Fund's administrator, manager, and transfer agent have agreed in advance
to waive a portion of their respective fees in order to limit the total expenses
of the Fund to an annual rate of 1.25% of average net assets through April 30,
2004. If these fee waivers are insufficient to so limit the Fund's expenses, the
Fund administrator, manager, and transfer agent have agreed to make certain
payments to reduce the Fund's expenses. After April 30, 2004, these agreements
may end at any time upon notice to the Board. Past expense waivers by the Fund's
administrator, manager, and transfer agent increased the Fund's total returns.
If they had not taken this action, the Fund's one-year, three-year, and
five-year average annual total returns and since inception cumulative total
return would have been lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated period.
3. Cumulative total return represents the change in value of an investment over
the indicated periods.
4. Source: JP Morgan. The Emerging Markets Bond Index Global (EMBIG) tracks
total returns for U.S. dollar-denominated debt instruments issued by emerging
market sovereign and quasi-sovereign entities. The index includes reinvested
interest.
Indices are unmanaged, do not contain cash, and do not include management or
operating expenses. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified series of an investment company, the Fund may invest in a
relatively small number of issuers and, as a result, be subject to greater risk
of loss with respect to its portfolio procedures. You may have a gain or loss
when you sell your shares. Past performance is not predictive of future results.
The performance figures do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page X.
NOT FDIC INSURED/MAY LOSE VALUE/NO BANK GUARANTEE
ECONOMIC AND MARKET OVERVIEW
During the year in review, many global developed economies showed signs of
recovery and benign inflationary pressures, which followed an environment of low
growth and disinflation that facilitated monetary easing in many major
economies. Economic growth accelerated in the United States; remained strong in
Asia; and was weak, yet positive, in Europe. Despite these signs of economic
recovery, dis-inflationary trends continued, supported by productivity growth
and excess capacity in labor and capital. Many global bond markets benefited
from the low interest rate environment and currency developments as most major
currencies appreciated against the U.S. dollar.
The U.S. dollar depreciated 15.26% relative to the nation's major trading
partners for the 12 months ended December 31, 2003. The United States
experienced deteriorating balance of payment fundamentals during the year, as
record trade deficit levels drove the United States current account deficit to
$135 billion for third quarter 2003, or 4.9% of gross domestic product (GDP) on
an annualized basis./2/ The current account deficit combined with a fiscal
deficit created a "twin-deficit" problem similar to previous periods when the
U.S. dollar came under pressure.
Slow economic growth at the beginning of the year, accompanied by heightened
geopolitical uncertainty, rising unemployment, and dis-inflationary pressures
provided a favorable environment for an accommodative monetary stance at many
major central banks. In the United States, the Federal Reserve Board lowered the
federal funds target rate 25 basis points to 1.00%. However, the yield curve
steepened on prospects of stronger economic growth later in the year. Similarly
in Europe, policymakers at the European Central Bank reduced its reference rate
75 basis points to 2.00%. Global bond markets responded favorably to the
declines in interest rates, increasing 2.22% in local currency terms and 14.51%
in U.S. dollar terms, as measured by the JP Morgan Global Government Bond Index
(GGBI)/3/, over the course of the reporting period.
A reduction in interest rates in developed economies generally benefits emerging
market borrowers, as it lowers financing costs and can attract positive
investment flows as investors seek higher returns outside developed countries.
Emerging bond markets, as measured by the JP Morgan EMBIG, returned 25.66%
during the 12-month period, with sovereign spreads declining from 725 basis
points over the U.S. Treasury market to 403 basis points by the end of the
reporting period. Regionally, Latin America returned 32.97%, Eastern Europe
22.07%, and Asia 9.02%.
INVESTMENT STRATEGY
We invest selectively in emerging market bonds to generate income for the Fund,
while at the same time monitoring interest rate, exchange rate, and credit
risks.
MANAGER'S DISCUSSION
The Fund's underperformance relative to the JP Morgan EMBIG during the period
reflected the Fund's defensive positioning with regards to Brazil early in the
year, given increased default risk as capital markets remained closed to Brazil
ahead of the presidential election in the fall of 2002. As the credit outlook
improved, the Fund moved to an overweight position in Brazilian securities. The
Fund still returned 21.08% for the year without taking significant default risk.
The JP Morgan EMBIG, an index of United States dollar denominated emerging
markets debt, produced strong returns during the year and sovereign spreads
tightened to historical low levels over the U.S. Treasury curve. This
performance of the benchmark index was supported by favorable investment flows
to the asset class given its attractive yield over developed markets as well as
the favorable credit developments, highlighted by the large number of sovereign
credit upgrades in 2003. The worsening of the twin-deficit condition in the
United States and steepening of the U.S. Treasury curve could have negative
implications for U.S. dollar denominated assets as well as spreads.
Consequently, the Fund began to increase relative allocation to euro and local
currency denominated markets with attractive yield characteristics and potential
for currency appreciation. Over the past 12 months, the Fund increased
allocation to Asia and Latin America, and reduced allocation to Eastern Europe.
Latin America was the best performing region within the JP Morgan EMBIG, and it
contributed to more than half of the overall index return in 2003. The Fund's
key positions in Latin America included Brazil, Venezuela, and Mexico, which
returned 69.77%, 39.89%, and 11.56%, respectively. We moved to an overweight
position in Brazil, relative to the Fund's benchmark, during the year following
the containment of inflationary pressures and the reduction in official interest
rates. Typically, lower interest rates support economic growth, lower borrowing
costs to the government, and support fiscal performance and debt service
capacity. Additionally, Brazil regained access to international capital markets,
thus easing financing concerns that pressured bond prices the previous year. We
maintained an overweight position in Venezuelan securities, positively impacting
Fund performance. Venezuelan bond markets experienced volatility early in the
year after an employee strike at the nation's oil company affected economic
conditions. However, bond markets rebounded, following the resumption of oil
production, sustained oil prices, and the accumulation of international
reserves. We reduced the Fund's exposure to Mexico to a significant underweight
position relative to the JP Morgan EMBIG as the relative weighting to Brazil was
increased.
Following continued improvement in macroeconomic and credit trends and the
tightening of credit spreads, the Fund began to take profits in Russia, thereby
reducing the Fund's relative allocation to Eastern Europe. Eastern Europe, and
specifically Russia and Ukraine, experienced an acceleration of economic growth
during the year. In Russia, GDP increased from 4.7% in 2002 to 7.0% in 2003/4/,
and GDP growth in the Ukraine increased from 4.8% to 8.5% for the same time
periods./5/ Both Russia and the Ukraine experienced rapid foreign reserve
accumulation reflecting strength in the balance of payment position from
improvement in both their current and capital accounts. The current account
surplus was supported by strong export growth while the capital account
benefited from increases in foreign direct investment. After only five years,
Moody's upgraded Russia's long-term foreign currency rating to investment grade,
specifically to Baa3 from Ba2. Similarly, Ukraine was upgraded from B2 to B1./6/
Over the past 12 months, Russian and Ukrainian bonds returned 22.38% and 19.76%,
respectively.
As the focal point of the Fund's local currency strategy, we increased the
Fund's regional allocation to Asia. Primarily, we expanded and diversified the
Fund's Asian exposure later in the reporting period to include the local bond
market positions in South Korea, Thailand, and Indonesia. Economic growth in
Asia improved in many countries over the past year, accompanied by low
inflationary pressures. Export growth and current account surpluses in many of
the countries supported international reserve accumulation, particularly among
the newly industrialized economies of South Korea, Thailand, and Indonesia. By
the end of the year, international reserve assets in these countries amounted to
$155 billion, $42 billion, and $36 billion, respectively. Furthermore, these
reserve levels represented increases of 28.0%, 8.0%, and 14.8%, respectively,
from the previous year. In South Korea, credit conditions improved with low
inflationary pressures and positive balance of payment dynamics. The most recent
current account data in South Korea exhibited a $2.95 billion surplus, the
highest level in nearly five years. Indonesia's credit condition improved and
Standard & Poor's upgraded the country's foreign currency sovereign rating twice
during the 12-month period to B and the local currency to B+./7/ Likewise,
robust external and domestic demand drove economic growth in Thailand to 6.5% by
the third quarter of 2003, compared to 5.2% in the year 2002./8/
It is important to note that foreign investing involves special risks related to
market, currency, economic, social, political, and other factors, in addition to
the heightened risks associated with the relatively small size and lesser
liquidity of emerging markets. Investing in any emerging market security means
accepting a certain amount of volatility that can arise from such factors as
high levels of inflation, deflation, or currency devaluation. These risks and
other considerations are discussed in the Fund's prospectus.
We thank you for your continued participation and look forward to serving your
investment needs.
Best regards,
[INSERT SIGNATURE]
Alexander C. Calvo
Portfolio Management Team
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES
NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
[Footnotes]
1. Soure: JP Morgan. The Emerging Markets Bond Index Global (EMBIG) tracks total
returns for U.S. dollar-denominated debt instruments issued by emerging market
sovereign and quasi-sovereign entities. The index includes reinvested interest.
2. Source: Bureau of Economic Analysis, U.S. Department of Commerce
3. Source: JP Morgan. The JP Morgan Global Government Bond Index tracks total
returns of government bonds in developed countries globally. The bonds included
in the index are weighted according to their market capitalization. The index is
unhedged and expressed in terms of $US.
4. Source: State Statistic Committee (Russia).
5. Source: National Bank of Ukraine.
6. Source: Moody's Investors Service, an independent credit rating agency. The
rating does not reflect the rating of the fund, the yield or market price of the
Fund's shares, or approval of the Fund by Moody's Investors Service.
7. Source: Standard & Poor's, an independent credit rating agency. The rating
does not reflect the rating of the fund, the yield or market price of the Fund's
shares, or approval of the Fund by or Standard & Poor's.
8. Source: National Economic & Social Development Board.
INSERT THE FOLLOWING CHARTS ON PAGES 2 AND 3 AS INDICATED
Page 2, left side callout
GEOGRAPHIC DISTRIBUTION ON 12/31/03- pie chart
(FIXED INCOME ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
Latin America 40.5%
Asia 28.0%
Europe 24.4%
Middle-East Africa 2.7%
Short-Term Investments and Other Net Assets 4.4%
FUND ASSET ALLOCATION ON 12/31/03 - pie chart
Government Agencies and Other Net Assets 95.6%
Corporate Bonds 4.4%
Page 3, right side callout
Insert shaded box-
10 LARGEST POSITIONS ON 12/31/03
(Percent of Total Net Assets)
1. Republic of Brazil, 8.00%, 4/15/04 11.6%
2. Federation of Russia, Reg S, 7.50%, 3/31/30 10.6%
3. Republic of Brazil, 11.00%, 8/17/40 8.0%
4. Republic of Bulgaria, 144A, 8.25%, 1/15/15 4.1%
5. Indonesia Recapital, 13.15%, 3/15/10 3.6%
6. Republic of Vietnam, 4.00%, 3/12/16 3.2%
7. Republic of Indonesia, 14.00%, 6/15/09 3.2%
8. Republic of Ukraine, 10.00%, 3/15/07 3.1%
9. Republic of Venezuela, 10.75%, 9/19/13 3.1%
10. Republic of Venezuela, 9.25%, 9/15/27 3.0%
INSERT GRAPH:
TOTAL RETURN INDEX COMPARISON/1/
$5,000,000 INVESTMENT: 06/04/97-12/31/03
TIFI Emerging Fixed Income Markets Series/1/
Emerging Markets Bond Index Global/4/
Periods ended December 31, 2003
Since
One- Three- Five- Inception
year year year (06/04/97)
-----------------------------------------
Average Annual Total Return/1/,/2/ 21.08% 13.68% 12.95% 10.84%
Cumulative Total Return/1/,/3/ 21.08% 46.92% 83.81% 98.64%
1. The Fund's administrator, manager, and transfer agent have agreed in advance
to waive a portion of their respective fees in order to limit the total expenses
of the Fund to an annual rate of 1.25% of average net assets through April 30,
2004. If these fee waivers are insufficient to so limit the Fund's expenses, the
Fund administrator, manager, and transfer agent have agreed to make certain
payments to reduce the Fund's expenses. After April 30, 2004, these agreements
may end at any time upon notice to the Board. Past expense waivers by the Fund's
administrator, manager, and transfer agent increased the Fund's total returns.
If they had not taken this action, the Fund's one-year, three-year, five year,
and since inception average annual total returns and cumulative total returns
would have been lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3. Cumulative total return represents the change in value of an investment over
the indicated periods.
4. Source: JP Morgan. The Emerging Markets Bond Index Global (EMBIG) tracks
total returns for U.S. dollar-denominated debt instruments issued by emerging
market sovereign and quasi-sovereign entities. The index includes reinvested
interest.
Indices are unmanaged, do not contain cash, and do not include management or
operating expenses. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified series of an investment company, the Fund may invest in a
relatively small number of issuers and, as a result, be subject to greater risk
of loss with respect to its portfolio securities. You may have a gain or loss
when you sell your shares. Past performance is not predictive of future results.
The performance figures do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL HIGHLIGHTS
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE++
(for a share outstanding throughout the year)
Net asset value, beginning of year $ 9.12 $ 9.09 $ 8.96 $ 8.82 $ 8.59
------------------------------------------------------------
Income from investment operations:
Net investment income/a/ .68 .79 .79/c .89 .77
Net realized and unrealized gains (losses) 1.23 .05 .20/c .14 .22
------------------------------------------------------------
Total from investment operations 1.91 .84 .99 1.03 .99
------------------------------------------------------------
Less distributions from net investment income: (.72) (.81) (.86) (.89) (.76)
------------------------------------------------------------
Net asset value, end of year $ 10.31 $ 9.12 $ 9.09 $ 8.96 $ 8.82
============================================================
Total return/b/ 21.08% 9.28% 11.03% 12.07% 11.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 3,460 $2,857 $2,615 $2,352 $2,103
Ratios to average net assets:
Expenses 1.25% 1.25% 1.25% 1.25% 1.25%
Expenses, excluding waiver and
payments by affiliate 2.02% 2.22% 3.43% 2.90% 2.62%
Net investment income 6.74% 8.39% 8.56%/c 9.61% 8.57%
Portfolio turnover rate 110.68% 124.79% 199.64% 178.02% 297.46%
a/ Based on average daily shares outstanding.
b/ Total return is not annualized for periods less than one year.
c/ Effective January 1,2001, the Fund adopted the provisions of the AICPA Audit
and Accounting Guide of Investment Companies and began recording all paydown
gains and losses as part of investment income and amortizing all premium and
discount on fixed-income securities, as required. The effect of this change
was follows:
- ------------------------------------------------------
Net investment income per share $(0.05)
Net realized an unrealized gain (losses) per share 0.05
Ratio of net investment income to average net assets (0.54)%
Per share data and ratios for prior periods have not been restated to reflect
this change in accounting policy.
