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 811-06135
--------
TEMPLETON INSTITUTIONAL FUNDS, INC.
------------------------------------
(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
--------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-----------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
--------------
Date of fiscal year end: 12/31
------
Date of reporting period: 12/31/04
-------
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT |
- --------------------------------------------------------------------- 12 31 2004
THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
- --------------------------------------------------------------------------------
TEMPLETON INSTITUTIONAL FUNDS, INC.
-----------------------------------
Foreign Equity Series
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INSTITUTIONAL
FRANKLIN o TEMPLETON o FIDUCIARY
CONTENTS
ANNUAL REPORT
- --------------------------------------------------------------------------------
TIFI Foreign Equity Series ................................................ 2
Performance Summary ....................................................... 7
Your Fund's Expenses ...................................................... 9
Financial Highlights and Statement of Investments ......................... 11
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 21
Report of Independent Registered Public Accounting Firm ................... 31
Tax Designation ........................................................... 32
Board Members and Officers ................................................ 35
Shareholder Information ................................................... 42
-----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-----------------------------------------------------
Annual Report | 1
ANNUAL REPORT
TIFI FOREIGN EQUITY SERIES
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund invests at
least 80% of its net assets in foreign (non-U.S.) equity securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT
FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT
MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you the Templeton Institutional Funds, Inc. (TIFI)
Foreign Equity Series (the "Fund") annual report for the fiscal year ended
December 31, 2004.
PERFORMANCE OVERVIEW
The Fund posted a 21.25% cumulative total return for the 12-month period ended
December 31, 2004. The Fund performed comparably to the MSCI All Country World
ex-U.S. Index,(1,2) which returned 21.36% for the period, and outperformed the
MSCI EAFE Index,(2,3) which returned 20.70%, during the same period.
ECONOMIC AND MARKET OVERVIEW
The global economic recovery continued in 2004, led by growth in China and the
United States. As of September 30, 2004, U.S. gross domestic product (GDP) had
increased for 12 consecutive quarters and more recent data suggested the fourth
quarter would extend this run. In China, GDP grew 9.5% annualized in the first
three quarters of 2004.(4)
(1) Source: Standard & Poor's Micropal. The Morgan Stanley Capital
International (MSCI) All Country World ex-U.S. Index is a free
float-adjusted, market capitalization-weighted index that is designed to
measure equity market performance in the global developed and emerging
markets, excluding the United States. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
(2) All MSCI data is presented "as is." The Fund described herein is not
sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or
any MSCI data provider have any liability of any kind in connection with
the MSCI data or the Fund described herein. Copying or distributing the
MSCI data is strictly prohibited.
(3) Source: Standard & Poor's Micropal. The MSCI Europe, Australasia, and Far
East (EAFE) Index is a free float-adjusted, market capitalization-weighted
index that is designed to measure equity market performance in the global
developed markets, excluding the United States and Canada. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in
an index, nor is an index representative of the Fund's portfolio.
(4) Source: Bloomberg L.P.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12.
2 | Annual Report
The 12-nation euro zone lagged other regions in the current recovery. However,
the European Central Bank projected euro zone growth may be between 1.6% and
2.2% in 2004, compared with only 0.5% in 2003. In Japan, the economy struggled
to emerge from a decade-long deflationary period. Although the country's
consumer and business confidence reached their highest levels since 1991,
economic growth slowed in response to higher oil prices and reduced external
demand. In addition, the U.S. dollar declined 4% versus the yen and 7% versus
the euro in 2004. This hurt Japanese and European exports into the U.S., as it
made their goods more expensive in the world's biggest market.(5)
Oil prices increased during most of 2004, reaching $56 per barrel in October,
but declined to end the year at $43. Higher oil prices triggered investor
worries about inflation, decreased spending--due to cautionary consumer and
business sentiment--and slower economic and corporate profit growth.
Global equity markets ended 2004 on a positive note. They registered a second
consecutive year of strong gains, after three years of declines. The total
return for the MSCI All Country ex-US Index(1,2) was 21.36% and total return for
the MSCI Emerging Markets Index(2,6) was 25.95%, in U.S. dollar terms for the
12-month period ended December 31, 2004. These indices' total returns were
significantly lower in local currencies (13.49% and 16.45%, respectively) over
the same period. Throughout 2004, most of the world's currencies strengthened in
relation to the U.S. dollar, which benefited U.S.-based investors who invested
in non-U.S. equities from developed and emerging market countries. The Fund
benefited from this macroeconomic trend as well as from the continuation of the
global economic expansion.
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.
GEOGRPAHIC DISTRIBUTION ON 12/31/04
EQITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Europe 64.1%
Asia 20.4%
North America 4.6%
Australia & New Zealand 3.0%
Latin America 0.9%
Middle-East/Africa 0.8%
Short-Term Investments &
Other Net Assets 6.2%
SECTOR DIVERSIFICATION ON 12/31/04
EQUITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
Financials 18.4%
Industrials 13.9%
Consumer Discretionary 11.1%
Materials 11.0%
Telecommunication Services 8.8%
Energy 7.6%
Health Care 7.5%
Information Technology 6.2%
Utilities 6.0%
Consumer Staples 3.3%
Short-Term Investments &
Other Net Assets 6.2%
(5) Source: Bloomberg.com, December 15, 2004.
(6) Source: Standard & Poor's Micropal. The Morgan Stanley Capital
International (MSCI) Emerging Markets Index is a free float-adjusted,
market capitalization-weighted index that is designed to measure equity
market performance in the global emerging markets. The index is unmanaged
and includes reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio.
Annual Report | 3
10 LARGEST EQUITY POSITIONS
ON 12/31/04
PERCENTAGE OF TOTAL NET ASSETS
Samsung Electronics Co. Ltd. 2.1%
Telefonica SA, ORD & ADR 1.7%
Celesio AG 1.7%
Sanofi-Aventis, ORD & ADR 1.6%
E.ON AG 1.5%
Nordea Bank AB, FDR 1.5%
Michelin SA, B 1.5%
Shell Transport & Trading Co. PLC, ADR 1.5%
Iberdrola SA, Br. 1.5%
BHP Billiton PLC 1.5%
FUND ASSET ALLOCATION ON 12/31/04
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Equity 93.8%
Short-Term Investment &
Other Net Assets 6.2%
MANAGER'S DISCUSSION
In the fourth quarter of 2004, global equity markets abandoned the pattern of
relatively flat returns that characterized the earlier part of the year. A few
factors contributed to spark a year-end rally. First, there was a sense of
relief in the markets after the gradual escalation in the price of oil
concluded. The price per barrel spiked to $56 in mid-October, but dropped to $46
in about three weeks' time. The barrel's price was slightly over $43 at year-end
2004. Higher energy prices had affected the outlook for inflation and corporate
profit growth during most of the year. Second, investor sentiment improved
significantly as a previously feared hard landing in the Chinese economy
appeared unlikely. Third, the U.S. presidential election concluded without
incident.
The Reuters CRB Index, a gauge for price changes in energy, industrial minerals,
and other commodities, rose 11% in 2004, after a rise of 9% in 2003. In both
years, the increases reflected not only dollar weakness, but also strong world
demand for energy sources and commodities needed to support an expanding global
economy. The Fund benefited from this secular trend. Most of our holdings in the
energy, materials, and industrial sectors experienced share price increases
during 2004, in part because the additional demand improved the prospects for
margin expansion and earnings growth rates. Last year, these three sectors had a
significant effect on the Fund's overall performance. In the case of materials
and industrial holdings, the effect was compounded because the Fund maintained
overweight positions relative to the MSCI All Country World ex-U.S. Index.