See Notes to Financial Statements.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
Principal
Amount Value
- -------------------------------------------------------------------------------
LONG TERM SECURITIES 95.6%
BRAZIL 19.5%
Republic of Brazil,
8.00%, 4/15/14 $ 406,365 $ 400,398
11.00%, 8/17/40 250,000 275,470
----------
675,868
----------
BULGARIA 4.1%
Republic of Bulgaria, 144A,
8.25%, 1/15/15 120,000 142,152
----------
CHILE .2%
Republic of Chile, 7.125%, 1/11/12 5,000 5,720
----------
COLOMBIA 4.3%
Republic of Colombia:
10.50%, 7/09/10 34,000 38,261
10.00%, 1/23/12 21,000 23,054
10.75%, 1/15/13 60,000 67,383
11.75%, 2/25/20 18,000 21,453
----------
150,151
----------
HUNGARY 2.8%
Government of Hungary, 8.50%, 10/12/05 20,700,000 HUF 96,363
----------
INDONESIA 7.7%
Indonesia Recapital,
12.125%, 2/15/06 270,000,000 IDR 32,458
13.15%, 3/15/10 1,035,000,000 IDR 123,500
Republic of Indonesia, 14.00%, 6/15/09 892,000,000 IDR 109,825
----------
265,783
----------
MALAYSIA 4.4%
Government of Malaysia, 7.50%, 7/15/11 71,000 84,168
Petronas Capital Ltd., 144A, 7.00%, 5/22/12 60,000 68,397
----------
152,565
----------
MEXICO 4.8%
United Mexican States,
7.50%, 3/08/10 30,000 EUR 42,122
144A, 7.50%, 3/08/10 40,000 EUR 56,163
5.375%, 6/10/13 20,000 EUR 24,374
11.50%, 5/15/26 30,000 43,575
---------
166,234
---------
PANAMA 1.1%
Republic of Panama:
8.875%, 9/30/27 12,000 12,660
9.375%, 4/01/29 23,000 25,918
----------
38,578
---------
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
Principal
Amount Value
- -------------------------------------------------------------------------------
PERU 2.0%
Republic of Peru, FRN, 5.00%, 3/07/17 $ 75,200 $ 70,193
---------
PHILIPPINES 4.6%
Republic of Philippines,
FRN, 6/01/08 30,500 28,518
9.125%, 2/22/10 20,000 EUR 26,260
144A, 9.125%, 2/22/10 10,000 EUR 13,134
9.00%, 2/15/13 27,000 28,197
10.625%, 3/16/25 56,000 61,775
----------
157,884
----------
POLAND .3%
Republic of Poland, 6.25%, 7/03/12 9,000 9,845
---------
RUSSIA 12.4%
Federation of Russia,
12.75% 6/24/28 40,000 64,028
Reg S, 5.00%, 3/31/30 380,000 365,085
---------
429,113
---------
SOUTH AFRICA 2.7%
Republic of South Africa,
7.375%, 4/25/12 62,000 69,769
5.25%, 5/16/13 10,000 EUR 12,153
8.50%,6/23/17 10,000 12,037
---------
93,959
---------
SOUTH KOREA 4.2%
Korea Development Bank, 4.25%, 11/13/07 100,000 102,048
Korea Treasury Bond, 4.75%, 3/12/08 50,000,000 KRW 42,236
---------
144,284
---------
THAILAND 3.9%
Kingdom of Thailand,
6.00%, 3/05/05 900,000 THB 23,922
8.50%, 10/14/05 600,000 THB 16,961
8.00%, 12/08/06 1,000,000 THB 29,433
5.60%, 7/07/07 600,000 THB 16,791
4.125%, 2/12/08 500,000 THB 13,399
8.50%, 12/08/08 100,000 THB 3,187
4.80%, 4/09/10 1,100,000 THB 29,412
---------
133,105
---------
UKRAINE 4.8%
Republic of Ukraine,
10.00%, 3/15/07 78,401 EUR 107,050
11.00%, 3/15/07 51,614 57,663
---------
164,713
--------
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
Principal
Amount Value
- -------------------------------------------------------------------------------
VENEZUELA 8.6%
Republic of Venezuela:
FRN, 12/18/07 $ 95,235 $ 90,354
10.75%, 9/19/13 100,000 106,500
9.25%, 9/15/27 112,000 102,095
---------
298,949
---------
VIETNAM 3.2%
Republic of Vietnam, 4.00%, 3/12/16 120,000 111,000
---------
TOTAL LONG TERM INVESTMENTS (COST $3,098,462) 3,306,459
---------
SHORT TERM INVESTMENT ($129,198) 3.7%
a/Franklin Institutional Fiduciary Trust
Money Market Portfolio 129,198 129,198
-------------
TOTAL INVESTMENTS (COST $3,227,660) 99.3% 3,435,657
OTHER ASSETS, LESS LIABILITIES .7% 23,924
------------
NET ASSETS 100.0% $3,459,581
============
CURRENCY ABBREVIATIONS:
EUR - European Unit
HUF - Hungarian Forint
IDR - Indoenesian Rupiah
KRW - Korean Won
THB - Thailand Bhat
a/ See Note 6 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
See Notes to Financial Statements
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
Assets:
Investments in securities:
Cost $ 3,227,660
-------------
Value 3,435,657
Receivables:
Investment securities sold 466,413
Dividends and interest 71,028
-----------
Total assets 3,973,098
===========
Liabilities:
Payables:
Investment securities purchased 485,477
Affiliates 10,869
Other liablities 17,171
-----------
Total liabilites 513,517
-----------
Net assets, at value $3,459,581
===========
Net assets consist of:
Undistributed net investment income $ (5,575)
Net unrealized appreciation (depreciation) 208,410
Accumulated net realized gain (loss) 8,857
Capital shares 3,247,889
-------------
Net assets, at value $3,459,581
=============
Net asset value per share ($3,459,581/335,700 shares outstanding) $10.31
======
SEE NOTES TO FINANCIAL STATEMENTS
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 2003
Investment Income:
Dividends $ 556
Interest 251,543
----------
Total investment income 252,109
----------
Expenses:
Management fees (Note 3) 21,859
Administrative fees (Note 3) 2,765
Transfer agent fees (Note 3) 150
Custodian fees 1,000
Report to shareholders 1,400
Registration and filing fees 7,700
Professional fees 21,700
Directors' fees and expenses 6,500
Other 500
---------
Total expenses 63,574
Expenses waived/paid by affiliate (Note 3) (24,146)
----------
Net expenses 39,428
----------
Net investment income 212,681
----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 262,945
Foreign currency transactions 117
---------
Net realized gain (loss) 263,062
Net unrealized appreciation (depreciation)on:
Investments 125,957
Translation of assets and liabilities
demominated in foreign currencies 413
---------
Net unrealized appreciation(depreciation) 126,370
---------
Net realized and unrealized gain (loss) 389,432
---------
Net increase(decrease) in net assets resulting
from operations $602,113
=========
SEE NOTES TO FINANCIAL STATEMENT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
AND THE YEAR ENDED DECEMBER 31, 2003 AND PERIOD ENDED DECEMBER 31, 2002
2003 2002
----------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 212,681 $ 227,614
Net realized gain (loss) from investments
and foreign currency transactions 263,062 61,647
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated
in foreign currencies 126,370 (46,377)
----------------------------------------
Net increase (decrease) in net assets resulting from
operations 602,113 242,884
Distributions to shareholders from net investment income (226,031) (232,049)
Capital share transactions (Note 2) 226,031 232,049
----------------------------------------
Net increase (decrease) in net assets 602,113 242,884
Net assets:
Beginning of year 2,857,468 2,614,584
----------------------------------------
End of year $3,459,581 $2,857,468
========================================
Undistributed net investment income included in net assets:
End of year $ (5,575) $ (556)
========================================
SEE NOTES TO FINANCIAL STATEMENTS.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Emerging Fixed Income Markets Series (the Fund) is a separate, non-diversified
series of Templeton Institutional Funds, Inc. (the Company), which is an
open-end investment company registered under the Investment Company Act of 1940.
The Fund seeks high total return consisting of current income and capital
appreciation through a flexible policy of investing at least 80% of total assets
in debt securities in emerging market countries and entities organized for the
purpose of restructuring securities issued by these issuers. The following
summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Investments in open-end mutual funds are
valued at the closing net asset value. Foreign securities are valued at the
close of trading of the foreign exchange or the NYSE, whichever is earlier. If
events occur that materially affect the values of securities after the prices or
foreign exchange rates are determined, or if market quotations are not readily
available, the securiteis will be valued at fair value as determined following
procedures approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of interest and foreign withholding taxes, and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in foreign exchange rates on foreign denominated
assets and liabilities other than investments in securities held at the end of
the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Distributions to shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
G. GUARANTEES AND INDEMNIFICATION
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business, the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2003, there were 1.14 billion shares authorized ($0.01 par
value) for the Company, of which 140 million have been classified as Fund
shares. Transactions in the Fund's shares were as follows:
YEAR ENDED
2003 2002
-------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -----------------------------
Shares sold - - - -
Shares issued on reinvestment of distributions 22,271 $226,031 25,669 $232,049
Shares redeemed - - - -
------------- -----------------------------
Net increase (decrease) 22,271 $226,031 25,669 $232,049
============================================
Templeton Global Investors, Inc., a subsidiary of Franklin Resources, Inc. (an
affiliate of the Fund's investment manager), is the record owner of 100% of the
Fund shares as of December 31, 2003.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, LLC (TIC), Franklin Templeton Services, LLC (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors), and Franklin/Templeton
Investor Services, LLC (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TIC of 0.70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the aggregate average daily net
assets of certain funds within the Company as follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------- --------------------------------------------------------------
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
The investments manager and administrator have agreed in advance to waive or
limit their respective fees and to assume as their own expenses otherwise
payable by the Fund through April 30, 2004, as noted in the Statement of
Operations.
The Fund paid transfer agent fees of $150.
4. INCOME TAXES
At December 31, 2003, the cost of investments and net unrealized appreciation
(depreciation), undistributed oridinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments $3,237,398
----------
Unrealized appreciation 215,745
Unrealized depreciation (17,486)
----------
Net unrealized appreciation (depreciation) $ 198,259
-----------
Undistributed ordinary income 1,440
Undistributed long term capital gains 11,578
----------
Distributed earnings $ 13,018
-----------
The tax character of distributions paid during the years ended December 31, 2003
and 2002, was a follows:
2003 2002
----------------------
Distributions paid from ordinary income $226,031 $232,049
--------- ---------
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, and bond discounts
and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, wash
sales, and bond discounts and premiums.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 2003, aggregated $3,558,189 and $3,337,897, respectively.
6. INVESTMENT IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Franklin Advisers Inc. (an affiliate of the Fund's investment manager).
Management fees paid by the Fund are reduced on assets invested in the Sweep
Money Fund, in an amount not to exceed the management fees paid by the Sweep
Money Fund. The Fund earned $566 of dividend income from investment in the Sweep
Money Fund.
7. REGULATORY MATTERS
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries (the "Company"),
alleging violations of the Massachusetts Uniform Securities Act. The complaint
arises from activity that occurred in 2001 during which time an officer of a
Company subsidiary was negotiating an agreement with an investor relating to
investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, including other funds, has been named in shareholder class actions
related to the matter described above. The Company believes that the claims made
in the lawsuit are without merit and it intends to defend itself vigorously
against the allegations. The company and the Fund may be named in similar civil
actions related to the matter described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Fund's management has been advised that the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on the Fund is uncertain at this time. If the Company finds that it bears
responsibility for any unlawful or improper conduct, it has committed to making
the Fund or its shareholders whole, as appropriate.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Templeton Institutional Funds, Inc. - Emerging Fixed Income Markets Series
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Emerging Fixed Income Markets
Series of Templeton Institutional Funds, Inc. (the "Fund") at December
31, 2003 the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the year then ended
and the period from September 3, 2002 (inception date) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2004, except for Note 7, as to which the date is February 12, 2004.
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $11,578 as a capital gain dividends for the fiscal year ended
December 31, 2003.
BOARD MEMBERS AND OFFICERS
The name, age, and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of U.S registered portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
LENGTH OF OVERSEEN BY
NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ---------------------------------------------------------------------------------------------------------------
Harris J. Ashton (71) Director Since 1992 142 Director, Bar-S Foods
500 East Broward (meat packing company).
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank
holding company) (until 2002); and President, Chief Executive Officer and
Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
- ---------------------------------------------------------------------------------------------------------------
Frank J. Crothers (59) Director Since 1990 20 None
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
- ---------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice
Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power
Company Ltd.; Director, Caribbean Electric Utility Services Corporation
(Chairman until 2002); director of various other business and nonprofit
organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
(1977-2003).
- -------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato Director Since 1992 143 None
(71)
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- -------------------------------------------------------------------------------------------------------------
Edith E. Holiday (51) Director Since 1996 96 Director, Amerada Hess
500 East Broward Corporation (exploration
Blvd. and refining of oil and
Suite 2100 gas); Beverly Enterprises,
Fort Lauderdale, FL Inc. (health care); H.J.
33394-3091 Heinz Company (processed
foods and allied
products); RTI
International Metals, Inc.
(manufacture and
distribution of titanium);
and Canadian National
Railway (railroad).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, 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).
- -------------------------------------------------------------------------------------------------------------
Betty P. Krahmer (74) Director Since 1995 21 None
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various civic associations; and FORMERLY, Economic
Analyst, U.S. government.
- -------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (75) Director Since 1993 142 Director, White Mountains
500 East Broward Insurance Group, Ltd.
Blvd. (holding company); Martek
Suite 2100 Biosciences Corporation;
Fort Lauderdale, FL MedImmune, Inc.
33394-3091 (biotechnology); and
Overstock.com (Internet
services); and FORMERLY,
Director, MCI
Communication Corporation
(subsequently known as MCI
WorldCom, Inc. and
WorldCom, Inc.)
(communications services)
(1988-2002) and Spacehab,
Inc. (aerospace services)
(1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and
FORMERLY, Chairman, White River Corporation (financial services) (1993-1998) and
Hambrecht & Quist Group (investment banking) (1987-1992); and President,
National Association of Securities Dealers, Inc. (1970-1987).
- -------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (74) Director Since 1992 28 None
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal
investments (1978-present); 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).
- -------------------------------------------------------------------------------------------------------------
Frank A. Olson Director Since 2003 20 Director, Becton,
(71) Dickinson and Co. (medical
500 East Broward technology); White
Blvd. Mountains Insurance Group
Suite 2100 Ltd. (holding company);
Fort Lauderdale, FL and Amerada Hess
33394-3091 Corporation (exploration
and refining of oil and
gas).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief
Executive Officer 1977-1999); and FORMERLY, Chairman of the Board, President and
Chief Executive Officer, UAL Corporation (airlines).
- -------------------------------------------------------------------------------------------------------------
Constantine D. Director Since 1990 20 None
Tseretopoulos (49)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; and FORMERLY, Cardiology Fellow, University of Maryland
(1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center
(1982-1985).
- -------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
LENGTH OF OVERSEEN BY
NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ---------------------------------------------------------------------------------------------------------------
**Nicholas F. Brady Director Since 1993 21 Director, Amerada Hess
(73) Corporation (exploration
500 East Broward and refining of oil and
Blvd. gas); and C2, Inc.
Suite 2100 (operating and investment
Fort Lauderdale, FL business); and FORMERLY,
33394-3091 Director, H.J. Heinz
Company (processed foods
and allied products)
(1987-1988;1993-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments
LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-present);
Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment
Fund; and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC
(until 2003); Secretary of the United States Department of the Treasury
(1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment
banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982).
- -------------------------------------------------------------------------------------------------------------
**Charles B. Johnson Director, Vice Director and 142 None
(70) President and Vice President
One Franklin Parkway Chairman of since 1993 and
San Mateo, CA the Board Chairman of
94403-1906 the Board
since 1995
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.;
Director, Fiduciary Trust Company International; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
- -------------------------------------------------------------------------------------------------------------
Harmon E. Burns (58) Vice President Since 1996 Not None
One Franklin Parkway Applicable
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc.; and officer and/or director or trustee, as the case may
be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of
the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
Jeffrey A. Everett Vice President Since 2001 Not None
(39) Applicable
PO Box N-7759
Lyford Cay,
Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; officer of 15 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Investment
Officer, First Pennsylvania Investment Research (until 1989).
- -------------------------------------------------------------------------------------------------------------
Martin L. Flanagan Vice President Since 1990 Not None
(43) Applicable
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice
President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive
Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.;
Executive Vice President and Chief Operating Officer, Templeton Investment
Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice
President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services,
LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 49 of the investment companies in Franklin Templeton
Investments.
- -------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill (56) Senior Vice Since 2002 Not None
500 East Broward President and Applicable
Blvd. Chief Executive
Suite 2100 Officer -Finance
Fort Lauderdale, FL and
33394-3091 Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton
Worldwide, Inc.; and officer of 51 of the investment companies in Franklin
Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
David P. Goss (56) Vice President Since 2000 Not None
One Franklin Parkway Applicable
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one
of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment
companies in Franklin Templeton Investments; and FORMERLY, President, Chief
Executive Officer and Director, Property Resources Equity Trust (until 1999) and
Franklin Select Realty Trust (until 2000).
- -------------------------------------------------------------------------------------------------------------
Barbara J. Green (56) Vice President Vice President Not None
One Franklin Parkway and Secretary since 2000 Applicable
San Mateo, CA and Secretary
94403-1906 since 1996
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.;
Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary,
Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment
Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton
Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC,
Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc.,
Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services,
Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 51 of the investment companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S.
District Court (District of Massachusetts) (until 1979).
- -------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Vice President Since 1996 Not None
Jr. (63) Applicable
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.;
Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
John R. Kay (63) Vice President Since 1994 Not None
500 East Broward Applicable
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton
Services, LLC; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 35 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- -------------------------------------------------------------------------------------------------------------
Michael O. Magdol (66) Vice President - Since 2002 Not Director, FTI Banque, Arch
600 Fifth Avenue AML Compliance Applicable Chemicals, Inc. and
Rockefeller Center Lingnan Foundation.
New York, NY
10048-0772
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company
International; and officer and/or director, as the case may be, of some of the
other subsidiaries of Franklin Resources, Inc. and of 48 of the investment
companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
Mark Mobius (67) Vice President Since 1993 Not None
17th Floor, Applicable
The Chater House
8 Connaught Road
Central
Hong Kong
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; Executive Vice President and Director,
Templeton Global Advisors Limited; and officer and/or director, as the case may
be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the
investment companies in Franklin Templeton Investments; 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 (59) President and President Not None
1 Adelaide Street Chief Executive since 1993 Applicable
East, Suite 2101 Officer - and Chief
Toronto, Ontario Investment Executive
Canada M5C 3B8 Management Officer -
Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Director, Templeton Worldwide, Inc.; Chief
Executive Officer, Templeton Investment Counsel, LLC; President, Chief Executive
Officer and Director, Franklin Templeton Investments Corp.; officer and/or
director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc.; and FORMERLY, Chairman and Director of FTTrust Company.