Strong demand for commodities has traditionally been associated with good news
for emerging market equities. Last year was no exception. The rise in commodity
prices helped produce strong equity market returns in countries such as Chile,
Brazil, Mexico, and Argentina. In 2004, however, the Fund did not derive the
bulk of returns related to emerging market exposure from commodity-related
holdings. Instead, the largest contributions came from holdings in
telecommunications such as Telmex (Mexico), Chunghwa Telecom (Taiwan), and from
technology-related holdings, such as Samsung Electronics (South Korea), Check
Point Software Technologies (Israel), and Satyam Computer Services (India). At
Templeton we are stock pickers and valuations are our main criteria for stock
selection.
The health care sector was out of favor with investors during most of 2004.
Patent expirations, drug re-importation issues, and withdrawal from the market
of several leading prescription drugs created a challenging environment for
pharmaceutical companies. Our focus on longer-term
4 | Annual Report
fundamentals had led us to conclude that certain companies deserved better
valuations than the market was willing to recognize. As a result, we had
accumulated shares of Merck (Germany), Aventis (France), GlaxoSmithKline (U.K.),
and Ono Pharmaceutical (Japan). Last year, rival company Sanofi-Synthelabo
acquired Aventis. The combined entity, known as Sanofi-Aventis has been a
holding in the portfolio. Another holding was Celesio, a German-based company
that operates a chain of retail pharmacies and is Europe's largest drug
wholesaler. Despite a lackluster performance of the health care sector versus
the broader market during 2004, pharmaceutical holdings in the portfolio
performed strongly. This was based primarily on company-specific fundamentals,
and perhaps, on the realization that investor sentiment toward the
pharmaceutical industry had become overly pessimistic.
In 2004, the financial sector provided the strongest contribution to investment
returns of any sector in both the Fund and the MSCI All Country World ex-U.S.
Index. This resulted from the generally favorable business climate that existed
last year for banks, insurance companies, and the like, plus the fact that
combined, these holdings represented the biggest relative weight of any sector,
in both the Fund and the MSCI All Country World ex-U.S. Index. Although
financial holdings within the Fund performed well, their returns, in aggregate,
lagged the combined returns of the MSCI All Country World ex-U.S. Index's
constituents. There were two main reasons behind this. First, the Fund lacked
exposure to banks in Japan and Europe that performed well last year. Second, the
Fund was underweight in the financial sector relative to the MSCI All Country
World ex-U.S. Index (19% versus 26%), as of year-end 2004.
In general, if the value of the U.S. dollar goes up compared with a foreign
currency, an investment traded in that foreign currency will go down in value
because it will be worth fewer U.S. dollars. This can have a negative effect on
Fund performance. Conversely, when the U.S. dollar weakens in relation to a
foreign currency, an investment traded in that foreign currency will increase in
value, which can contribute to Fund performance. For the 12 months ended
December 31, 2004, the U.S. dollar declined in value relative to most non-U.S.
currencies. At the end of the period, the Fund's portfolio was invested
predominantly in securities with non-U.S. currency exposure, which resulted in a
positive effect on Fund performance. However, one cannot expect the same result
in future periods.
The Fund's moderate exposure to the Brazilian equity market as well as to
Japan-based banks that performed strongly during the period hurt performance
relative to the index.
Annual Report | 5
We thank you for your continued participation in the Fund and look forward to
serving your investment needs.
Sincerely,
[PHOTO OMMITED] /s/ Gary P. Motyl
Gary P. Motyl, CFA
President
Templeton Investment Counsel, LLC
Chief Investment Officer, Templeton Institutional
Global Equities
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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.
6 | Annual Report
PERFORMANCE SUMMARY AS OF 12/31/04
TOTAL RETURNS
Your dividend income will vary depending on the dividends or interest paid by
the securities in the Fund's portfolio. Capital gain distributions are net
profits realized from the sale of portfolio securities. The performance table
and graph do not reflect any taxes due on Fund dividends, capital gain
distributions, if any, or any realized gains on the sale of Fund shares. Total
return reflects reinvestment of the Fund's dividends and capital gain
distributions, if any, and any unrealized gains or losses. The unmanaged indices
include reinvested dividends. They differ from the fund in composition and do
not pay management fees or expenses. One cannot invest directly in an index.
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE CUMULATIVE
THREE YEAR FIVE YEAR TEN YEAR ANNUAL SINCE
ONE YEAR AVERAGE AVERAGE AVERAGE SINCE INCEPTION(1,2)
CUMULATIVE(1,2) ANNUAL(1,3) ANNUAL(1,3) ANNUAL(1,3) INCEPTION(1,3) (10/18/90)
- ----------------------------------------------------------------------------------------------------------------------
TIFI Foreign Equity Series 21.25% 13.78% 4.04% 10.10% 10.43% 309.31%
- ----------------------------------------------------------------------------------------------------------------------
MSCI All Country World
ex-U.S. Index(4,5) 21.36% 13.56% 0.02% 6.02% 7.13% 165.93%
- ----------------------------------------------------------------------------------------------------------------------
MSCI EAFE Index(5,6) 20.70% 12.31% -0.80% 5.94% 6.35% 139.71%
- ----------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563.