- -------------------------------------------------------------------------------------------------------------
Kimberley H. Treasurer and Treasurer Not None
Monasterio (40) Chief Financial and Chief Applicable
One Franklin Parkway Officer Financial
San Mateo, CA Officer since
94403-1906 2003
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of
the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
Murray L. Simpson (66) Vice President Since 2000 Not None
One Franklin Parkway Applicable
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
and/or director, as the case may be, of some of the subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until 2000); and
Director, Templeton Asset Management Ltd. (until 1999).
- -------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments fund
complex. These portfolios have a common investment adviser or affiliated
investment advisers.
** Charles B. Johnson is considered an interested person of the Fund under the
federal securities laws due to his position as officer and director and major
shareholder of Franklin Resources, Inc. (Resources), which is the parent company
of the Fund's adviser and distributor. Nicholas F. Brady is considered an
interested person of the Fund under the federal securities laws due to his
business affiliations with Resources, and Templeton Global Advisors Limited. On
October 1, 2003, Resources acquired all of the shares of Darby Overseas
Investments, Ltd. (Darby Investments) and the remaining portion of the limited
partner interests not currently owned by Resources of Darby Overseas Partners,
L.P. (Darby Partners). Mr. Brady, formerly a shareholder of Darby Investments
and a partner of Darby Partners, will continue as Chairman of Darby Investments,
which is the corporate general partner of Darby Partners. In addition, Darby
Partners and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P. (DEMF). Mr. Brady will also continue to serve as
Chairman of the corporate general partner of DEMF, and Darby Partners and Darby
Investments own 100% of the stock of the general partner of DEMF. Resources also
is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby
Partners is a significant investor and for which Darby Partners has the right to
appoint a majority of the directors. Templeton Global Advisors Limited also is a
limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. (DBVA), a
private equity fund in which Darby Partners is a significant investor, and the
general partner of which Darby Partners controls jointly with an unaffiliated
third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd.
(TCAL), which serves as investment manager to certain unregistered funds. TCAL
and Templeton Global Advisors Limited are both indirect subsidiaries of
Resources.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange
Commission require the Fund to disclose whether the Fund's Audit Committee
includes at least one member who is an audit committee financial expert within
the meaning of such Act and Rules. The Fund's Board of Directors has determined
that there is at least one such financial expert on the Audit Committee and has
designated each of Fred R. Millsaps and Frank A. Olson as an audit committee
financial expert. The Board believes that Messrs. Millsaps and Olson qualify as
such an expert in view of their extensive business background and experience.
Mr. Millsaps, who is currently a director of various business and nonprofit
organizations, has served as a member and chairman of the Fund Audit Committee
since 1992 and was formerly Chairman and Chief Executive Officer of Landmark
Banking Corporation and Financial Vice President of Florida Power and Light. Mr.
Olson, who currently serves as Chairman of the Board of The Hertz Corporation
and was its Chief Executive Officer from 1977 to 1999, is a director and audit
committee member of Amerada Hess Corporation and White Mountains Insurance
Group, Ltd. and a former President and Chief Executive Officer of United
Airlines. As a result of such background and experience, the Board of Directors
believe that Mr. Millsaps and Mr. Olson have each acquired an understanding of
generally accepted accounting principles and financial statements, the general
application of such principles in connection with the accounting estimates,
accruals and reserves, and analyzing and evaluating financial statements that
present a breadth and level of complexity of accounting issues generally
comparable to those of the Fund, as well as an understanding of internal
controls and procedures for financial reporting and an understanding of audit
committee functions. Messrs. Millsaps and Olson are independent Directors as
that term is defined under the applicable Stock Exchange Rules and Securities
and Exchange Commission Rules and Releases.
The Statement of Additional Information (SAI) includes additional information
about the board members and is available, without charge, upon request.
Shareholders may call 1-800/DIAL BEN (1-800/342-5236) to request the SAI.
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group.
(BACK COVER)
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc. Emerging Fixed Income Markets Series, which
contains more complete information, including risk factors, charges and
expenses. Like any investment in securities, the value of the Fund's portfolio
will be subject to the risk of loss from market, currency, economic, political
and other factors. The Fund and its investors are not protected from such losses
by the Investment Manager. Therefore, investors who cannot accept this risk
should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
identified by the presence of a regular beeping tone.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES: 1-800-321-8563
ZT453 A 02/04
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
TIFI----------------------------------------------------------------------------
ANNUAL REPORT
TEMPLETON
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INVESTING IN EMERGING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH INCLUDE
RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL, ECONOMIC AND
POLITICAL DEVELOPMENTS, AND THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY.
THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S PROSPECTUS. THE
FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A WELL-DIVERSIFIED PORTFOLIO.
REGULATORY UPDATE
AS OF FEBRUARY 12, 2004
To Our Valued Shareholders:
In our efforts to fulfill our ongoing commitment to
providing you with timely and accurate information, we have prepared this
statement to give you an overview of current industry issues as they pertain to
Franklin Resources, Inc. (Franklin Templeton Investments) and our subsidiary
companies (the "Company"). Any further updates on these and other matters will
be disclosed on the Company's website at franklintempleton.com under "Statement
on Current Industry Issues."
On February 4, 2004, the Securities Division of the
Office of the Secretary of the Commonwealth of Massachusetts filed an
administrative complaint against Franklin Resources, Inc. and certain of its
subsidiaries, alleging violations of the Massachusetts Uniform Securities Act.
The complaint arises from activity that occurred in 2001 during which time an
officer of a Company subsidiary was negotiating an agreement with an investor
relating to investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within
Franklin Templeton Investments, has been named in shareholder class actions
related to the matter described above. The Company believes that the claims made
in the lawsuit are without merit and it intends to defend the allegations
vigorously. The Company and the Fund may be named in similar civil actions
related to the matter described above.
In addition, as part of ongoing investigations by the
U.S. Securities and Exchange Commission (the "SEC"), the U.S. Attorney for the
Northern District of California, the New York Attorney General, the California
Attorney General, the U.S. Attorney for the District of Massachusetts, the
Florida Department of Financial Services, and the Commissioner of Securities and
the Attorney General of the State of West Virginia, relating to certain
practices in the mutual fund industry, including late trading, market timing and
sales compensation arrangements, the Company and its subsidiaries, as well as
certain current or former executives and employees of the Company, have received
requests for information and/or subpoenas to testify or produce documents. The
Company and its current employees are providing documents and information in
response to these requests and subpoenas. In addition, the Company has responded
to requests for similar kinds of information from regulatory authorities in some
of the foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it
intends to recommend that the Commission authorize an action against an
affiliate of the Fund's adviser and a senior executive officer relating to the
frequent trading issues that are the subject of the SEC's investigation. These
issues were previously disclosed as being under investigation by government
authorities and the subject of an internal inquiry by the Company in its Annual
Report on Form 10-K and on its public website. The Company currently is in
discussions with the SEC Staff in an effort to resolve the issues raised in
their investigation. Such discussions are preliminary and the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on a fund is uncertain at this time. If we find that we bear responsibility for
any unlawful or improper conduct, we have committed to making a fund or its
shareholders whole, as appropriate.
December 31, 2003
We are pleased to bring you the annual report for the
Templeton Institutional Funds, Inc. (TIFI) Foreign Smaller Companies Series (the
"Fund") covering the 12-month period ended December 31, 2003.
PERFORMANCE OVERVIEW
The Fund posted a 51.21% cumulative total return for the
12-month period ended December 31, 2003. The Fund underperformed its benchmark,
the S&P/Citigroup Global
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF 12/31/03
CUMULATIVE
ONE-YEAR SINCE
AVERAGE INCEPTION
ANNUAL 1,2 (10/21/02) 1,3
TIFI Foreign Smaller
Companies Series 51.21% 52.72%
S&P/Citigroup Global
ex-U.S. <$2 Billion Index 4 59.20% 64.69%
1 Past fee waivers by the Fund's manager and administrator increased the Fund's
total returns. Without these waivers, the Fund's total returns would have been
lower.
2 Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3 Cumulative total return represents the change in value of an investment over
the indicated periods.
4 Source: S&P/Citigroup. The S&P/Citigroup Global ex-U.S. less than $2 Billion
Index measures the small stock component of the S&P/Citigroup Global Equity
Index, which includes developed and emerging market countries globally,
excluding the U.S. Within each country, those stocks falling under two billion
dollar market capitalization of the available market capital in each country
forms the universe. The unmanaged index measures the total returns (gross
dividends are reinvested) of small capitalization equity securities. The
securities in the index are float weighted.
Indices are unmanaged, do not contain cash and do not include management or
operating expenses. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
The performance figures do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
- --------------------------------------------------------------------------------
[PHOTO OF CINDY L. SWEETING OMITTED]
CINDY L. SWEETING, CFA
EXECUTIVE VICE PRESIDENT
DIRECTOR OF RESEARCH/PORTFOLIO MANAGER
[PHOTO OF SIMON RUDOLPH OMITTED]
SIMON RUDOLPH, ACA
EXECUTIVE VICE PRESIDENT
PORTFOLIO MANAGER
[PHOTO OF TUCKER SCOTT OMITTED]
TUCKER SCOTT, CFA
SENIOR VICE PRESIDENT
PORTFOLIO MANAGER
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 8.
-----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-----------------------------------------------------
ANNUAL REPORT
CONTINUED ...
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES SERIES
LETTER CONTINUED................................................................
ex-U.S. <$2 Billion Index1, which returned 59.20% during the same period.
ECONOMIC AND MARKET OVERVIEW
Over the period under review, many international equity
markets performed well as macroeconomic data for the United States showed signs
of a strengthening economy. While most of Europe showed positive economic growth
for the period, it lagged gross domestic product growth in the United States, as
the euro remains strong against the dollar. The euro's strength makes European
exports less competitive relative to those of U.S. dollar-based companies. Also,
European central banks have been criticized in recent months for a relatively
tight approach in regards to their monetary and fiscal policy when compared to
the expansionary actions taken by the Federal Reserve Committee and the U.S.
government. In Asia, it appears that the Japanese economy may be slowly emerging
from a decade-long recession, while the Chinese economy continues to be one of
the strongest performers worldwide.
INVESTMENT STRATEGY
We take a long-term, value-oriented approach to
investing. We focus our analysis primarily at the company level; we seek to
identify when a company's value on the stock exchange is substantially below our
estimate of the company's underlying worth. Our analysts determine the intrinsic
value of a company first by understanding the company and the industry in which
it operates, and then by forecasting long-term earnings and cash flow potential.
We are patient investors; our typical holding period is four to five years. In
looking for opportunities, we put less emphasis on the current situation and
more on what could materialize over the long term. Hence, the greatest
opportunities are often in companies that are out of favor--they may be
undergoing a restructuring, the business cycle may have
GEOGRAPHIC DISTRIBUTION ON 12/31/03
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
[PIE CHART]
Australia
Europe Asia North America & New Zealand Latin America
35.9% 29.6% 10.4% 9.3% 3.8%
Short-Term Investments
Middle East/Africa & Other Net Assets
1.2% 9.8%
FUND ASSET ALLOCATION ON 12/31/03
[PIE CHART]
Equity Short-Term Investments & Other Net Assets
90.2% 9.8%
1. Source: S&P/Citigroup. The S&P/Citigroup Global ex-U.S. less than $2 Billion
Index measures the small stock component of the S&P/Citigroup Global Equity
Index, which includes developed and emerging market countries globally,
excluding the U.S. Within each country, those stocks falling under two billion
dollar market capitalization of the available market capital in each country
forms the universe. The unmanaged index measures the total returns (gross
dividends are reinvested) of small capitalization equity securities. The
securities in the index are float weighted.
2 ANNUAL REPORT
turned against them, or they may have been oversold due to temporary
difficulties which our analysis indicates have been over-discounted by the
market.
MANAGER'S DISCUSSION
During the period under review, the Fund benefited from
the strong performance of several stocks. For example, we owned shares of
Techtronic Industries, a world leader in the design, engineering, manufacturing,
and marketing of power tools, which appreciated by more than 190% during the
year. Techtronic's state of the art manufacturing facilities and leading product
technologies have helped it gain share in the United States, where it has
broadened its relationship with Home Depot, as well as in Europe. Its sells
power tools under the "RYOBI" brand in North America and Europe, and floor care
products under the "VAX" brand globally. We continued to own the stock at the
end of the reporting period, as it still traded at a discount relative to our
ongoing estimates of the company's future earnings potential.
The Fund also benefited from its holding of Vedior, NV.
Vedior is a Dutch-based specialist staffing company and is one of the larger
European providers of temporary employment services. Two major acquisitions have
given it this position: BIS & Select. Over the 12-month period following the
acquisitions, Vedior issued two profit warnings and experienced sharp share
price underperformance as the temporary employment business was affected by the
economic downturn while the company was also involved in the integration of its
acquisitions. Ultimately, the Chairman and a number of board members resigned
and were replaced. We used this opportunity to purchase shares for the Fund.
Vedior shares offered us, in our opinion, a leveraged play on healthier European
labor markets. Vedior has performed well for us, rising more than 170% this
year.
Finally, the Fund benefited from its holdings of
Corporacion Geo. Geo is a fully integrated homebuilder engaged in all aspects of
the design, development, and construction of entry level housing for low-income
families in Mexico. Over the last year and a half, Geo has demonstrated to the
market
INDUSTRY DIVERSIFICATION ON 12/31/03
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
Industrials 23.8%
Consumer Discretionary 22.0%
Financials 11.5%
Information Technology 10.0%
Health Care 6.1%
Consumer Staples 5.4%
Materials 5.3%
Energy 3.8%
Utilities 1.7%
Telecommunication Services 0.6%
Short-Term Investments &
Other Net Assets 9.8%
10 LARGEST EQUITY POSITIONS ON 12/31/03
(PERCENTAGE OF TOTAL NET ASSETS)
PTT Public Co. Ltd., fgn. 2.2%
Vedior NV 1.9%
Vestas Wind Systems A/S 1.8%
John Fairfax Holdings Ltd. 1.8%
China Resources Power Co. Ltd.,
Ord., and 144A 1.7%
Techtronic Industries Co. Ltd. 1.6%
Iluka Resources Ltd. 1.6%
Corporacion Geo SA, B 1.6%
OPG Groep NV 1.5%
Amer Group Ltd., A 1.5%
ANNUAL REPORT 3
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES SERIES
LETTER CONTINUED................................................................
in dramatic fashion that it can meet or exceed the operating and financial
targets that it has clearly articulated to investors. Geo has risen 179% during
the year as the market continues to recognize the compelling growth
opportunities of this large and well-financed Mexican homebuilding company.
Some of the Fund's holdings did not perform well over
the past year and detracted from performance. Examples of such stocks include
Tokyo Individualized Education and Swisslog Holding AG. Tokyo Individualized
Education Institute is the leading provider of private education in the Japanese
market. The company is unique as it targets below-average students, a market
that is often ignored in Japan as most companies try to attract only the
brighter students. In the past, a shortage of managers has constrained growth.
Now, as a result of a highly successful management-training program, Tokyo
Individualized Education Institute plans to expand its operations by opening
more schools. The near-term performance of the company has been disappointing as
management was focusing more on increasing the size of its student body rather
than the quality of education. This has changed as management goals are now more
aligned with those of shareholders.
We were also disappointed by the recent performance of
Swisslog Holding AG. Swisslog Holding is a global provider of turnkey solutions
for automating warehouses. We overestimated the growth potential for the company
and underestimated the degree to which the cyclical downturn would affect it. We
reduced the Fund's position in Swisslog during the year and have since
eliminated it.
It is important to note that there are special risks
associated with foreign investments in smaller companies, and these risks are
heightened in emerging markets. These include political, social and economic
uncertainties, price volatility, illiquidity, currency fluctuation and limited
product lines, markets, or financial and management resources. In addition,
emerging markets are relatively small and less liquid. Investing in any emerging
market means accepting a certain amount of volatility and, in some cases, the
consequences of severe market corrections. The short-term price volatility of
smaller companies
- --------------------------------------------------------------------------------
TEMPLETON FOREIGN SMALLER COMPANIES SERIES
TOTAL RETURN INDEX COMPARISON1
$5,000,000 INVESTMENT: 10/21/02 - 12/31/03
[LINE GRAPH OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Inception $5,000,000 $5,000,000
Oct-02 5,060,000 5,013,122
Nov-02 5,160,000 5,196,100
Dec-02 5,050,000 5,172,718
Jan-03 4,895,000 5,176,856
Feb-03 4,730,000 5,121,464
Mar-03 4,750,000 5,058,470
Apr-03 5,110,000 5,426,726
May-03 5,535,000 5,892,665
Jun-03 5,765,000 6,193,780
Jul-03 6,090,000 6,429,330
Aug-03 6,435,000 6,830,841
Sep-03 6,585,000 7,175,799
Oct-03 7,060,000 7,702,503
Nov-03 7,155,000 7,737,934
Dec-03 7,636,010 8,234,709
Periods ended December 31, 2003
SINCE
ONE- INCEPTION
YEAR (10/21/02)
Average Annual
Total Return 1,2 51.21% 42.54%
Cumulative
Total Return 1,3 51.21% 52.72%
1 PAST FEE WAIVERS BY THE FUND'S MANAGER AND ADMINISTRATOR INCREASED THE FUND'S
TOTAL RETURNS. WITHOUT THESE WAIVERS, THE FUND'S TOTAL RETURNS WOULD HAVE BEEN
LOWER.
2 AVERAGE ANNUAL TOTAL RETURN REPRESENTS THE AVERAGE ANNUAL CHANGE IN VALUE OF
AN INVESTMENT OVER THE INDICATED PERIODS.
3 CUMULATIVE TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER
THE INDICATED PERIODS.
4 SOURCE: S&P/CITIGROUP. THE S&P/CITIGROUP GLOBAL EX-U.S. LESS THAN $2 BILLION
INDEX MEASURES THE SMALL STOCK COMPONENT OF THE S&P/CITIGROUP GLOBAL EQUITY
INDEX, WHICH INCLUDES DEVELOPED AND EMERGING MARKET COUNTRIES GLOBALLY
EXCLUDING THE U.S. WITHIN EACH COUNTRY, THOSE STOCKS FALLING UNDER TWO BILLION
DOLLAR MARKET CAPITALIZATION OF THE AVAILABLE MARKET CAPITAL IN EACH COUNTRY
FORMS THE UNIVERSE. THE UNMANAGED INDEX MEASURES THE TOTAL RETURNS (GROSS
DIVIDENDS ARE REINVESTED) OF SMALL CAPITALIZATION EQUITY SECURITIES. THE
SECURITIES IN THE INDEX ARE FLOAT WEIGHTED.
INDICES ARE UNMANAGED, DO NOT CONTAIN CASH AND DO NOT INCLUDE MANAGEMENT OR
OPERATING EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX, NOR IS AN INDEX
REPRESENTATIVE OF THE FUND'S PORTFOLIO.
ALL CALCULATIONS ASSUME REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE WITH MARKET CONDITIONS, CURRENCY VOLATILITY AND THE ECONOMIC,
SOCIAL AND POLITICAL CLIMATES OF THE COUNTRIES WHERE THE FUND INVESTS.
EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER
LIQUIDITY. YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. PAST
PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
THE PERFORMANCE FIGURES DO NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
- --------------------------------------------------------------------------------
4 ANNUAL REPORT
and emerging markets can be disconcerting and substantial declines are not
unusual in emerging markets. The special risks of investing in smaller companies
and emerging markets, as well as other considerations, are discussed in the
Fund's prospectus.
We thank you for your continued participation and look
forward to serving your investment needs.
Sincerely,
/S/Cindy L. Sweeting
Cindy L. Sweeting
/S/Simon Rudolph
Simon Rudolph
/S/Tucker Scott
Tucker Scott
PORTFOLIO MANAGEMENT TEAM
TIFI FOREIGN SMALLER COMPANIES SERIES
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE BUT THE ADVISER MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
ANNUAL REPORT 5
TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES SERIES
LETTER CONTINUED................................................................
CINDY L. SWEETING, Director of Research, joined Templeton's Nassau office in
1997 and has more than 19 years of experience in the investment industry. Ms.
Sweeting is the lead portfolio manager for the Templeton International Smaller
Companies Fund and co-manages the Templeton Global Smaller Companies Fund. She
also has portfolio management responsibility for significant institutional
separate account relationships.
SIMON RUDOLPH joined Templeton in 1997 as a portfolio manager and research
analyst. He currently is an Executive Vice President. He has global research
responsibility for food, personal care, household products, and non-alcoholic
beverage companies, as well as for Japanese banks. In addition, he has joint
coverage of the small cap consumer goods industries. Mr. Rudolph has country
research coverage of India and Japan. He manages small cap mutual funds,
international and global institutional portfolios, and Asia Pacific mandates.
TUCKER SCOTT, Senior Vice President, joined the Templeton organization in 1996
and currently has responsibility for institutional and retail accounts. Mr.
Scott's global research responsibilities include Internet software and services
as well as commercial services. He also co-manages several small cap mutual
funds and researches small cap stocks in support of those funds.
6 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Financial Highlights
YEAR ENDED PERIOD ENDED
DECEMBER 31, DEC. 31,
2003 2002 C
-------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $10.10 $10.00
-------------------------
Income from investment operations:
Net investment income (loss) a .................................. .17 (.01)
Net realized and unrealized gains (losses) ...................... 4.99 .11
-------------------------
Total from investment operations ................................. 5.16 .10
-------------------------
Less distributions from:
Net Investment income ........................................... (.13) --
Net realized gains .............................................. (.16) --
-------------------------
Total distributions .............................................. (.29) --
-------------------------
Net asset value, end of year ..................................... $14.97 $10.10
-------------------------
Total return b ................................................... 51.21% 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $33,583 $6,195
Ratios to average net assets:
Expenses ........................................................ .95% .95%d
Expenses, excluding waiver and payments by affiliate ............ 1.58% 7.71%d
Net investment income ........................................... 1.40% (.55)%d
Portfolio turnover rate .......................................... 12.58% --
<FN>
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
c For the period October 21, 2002 (inception date) to December 31, 2002.
d Annualized.
</FN>
See notes to financial statements.
ANNUAL REPORT 7
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 88.4%
AUSTRALIA 8.0%
APN News & Media Ltd. ......................................... Media 118,510 $ 357,165
a APN News & Media Ltd.,144A .................................... Media 19,600 59,070
Iluka Resources Ltd. .......................................... Metals & Mining 159,460 544,257
John Fairfax Holdings Ltd. .................................... Media 222,990 591,401
Mayne Group Ltd. .............................................. Health Care Providers & Services 97,810 240,245
Promina Group Ltd. ............................................ Insurance 151,700 374,898
a Sons of Gwalia Ltd. ........................................... Metals & Mining 189,220 506,115
-----------
2,673,151
-----------
BELGIUM 1.4%
Barco NV ...................................................... Electronic Equipment & Instruments 5,310 465,496
-----------
BERMUDA .5%
Axis Capital Holdings Ltd. .................................... Insurance 6,080 178,022
-----------
CANADA 9.9%
a ATI Technologies Inc. ......................................... Semiconductors & Semiconductor Equipment 21,760 328,189
a GSI Lumonics Inc. ............................................. Electronic Equipment & Instruments 39,570 465,439
Laurentian Bank of Canada ..................................... Commercial Banks 19,180 413,359
Legacy Hotels REIT ............................................ Consumer Finance 11,000 61,118
Linamar Corp. ................................................. Auto Components 43,400 387,569
North West Company Fund ....................................... Diversified Financial Services 22,080 423,061
a Precision Drilling Corp. ...................................... Energy Equipment & Services 5,040 221,335
Quebecor World Inc. ........................................... Commercial Services & Supplies 14,700 304,295
Sobeys Inc. ................................................... Food & Staples Retailing 7,450 191,979
Torstar Corp., B .............................................. Media 14,260 320,126
Transcontinental Inc., B ...................................... Commercial Services & Supplies 10,450 195,455
-----------
3,311,925
-----------
CHINA 2.3%
a China Resources Power Co. Ltd. ................................ Electric Utilities 1,038,000 484,666
a China Resources Power Co. Ltd., 144A .......................... Electric Utilities 160,000 74,707
a Weiqiao Textile Co. ........................................... Textiles Apparel & Luxury Goods 89,000 112,345
a Weiqiao Textile Co., 144A ..................................... Textiles Apparel & Luxury Goods 82,000 103,509
-----------
775,227
-----------
DENMARK 2.7%
a ISS A/S ....................................................... Commercial Services & Supplies 6,500 320,422
Vestas Wind Systems A/S ....................................... Electrical Equipment 36,390 591,793
-----------
912,215
-----------
FINLAND 3.6%
Amer Group Ltd., A ............................................ Leisure Equipment & Products 11,800 511,264
KCI Konecranes International PLC .............................. Machinery 4,240 147,608
Metso OYJ ..................................................... Machinery 31,840 388,763
Orion Yhtyma OYJ B ............................................ Pharmaceuticals 7,770 166,808
-----------
1,214,443
-----------
FRANCE .2%
Galeries Lafayette SA ......................................... Multiline Retail 440 68,153
-----------
GERMANY 1.6%
Celesio AG .................................................... Health Care Providers & Services 4,710 228,727
Jenoptik AG ................................................... Semiconductors & Semiconductor Equipment 27,060 305,483
-----------
534,210
-----------
HONG KONG 11.9%
Asia Satellite Telecommunications Holdings Ltd. ............... Diversified Telecommunication Services 101,000 191,889
ASM Pacific Technology Ltd. ................................... Semiconductors & Semiconductor Equipment 95,000 416,044
Dah Sing Financial Holdings Ltd. .............................. Commercial Banks 56,400 419,535
Fountain Set Holdings Ltd. .................................... Textiles Apparel & Luxury Goods 462,000 315,395
Giordano International Ltd. ................................... Specialty Retail 828,000 383,946
Lerado Group Holdings Co. Ltd. ................................ Textiles Apparel & Luxury Goods 1,607,186 310,523
Li & Fung Ltd. ................................................ Distributors 50,000 85,656
8 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HONG KONG (CONT.)
Moulin International Holdings Ltd. ............................ Health Care Equipment & Supplies 376,000 $ 249,421
Ngai Lik Industrial Holding Ltd. .............................. Household Durables 752,000 309,959
Techtronic Industries Co. Ltd. ................................ Household Durables 198,000 549,603
Texwinca Holdings Ltd. ........................................ Textiles Apparel & Luxury Goods 291,000 211,777
Wing Hang Bank Ltd. ........................................... Commercial Banks 48,000 285,641
Wing Lung Bank Ltd. ........................................... Commercial Banks 42,400 277,165
-----------
4,006,554
-----------
INDIA 2.1%
Satyam Computers Services Ltd. ................................ IT Services 32,373 260,651
Tata Engineering & Locomotive Co. Ltd., GDR ................... Automobiles 44,680 440,098
-----------
700,749
-----------
ISRAEL 1.2%
a Orbotech Ltd. ................................................. Electronic Equipment & Instruments 17,070 408,314
-----------
ITALY .7%
Banca Popolare di Verona e SCRL ............................... Commercial Banks 13,050 220,902
-----------
JAPAN 4.8%
Japan Airport Terminal Co. Ltd. ............................... Transportation Infrastructure 54,000 397,052
Kikkoman Corp. ................................................ Food Products 30,000 213,306
Meitec Corp. .................................................. Commercial Services & Supplies 12,000 461,323
Ono Pharmaceutical Co. Ltd. ................................... Pharmaceuticals 5,000 188,019
Sangetsu Co. Ltd. ............................................. Household Durables 13,300 253,168
Seiko Epson Corp. 144A ........................................ Computers & Peripherals 700 32,658
Tokyo Individualized Educational Institute Inc. ............... Commercial Services & Supplies 9,300 74,629
-----------
1,620,155
-----------
LUXEMBOURG .6%
a Thiel Logistik AG ............................................. Software 35,770 190,400
-----------
MEXICO 3.2%
a Corporacion Geo SA, B ......................................... Household Durables 103,740 528,705
Grupo Aeroportuario del Sureste SA de CV, ADR ................. Transportation Infrastructure 16,750 294,800
Grupo Continental SA .......................................... Beverages 147,940 250,138
-----------
1,073,643
-----------
NETHERLANDS 8.3%
Aalberts Industries NV ........................................ Industrial Conglomerates 13,820 357,877
Arcadis NV .................................................... Commercial Services & Supplies 17,400 204,990
a Draka Holding NV .............................................. Electrical Equipment 20,240 398,264
IHC Caland NV ................................................. Energy Equipment & Services 5,840 316,751
Imtech NV ..................................................... Construction & Engineering 13,260 344,212
OPG Groep NV .................................................. Health Care Providers & Services 11,280 512,921
Vedior NV ..................................................... Commercial Services & Supplies 41,850 654,566
-----------
2,789,581
-----------
NEW ZEALAND 1.4%
Fisher & Paykel Healthcare Corp. Ltd. ......................... Health Care Equipment & Supplies 55,100 457,626
-----------
SINGAPORE 1.3%
OSIM International Ltd. ....................................... Personal Products 64,000 44,468
Want Want Holdings Ltd. ....................................... Food Products 403,000 382,850
-----------
427,318
-----------
SOUTH KOREA 4.4%
Bank of Pusan ................................................. Commercial Banks 41,060 229,853
Dae Duck Electronics Co. Ltd. ................................. Electronic Equipment & Instruments 38,560 383,497
Daegu Bank Co. Ltd. ........................................... Commercial Banks 42,740 206,974
Halla Climate Control Co. Ltd. ................................ Electrical Equipment 4,260 384,348
ANNUAL REPORT 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONT.)
INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SOUTH KOREA (CONT.)
Koram Bank .................................................... Commercial Banks 13,750 $ 161,561
Samsung Electro-Mechanics Co. ................................. Electronic Equipment & Instruments 3,590 118,863
-----------
1,485,096
-----------
SPAIN 2.4%
Actividades de Construcciones y Servicios SA .................. Construction & Engineering 2,180 106,415
Sol Melia SA .................................................. Hotels Restaurants & Leisure 55,540 400,017
Transportes Azkar SA .......................................... Road & Rail 48,620 318,900
-----------
825,332
-----------
SWEDEN 2.2%
D. Carnegie & Co. AB .......................................... Diversified Financial Services 36,070 355,923
Observer AB ................................................... Commercial Services & Supplies 82,280 392,229
-----------
748,152
-----------
SWITZERLAND 3.7%
Gurit Heberlein AG, Br. ....................................... Chemicals 582 404,235
Kuoni Reisen Holding AG, B .................................... Hotels Restaurants & Leisure 150 50,212
Lindt & Spruengli Chocolate Works Ltd. ........................ Food Products 380 316,475
SIG Holding AG ................................................ Machinery 1,630 225,044
Vontobel Holding AG ........................................... Capital Markets 11,640 265,882
-----------
1,261,848
-----------
TAIWAN .5%
Taiwan Fu Hsing ............................................... Household Durables 179,000 156,592
-----------
THAILAND 2.2%
PTT Public Co. Ltd., fgn. ..................................... Oil & Gas 146,100 731,929
-----------
UNITED KINGDOM 7.3%
Avis Europe PLC ............................................... Road & Rail 227,900 387,578
Brambles Industries PLC ....................................... Commercial Services & Supplies 106,520 388,049
Burberry Group PLC ............................................ Textiles Apparel & Luxury Goods 43,250 282,986
Geest PLC ..................................................... Food Products 51,150 414,110
Kidde PLC ..................................................... Electrical Equipment 182,540 348,016
Novar PLC ..................................................... Building Products 128,902 316,711
W.H. Smith PLC ................................................ Specialty Retail 42,380 209,013
Yule Catto & Company PLC ...................................... Chemicals 24,400 112,694
-----------
2,459,157
-----------
TOTAL COMMON STOCKS (COST $20,677,272) ........................ 29,696,190
-----------
PREFERRED STOCKS 1.8%
BRAZIL
Aracruz Celulose SA, ADR, pfd. ................................ Paper & Forest Products 6,180 216,547
GERMANY
Hugo Boss AG, pfd. ............................................ Textiles Apparel & Luxury Goods 19,040 383,058
-----------
TOTAL PREFERRED STOCKS (COST $360,719) ........................ 599,605
-----------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $3,277,004) 9.8%
UNITED STATES
U.S. Treasury Bills, 0.847% to 0.932%, with maturities to 3/25/04 $3,280,000 3,277,340
TOTAL INVESTMENTS (COST $24,314,995) 100.0% 33,573,135
OTHER ASSETS, LESS LIABILITIES 9,581
------------
NET ASSETS 100.0% $33,582,716
------------
<FN>
a Non-income producing.
</FN>
See notes to financial statements.
10 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
Assets:
Investments in securities:
Cost ........................................................................... $24,314,995
-----------
Value .......................................................................... 33,573,135
Cash ............................................................................ 2,391
Foreign currency, at value (cost $100,318) ...................................... 100,166
Receivables:
Dividends and interest ......................................................... 33,677
-----------
Total assets ............................................................... 33,709,369
-----------
Liabilities:
Payables:
Investment securities purchased ................................................ 100,803
Affiliates ..................................................................... 1,601
Deferred tax liability (Note 1g) ............................................... 6,208
Other liabilities ............................................................... 18,041
-----------
Total liabilities .......................................................... 126,653
-----------
Net assets, at value ............................................................. $33,582,716
-----------
Net assets consist of:
Undistributed net investment income ............................................ $ 29,067
Net unrealized appreciation (depreciation) ..................................... 9,251,264
Accumulated net realized gain (loss) ........................................... 334,666
Capital shares ................................................................. 23,967,719
-----------
Net assets, at value ............................................................. $33,582,716
-----------
Net asset value per share ($33,582,716 / 2,243,788 shares outstanding) ........... $14.97
-----------
See notes to financial statements.