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT
(10/18/90-12/31/04)
Millions
[THE FOLLOWING TABLES WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TIFI FOREIGN MSCI ALL COUNTRY MSCI EAFE
Inception Date Equity Series World ex U.S. Index Index CPI Index
- -------------- -------------- ------------------- -------------- -----------------
Oct-1990* $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00
Oct-90 4,970,000.00 5,277,872.02 4,934,898.82 5,010,765.71
Nov-90 4,875,000.00 4,984,504.08 4,645,204.64 5,021,531.42
Dec-90 4,860,000.00 5,075,508.20 4,722,265.21 5,021,531.42
Jan-91 5,005,000.00 5,234,135.03 4,876,331.94 5,051,809.99
Feb-91 5,614,717.29 5,796,297.48 5,400,502.19 5,059,211.41
Mar-91 5,452,705.61 5,477,301.69 5,077,601.57 5,066,612.84
Apr-91 5,503,334.26 5,536,809.68 5,128,939.01 5,074,014.26
May-91 5,579,277.23 5,615,435.40 5,183,969.76 5,088,817.12
Jun-91 5,295,756.79 5,224,874.15 4,804,403.31 5,104,292.83
Jul-91 5,604,591.56 5,475,926.32 5,041,756.63 5,111,694.25
Aug-91 5,614,717.29 5,381,896.37 4,940,601.98 5,126,497.11
Sep-91 5,756,477.51 5,655,733.95 5,220,530.99 5,149,374.24
Oct-91 5,736,226.05 5,754,623.56 5,295,844.65 5,156,775.67
Nov-91 5,685,597.40 5,498,299.12 5,050,016.68 5,171,578.52
Dec-91 5,899,356.90 5,783,735.71 5,312,370.80 5,175,615.66
Jan-92 6,060,450.45 5,703,138.61 5,200,544.26 5,183,017.09
Feb-92 6,154,884.60 5,528,007.26 5,015,879.37 5,201,857.09
Mar-92 6,108,305.50 5,193,698.94 4,686,142.21 5,228,098.51
Apr-92 6,304,443.75 5,210,753.61 4,709,498.85 5,235,499.93
May-92 6,657,492.60 5,527,136.19 5,026,179.50 5,242,901.36
Jun-92 6,584,641.25 5,260,404.73 4,789,506.20 5,261,741.35
Jul-92 6,360,483.25 5,148,494.88 4,668,310.42 5,273,179.92
Aug-92 6,181,156.85 5,423,065.99 4,962,686.21 5,287,982.77
Sep-92 6,024,246.25 5,311,797.98 4,866,379.38 5,302,785.63
Oct-92 5,811,296.15 5,078,534.03 4,612,699.38 5,321,625.62
Nov-92 5,822,504.05 5,106,637.57 4,657,430.00 5,329,027.05
Dec-92 5,820,814.28 5,149,274.26 4,682,817.64 5,325,662.76
Jan-93 5,843,981.70 5,148,678.26 4,683,724.34 5,351,904.19
Feb-93 5,971,402.51 5,306,250.63 4,826,680.96 5,370,744.18
Mar-93 6,119,129.28 5,743,162.08 5,248,599.45 5,389,584.17
Apr-93 6,316,146.70 6,250,447.00 5,748,192.04 5,404,387.03
May-93 6,484,190.97 6,389,589.31 5,871,201.22 5,411,788.45
Jun-93 6,362,503.74 6,313,118.35 5,780,833.30 5,419,189.88
Jul-93 6,466,807.08 6,522,955.04 5,984,538.92 5,419,189.88
Aug-93 6,924,582.85 6,873,034.36 6,308,835.87 5,434,665.59
Sep-93 6,872,431.18 6,731,737.28 6,168,297.12 5,445,431.30
Oct-93 7,278,055.28 6,975,224.87 6,359,913.39 5,468,308.44
Nov-93 7,110,011.01 6,444,008.40 5,805,314.24 5,472,345.58
Dec-93 7,801,444.08 6,946,617.03 6,225,721.55 5,471,672.72
Jan-94 8,357,853.38 7,517,902.83 6,753,421.89 5,487,148.43
Feb-94 8,129,432.72 7,461,053.91 6,736,194.56 5,505,988.43
Mar-94 7,768,922.25 7,119,318.55 6,447,258.98 5,524,828.42
Apr-94 7,881,601.28 7,360,834.76 6,722,291.80 5,532,229.85
May-94 7,911,253.65 7,363,310.44 6,685,117.04 5,535,594.13
Jun-94 7,656,243.23 7,415,528.92 6,781,227.41 5,554,434.13
Jul-94 7,988,349.83 7,536,103.65 6,848,021.09 5,569,236.98
Aug-94 8,261,151.68 7,789,677.34 7,011,529.62 5,592,114.12
Sep-94 8,065,446.00 7,596,849.47 6,792,107.83 5,606,916.97
Oct-94 8,237,429.78 7,801,047.12 7,019,992.17 5,610,954.11
Nov-94 7,881,601.28 7,424,743.95 6,684,210.34 5,618,355.54
Dec-94 7,819,889.51 7,407,368.35 6,727,429.78 5,618,355.54
Jan-95 7,594,900.47 7,071,409.58 6,470,833.22 5,640,559.82
Feb-95 7,713,478.58 7,032,715.64 6,453,908.13 5,663,436.95
Mar-95 7,749,977.69 7,430,062.08 6,858,151.97 5,682,276.95
Apr-95 8,090,636.05 7,719,899.87 7,117,915.94 5,700,444.09
May-95 8,297,464.34 7,685,790.52 7,034,892.30 5,711,882.65
Jun-95 8,346,129.82 7,579,473.87 6,913,391.26 5,723,321.22
Jul-95 8,759,786.40 8,009,875.21 7,345,800.28 5,723,321.22
Aug-95 8,534,708.56 7,731,957.34 7,067,140.65 5,738,796.93
Sep-95 8,692,871.37 7,864,085.24 7,207,074.93 5,749,562.64
Oct-95 8,504,292.63 7,653,973.46 7,015,156.42 5,768,402.64
Nov-95 8,638,122.70 7,833,735.25 7,212,212.91 5,764,365.50
Dec-95 8,834,438.34 8,143,470.17 7,504,775.30 5,760,328.35
Jan-96 9,117,593.42 8,255,334.17 7,537,416.55 5,793,971.20
Feb-96 9,262,239.31 8,255,655.09 7,564,617.60 5,812,811.20
Mar-96 9,331,737.70 8,409,330.56 7,727,192.22 5,843,089.76
Apr-96 9,672,911.59 8,664,463.01 7,953,749.76 5,865,294.04
May-96 9,786,636.22 8,534,352.33 7,809,427.04 5,876,732.61
Jun-96 9,755,046.04 8,577,630.87 7,855,148.98 5,880,769.75
Jul-96 9,502,324.64 8,292,469.35 7,627,482.25 5,891,535.46
Aug-96 9,780,318.18 8,341,111.85 7,646,220.75 5,902,974.03
Sep-96 9,862,545.80 8,548,243.64 7,851,032.55 5,921,814.02
Oct-96 9,957,438.80 8,462,603.50 7,772,856.74 5,940,654.02
Nov-96 10,469,861.00 8,789,072.17 8,084,157.63 5,951,419.73
Dec-96 10,741,164.36 8,687,294.27 7,982,002.58 5,951,419.73
Jan-97 10,938,370.56 8,527,704.68 7,704,551.88 5,970,259.72
Feb-97 11,089,456.80 8,684,085.05 7,832,396.81 5,988,426.86
Mar-97 11,201,338.56 8,665,884.23 7,862,620.20 6,003,229.71
Apr-97 11,148,688.32 8,738,962.60 7,906,444.11 6,010,631.14
May-97 11,609,377.92 9,278,752.26 8,422,659.56 6,006,594.00
Jun-97 12,122,717.76 9,790,713.45 8,889,311.68 6,013,995.42
Jul-97 12,563,663.52 9,988,951.14 9,034,686.17 6,021,396.85
Aug-97 11,852,885.28 9,203,152.36 8,361,910.55 6,032,835.42
Sep-97 12,807,170.88 9,700,717.95 8,832,186.46 6,047,638.27
Oct-97 11,859,466.56 8,874,804.01 8,155,276.28 6,063,113.98
Nov-97 11,780,491.20 8,763,902.77 8,073,881.67 6,059,076.84
Dec-97 11,968,834.64 8,864,763.76 8,146,417.80 6,051,675.41
Jan-98 12,113,618.93 9,129,936.46 8,520,885.57 6,063,113.98