ANNUAL REPORT 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
Investment Income:
(net of foreign taxes of $45,428)
Dividends ..................................................................... $ 451,365
Interest ...................................................................... 14,518
------------
Total investment income ................................................. 465,883
------------
Expenses:
Management fees (Note 3) ...................................................... 148,511
Administrative fees (Note 3) .................................................. 39,539
Transfer agent fees (Note 3) .................................................. 8,500
Custodian fees ................................................................ 5,000
Reports to shareholders ....................................................... 10,100
Registration and filing fees .................................................. 18,700
Amortization of offering costs (Note 1f) ...................................... 36,667
Professional fees ............................................................. 35,200
Directors' fees and expenses .................................................. 10,000
Other ......................................................................... 1,150
------------
Total expenses .......................................................... 313,367
Expenses waived/paid by affiliate (Note 3) ........................... (125,226)
------------
Net expenses ...................................................... 188,141
------------
Net investment income .......................................... 277,742
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................................................. 689,032
Foreign currency transactions ................................................ (12,594)
------------
Net realized gain (loss) ................................................ 676,438
Net unrealized appreciation (depreciation) on:
Investments .................................................................. 9,257,285
Translation of assets and liabilities denominated in foreign currencies ...... 5,327
Deferred taxes (Note 1g) ..................................................... (6,208)
------------
Net unrealized appreciation (depreciation) .............................. 9,256,404
------------
Net realized and unrealized gain (loss) ........................................ 9,932,842
------------
Net increase (decrease) in net assets resulting from operations ................ $10,210,584
------------
See notes to financial statements.
12 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Financial Statements (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2003
AND THE PERIOD OCTOBER 21, 2002 (INCEPTION DATE) TO DECEMBER 31, 2002
2003 2002
------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 277,742 $ (3,101)
Net realized gain (loss) from investments and foreign currency transactions ............ 676,438 (1,858)
Net unrealized appreciation (depreciation) on investments, translation of assets and
liabilities denominated in foreign currencies, and deferred taxes ...................... 9,256,404 (5,140)
------------------------
Net increase (decrease) in net assets resulting from operations ..................... 10,210,584 (10,099)
Distributions to shareholders from:
Net investment income .................................................................. (271,177) --
Net realized gains ..................................................................... (354,366) --
------------------------
Total distributions to shareholders ...................................................... (625,543) --
Capital share transactions (Note 2) ...................................................... 17,802,794 6,204,980
------------------------
Net increase (decrease) in net assets ............................................... 27,387,835 6,194,881
Net assets:
Beginning of year ....................................................................... 6,194,881 --
------------------------
End of year ............................................................................. $33,582,716 $6,194,881
------------------------
Undistributed net investment income included in net assets:
End of year ............................................................................. $ 29,067 $ (1,039)
------------------------
See notes to financial statements.
ANNUAL REPORT 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Smaller Companies Series (the Fund) is a separate, diversified series of
Templeton Institutional Funds, Inc. (the Company), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital growth. Under normal conditions, the Fund invests at
least 80% of its net assets in the equity securities of smaller companies
located outside the United States, including emerging markets. The following
summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Investments in open-end mutual funds are
valued at the closing net asset value. Foreign securities are valued at the
close of trading of the foreign exchange or the NYSE, whichever is earlier. If
events occur that materially affect the values of securities after the prices or
foreign exchange rates are determined, or if market quotations are not readily
available, the securities will be valued at fair value as determined following
procedures approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
F. OFFERING COSTS
Offering costs were amortized on a straight line basis over twelve months.
14 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Notes to Financial Statements (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. DEFERRED TAXES
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities as reflected in the accompanying
financial statements.
H. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
I. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2003, there were 1.14 billion shares authorized ($0.01 par
value) for the Company, of which 60 million have been classified as Fund shares.
Transactions in the Fund's shares were as follows:
YEAR ENDED PERIOD ENDED*
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------
Shares sold ......................................... 1,664,949 $18,209,070 613,135 $ 6,204,980
Shares issued on reinvestment of distributions ...... 36,517 524,024 -- --
Shares redeemed ..................................... (70,813) (930,300) -- --
---------------------------------------------------
Net increase (decrease) ............................. 1,630,653 $17,802,794 613,135 $ 6,204,980
---------------------------------------------------
* For the period October 21, 2002 (inception date) to December 31, 2002.
3. TRANSACTIONS WITH AFFILIATES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, LLC (TIC), Franklin Templeton Services, LLC (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors), and Franklin/Templeton
Investor Services, LLC (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TIC of .75% per year of the
average daily net assets of the Fund. The Fund pays an administrative fee to FT
Services of .20% per year of the Fund's average daily net assets.
The investment manager and administrator have agreed in advance to waive or
limit their respective fees and to assume as their own expense certain expenses
otherwise payable by the Fund as noted in the Statement of Operations.
The Fund paid transfer agent fees of $8,500, of which $5,163 was paid to
Investor services.
ANNUAL REPORT 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Notes to Financial Statements (CONTINUED)
4. INCOME TAXES
At December 31, 2003, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments .............................. $24,316,330
------------
Unrealized appreciation .......................... 9,342,918
Unrealized depreciation .......................... (86,113)
------------
Net unrealized appreciation (depreciation) ....... $ 9,256,805
------------
Undistributed ordinary income .................... $ 344,417
Undistributed long term capital gains ............ 21,248
------------
Distributable earnings ........................... $ 365,665
------------
The tax character of distributions paid during the year ended December 31, 2003
and the period ended December 2002 were as follows:
2003 2002
-----------------
Distributions paid from ordinary income ............. $625,543 $--
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares and organization and offering costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of foreign currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 2003 aggregated $17,792,805 and $2,144,068, respectively.
6. REGULATORY MATTERS
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries (the "Company"),
alleging violations of the Massachusetts Uniform Securities Act. The complaint
arises from activity that occurred in 2001 during which time an officer of a
Company subsidiary was negotiating an agreement with an investor relating to
investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, has been named in shareholder class actions related to the matter
described above. The Company believes that the claims made in the lawsuit are
without merit and it intends to defend vigorously against the allegations. The
Company and the Fund may be named in similar civil actions related to the matter
described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Fund's management has been advised that the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on the Fund is uncertain at this time. If the Company finds that it bears
responsibility for any unlawful or improper conduct, it has committed to making
the Fund or its shareholders whole, as appropriate.
16 ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Templeton Institutional Funds, Inc. - Foreign Smaller Companies Series
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Foreign Smaller Companies Series of
Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2003, the
results of its operations for the year then ended and the changes in its net
assets and the financial highlights for the year then ended and the period from
October 21, 2002 (inception date) to December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2004, except for Note 6, as to which the date is February 12, 2004.
17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Tax Designation (unaudited)
Under Section 852(b)(3)(c) of the Internal Revenue Code, the Fund hereby
designates $21,248 as a capital gain dividend for the fiscal year ended December
31, 2003.
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby
designates up to a maximum of $354,168 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2003. In January 2004, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2003. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
At December 31, 2003, more than 50% of the Foreign Smaller Companies Series'
total assets were invested in securities of foreign issuers. In most instances,
foreign taxes were withheld from dividends paid to the Fund on these
investments. As shown in the table below, the Fund hereby designates to
shareholders the foreign source income and foreign taxes paid, pursuant to
Section 853 of the Internal Revenue Code. This designation will allow
shareholders of record on December 11, 2003, to treat their proportionate share
of foreign taxes paid by the Fund as having been paid directly by them. The
shareholder shall consider these amounts as foreign taxes paid in the tax year
in which they receive the Fund distribution.
The following tables provide a detailed analysis, by country, of Foreign Tax
Paid, Foreign Source Income, Foreign Qualified Dividends and Adjusted Foreign
Source Income as designated by the Fund, to shareholders of record. As a service
to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per
Share" in column 4 below reports foreign source income with the required
adjustments to foreign source qualified dividends. This information is provided
to simplify your reporting of foreign source income for line 1 of Form 1116.
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
-----------------------------------------------------------------------------------------------------------
Australia 0.0005 0.0135 0.0135 0.0058
Belgium 0.0005 0.0020 0.0020 0.0009
Bermuda 0.0000 0.0002 0.0002 0.0001
Brazil 0.0000 0.0021 0.0021 0.0009
Canada 0.0032 0.0134 0.0071 0.0093
Denmark 0.0001 0.0006 0.0006 0.0003
Finland 0.0028 0.0119 0.0119 0.0051
France 0.0000 0.0002 0.0002 0.0001
Germany 0.0018 0.0071 0.0028 0.0055
Hong Kong 0.0000 0.0286 0.0000 0.0286
India 0.0000 0.0014 0.0014 0.0006
Italy 0.0004 0.0017 0.0017 0.0007
Japan 0.0007 0.0043 0.0043 0.0018
Mexico 0.0000 0.0031 0.0031 0.0013
Netherlands 0.0024 0.0101 0.0101 0.0043
New Zealand 0.0013 0.0055 0.0055 0.0024
Norway 0.0001 0.0006 0.0006 0.0003
Singapore 0.0000 0.0016 0.0000 0.0016
South Korea 0.0003 0.0010 0.0000 0.0010
Spain 0.0005 0.0020 0.0020 0.0009
Sweden 0.0018 0.0077 0.0077 0.0033
Switzerland 0.0011 0.0044 0.0044 0.0019
Thailand 0.0002 0.0010 0.0010 0.0004
United Kingdom 0.0033 0.0212 0.0211 0.0091
--------------------------------------------------------------------------------------
TOTAL $0.0210 $0.1452 $0.1033 $0.0862
--------------------------------------------------------------------------------------
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the fund's distribution to which the foreign taxes relate).
18
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Tax Designation (unaudited) (CONTINUED)
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends without adjustment for the lower U.S.
tax rates. Generally, this is the foreign source income to be reported by
certain trusts and corporate shareholders.
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the fund. If you are an individual shareholder who
does not meet the qualified dividend holding period requirements, you may find
this information helpful to calculate the foreign source income adjustment
needed to complete line 1 of Form 1116.
Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per
share of foreign source income the fund paid to you. These amounts reflect the
Foreign Source Income reported in column 2 adjusted for the tax rate
differential on foreign source qualified dividends that may be required for
certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B).
If you are an individual shareholder who meets the qualified dividend holding
period requirements, generally, these Adjusted Foreign Source Income amounts may
be reported directly on line 1 of Form 1116 without additional adjustment.
In January 2004, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2003. The Foreign Source Income reported on Form 1099-DIV has been
reduced to take into account the tax rate differential on foreign source
qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B).
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their 2003 individual income tax returns.
19
BOARD MEMBERS AND OFFICERS
The name, age, and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of U.S registered portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton (71) Director Since 1992 142 Director, Bar-S Foods (meat packing company).
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
- -----------------------------------------------------------------------------------------------------------------------------------
Frank J. Crothers (59) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice
Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric
Utility Services Corporation (Chairman until 2002); director of various other business and nonprofit organizations; and
FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato (71) Director Since 1992 143 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- -----------------------------------------------------------------------------------------------------------------------------------
Edith E. Holiday (51) Director Since 1996 96 Director, Amerada Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas); Beverly Enterprises,
Suite 2100 Inc. (health care); H.J. Heinz Company (processed
Fort Lauderdale, FL 33394-3091 foods and allied products); RTI International
Metals, Inc. (manufacture and distribution of
titanium); and Canadian National Railway
(railroad).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Betty P. Krahmer (74) Director Since 1995 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government.
- -----------------------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (75) Director Since 1993 142 Director, White Mountains Insurance Group, Ltd.
500 East Broward Blvd. (holding company); Martek Biosciences Corporation;
Suite 2100 MedImmune, Inc. (biotechnology); and Overstock.com
Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI
Communication Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom, Inc.)
(communications services) (1988-2002) and
Spacehab, Inc. (aerospace services) (1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River
Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and
President, National Association of Securities Dealers, Inc. (1970-1987).
- -----------------------------------------------------------------------------------------------------------------------------------
20
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (74) Director Since 1992 28 None
500 East Broward Blvd.
Suite 2100 Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Frank A. Olson (71) Director Since 2003 20 Director, Becton, Dickinson and Co. (medical
500 East Broward Blvd. technology); White Mountains Insurance Group Ltd.
Suite 2100 (holding company); and Amerada Hess Corporation
Fort Lauderdale, FL 33394-3091 (exploration and refining of oil and gas).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief Executive Officer 1977-1999); and
FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
Constantine D.
Tseretopoulos (49) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology
Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**Nicholas F. Brady (73) Director Since 1993 21 Director, Amerada Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas); and C2, Inc.
Suite 2100 (operating and investment business); and FORMERLY,
Fort Lauderdale, FL 33394-3091 Director, H.J. Heinz Company (processed foods and
allied products)(1987-1988;1993-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group,
LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund;
and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States
Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until
1988); and U.S. Senator, New Jersey (April 1982-December 1982).
- -----------------------------------------------------------------------------------------------------------------------------------
**Charles B. Johnson (70) Director, Director and 142 None
One Franklin Parkway Vice Vice President
San Mateo, CA 94403-1906 President since 1993 and
and Chairman Chairman of
of the Board the Board since
1995
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin
Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Harmon E. Burns (58) Vice Since 1996 Not None
One Franklin Parkway President Applicable
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries
of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
21
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Jeffrey A. Everett (39) Vice Since 2001 Not Applicable None
PO Box N-7759 President
Lyford Cay, Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989).
- -----------------------------------------------------------------------------------------------------------------------------------
Martin L. Flanagan (43) Vice Since 1990 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide,
Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director,
Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services,
LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill (56) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL Officer -
33394-3091 Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the
investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
David P. Goss (56) Vice Since 2000 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust
(until 2000).
- -----------------------------------------------------------------------------------------------------------------------------------
Barbara J. Green (56) Vice Vice Not Applicable None
One Franklin Parkway President President
San Mateo, CA 94403-1906 and since 2000
Secretary and Secretary
since 1996
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President,
Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment
Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin
Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton
Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries
of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
- -----------------------------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Jr. Vice Since 1996 Not Applicable None
(63) President
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may
be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
22
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Kay (63) Vice Since 1994 Not Applicable None
500 East Broward Blvd. President
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Michael O. Magdol (66) Vice Since 2002 Not Applicable Director, FTI Banque, Arch Chemicals, Inc. and Lingnan
600 Fifth Avenue President Foundation.
Rockefeller Center - AML
New York, NY 10048-0772 Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Mark Mobius (67) Vice Since 1993 Not Applicable None
17th Floor, President
The Chater House
8 Connaught Road
Central Hong Kong
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.;
Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may
be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton
Investments; 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 (59) President President Not Applicable None
1 Adelaide Street East, and Chief since 1993
Suite 2101 Executive and Chief
Toronto, Ontario Canada Officer - Executive
M5C 3B8 Investment Officer -
Management Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel,
LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as
the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of
FTTrust Company.
- -----------------------------------------------------------------------------------------------------------------------------------
Kimberley H. Monasterio Treasurer Treasurer Not Applicable None
(40) and Chief and Chief
One Franklin Parkway Financial Financial
San Mateo, CA 94403-1906 Officer Officer
since 2003
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton
Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
23
NUMBER OF
PORTFOLIOS IN FUND
LENGTH OF COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
Murray L. Simpson (66) Vice Since 2000 Not Applicable None
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of
some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia)
Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
- -----------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered
investment companies within the Franklin Templeton Investments fund complex.
These portfolios have a common investment adviser or affiliated investment
advisers.
**Charles B. Johnson is considered an interested person of the Fund under the
federal securities laws due to his position as officer and director and major
shareholder of Franklin Resources, Inc. (Resources), which is the parent company
of the Fund's adviser and distributor. Nicholas F. Brady is considered an
interested person of the Fund under the federal securities laws due to his
business affiliations with Resources, and Templeton Global Advisors Limited. On
October 1, 2003, Resources acquired all of the shares of Darby Overseas
Investments, Ltd. (Darby Investments) and the remaining portion of the limited
partner interests not currently owned by Resources of Darby Overseas Partners,
L.P. (Darby Partners). Mr. Brady, formerly a shareholder of Darby Investments
and a partner of Darby Partners, will continue as Chairman of Darby Investments,
which is the corporate general partner of Darby Partners. In addition, Darby
Partners and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P. (DEMF). Mr. Brady will also continue to serve as
Chairman of the corporate general partner of DEMF, and Darby Partners and Darby
Investments own 100% of the stock of the general partner of DEMF. Resources also
is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby
Partners is a significant investor and for which Darby Partners has the right to
appoint a majority of the directors. Templeton Global Advisors Limited also is a
limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. (DBVA), a
private equity fund in which Darby Partners is a significant investor, and the
general partner of which Darby Partners controls jointly with an unaffiliated
third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd.
(TCAL), which serves as investment manager to certain unregistered funds. TCAL
and Templeton Global Advisors Limited are both indirect subsidiaries of
Resources.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT
ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE
SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK
BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR.