Feb-98 12,885,801.81 9,739,136.81 9,069,440.05 6,075,225.41
Mar-98 13,833,179.95 10,075,645.74 9,350,792.58 6,087,336.83
Apr-98 14,013,101.25 10,147,807.19 9,426,985.74 6,098,102.54
May-98 13,860,860.15 9,963,781.74 9,383,430.81 6,108,868.25
Jun-98 13,729,379.20 9,926,325.63 9,456,269.18 6,116,269.68
Jul-98 13,971,580.95 10,020,768.19 9,554,528.43 6,123,671.11
Aug-98 11,722,564.70 8,607,568.24 8,372,790.97 6,131,072.53
Sep-98 11,549,563.45 8,425,743.39 8,118,343.30 6,138,473.96
Oct-98 12,442,249.90 9,308,277.02 8,967,019.03 6,153,276.81
Nov-98 13,113,494.75 9,808,501.66 9,428,493.88 6,153,276.81
Dec-98 13,184,952.96 10,146,431.81 9,802,659.42 6,149,239.67
Jan-99 13,043,897.72 10,135,566.33 9,776,062.84 6,164,715.38
Feb-99 12,746,939.32 9,908,629.12 9,545,156.16 6,170,771.09
Mar-99 13,435,670.93 10,387,031.11 9,945,957.56 6,189,611.09
Apr-99 14,537,321.51 10,906,602.73 10,351,289.45 6,234,019.65
May-99 14,001,383.39 10,394,320.61 9,820,491.21 6,234,019.65
Jun-99 14,663,862.45 10,871,943.22 10,205,540.19 6,234,019.65
Jul-99 14,745,741.89 11,126,938.14 10,511,391.80 6,250,841.07
Aug-99 14,671,306.04 11,165,540.39 10,551,891.14 6,269,681.07
Sep-99 14,373,562.64 11,241,048.59 10,660,695.33 6,296,595.34
Oct-99 14,604,313.77 11,659,621.68 11,062,364.15 6,309,379.63
Nov-99 15,333,785.10 12,125,828.66 11,448,921.27 6,312,071.05
Dec-99 16,789,277.01 13,282,291.56 12,478,632.07 6,312,071.05
Jan-00 15,752,131.70 12,561,548.12 11,687,988.26 6,329,565.33
Feb-00 16,188,824.46 12,900,853.65 12,004,729.36 6,365,899.61
Mar-00 16,515,106.04 13,386,361.76 12,472,587.39 6,417,036.74
Apr-00 15,808,661.39 12,639,256.93 11,818,275.24 6,422,419.59
May-00 15,753,715.70 12,315,951.62 11,532,035.58 6,427,129.59
Jun-00 16,562,202.35 12,840,245.37 11,985,706.76 6,462,118.15
Jul-00 16,334,570.19 12,333,327.22 11,485,491.57 6,476,248.15
Aug-00 16,577,901.12 12,485,902.38 11,587,598.26 6,476,248.15
Sep-00 15,800,812.01 11,793,308.33 11,025,793.85 6,509,891.00
Oct-00 15,149,313.05 11,418,472.23 10,767,504.78 6,520,656.71
Nov-00 15,047,271.05 10,906,190.11 10,366,017.31 6,524,693.85
Dec-00 15,806,214.00 11,278,550.54 10,736,888.49 6,519,310.99
Jan-01 16,057,994.40 11,447,813.61 10,731,829.10 6,562,373.84
Feb-01 15,526,458.00 10,541,485.96 9,928,068.34 6,589,960.97
Mar-01 14,351,908.40 9,796,352.50 9,270,721.76 6,606,109.54
Apr-01 15,163,924.27 10,462,631.00 9,920,944.69 6,629,659.53
May-01 15,069,503.82 10,173,710.13 9,578,670.87 6,658,592.38
Jun-01 14,729,590.20 9,783,515.65 9,190,508.89 6,672,049.52
Jul-01 14,370,792.49 9,565,839.30 9,024,029.41 6,651,190.96
Aug-01 14,210,277.73 9,328,265.83 8,797,305.65 6,653,882.38
Sep-01 12,463,499.40 8,338,636.18 7,908,239.38 6,681,469.52
Oct-01 12,869,507.34 8,572,266.90 8,110,458.02 6,658,592.38
Nov-01 13,634,312.98 8,964,341.06 8,409,956.67 6,647,153.82
Dec-01 13,891,851.15 9,079,826.89 8,460,091.23 6,620,912.39
Jan-02 13,498,232.70 8,690,961.94 8,011,210.46 6,638,406.67
Feb-02 13,719,043.05 8,753,541.60 8,067,791.66 6,665,320.95
Mar-02 14,385,895.04 9,229,055.30 8,508,246.15 6,700,309.51
Apr-02 14,405,127.52 9,289,021.74 8,569,862.57 6,738,662.36
May-02 14,664,766.00 9,390,203.65 8,686,119.85 6,737,316.65
Jun-02 14,058,942.88 8,984,742.48 8,343,592.16 6,742,699.50
Jul-02 12,549,193.20 8,109,223.28 7,520,545.86 6,750,100.93
Aug-02 12,578,041.92 8,109,681.74 7,505,258.87 6,771,632.35
Sep-02 11,029,827.28 7,250,254.44 6,701,105.21 6,782,398.06
Oct-02 11,635,650.40 7,639,211.08 7,061,779.02 6,796,528.06
Nov-02 12,424,182.08 8,006,574.30 7,383,183.59 6,795,182.34
Dec-02 11,835,829.31 7,747,911.72 7,135,478.75 6,780,379.49
Jan-03 11,513,832.30 7,475,907.98 6,838,132.00 6,810,658.05
Feb-03 11,172,320.33 7,324,433.12 6,681,816.64 6,863,140.90
Mar-03 10,810,118.59 7,182,356.66 6,555,540.31 6,904,185.17
Apr-03 12,046,121.26 7,874,446.41 7,205,572.83 6,890,055.17
May-03 12,722,979.87 8,376,046.43 7,648,862.27 6,876,598.04
Jun-03 13,036,885.31 8,609,172.85 7,838,169.48 6,883,999.46
Jul-03 13,694,124.82 8,838,173.13 8,029,078.53 6,890,728.03
Aug-03 14,223,840.25 9,100,640.93 8,224,369.96 6,918,315.17
Sep-03 14,321,935.70 9,355,452.45 8,479,533.93 6,939,173.73
Oct-03 15,410,795.20 9,961,902.05 9,008,594.32 6,932,445.16
Nov-03 15,685,462.46 10,179,119.94 9,210,163.16 6,911,586.60
Dec-03 16,879,250.70 10,956,299.69 9,930,120.51 6,904,858.03
Jan-04 17,138,165.46 11,132,210.41 10,071,275.81 6,939,173.73
Feb-04 17,616,161.94 11,415,263.02 10,305,479.86 6,974,162.29
Mar-04 17,464,823.78 11,485,498.94 10,367,507.32 7,015,879.42
Apr-04 17,064,483.98 11,128,542.74 10,141,777.91 7,036,737.99
May-04 17,104,517.96 11,163,752.40 10,185,695.51 7,079,127.98
Jun-04 17,464,823.78 11,405,727.07 10,413,008.63 7,100,659.40
Jul-04 16,984,416.02 11,073,344.28 10,076,507.48 7,086,529.40
Aug-04 17,094,509.46 11,162,010.25 10,123,290.26 7,093,930.83
Sep-04 17,715,036.15 11,520,891.98 10,389,355.81 7,108,060.83
Oct-04 18,415,630.80 11,921,585.17 10,744,259.97 7,145,740.82
Nov-04 19,766,777.63 12,749,057.87 11,481,208.91 7,149,777.96
Dec-04 20,465,666.31 13,296,503.79 11,985,425.68 7,123,536.54
Annual Report | 7
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY
VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS
INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE
ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(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) Cumulative total return shows the change in value of an investment over
the indicated periods. It assumes income dividends and capital gain
distributions are reinvested at net asset value, the account was
completely redeemed at the end of each period, and the deduction of all
applicable charges and fees.
(3) Average annual total return represents the change in value of an
investment over the indicated periods.
(4) Source: Standard & Poor's Micropal. The Morgan Stanley Capital
International (MSCI) All Country World ex-U.S. Index is a free
float-adjusted, market capitalization-weighted index that is designed to
measure equity market performance in the global developed and emerging
markets, excluding the United States. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
(5) All MSCI data is presented "as is." The Fund described herein is not
sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or
any MSCI data provider have any liability of any kind in connection with
the MSCI data or the Fund described herein. Copying or distributing the
MSCI data is strictly prohibited.
(6) Source: Standard & Poor's Micropal. The MSCI Europe, Australasia, and Far
East (EAFE) Index is a free float-adjusted, market capitalization-weighted
index that is designed to measure equity market performance in the global
developed markets, excluding the United States and Canada. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in
an index, nor is an index representative of the Fund's portfolio.
8 | Annual Report
YOUR FUND'S EXPENSES
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases, if
applicable, and redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, if applicable, and other Fund expenses. All mutual funds
have ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) of the table below provides actual account values and
expenses. The "Ending Account Value" is derived from the Fund's actual return,
which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = $8.6
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) of the table below can help you
compare ongoing costs of investing in the Fund with those of other mutual funds.
This information may not be used to estimate the actual ending account balance
or expenses you paid during the period. The hypothetical "Ending Account Value"
is based on the actual expense ratio for the Fund and an assumed 5% annual rate
of return before expenses, which does not represent the Fund's actual return.
The figure under the heading "Expenses Paid During Period" shows the
hypothetical expenses your account would have incurred under this scenario. You
can compare this figure with the 5% hypothetical examples that appear in the
shareholder reports of other funds.
Annual Report | 9
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is
useful in comparing ongoing costs only, and will not help you compare total
costs of owning different funds. In addition, if transaction costs were
included, your total costs would have been higher. Please refer to the Fund
prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
ON 6/30/04 ON 12/31/04 6/30/04-12/31/04
- -------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,171.80 $4.42
- -------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000.00 $1,021.06 $4.12
- -------------------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.81%
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
10 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOREIGN EQUITY SERIES
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
PRIMARY SHARES 2004 2003 2002 2001 2000
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 16.95 $ 12.13 $ 14.47 $ 16.95 $ 21.53
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ................... 33 .25 .23 .25 .35
Net realized and unrealized gains (losses) . 3.25 4.87 (2.37) (2.28) (1.66)
---------------------------------------------------------------------------------
Total from investment operations ............ 3.58 5.12 (2.14) (2.03) (1.31)
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.26) (.30) (.20) (.28) (.33)
Net realized gains ......................... -- -- -- (.17) (2.94)
---------------------------------------------------------------------------------
Total distributions ......................... (.26) (.30) (.20) (.45) (3.27)
---------------------------------------------------------------------------------
Redemption fees ............................. --(c) -- -- -- --
---------------------------------------------------------------------------------
Net asset value, end of year ................ $ 20.27 $ 16.95 $ 12.13 $ 14.47 $ 16.95
=================================================================================
Total return(b) ............................. 21.25% 42.61% (14.80)% (12.11)% (5.86)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 5,658,170 $ 4,642,764 $ 3,164,910 $ 3,551,516 $ 4,344,727
Ratios to average net assets:
Expenses ................................... .82% .83% .83% .84% .83%
Net investment income ...................... 1.89% 1.85% 1.68% 1.62% 1.71%
Portfolio turnover rate ..................... 18.25% 8.93% 16.26% 15.38% 27.41%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
Annual Report | See notes to financial statements. | 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 93.8%
AUSTRALIA 2.9%
Alumina Ltd. .............................. Metals & Mining 9,790,288 $ 45,520,184
AMP Ltd. .................................. Insurance 5,184,670 29,463,194
National Australia Bank Ltd. .............. Commercial Banks 2,903,680 65,503,548
Qantas Airways Ltd. ....................... Airlines 9,186,030 26,676,194
---------------
167,163,120
---------------
BERMUDA 1.5%
ACE Ltd. .................................. Insurance 1,108,930 47,406,758
XL Capital Ltd., A ........................ Insurance 450,020 34,944,053
---------------
82,350,811
---------------
CANADA 2.7%
Alcan Inc. ................................ Metals & Mining 1,066,343 52,279,125
BCE Inc. .................................. Diversified Telecommunication Services 2,469,060 59,536,595
BCE Inc. (USD Traded)...................... Diversified Telecommunication Services 5,920 142,849
(a) Celestica Inc. ............................ Electronic Equipment & Instruments 9,815 138,490
Husky Energy Inc. ......................... Oil & Gas 1,453,010 41,493,803
---------------
153,590,862
---------------
CHINA .5%
China Mobile (Hong Kong) Ltd., fgn. ....... Wireless Telecommunication Services 8,492,000 28,788,107
---------------
DENMARK .7%
TDC AS .................................... Diversified Telecommunication Services 531,490 22,467,975
(a) Vestas Wind Systems AS .................... Electrical Equipment 1,111,445 13,786,244
(a) Vestas Wind Systems AS, 144A .............. Electrical Equipment 340,168 4,219,407
---------------
40,473,626
---------------
FINLAND 3.0%
M-real OYJ, B ............................. Paper & Forest Products 2,306,820 14,650,054
M-real OYJ, B, 144A ....................... Paper & Forest Products 1,922,350 12,208,378
Stora Enso OYJ, R (EUR/FIM Traded) ........ Paper & Forest Products 1,673,625 25,572,678
Stora Enso OYJ, R (SEK Traded) ............ Paper & Forest Products 2,814,636 43,000,971
UPM-Kymmene Corp. ......................... Paper & Forest Products 3,278,200 72,733,227
---------------
168,165,308
---------------
FRANCE 6.2%
Accor SA .................................. Hotels Restaurants & Leisure 494,470 21,612,765
AXA SA .................................... Insurance 2,311,148 57,016,597
Michelin SA, B ............................ Auto Components 1,341,820 85,925,861
Sanofi-Aventis ............................ Pharmaceuticals 1,106,500 88,289,366
Sanofi-Aventis, ADR ....................... Pharmaceuticals 6,813 272,861
Suez SA ................................... Multi-Utilities & Unregulated Power 2,075,810 55,267,047
Suez SA, ADR .............................. Multi-Utilities & Unregulated Power 7,250 193,937
Total SA, B ............................... Oil & Gas 201,687 43,981,845
---------------
352,560,279
---------------
12 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
GERMANY 9.1%
BASF AG ................................... Chemicals 879,580 $ 63,164,758
BASF AG, ADR .............................. Chemicals 6,430 463,089
Bayer AG, Br. ............................. Chemicals 1,469,460 49,652,003
Celesio AG ................................ Health Care Providers & Services 1,178,552 95,477,873
Deutsche Post AG .......................... Air Freight & Logistics 3,524,380 80,634,325
E.ON AG ................................... Electric Utilities 956,750 87,220,411
Merck KGaA ................................ Pharmaceuticals 1,131,887 77,259,290
Muenchener Rueckversicherungs-Gesellschaft Insurance 144,848 17,747,280
Muenchener Rueckversicherungs-Gesellschaft,
144A .................................... Insurance 37,999 4,655,770
Volkswagen AG ............................. Automobiles 885,310 40,065,527
---------------
516,340,326
---------------
HONG KONG 1.7%
Cheung Kong Holdings Ltd. ................. Real Estate 54,000 538,416