OLSON, WHO CURRENTLY SERVES AS CHAIRMAN OF THE BOARD OF THE HERTZ CORPORATION
AND WAS ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT
COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE
GROUP, LTD. AND A FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UNITED
AIRLINES. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS
BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS
THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND SECURITIES
AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
24
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
Proxy Voting Policies and Procedures
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group.
ANNUAL REPORT 25
This page intentionally left blank.
- ---------------------
PRSRT STD
U.S. POSTAGE
PAID
So. San Francisco, CA
Permit No. 655
- ---------------------
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc. Foreign Smaller Companies Series, which
contains more complete information, including risk factors, charges and
expenses. Like any investment in securities, the value of the Fund's portfolio
will be subject to the risk of loss from market, currency, economic, political
and other factors. The Fund and its investors are not protected from such losses
by the Investment Manager. Therefore, investors who cannot accept this risk
should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
identified by the presence of a regular beeping tone.
PRINCIPAL UNDERWRITER:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES: 1-800-321-8563
ZT458 A 02/04
TIFI
FRANKLIN TEMPLETON NON-U.S.
CORE EQUITY SERIES
DECEMBER 31, 2003
[TEMPLETON LOGO]
TEMPLETON(R)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INVESTING IN DEVELOPING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH MAY
INCLUDE RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL,
ECONOMIC, AND POLITICAL DEVELOPMENTS, AND THEIR RELATIVELY SMALL SIZE AND LESSER
LIQUIDITY. THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S
PROSPECTUS. THE FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A
WELL-DIVERSIFIED PORTFOLIO.
REGULATORY UPDATE
As of February 12, 2004
To Our Valued Shareholders:
In our efforts to fulfill our ongoing commitment to providing you with timely
and accurate information, we have prepared this statement to give you an
overview of current industry issues as they pertain to Franklin Resources, Inc.
(Franklin Templeton Investments) and our subsidiary companies (the "Company").
Any further updates on these and other matters will be disclosed on the
Company's website at franklintempleton.com under "Statement on Current Industry
Issues."
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries, alleging violations of
the Massachusetts Uniform Securities Act. The complaint arises from activity
that occurred in 2001 during which time an officer of a Company subsidiary was
negotiating an agreement with an investor relating to investments in a mutual
fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, has been named in shareholder class actions related to the matter
described above. The Company believes that the claims made in the lawsuit are
without merit and it intends to defend the allegations vigorously. The Company
and the Fund may be named in similar civil actions related to the matter
described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Company cannot predict the likelihood of whether those
discussions will result in a settlement and, if so, the terms of such
settlement. The impact, if any, of these matters on a fund is uncertain at this
time. If we find that we bear responsibility for any unlawful or improper
conduct, we have committed to making a fund or its shareholders whole, as
appropriate.
We are pleased to bring you the annual report for the Templeton Institutional
Funds, Inc. (TIFI) Franklin Templeton Non-U.S. Core Equity Series (the "Fund")
covering the 12-month period ended December 31, 2003.
PERFORMANCE OVERVIEW
The Fund posted a 34.89% cumulative total return for the 12-month period ended
December 31, 2003. The Fund underperformed its benchmark, the Morgan Stanley
Capital International (MSCI) Europe Australasia Far East (EAFE) Index/1/, which
increased 39.17% (in U.S. dollars).
TOTAL RETURNS AS OF 12/31/03
- -------------------------------------------------------------------------------
ONE-YEAR Cumulative Since
AVERAGE Inception
ANNUAL/1/,/2/ (09/03/02)/1/,/3/
- -------------------------------------------------------------------------------
TIFI Franklin Templeton Non-U.S.
Core Equity Series 34.89% 28.07%
- -------------------------------------------------------------------------------
MSCI EAFE Index/4/ 39.17% 32.31%
- -------------------------------------------------------------------------------
1. Fee waivers by the Fund's manager and administrator increased the Fund's
total returns. Without these waivers, the Fund's total returns would have been
lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3. Cumulative total return represents the change in value of an investment over
the indicated periods.
4. Source: Morgan Stanley Capital International (MSCI). The MSCI Europe,
Australasia, and Far East (EAFE) Index is a capitalization-weighted (outstanding
shares times price) equity index that measures the total returns (gross
dividends are reinvested) of equity securities in the developed markets of
Europe, Australasia, and the Far East.
Indices are unmanaged, do not contain cash and do not include management or
operating expenses. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility and the economic, social
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
The performance figures do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page X.
ECONOMIC AND MARKET OVERVIEW
The momentum of the global economic recovery picked up its pace in 2003, led by
strengthening in the U.S. economy and resulting positive equity market returns
worldwide. Overall support for the broadening global economic recovery came from
increased business spending after a three-year decline, increased industrial
production, a greater demand for exports, and continued low interest rates. In
many countries, including the United States, China, and Japan, gross domestic
product (GDP) growth accelerated in 2003, particularly in the second half of the
year. Inflation threats were a concern in the United States, with a continued
rise in commodity prices and a weaker U.S. dollar. Industrial commodity prices
increased 22.1% in U.S. dollar terms in 2003, and gold rallied 19.5% in response
to the weakening dollar./2/ The Japanese markets performed well, as the
country's economy continued to strengthen in view of improving domestic demand,
rising employment, and the deadlines the government set to handle its banking
problems. Strong performers among the MSCI country indices for the developed
markets in 2003 include Germany (60.1%), Canada (55.4%), and Japan (36.2%)./3/
INVESTMENT STRATEGY
The Fund invests primarily in equity securities of foreign companies located
outside of the United States, including emerging markets. The Fund pursues a
disciplined "blend" of growth and value strategies by allocating approximately
50% of the portfolio to each strategy. The growth and value allocations are
rebalanced whenever changes in market values cause one strategy to comprise more
than 55% of the portfolio. The value manager focuses on bottom-up valuation
analysis of the equity securities, while the growth manager utilizes both
bottom-up as well as top-down macroeconomic and thematic evaluations of market
sectors.
MANAGER'S DISCUSSION
Value-oriented equities strongly outperformed growth oriented equities during
the year. The style divergence was over 13% as the MSCI EAFE Value Index/4/ rose
45.9% versus a 32.5% gain in the MSCI EAFE Growth Index./5/ Correspondingly, the
value portion of the Fund has increased in proportion to the growth portion, but
not yet enough to warrant an automatic rebalancing between the two style halves.
The performance of the value portion of the Fund's portfolio, relative to the
MSCI EAFE Index, benefited from overweight positions in the strongly performing
industrials and materials sectors. Increased investor confidence and stronger
prospects for global economic growth focused attention on cyclical companies
- -------------------------
1. Source: Morgan Stanley Capital International (MSCI). The MSCI Europe,
Australasia, and Far East (EAFE) Index is a capitalization-weighted
(outstanding shares times price) equity index that measures the total returns
(gross dividends are reinvested) of equity securities in the developed
markets of Europe, Australasia, and the Far East.
2. New York Times Online. "Industrial Commodities, Gold Climb." January
2, 2004. p. 1.
3. Source: Morgan Stanley Capital International (MSCI).
4. Source: Morgan Stanley Capital International (MSCI). The MSCI EAFE
Value Index (Europe, Australasia, Far East) is a free float-adjusted market
capitalization-weighted index designed to measure the performance of
value-oriented equity securities from global developed markets, excluding the
U.S. and Canada. The index is constructed based on a two-dimensional
framework for style segmentation utilizing eight valuation attributes and is
designed to divide 50% of the free float-adjusted market capitalization of
the underlying MSCI EAFE Index into each a value index and a growth index.
5. Source: Morgan Stanley Capital International (MSCI). The MSCI EAFE Growth
Index (Europe, Australasia, Far East) is a free float-adjusted market
capitalization-weighted index designed to measure the performance of
growth-oriented equity securities from global developed markets, excluding
the U.S. and Canada. The index is constructed based on a two-dimensional
framework for style segmentation utilizing eight valuation attributes and is
designed to divide 50% of the free float-adjusted market capitalization of
the underlying MSCI EAFE Index into each a value index and a growth index.
such as metals producers and industrial components firms. Somewhat offsetting
these results were weak stock selection in the energy area and a modest
underweight position to the solidly performing financials sector. On the buy
side, we initiated positions in Vestas Wind Systems, a European manufacturer of
wind turbines. Vestas had a strong technological position in the area of wind
turbines, an increasingly attractive way of generating clean energy. We also
initiated a position in China Life Insurance Company. On the sell side, we
liquidated our position in Antena 3 De Television. This was a spin off from
Telefonica in Spain, and appeared not to have attractive valuation
characteristics.
The performance of the growth portion of the Fund's portfolio, relative to the
MSCI EAFE Growth Index, benefited from overweight positions in Asia (excluding
Japan), and an allocation to emerging markets, notably China and Mexico. The
growth portion's large overweight position in the consumer discretionary sector
detracted from performance, but was more than offset by very strong stock
selection in that sector, including BMW and a variety of media holdings. The
overweight position in the financials sector relative to the EAFE Growth Index
also helped performance, as financials were the third best performing sector for
the year. Stock selection in health care detracted from performance, notably a
small holding in Biovail, a Canadian biotechnology firm, and Takeda Chemical
Industries, a Japanese firm. Ultimately, we liquidated the Fund's holdings in
both stocks. The Fund produced notable returns in the utilities sector for the
year, with strong returns from utilities in China and Hong Kong. Top
contributors for the growth portion for the year included SAP, Puma AG, and
Siemens, which reflected the strength in the German equity markets in 2003.
Detractors for the year included ING Groep, Kao Corp, and Sony Corp.
It is important to note that there are special risks associated with foreign
investments in smaller companies, and these risks are heightened in emerging
markets. These include political, social and economic uncertainties, price
volatility, illiquidity, currency fluctuation and limited product lines,
markets, or financial and management resources. In addition, emerging markets
are relatively small and less liquid. Investing in any emerging market means
accepting a certain amount of volatility and, in some cases, the consequences of
severe market corrections. The short-term price volatility of smaller companies
and emerging markets can be disconcerting and substantial declines are not
unusual in emerging markets. The special risks of investing in smaller companies
and emerging markets, as well as other considerations, are discussed in the
Fund's prospectus.
We thank you for your continued participation and look forward to serving your
investment needs.
Sincerely,
Gary P. Motyl, CFA
John P. Remmert
Canyon A. Chan, CFA
PORTFOLIO MANAGERS
TIFI FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
Gary P. Motyl, CFA, Chief Investment Officer of Templeton institutional global
equities group and President of Templeton Investment Counsel, LLC, manages
several institutional mutual funds and separate account portfolios and has
research responsibility for the global automobile industry.
John P. Remmert, Senior Vice President, is responsible for managing
institutional global equity portfolios. He has more than 15 years of investment
experience. Prior to joining Fiduciary in 2002, Mr. Remmert was with Citigroup
Global Asset Management and was based in both New York and London. Prior to
this, he was with the Federal Reserve. Mr. Remmert holds an M.B.A. from the
University of Chicago (1987), a J.D. from Georgetown University (1981), and a
B.A. from Rutgers University (1977).
Canyon A. Chan, CFA, is Director of Alternative Strategies for Franklin
Templeton Alternative Strategies, Inc. (FTAS). He currently manages the Franklin
Templeton Strategic Growth and Franklin Templeton Capital Preservation funds of
hedge funds, the Franklin Templeton dynamic and core growth/value products
(Franklin Templeton Global Growth and Value Fund, Non-U.S. Core Equity Series,
and Non-U.S. Dynamic Core Equity Fund) and oversees risk management and
compliance for FTAS.
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE
FUND'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON MARKET AND ECONOMIC
CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN
OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF
EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS
OF FACT ARE FROM SOURCES CONSIDERED RELIABLE BUT THE INVESTMENT MANAGER MAKES NO
REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH
HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY
HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY.
GEOGRAPHIC DISTRIBUTION ON 12/31/03- pie chart
(EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
Europe 63.8%
Asia 26.7%
North America 3.3%
Latin America 2.1%
Australia & New Zealand 2.0%
Middle-East/Africa 0.8%
Short-Term Investments & Other Net Assets 1.3%
FUND ASSET ALLOCATION ON 12/31/03 - pie chart
Equity* 98.6%
Fixed Income 0.1%
Short-Term Investments & Other Net Assets 1.3%
*Equity includes convertible and preferred securities.
Sector Diversification on 12/31/03
(Equity Assets as a Percentage of Total Net Assets)
Financials 21.5%
Consumer Discretionary 16.2%
Industrials 11.3%
Telecommunication Services 10.9%
Information Technology 9.4%
Materials 7.9%
Health Care 7.6%
Energy 5.7%
Consumer Staples 5.0%
Utilities 3.2%
Short-Term Investments & Other Net Assets 1.3%
Page 3, right-side callout
10 LARGEST EQUITY POSITIONS ON 12/31/03
(Percentage of Total Net Assets)
SAP AG 1.9%
Bayerische Motoren Werke AG (BMW) 1.9%
UBS AG 1.6%
Kookmin Bank 1.6%
Vodafone Group PLC 1.4%
Banco Santander Central Hispano SA 1.4%
Compass Group PLC 1.4%
Sun Hung Kai Properties Ltd. 1.3%
Koninklijke Philips Electronics NV 1.3%
Sompo Japan Insurance Inc 1.3%
INSERT GRAPH (PLEASE SPACE BOX ON LEFT SIDE OF PAGE TO MATCH EXACT SPACING AS
USED IN THE TIFI FOREIGN SMALLER COMPANIES SERIES REPORT):
TOTAL RETURN INDEX COMPARISON/1/
$5,000,000 INVESTMENT: 09/03/02-12/31/03
TIFI Franklin Templeton Non-U.S. Core Equity Series/1/
MSCI EAFE Index/4/
Periods ended December 31, 2003
Since
Inception
One-Year (09/03/02)
- ---------------------------------------------------------------------------
Average Annual Total Return/1/,/2/ 34.89% 20.53%
Cumulative Total Return/1/,/3/ 34.89% 28.07%
1. Fee waivers by the Fund's manager and administrator increased the Fund's
total returns. Without these waivers, the Fund's total returns would have been
lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3. Cumulative total return represents the change in value of an investment over
the indicated periods.
4. Source: Morgan Stanley Capital International (MSCI). The MSCI Europe,
Australasia, and Far East (EAFE) Index is a capitalization-weighted (outstanding
shares times price) equity index that measures the total returns (gross
dividends are reinvested) of equity securities in the developed markets of
Europe, Australasia, and the Far East.
Indices are unmanaged, do not contain cash and do not include management or
operating expenses. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility and the economic, social
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
The performance figures do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
FINANCIAL HIGHLIGHTS
YEAR ENDED PERIOD ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002/c/
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $9.45 $10.00
-----------------------------------------
Income from investment operations:
Net investment income/a/ .19 .01
Net realized and unrealized gains (losses) 3.09 (.51)
-----------------------------------------
Total from investment operations 3.28 (.50)
-----------------------------------------
Less distributions from net investment income: (.27) (.05)
-----------------------------------------
Net asset value, end of year $12.46 $9.45
=========================================
Total return/b/ 34.89% (5.05)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s) $2,493 $2,942
Ratios to average net assets:
Expenses .84% .84%/d/
Expenses, excluding waiver and payments
by affiliate 5.31% 5.47%/d/
Net investment income 1.87% .28%/d/
Portfolio turnover rate 39.97% 6.36%
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
c For the period September 3, 2002 (inception date) to December 31, 2002.
d Annualized.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 98.6%
AUSTRALIA 2.0%
Mayne Group Ltd ................................. Health Care Providers & Services 4,820 $ 11,839
News Corp. Ltd. ADR ............................. Media 500 18,050
Qantas Airways Ltd ............................. Airlines 4,970 12,320
Westpac Banking Corp............................. Commercial Banks 700 8,433
-------------
50,642
-------------
BERMUDA 1.1%
ACE Ltd.......................................... Insurance 640 26,509
-------------
CANADA 2.2%
Alcan Inc. ...................................... Metals & Mining 420 19,686
BCE Inc. ........................................ Diversified Telecommunication Services 1,060 23,706
EnCana Corp. .................................... Oil & Gas 300 11,840
-------------
55,232
-------------
CHINA 1.8%
Beijing Capital International Airport Co. Ltd.,H. Transportation Infrastructure 18,000 6,144
a China Life Insurance Co. Ltd., ADR .............. Insurance 100 3,297
a China Life Insurance Co. Ltd., H ................ Insurance 11,000 8,997
China Mobile (Hong Kong) Ltd. .... .............. Wireless Telecommunication Services 4,450 13,671
Huaneng Power International Inc., H ............. Electric Utilities 7,000 12,127
-------------
44,236
-------------
DENMARK .2%
Vestas Wind Systems A/S ......................... Electrical Equipment 370 6,017
-------------
FINLAND 1.0%
Stora Enso Oyj, R (EUR/FIM Traded) ............. Paper & Forest Products 1,820 24,518
-------------
FRANCE 7.3%
Accor SA ....................................... Hotels Restaurants & Leisure 140 6,340
Aventis SA ..................................... Pharmaceuticlas 420 27,760
Axa ............................................ Insurance 970 20,763
Dassault Systemes SA ........................... Software 300 13,683
Michelin, B .................................... Auto Components 530 24,321
Publicis Groupe ................................. Media 500 16,208
Sanofi-Synthelabo SA ............................ Pharmaceuticlas 400 30,121
Suez SA ........................................ Multi-Utilities & Unregulated Power 1,190 23,911
Television Francaise 1 .......................... Media 560 19,552
-------------
182,659
-------------
GERMANY 11.7%
BASF AG ........................................ Chemicals 350 19,756
Bayer AG ....................................... Chemicals 510 15,053
Bayerische Motoren Werke AG .................... Automobiles 1,000 46,607
Celesio AG ..................................... Health Care Providers & Services 460 22,338
Deutsche Post AG ............................... Air Freight & Logistics 1,520 31,290
E.ON AG ........................................ Electric Utilities 400 26,201
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
GERMANY (CONT.)