Cheung Kong Holdings Ltd., ADR ............ Real Estate 31,535 314,425
Hutchison Whampoa Ltd. .................... Industrial Conglomerates 5,342,550 50,003,926
Hutchison Whampoa Ltd., ADR ............... Industrial Conglomerates 4,795 224,396
Swire Pacific Ltd., A ..................... Industrial Conglomerates 5,440,500 45,496,153
Swire Pacific Ltd., B ..................... Industrial Conglomerates 154,500 229,579
---------------
96,806,895
---------------
INDIA 2.5%
Housing Development Finance Corp. Ltd. .... Thrifts & Mortgage Finance 3,668,470 64,980,691
ICICI Bank Ltd. ........................... Commercial Banks 4,935,848 42,311,344
Satyam Computers Services Ltd. ............ IT Services 3,347,536 31,726,127
Satyam Computers Services Ltd., ADR ....... IT Services 47,700 1,151,001
---------------
140,169,163
---------------
ISRAEL .8%
(a) Check Point Software Technologies Ltd. .... Software 1,811,250 44,611,088
---------------
ITALY 1.8%
Eni SpA ................................... Oil & Gas 2,745,390 68,623,574
Riunione Adriatica di Sicurta SpA ......... Insurance 1,359,294 30,693,497
---------------
99,317,071
---------------
JAPAN 8.3%
East Japan Railway Co. .................... Road & Rail 6,228 34,660,808
Hitachi Ltd. .............................. Electronic Equipment & Instruments 4,622,000 32,040,812
Hitachi Ltd., ADR ......................... Electronic Equipment & Instruments 2,275 157,953
Komatsu Ltd. .............................. Machinery 5,609,365 39,268,841
NEC Corp. ................................. Computers & Peripherals 3,873,000 24,088,079
NEC Corp., ADR ............................ Computers & Peripherals 14,625 89,651
Nintendo Co. Ltd. ......................... Software 318,900 40,072,671
Annual Report | 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
JAPAN (CONT.)
Nippon Telegraph & Telephone Corp. ........ Diversified Telecommunication Services 10,115 $ 45,429,604
Nippon Telegraph & Telephone Corp., ADR ... Diversified Telecommunication Services 6,815 153,678
Nomura Holdings Inc. ...................... Capital Markets 1,882,000 27,452,724
Ono Pharmaceutical Co. Ltd. ............... Pharmaceuticals 977,000 54,850,127
Seiko Epson Corp. ......................... Computers & Peripherals 764,200 34,024,136
Sompo Japan Insurance Inc. ................ Insurance 6,208,000 63,280,141
Sony Corp. ................................ Household Durables 1,130,000 43,690,685
Sony Corp., ADR ........................... Household Durables 4,405 171,619
Takeda Pharmaceutical Co. Ltd. ............ Pharmaceuticals 650,400 32,767,663
---------------
472,199,192
---------------
MEXICO .9%
Telefonos de Mexico SA de CV (Telmex), L,
ADR ..................................... Diversified Telecommunication Services 1,383,057 52,998,744
---------------
NETHERLANDS 5.3%
Akzo Nobel NV, ADR ........................ Chemicals 5,290 224,772
CNH Global NV ............................. Machinery 335,040 6,489,725
IHC Caland NV ............................. Energy Equipment & Services 603,625 38,285,611
ING Groep NV .............................. Diversified Financial Services 2,548,410 76,979,328
ING Groep NV, ADR ......................... Diversified Financial Services 12,965 392,191
Koninklijke Philips Electronics NV ........ Household Durables 2,735,551 72,423,872
Koninklijke Philips Electronics NV (N.Y.
shares) ................................. Household Durables 11,935 316,278
Unilever NV ............................... Food Products 1,093,340 73,189,033
Unilever NV (N.Y. shares), ADR ............ Food Products 2,540 169,444
Wolters Kluwer NV ......................... Media 1,499,375 30,051,795
---------------
298,522,049
---------------
NEW ZEALAND .1%
Carter Holt Harvey Ltd. ................... Paper & Forest Products 2,361,750 3,510,421
---------------
NORWAY 1.2%
Norsk Hydro ASA ........................... Oil & Gas 476,090 37,446,913
Telenor ASA ............................... Diversified Telecommunication Services 3,671,250 33,295,476
---------------
70,742,389
---------------
PORTUGAL 1.0%
Portugal Telecom SA, SGPS ................. Diversified Telecommunication Services 4,496,290 55,523,312
---------------
SINGAPORE 1.0%
DBS Group Holdings Ltd. ................... Commercial Banks 5,624,185 55,473,491
DBS Group Holdings Ltd., ADR .............. Commercial Banks 7,605 300,044
---------------
55,773,535
---------------
14 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SOUTH KOREA 5.5%
(a) Kookmin Bank .............................. Commercial Banks 900,573 $ 35,233,005
(a) Kookmin Bank, ADR ......................... Commercial Banks 216,498 8,460,742
(a) Korea Electric Power Corp. ................ Electric Utilities 1,146,540 29,737,827
Korea Electric Po wer Corp., ADR .......... Electric Utilities 12,195 161,462
KT Corp., ADR ............................. Diversified Telecommunication Services 903,955 19,715,259
LG Electronics Inc. ....................... Household Durables 938,340 58,102,390
POSCO ..................................... Metals & Mining 224,020 40,467,291
POSCO, ADR ................................ Metals & Mining 4,080 181,682
Samsung Electronics Co. Ltd. .............. Semiconductors & Semiconductor Equipment 270,520 117,725,328
---------------
309,784,986
---------------
SPAIN 6.2%
Banco Santander Central Hispano SA ........ Commercial Banks 5,231,710 64,817,772
Endesa SA ................................. Electric Utilities 1,635,640 38,376,236
Iberdrola SA, Br. ......................... Electric Utilities 3,310,874 84,016,370
Repsol YPF SA ............................. Oil & Gas 2,520,610 65,536,134
Telefonica SA ............................. Diversified Telecommunication Services 5,224,173 98,256,307
Telefonica SA, ADR ........................ Diversified Telecommunication Services 8,550 483,075
---------------
351,485,894
---------------
SWEDEN 7.7%
Atlas Copco AB, A ......................... Machinery 1,540,640 69,568,463
Autoliv Inc. .............................. Auto Components 830,940 40,134,402
Autoliv Inc., SDR ......................... Auto Components 9,100 435,570
Electrolux AB, B .......................... Household Durables 2,311,080 52,874,778
Foreningssparbanken AB, A ................. Commercial Banks 1,405,980 35,024,112
Nordea Bank AB, FDR ....................... Commercial Banks 8,593,898 86,939,572
Securitas AB, B ........................... Commercial Services & Supplies 1,761,160 30,219,944
Svenska Cellulosa AB, B ................... Paper & Forest Products 1,294,903 55,256,107
Volvo AB, B ............................... Machinery 1,625,555 64,472,168
---------------
434,925,116
---------------
SWITZERLAND 3.6%
Adecco SA ................................. Commercial Services & Supplies 1,031,040 52,233,204
Lonza Group AG ............................ Chemicals 420,110 23,606,866
Nestle SA ................................. Food Products 246,320 64,340,138
Nestle SA, ADR ............................ Food Products 2,310 150,846
Swiss Reinsurance Co. ..................... Insurance 871,120 61,799,461
Swiss Reinsurance Co., ADR ................ Insurance 3,295 233,756
UBS AG .................................... Capital Markets 4,755 398,659
---------------
202,762,930
---------------
TAIWAN .9%
Chunghwa Telecom Co. Ltd., ADR ............ Diversified Telecommunication Services 1,223,460 25,753,833
Compal Electronics Inc., 144A ............. Computers & Peripherals 4,003,190 19,935,886
Compal Electronics Inc., GDR, Reg S ....... Computers & Peripherals 1,061,000 5,283,780
---------------
50,973,499
---------------
Annual Report | 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
UNITED KINGDOM 18.3%
Amvescap PLC .............................. Capital Markets 3,236,560 $ 19,926,420
BAE Systems PLC ........................... Aerospace & Defense 5,617,238 24,852,650
BHP Billiton PLC .......................... Metals & Mining 7,121,991 83,457,628
BP PLC .................................... Oil & Gas 4,940,110 48,170,292
Brambles Industries PLC ................... Commercial Services & Supplies 7,121,727 35,575,827
(a) British Airways PLC ....................... Airlines 9,058,170 40,858,957
(a) British Airways PLC, ADR .................. Airlines 8,225 371,194
British Sky Broadcasting Group PLC ........ Media 3,090,910 33,342,766
Cadbury Schweppes PLC ..................... Food Products 5,278,910 49,143,371
Compass Group PLC ......................... Hotels Restaurants & Leisure 10,312,500 48,743,774
GKN PLC ................................... Auto Components 3,732,700 16,944,673
GlaxoSmithKline PLC ....................... Pharmaceuticals 2,274,620 53,353,020
Hanson PLC ................................ Construction Materials 4,059,615 34,850,912
HSBC Holdings PLC ......................... Commercial Banks 3,254,421 55,686,238
HSBC Holdings PLC, ADR .................... Commercial Banks 3,790 322,681