Puma AG ........................................ Textiles Apparel & Luxury Goods 150 $ 26,488
SAP AG ......................................... Software 280 47,255
Siemens AG ..................................... Industrial Conglomerates 400 32,190
Volkswagen AG ................................... Automobiles 460 25,733
-------------
292,911
-------------
HONG KONG 5.4%
Esprit Holdings Ltd. ............................ Specialty Retail 7,000 23,307
HSBC Holdigns PLC ............................... Commercial Banks 1,200 18,935
Sun Hung Kai Properties Ltd. .................... Real Estate 4,000 33,103
Swire Pacific Ltd., A ........................... Diversified Financial Services 2,000 12,340
Television Broadcasts Ltd. ...................... Media 5,000 25,246
Wharf Holdings Ltd. ............................. Diversified Financial Services 8,000 22,155
-------------
135,086
-------------
IRISH REPUBLIC 1.3%
Anglo Irish Bank Corp. PLC ..................... Commercial Banks 2,000 31,710
-------------
ISRAEL .8%
a Check Point Software Technologies Ltd. .......... Software 1,160 19,511
-------------
ITALY 4.8%
Arnoldo Mondadori Editore SpA ................... Media 1,700 15,246
Eni SpA ........................................ Oil & Gas 1,300 24,531
Luxottica Group SpA, ADR ....................... Textile Apparel & Luxury Goods 1,200 20,880
Mediaset SpA ................................... Media 1,400 16,635
Riunione Adriatica di Sicurta SpA ............... Insurance 1,294 22,034
Saipem SpA ..................................... Energy Equipment & Services 2,500 20,213
-------------
119,539
-------------
JAPAN 14.0%
Canon Inc., ADR ................................ Office Electronics 400 19,056
East Japan Railway Co. .......................... Road & Rail 5 23,561
FANUC Ltd. ..................................... Machinery 400 23,962
JFE Holdings Inc. ............................... Metals & Mining 900 24,564
KAO Corp. ....................................... Household Products 1,000 20,341
KDDI Corp. ..................................... Wireless Telecommunication Services 4 22,917
Kyocera Corp. .................................. Electronic Equipment & Instruments 200 13,325
Misumi Corp. ................................... Trading Companies & Distributors 200 8,883
Mitsui Fudosan Co. Ltd. ......................... Real Estate 1,000 9,032
Nintendo Co. Ltd. ............................... Software 100 9,331
Nippon Telegraph & Telephone Corp. .............. Diversified Telecommunication Services 6 28,945
Nomura Holdings Inc. ............................ Capital Markets 1,000 17,029
Olympus Corp. ................................... Health Care Equipment & Supplies 1,000 21,694
Seiko Epson Corp. ............................... Computer & Peripherals 400 18,662
SMC Corp. ....................................... Machinery 200 24,895
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
JAPAN (CONT.)
Sompo Japan Insurance Inc. ...................... Insurance 4,000 $ 32,882
Sony Corp. ...................................... Household Durables 900 31,156
-------------
350,235
MEXICO 2.1%
America Movil SA de CV, L, ADR .................. Wireless Telecommunication Services 600 16,404
Grupo Financiero Banorte SA de CV, O ............ Commercial Banks 4,000 13,882
Telefonos de Mexcio SA de CV (Telmex), L, ADR ... Diversified Telecommunication Services 650 21,470
-------------
51,756
-------------
NETHERLANDS 5.2%
Akzo Nobel NV .................................. Chemicals 630 24,317
IHC Caland NV .................................. Energy Equipment & Services 410 22,238
ING Groep NV ................................... Diversified Financial Services 1,290 30,086
Koninklijke Phillips Electronics NV ............. Household Durables 1,130 32,996
STMicroelectronics NV .......................... Semiconductors & Semiconductor Equipment 700 18,983
-------------
128,620
-------------
NORWAY 1.0%
Norske Skogindustrier ASA, A .................... Paper & Forest Products 1,340 25,580
-------------
PORTUGAL .9%
Poortugal Telecom, SGPS, SA .................... Diversified Telecommunication Services 2,310 23,251
-------------
RUSSIA 1.1%
a Lukoil Holdings, ADR ........................... Oil & Gas 300 26,700
-------------
SOUTH KOREA 4.1%
Kookmin Bank, ADR ............................... Commercial Banks 1,040 39,354
KT Corp., ADR .................................. Diversified Telecommunication Services 1,100 20,977
POSCO, ADR ...................................... Metals & Mining 500 16,985
Samsung Electronics Co. Ltd., GDR, 144A.......... Semiconductors & Semiconductor Equipment 130 24,310
-------------
101,626
-------------
SPAIN 2.5%
Banco Santander Central Hispano SA............... Commercial Banks 2,900 34,348
a Telefonica SA .................................. Diversified Telecommunication Services 1,970 28,924
-------------
63,272
-------------
SWEDEN 3.8%
Atlas Copco AB, A ............................... Machinery 910 32,566
Nordea AB, FDR .................................. Commerical Banks 3,940 29,421
Securitas AB, B ................................. Commerical Services & Supplies 480 6,471
Volvo Ab, B .................................... Machinery 840 25,683
-------------
94,141
-------------
INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SWITZERLAND 3.4
Roche Holding AG ............................... Pharmaceuticlas 200 $ 20,174
Swiss Re ........................................ Insurance 340 22,955
UBS AG ......................................... Capital Markets 600 41,092
-------------
84,221
-------------
TAIWAN 1.4%
Chunghwa Telecom Co. Ltd., ADR ................. Diversified Telecommunication Services 700 10,150
a Taiwan Semiconductor Manufacturing Co.,Ltd, ADR.. Semiconductors & Semiconductor Equipment 2,500 25,600
-------------
35,750
-------------
UNITED KINGDON 19.5%
BAE Systems PLC ................................ Aerospace & Defense 6,900 20,783
BHP Billiton PLC ................................ Metals & Mining 3,150 27,518
BP PLC ......................................... Oil & Gas 1,560 12,651
Cable & Wireless PLC ............................ Diversified Telecommunication Services 11,130 26,599
Cadbury Schweppes PLC ........................... Food Products 3,700 27,173
Compass Group PLC ............................... Hotels Restaurants & Leisure 5,000 34,013
Diageo PLC ...................................... Beverages 2,200 28,947
Exel PLC ........................................ Air Freight & Logistics 900 11,898
J Sainsbury PLC .... ............................ Food & Staples Retailing 2,380 13,325
National Grid Transco PLC ....................... Multi-Utilities & Unregulated Power 2,350 16,838
Reckitt Benckiser PLC ........................... Household Products 700 15,839
Royal Bank of Scotland Group PLC ................ Commerical Banks 1,000 29,466
Shell Transport & Trading Co. PLC ............... Oil & Gas 3,310 24,620
a Shire Pharmaceuticals Group PLC ................. Pharmaceuticals 2,870 27,872
Smith & Nephew PLC .............................. Health Care Equipment & Supplies 3,200 26,881
Smith Group PLC ................................ Industrial Conglomerates 1,290 15,265
Standard Chartered PLC .......................... Commercial Banks 1,630 26,918
Tesco PLC ....................................... Food & Staples Retailing 4,300 19,841
The Sage Group PLC .............................. Software 7,200 22,653
Vodafone Group PLC ............................. Wireless Telecommunication Services 14,000 34,711
WPP Group PLC .................................. Media 2,200 21,602
-------------
485,413
-------------
TOTAL COMMON STOCKS (COST $1,836,959) 98.6% 2,459,135
-------------
INDUSTRY PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
BONDS & NOTES (COST $896) .1%
FRANCE 1%
AXA, cvt., zero cpn., 12/21/04 Insurance $ 60 $ 1,210
-------------
TOTAL INVESTMENTS (COST $1,837,855) 98.7% 2,460,345
OTHER ASSETS, LESS LIABILITIES 1.3% 32,631
-------------
NET ASSETS 100.0% $ 2,492,976
=============
CURRENCY ABBREVIATIONS:
EUR - Euro
FIM - Finnish Markka
a Non-income producing.
See notes to financial statements.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
Assets:
Investments in securities:
Cost ............................................................. $1,837,855
----------
Value ............................................................ 2,460,345
Cash ............................................................. 44,467
Receivables:
Dividends and interest............................................ 4,777
----------
Total assets ................................................. 2,509,589
----------
Liabilities:
Payables:
Affiliates......................................................... 69
Other liabilities.................................................. 16,544
----------
Total liabilities.............................................. 16,613
----------
Net assets, at value .............................................. $2,492,976
==========
Net assets consist of:
Undistributed net investment income ............................. $ (541)
Net unrealized appreciation (depreciation)......................... 622,731
Accumulated net realized gain (loss) .............................. (41,691)
Capital shares .................................................... 1,912,477
----------
Net assets, at value ............................................... $2,492,976
----------
Net asset value per share ($2,492,976/200,000 shares outstanding)... $12.46
----------
See notes to financial statements.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
Investment Income:
(net of foreign taxes of $8,229)
Dividends .............................................................. $64,799
Interest .............................................................. 1,163
--------
Total investment income ............................................. 65,962
--------
Expenses:
Management fees (Note 3) ............................................... 17,012
Administrative fees (Note 3) ........................................... 4,860
Transfer agent fees (Note 3) ........................................... 300
Custodian fees ......................................................... 950
Reports to shareholders ................................................ 5,800
Registration and filing fees ........................................... 14,900
Amortization of offering costs (Note 1f) ............................... 37,923
Professional fees ..................................................... 35,000
Directors' fees and expenses ........................................... 11,500
Other .................................................................. 860
--------
Total expenses ..................................................... 129,105
Expenses waived/paid by affiliate (Note 3) ........................(108,688)
--------
Net expenses .................................................... 20,417
--------
Net investment income ........................................ 45,545
--------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .......................................................... (28,961)
Foreign currency transactions ......................................... (984)
--------
Net realized gain (loss) ............................................ (29,945)
Net unrealized appreciation (depreciation) on:
Investments ........................................................... 672,591
Translation of assets and liabilities denominated in foreign currencies. 351
--------
Net unrealized appreciation (depreciation) ......................... 672,942
--------
Net realized and unrealized gain (loss) ................................ 642,997
--------
Net increase (decrease) in net assets resulting from operations ......... $688,542
--------
See notes to financial statements.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2003
AND THE PERIOD SEPTEMBER 3, 2002 (INCEPTION DATE) TO DECEMBER 31, 2002
2003 2002
----------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 45,545 $ 2,487
Net realized gain (loss) from investments and foreign
currency transactions ...................................... (29,945) (2,335)
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies ......................................... 672,942 (50,211)
----------------------------------------
Net increase (decrease) in net assets resulting
from operations ....................................... 688,542 (50,059)
Distributions to shareholders from net investment income ...... (55,229) (13,980)
Capital share transactions (Note 2) ........................... (1,082,722) 3,006,424
----------------------------------------
Net increase (decrease) in net assets ................... (449,409) 2,942,385
Net assets:
Beginning of year ............................................ 2,942,385 --
----------------------------------------
End of year ................................................. $2,492,976 $2,942,385
========================================
Undistributed net investment income included in net assets:
End of year .................................................. $ (541) $ 2,080
========================================
See notes to financial statements.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Non-U.S. Core Equity Series (the Fund) is a separate,
diversified series of Templeton Institutional Funds, Inc. (the Company), which
is an open-end investment company registered under the Investment Company Act of
1940. The Fund seeks long-term capital growth. Under normal conditions, the Fund
invests at least 80% of its net assets in foreign (non-U.S.) equity securities.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Investments in open-end mutual funds are
valued at the closing net asset value. Foreign securities are valued at the
close of trading of the foreign exchange or the NYSE, whichever is earlier. If
events occur that materially affect the values of securities after the prices or
foreign exchange rates are determined, or if market quotations are not readily
available, the securities will be valued at fair value as determined following
procedures approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
F. OFFERING COSTS
Offering costs were amortized on a straight line basis over twelve months.
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business, the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK
At December 31, 2003, there were 1.14 billion shares authorized ($0.01 par
value) for the Company of which 60 million were designated as Fund shares.
Transactions in the Fund's shares were as follows:
YEAR ENDED Period Ended
DECEMBER 31, 2003 December 31, 2002*
-------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------
Shares sold ....................................... -- $ -- 418,425 $4,000,000
Shares issued in reinvestment of distributions .... 667 6,169 -- --
Shares redeemed ................................... (112,026) (1,088,891) (107,066) (993,576)
-------------------------------------------------
Net increase (decrease) ........................... (111,359) $(1,082,722) 311,359 $3,006,424
=================================================
*For the period September 3, 2002 (inception date) to December 31, 2002.
Franklin Advisors, Inc. (an affiliate of the Fund's investment manager) is the
record owner of 100% of the Fund shares as of December 31, 2003.
3. TRANSACTIONS WITH AFFILIATES
Certain officers of the Company are also officers or directors of Franklin
Templeton Asset Strategies, LLC (Asset Strategies), Franklin Templeton Services,
LLC (FT Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, LLC (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to Asset Strategies of .70% per year
of the average daily net assets of the Fund. The Fund pays an administrative fee
to FT Services of .20% per year of the Fund's average daily net assets.
The investment manager and administrator have agreed in advance to waive or
limit their respective fees and to assume as their own expense certain expenses
otherwise payable by the Fund through December 31, 2003 as noted in the
Statement of Operations.
The Fund paid transfer agent fees of $300, of which $38 was paid to Investor
Services.
4. INCOME TAXES
At December 31, 2003, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ................................... $1,845,857
------------
Unrealized appreciation................................ 627,441
Unrealized depreciation ............................... (12,953)
------------
Net unrealized appreciation (depreciation)............. $ 614,488
============
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONT.)
The tax character of distributions paid during the year ended December 31, 2003
and the period ended December 31, 2002 was as follows:
2003 2002
-----------------------
Distributions paid from Ordinary Income: $55,229 $13,980
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, and organization
and offering costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and wash
sales.
At December 31, 2003, the Fund had deferred foreign currency losses occurring
subsequent to October 31, 2003 of $324. For tax purposes, such losses will be
reflected in the year ending December 31, 2004.
At December 31, 2003, the Fund had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
Capital loss carryovers expiring in:
2010.................................... $ 34
2011.................................... 33,331
-----------
$ 33,365
===========
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 2003 aggregated $919,018 and $1,826,455, respectively.
6. REGULATORY MATTERS
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries (the "Company"),
alleging violations of the Massachusetts Uniform Securities Act. The complaint
arises from activity that occurred in 2001 during which time an officer of a
Company subsidiary was negotiating an agreement with an investor relating to
investments in a mutual fund and a hedge fund.
The Company, in addition to other entities within Franklin Templeton
Investments, has been named in shareholder class actions related to the matter
described above. The Company believes that the claims made in the lawsuit are
without merit and it intends to defend vigorously against the allegations. The
Company and the Fund may be named in similar civil actions related to the matter
described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REGULATORY MATTERS (CONT.)
compensation arrangements, the Company and its subsidiaries, as well as certain
current or former executives and employees of the Company, have received
requests for information and/or subpoenas to testify or produce documents. The
Company and its current employees are providing documents and information in
response to these requests and subpoenas. In addition, the Company has responded
to requests for similar kinds of information from regulatory authorities in some
of the foreign countries where the Company conducts its global asset management
business.
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Fund's management has been advised that the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on the Fund is uncertain at this time. If the Company finds that it bears
responsibility for any unlawful or improper conduct, it has committed to making
the Fund or its shareholders whole, as appropriate.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Templeton Institutional Funds, Inc. -
Franklin Templeton Non-U.S. Core Equity Series
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Templeton Non-U.S. Core
Equity Series of Templeton Institutional Funds, Inc. (the "Fund") at December
31, 2003, and the results of its operations for the year then ended and the
changes in its net assets and the financial highlights for the year then ended
and the period from September 3, 2002 (inception date) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2004, except for Note 6, as to which the date is February 12, 2004.
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates up to a maximum of $66,415 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2003. In January 2004, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2003. Shareholders are advised to check with their tax advisors on
the treatment of these amounts on their individual income tax returns.