Kidde PLC ................................. Electrical Equipment 13,384,200 42,774,565
National Grid Transco PLC ................. Multi-Utilities & Unregulated Power 4,569,990 43,552,536
Pearson PLC ............................... Media 3,511,000 42,356,012
Rentokil Initial PLC ...................... Commercial Services & Supplies 6,043,130 17,138,325
(a) Rolls-Royce Group PLC ..................... Aerospace & Defense 13,555,704 64,268,473
(a) Rolls-Royce Group PLC, B .................. Aerospace & Defense 431,071,387 843,973
Shell Transport & Trading Co. PLC, ADR .... Oil & Gas 1,641,890 84,393,146
Shire Pharmaceuticals Group PLC ........... Pharmaceuticals 2,293,320 24,078,583
Shire Pharmaceuticals Group PLC, ADR ...... Pharmaceuticals 8,590 274,451
Smiths Group PLC .......................... Industrial Conglomerates 2,637,720 41,617,833
Standard Chartered PLC .................... Commercial Banks 2,715,610 50,483,095
Vodafone Group PLC ........................ Wireless Telecommunication Services 21,421,260 58,078,102
Yell Group PLC ............................ Media 2,599,590 21,955,154
---------------
1,037,414,651
---------------
UNITED STATES .4%
(a) News Corp. Ltd., A ........................ Media 1,089,919 20,337,889
---------------
TOTAL COMMON STOCKS
(COST $3,440,666,938)..................... 5,307,291,263
---------------
PREFERRED STOCKS (COST $99,850)
BRAZIL
Cia Vale do Rio Doce, A, ADR, pfd. ........ Metals & Mining 11,115 270,984
---------------
16 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES/PRINCIPAL
FOREIGN EQUITY SERIES AMOUNT(d) VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 7.6%
(b) Franklin Institutional Fiduciary Trust Money
Market Portfolio ............................ 160,093,425 $ 160,093,425
(c) U.S. Treasury Bills, 2/03/05 - 3/31/05 ....... 270,000,000 269,082,129
----------------
TOTAL SHORT TERM INVESTMENTS
(COST $429,106,877) ......................... 429,175,554
----------------
TOTAL INVESTMENTS (COST $3,869,873,665)
101.4% ...................................... 5,736,737,801
OTHER ASSETS, LESS LIABILITIES (1.4)% ........ (78,568,113)
----------------
NET ASSETS 100.0% ............................ $ 5,658,169,688
================
CURRENCY ABBREVIATIONS: | EUR - Euro | FIM - Finnish Markka |
SEK - Swedish Krona
(a) Non-income producing.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
(c) Security is traded on a discount basis with no stated coupon rate.
(d) The principal amount is stated in U.S. dollars unless otherwise indicated.
Annual Report | See notes to financial statements. | 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004
---------------
FOREIGN
EQUITY SERIES
---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............. $ 3,709,780,240
Cost - Sweep Money Fund (Note 7) ........ 160,093,425
----------------
Total cost of investments ............... 3,869,873,665
================
Value - Unaffiliated issuers ............ 5,576,644,376
Value - Sweep Money Fund (Note 7) ....... 160,093,425
----------------
Total value of investments .............. 5,736,737,801
Cash ..................................... 220,510
Foreign currency, at value (cost $54,478) 61,175
Receivables:
Capital shares sold ..................... 4,589,895
Dividends ............................... 6,123,626
----------------
Total assets ........................ 5,747,733,007
----------------
Liabilities:
Payables:
Capital shares redeemed ................. 85,323,352
Affiliates .............................. 3,585,339
Deferred tax ............................. 332,213
Other liabilities ........................ 322,415
----------------
Total liabilities ................... 89,563,319
----------------
Net assets, at value ...................... $ 5,658,169,688
================
Net assets consist of:
Undistributed net investment income ...... $ 6,273,524
Net unrealized appreciation (depreciation) 1,866,756,932
Accumulated net realized gain (loss) ..... (259,955,008)
Capital shares ........................... 4,045,094,240
----------------
Net assets, at value ...................... $ 5,658,169,688
================
Shares outstanding ........................ 279,178,456
================
Net asset value per share(a) .............. $ 20.27
================
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
18 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2004
-------------
FOREIGN
EQUITY SERIES
-------------
Investment income:
Dividends (net of foreign taxes of $15,674,569):
Unaffiliated issuers .................................................. $ 130,128,918
Sweep Money Fund (Note 7) ............................................. 1,212,011
Interest ............................................................... 1,871,341
--------------
Total investment income ........................................... 133,212,270
--------------
Expenses:
Management fees (Note 3) ............................................... 33,538,027
Administrative fees (Note 3) ........................................... 4,116,372
Transfer agent fees (Note 3) ........................................... 57,900
Custodian fees (Note 4) ................................................ 2,022,300
Reports to shareholders ................................................ 60,000
Registration and filing fees ........................................... 81,800
Professional fees ...................................................... 182,335
Directors' fees and expenses ........................................... 117,600
Other .................................................................. 160,700
--------------
Total expenses .................................................... 40,337,034
Expense reductions (Note 4) ....................................... (23,554)
--------------
Net expenses .................................................... 40,313,480
--------------
Net investment income ......................................... 92,898,790
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 99,026,684
Foreign currency transactions ......................................... (495,492)
--------------
Net realized gain (loss) .......................................... 98,531,192
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 797,144,359
Translation of assets and liabilities denominated in foreign currencies (63,024)
Deferred taxes ........................................................ 8,659,231
--------------
Net change in unrealized appreciation (depreciation) .............. 805,740,566
--------------
Net realized and unrealized gain (loss) ................................. 904,271,758
--------------
Net increase (decrease) in net assets resulting from operations ......... $ 997,170,548
==============
Annual Report | See notes to financial statements. | 19
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2004 and 2003
-----------------------------------
FOREIGN EQUITY SERIES
-----------------------------------
2004 2003
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 92,898,790 $ 66,241,621
Net realized gain (loss) from investments and foreign currency transactions ....... 98,531,192 (151,574,685)
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ..... 805,740,566 1,439,364,827
------------------------------------
Net increase (decrease) in net assets resulting from operations ................ 997,170,548 1,354,031,763
Distributions to shareholders from:
Net investment income:
Primary Shares ..................................................................... (72,392,703) (80,683,825)
Service Shares ..................................................................... -- (313)
------------------------------------
Total distributions to shareholders .................................................. (72,392,703) (80,684,138)
Capital share transactions (Note 2):
Primary Shares ..................................................................... 90,602,987 204,511,702
Service Shares ..................................................................... -- (17,258)
------------------------------------
Total capital share transactions ..................................................... 90,602,987 204,494,444
Redemption fees ...................................................................... 24,434 --
------------------------------------
Net increase (decrease) in net assets ........................................... 1,015,405,266 1,477,842,069
Net assets:
Beginning of year ................................................................... 4,642,764,422 3,164,922,353
------------------------------------
End of year ......................................................................... $ 5,658,169,688 $ 4,642,764,422
====================================
Undistributed net investment income/distributions in excess of net investment