At December 31, 2003, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the table
below the Fund hereby designates to shareholders the foreign source income and
foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This
designation will allow shareholders of record on December 12, 2003, to treat
their proportionate share of foreign taxes paid by the Fund as having been paid
directly by them. The shareholder shall consider these amounts as foreign taxes
paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis, by country, of Foreign Tax
Paid, Foreign Source Income, Foreign Qualified Dividends and Adjusted Foreign
Source Income as designated by the Funds, to Class Z. As a service to individual
shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in
column 4 below reports foreign source income with the required adjustments to
foreign source qualified dividends. This information is provided to simplify
your reporting of foreign source income for line 1 of Form 1116.
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------------------
Australia 0.0012 0.0104 0.0104 0.0045
Bermuda 0.0000 0.0020 0.0020 0.0009
Canada 0.0012 0.0059 0.0059 0.0025
China 0.0000 0.0068 0.0028 0.0052
Denmark 0.0014 0.0069 0.0069 0.0030
Finland 0.0016 0.0076 0.0076 0.0033
France 0.0039 0.0201 0.0201 0.0086
Germany 0.0049 0.0265 0.0263 0.0115
Hong Kong 0.0000 0.0153 0.0000 0.0153
Ireland 0.0000 0.0047 0.0047 0.0020
Italy 0.0031 0.0149 0.0149 0.0064
Japan 0.0011 0.0072 0.0072 0.0031
Mexico 0.0000 0.0050 0.0050 0.0021
Netherlands 0.0041 0.0198 0.0198 0.0085
Norway 0.0015 0.0074 0.0074 0.0032
Russia 0.0001 0.0006 0.0006 0.0003
South Africa 0.0000 0.0013 0.0013 0.0006
South Korea 0.0025 0.0110 0.0020 0.0099
Spain 0.0008 0.0054 0.0054 0.0023
Sweden 0.0033 0.0161 0.0161 0.0069
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
TAX DESIGNATION (UNAUDITED) (CONTINUED)
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------------------
Switzerland 0.0024 0.0116 0.0116 0.0050
United Kingdom 0.0080 0.0581 0.0581 0.0249
-------------------------------------------------------------------------
TOTAL $0.0411 $0.2646 $0.2361 $0.1300
-------------------------------------------------------------------------
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the fund's distribution to which the foreign taxes relate).
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends without adjustment for the lower U.S.
tax rates. Generally, this is the foreign source income to be reported by
certain trusts and corporate shareholders.
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the fund. If you are an individual shareholder who
does not meet the qualified dividend holding period requirements, you may find
this information helpful to calculate the foreign source income adjustment
needed to complete line 1 of Form 1116.
Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per
share of foreign source income the fund paid to you. These amounts reflect the
Foreign Source Income reported in column 2 adjusted for the tax rate
differential on foreign source qualified dividends that may be required for
certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B).
If you are an individual shareholder who meets the qualified dividend holding
period requirements, generally, these Adjusted Foreign Source Income amounts may
be reported directly on line 1 of Form 1116 without additional adjustment.
In January 2004, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2003. The Foreign Source Income reported on Form 1099-DIV has been
reduced to take into account the tax rate differential on foreign source
qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B).
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their 2003 individual income tax returns.
BOARD MEMBERS AND OFFICERS
The name, age, and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of U.S registered portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
LENGTH OF OVERSEEN BY
NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ---------------------------------------------------------------------------------------------------------------
Harris J. Ashton (71) Director Since 1992 142 Director, Bar-S Foods
500 East Broward (meat packing company).
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank
holding company) (until 2002); and President, Chief Executive Officer and
Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
- ---------------------------------------------------------------------------------------------------------------
Frank J. Crothers (59) Director Since 1990 20 None
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
- ---------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice
Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power
Company Ltd.; Director, Caribbean Electric Utility Services Corporation
(Chairman until 2002); director of various other business and nonprofit
organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
(1977-2003).
- -------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato Director Since 1992 143 None
(71)
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch.
- -------------------------------------------------------------------------------------------------------------
Edith E. Holiday (51) Director Since 1996 96 Director, Amerada Hess
500 East Broward Corporation (exploration
Blvd. and refining of oil and
Suite 2100 gas); Beverly Enterprises,
Fort Lauderdale, FL Inc. (health care); H.J.
33394-3091 Heinz Company (processed
foods and allied
products); RTI
International Metals, Inc.
(manufacture and
distribution of titanium);
and Canadian National
Railway (railroad).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, 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).
- -------------------------------------------------------------------------------------------------------------
Betty P. Krahmer (74) Director Since 1995 21 None
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various civic associations; and FORMERLY, Economic
Analyst, U.S. government.
- -------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (75) Director Since 1993 142 Director, White Mountains
500 East Broward Insurance Group, Ltd.
Blvd. (holding company); Martek
Suite 2100 Biosciences Corporation;
Fort Lauderdale, FL MedImmune, Inc.
33394-3091 (biotechnology); and
Overstock.com (Internet
services); and FORMERLY,
Director, MCI
Communication Corporation
(subsequently known as MCI
WorldCom, Inc. and
WorldCom, Inc.)
(communications services)
(1988-2002) and Spacehab,
Inc. (aerospace services)
(1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and
FORMERLY, Chairman, White River Corporation (financial services) (1993-1998) and
Hambrecht & Quist Group (investment banking) (1987-1992); and President,
National Association of Securities Dealers, Inc. (1970-1987).
- -------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (74) Director Since 1992 28 None
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal
investments (1978-present); 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).
- -------------------------------------------------------------------------------------------------------------
Frank A. Olson Director Since 2003 20 Director, Becton,
(71) Dickinson and Co. (medical
500 East Broward technology); White
Blvd. Mountains Insurance Group
Suite 2100 Ltd. (holding company);
Fort Lauderdale, FL and Amerada Hess
33394-3091 Corporation (exploration
and refining of oil and
gas).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief
Executive Officer 1977-1999); and FORMERLY, Chairman of the Board, President and
Chief Executive Officer, UAL Corporation (airlines).
- -------------------------------------------------------------------------------------------------------------
Constantine D. Director Since 1990 20 None
Tseretopoulos (49)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; and FORMERLY, Cardiology Fellow, University of Maryland
(1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center
(1982-1985).
- -------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
LENGTH OF OVERSEEN BY
NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ---------------------------------------------------------------------------------------------------------------
**Nicholas F. Brady Director Since 1993 21 Director, Amerada Hess
(73) Corporation (exploration
500 East Broward and refining of oil and
Blvd. gas); and C2, Inc.
Suite 2100 (operating and investment
Fort Lauderdale, FL business); and FORMERLY,
33394-3091 Director, H.J. Heinz
Company (processed foods
and allied products)
(1987-1988;1993-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments
LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-present);
Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment
Fund; and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC
(until 2003); Secretary of the United States Department of the Treasury
(1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment
banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982).
- -------------------------------------------------------------------------------------------------------------
**Charles B. Johnson Director, Vice Director and 142 None
(70) President and Vice President
One Franklin Parkway Chairman of since 1993 and
San Mateo, CA the Board Chairman of
94403-1906 the Board
since 1995
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.;
Director, Fiduciary Trust Company International; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
- -------------------------------------------------------------------------------------------------------------
Harmon E. Burns (58) Vice President Since 1996 Not None
One Franklin Parkway Applicable
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc.; and officer and/or director or trustee, as the case may
be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of
the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
Jeffrey A. Everett Vice President Since 2001 Not None
(39) Applicable
PO Box N-7759
Lyford Cay,
Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; officer of 15 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Investment
Officer, First Pennsylvania Investment Research (until 1989).
- -------------------------------------------------------------------------------------------------------------
Martin L. Flanagan Vice President Since 1990 Not None
(43) Applicable
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice
President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive
Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.;
Executive Vice President and Chief Operating Officer, Templeton Investment
Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice
President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services,
LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 49 of the investment companies in Franklin Templeton
Investments.
- -------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill (56) Senior Vice Since 2002 Not None
500 East Broward President and Applicable
Blvd. Chief Executive
Suite 2100 Officer -Finance
Fort Lauderdale, FL and
33394-3091 Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton
Worldwide, Inc.; and officer of 51 of the investment companies in Franklin
Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
David P. Goss (56) Vice President Since 2000 Not None
One Franklin Parkway Applicable
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; officer and director of one
of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment
companies in Franklin Templeton Investments; and FORMERLY, President, Chief
Executive Officer and Director, Property Resources Equity Trust (until 1999) and
Franklin Select Realty Trust (until 2000).
- -------------------------------------------------------------------------------------------------------------
Barbara J. Green (56) Vice President Vice President Not None
One Franklin Parkway and Secretary since 2000 Applicable
San Mateo, CA and Secretary
94403-1906 since 1996
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.;
Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary,
Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment
Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton
Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC,
Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc.,
Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services,
Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 51 of the investment companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S.
District Court (District of Massachusetts) (until 1979).
- -------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Vice President Since 1996 Not None
Jr. (63) Applicable
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.;
Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
John R. Kay (63) Vice President Since 1994 Not None
500 East Broward Applicable
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton
Services, LLC; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 35 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- -------------------------------------------------------------------------------------------------------------
Michael O. Magdol (66) Vice President - Since 2002 Not Director, FTI Banque, Arch
600 Fifth Avenue AML Compliance Applicable Chemicals, Inc. and
Rockefeller Center Lingnan Foundation.
New York, NY
10048-0772
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company
International; and officer and/or director, as the case may be, of some of the
other subsidiaries of Franklin Resources, Inc. and of 48 of the investment
companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
Mark Mobius (67) Vice President Since 1993 Not None
17th Floor, Applicable
The Chater House
8 Connaught Road
Central
Hong Kong
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; Executive Vice President and Director,
Templeton Global Advisors Limited; and officer and/or director, as the case may
be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the
investment companies in Franklin Templeton Investments; 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 (59) President and President Not None
1 Adelaide Street Chief Executive since 1993 Applicable
East, Suite 2101 Officer - and Chief
Toronto, Ontario Investment Executive
Canada M5C 3B8 Management Officer -
Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Director, Templeton Worldwide, Inc.; Chief
Executive Officer, Templeton Investment Counsel, LLC; President, Chief Executive
Officer and Director, Franklin Templeton Investments Corp.; officer and/or
director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc.; and FORMERLY, Chairman and Director of FTTrust Company.
- -------------------------------------------------------------------------------------------------------------
Kimberley H. Treasurer and Treasurer Not None
Monasterio (40) Chief Financial and Chief Applicable
One Franklin Parkway Officer Financial
San Mateo, CA Officer since
94403-1906 2003
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of
the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------
Murray L. Simpson (66) Vice President Since 2000 Not None
One Franklin Parkway Applicable
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
and/or director, as the case may be, of some of the subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until 2000); and
Director, Templeton Asset Management Ltd. (until 1999).
- -------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments fund
complex. These portfolios have a common investment adviser or affiliated
investment advisers.
** Charles B. Johnson is considered an interested person of the Fund under the
federal securities laws due to his position as officer and director and major
shareholder of Franklin Resources, Inc. (Resources), which is the parent company
of the Fund's adviser and distributor. Nicholas F. Brady is considered an
interested person of the Fund under the federal securities laws due to his
business affiliations with Resources, and Templeton Global Advisors Limited. On
October 1, 2003, Resources acquired all of the shares of Darby Overseas
Investments, Ltd. (Darby Investments) and the remaining portion of the limited
partner interests not currently owned by Resources of Darby Overseas Partners,
L.P. (Darby Partners). Mr. Brady, formerly a shareholder of Darby Investments
and a partner of Darby Partners, will continue as Chairman of Darby Investments,
which is the corporate general partner of Darby Partners. In addition, Darby
Partners and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P. (DEMF). Mr. Brady will also continue to serve as
Chairman of the corporate general partner of DEMF, and Darby Partners and Darby
Investments own 100% of the stock of the general partner of DEMF. Resources also
is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby
Partners is a significant investor and for which Darby Partners has the right to
appoint a majority of the directors. Templeton Global Advisors Limited also is a
limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. (DBVA), a
private equity fund in which Darby Partners is a significant investor, and the
general partner of which Darby Partners controls jointly with an unaffiliated
third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd.
(TCAL), which serves as investment manager to certain unregistered funds. TCAL
and Templeton Global Advisors Limited are both indirect subsidiaries of
Resources.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange
Commission require the Fund to disclose whether the Fund's Audit Committee
includes at least one member who is an audit committee financial expert within
the meaning of such Act and Rules. The Fund's Board of Directors has determined
that there is at least one such financial expert on the Audit Committee and has
designated each of Fred R. Millsaps and Frank A. Olson as an audit committee
financial expert. The Board believes that Messrs. Millsaps and Olson qualify as
such an expert in view of their extensive business background and experience.
Mr. Millsaps, who is currently a director of various business and nonprofit
organizations, has served as a member and chairman of the Fund Audit Committee
since 1992 and was formerly Chairman and Chief Executive Officer of Landmark
Banking Corporation and Financial Vice President of Florida Power and Light. Mr.
Olson, who currently serves as Chairman of the Board of The Hertz Corporation
and was its Chief Executive Officer from 1977 to 1999, is a director and audit
committee member of Amerada Hess Corporation and White Mountains Insurance
Group, Ltd. and a former President and Chief Executive Officer of United
Airlines. As a result of such background and experience, the Board of Directors
believe that Mr. Millsaps and Mr. Olson have each acquired an understanding of
generally accepted accounting principles and financial statements, the general
application of such principles in connection with the accounting estimates,
accruals and reserves, and analyzing and evaluating financial statements that
present a breadth and level of complexity of accounting issues generally
comparable to those of the Fund, as well as an understanding of internal
controls and procedures for financial reporting and an understanding of audit
committee functions. Messrs. Millsaps and Olson are independent Directors as
that term is defined under the applicable Stock Exchange Rules and Securities
and Exchange Commission Rules and Releases.
The Statement of Additional Information (SAI) includes additional information
about the board members and is available, without charge, upon request.
Shareholders may call 1-800/DIAL BEN (1-800/342-5236) to request the SAI.
Proxy Voting Policies and Procedures
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group.
(BACK COVER)
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc. Franklin Templeton Non-U.S. Core Equity
Series, which contains more complete information, including risk factors,
charges and expenses. Like any investment in securities, the value of the Fund's
portfolio will be subject to the risk of loss from market, currency, economic,
political and other factors. The Fund and its investors are not protected from
such losses by the Investment Manager. Therefore, investors who cannot accept
this risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
identified by the presence of a regular beeping tone.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES: 1-800-321-8563
ZT459 A 02/04
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 10(a), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are Fred R. Millsaps and Frank A.
Olson and they are "independent" as defined under the relevant Securities and
Exchange Commission Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $232,033 for the fiscal year ended December 31, 2003 and $163,348 for the
fiscal year ended December 31, 2002.
(b) Audit-Related Fees
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4 were $97 for the
fiscal year ended December 31, 2003 and $4,218 for the fiscal year ended
December 31, 2002. The services for which these fees were paid included payments
for internal control examination pursuant to the Statement of Auditing Standards
No. 70 and other attestation services.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of the their financial
statements were $316,594 for the fiscal year ended December 31, 2003 and
$357,762 for the fiscal year ended December 31, 2002. The services for which
these fees were paid included payments for internal control examination pursuant
to the Statement of Auditing Standards No. 70 and other attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $820 for the fiscal year ended
December 31, 2003 and $84,424 for the fiscal year ended December 31, 2002. The
services for which these fees were paid included payments for tax compliance and
advice.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant, other than the services
reported in paragraphs (a)-(c) of Item 4.
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant, other than
the services reported in paragraphs (a)-(c) of Item 4.
(e) (1) The Fund's audit committee is directly responsible for approving the
services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors to the Fund's investment adviser or to any entity that
controls, is controlled by or is under common control with the Fund's investment
adviser and that provides ongoing services to the Fund where the non-audit
services relate directly to the operations or financial reporting of the Fund;
and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e)(2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for
services rendered by the principal accountant to the registrant and the
registrant's investment adviser and any entity controlling, controlled by or
under common control with the investment adviser that provides ongoing services
to the registrant were $317,510 for the fiscal year ended December 31, 2003 and
$446,404 for the fiscal year ended December 31, 2002.
(h) No disclosures are required by this Item 4(h).
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. N/A
ITEM 10. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation in connection with the preparation of this Shareholder Report on Form
N-CSR.
ITEM 11. EXHIBITS.
(A) Code of Ethics for Principal Executive and Senior Financial Officers
(B)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Kimberley H. Monasterio, Chief Financial Officer
(B)(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Kimberley H. Monasterio, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON INSTITUTIONAL FUNDS, INC.
By /s/JIMMY D. GAMBILL
------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date: February 23, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By /s/JIMMY D. GAMBILL
------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date: February 23, 2004
By /s/KIMBERLEY H. MONASTERIO
-------------------------
Kimberley H. Monasterio
Chief Financial Officer
Date: February 23, 2004