income included in net assets:
End of year ......................................................................... $ 6,273,524 $ (13,659,162)
====================================
20 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Equity Series (the Fund) is a separate, diversified series of Templeton
Institutional Funds, Inc. (the Company). The Company 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 on a securities exchange or on the NASDAQ National Market
System, are valued at the last quoted sale price or the official closing price
of the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
U.S. Government securities, generally trade in the over-the-counter market
rather than on a securities exchange. The Fund may utilize independent pricing
services, quotations from bond dealers, and information with respect to bond and
note transactions, to assist in determining a current market value for each
security. The Fund's pricing services may use valuation models or matrix pricing
which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE on the day that the
value of the foreign security is determined. If no sale is reported at that
time, the foreign security will be valued within the range of the most recent
quoted bid and ask prices.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Occasionally, events occur between the
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the Fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Fund's Board of Directors.
Annual Report | 21
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 on these
contracts 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 AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
22 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME AND DEFERRED TAXES (CONTINUED)
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. When the Fund invests in these securities, the Fund
records an estimated deferred tax liability for net unrealized gains.
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.
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 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 expenses, during the reporting period. Actual results could differ from
those estimates.
G. REDEMPTION FEE
Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 1% of
the amount redeemed. Effective March 1, 2005, the fee will increase to 2%. Such
fees are retained by the Fund and accounted for as additional paid-in capital as
noted in the Statements of Changes in Net Assets.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund 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.
Annual Report | 23
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
2. CAPITAL STOCK
At December 31, 2004, 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,
2004 2003
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
PRIMARY SHARES:
Shares sold ................. 47,051,626 $ 832,987,696 68,564,860 $ 964,509,589
Shares issued in reinvestment
of distributions ........... 3,305,980 62,226,817 4,625,802 68,892,941
Shares redeemed ............. (45,065,673) (804,611,526) (60,226,673) (828,890,828)
----------------------------------------------------------------
Net increase (decrease) ..... 5,291,933 $ 90,602,987 12,963,989 $ 204,511,702
================================================================
SERVICE SHARES(a):
Shares liquidated ........... -- $ -- (1,024) $ (17,258)
================================================================
(a) On December 30, 2003, the Service Shares were terminated.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of the
following entities:
- -----------------------------------------------------------------------------------------
ENTITY AFFILIATION
- -----------------------------------------------------------------------------------------
Templeton Investment Counsel, LLC (TIC) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to TIC based on the Fund's average
daily net assets as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.700% Up to and including $1 billion
0.680% Over $1 billion, up to and including $5 billion
0.660% Over $5 billion, up to and including $10 billion
0.640% Over $10 billion, up to and including $15 billion
0.620% Over $15 billion, up to and including $20 billion
0.600% Over $20 billion
Prior to May 1, 2004, the Fund paid an investment management fee to TIC of .70%
per year of the average daily net assets of the Fund.
24 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
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 NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $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
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $57,900, of which $16,152 was paid to
Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At December 31, 2004, 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 ....................................... $ 82,638,416
2011 ....................................... 177,000,923
---------------
$ 259,639,339
===============
Annual Report | 25
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
5. INCOME TAXES (CONTINUED)
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
passive foreign investment company shares.
Net realized losses differ for financial statement and tax purposes primarily
due to differing treatments of wash sales and foreign currency transactions.
At December 31, 2004, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ......................... $ 3,920,497,029
================
Unrealized appreciation ..................... $ 1,969,424,640
Unrealized depreciation ..................... (153,183,868)
----------------
Net unrealized appreciation (depreciation) .. $ 1,816,240,772
================
Distributable earnings --
undistributed ordinary income ............. $ 56,581,219
================
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
------------------------------
2004 2003
------------------------------
Distributions paid from - ordinary income ... $ 72,392,703 $ 80,684,138
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended December 31, 2004 aggregated $1,006,350,038 and $849,238,782,
respectively.
7. 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.
26 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
8. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth
Annual Report | 27
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
8. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
of Massachusetts (the "State of Massachusetts") related to its administrative
complaint filed on February 4, 2004, concerning one instance of market timing
that was also a subject of the August 2, 2004 settlement that Franklin Advisers,
Inc. reached with the SEC, as described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
28 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
8. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
Annual Report | 29
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
8. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Company and fund management strongly believes that the claims made in each
of the lawsuits identified above are without merit and intends to vigorously
defend against them. The Company cannot predict with certainty, however, the
eventual outcome of the remaining governmental investigations or private
lawsuits, nor whether they will have a material negative impact on the Company.
Public trust and confidence are critical to the Company's business and any
material loss of investor and/or client confidence could result in a significant
decline in assets under management by the Company, which would have an adverse
effect on the Company's future financial results. If the Company finds that it
bears responsibility for any unlawful or inappropriate conduct that caused
losses to the Fund, it is committed to making the Fund or its shareholders
whole, as appropriate. The Company is committed to taking all appropriate
actions to protect the interests of its funds' shareholders.
30 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the Foreign Equity Series of
Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004, 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards 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, 2004 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 9, 2005
Annual Report | 31
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED)
FOREIGN EQUITY SERIES
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby
designates up to a maximum of $136,823,686 as qualified dividends for purposes
of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2004. In January 2005, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2004. 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, 2004, more than 50% of the 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 Code. This
designation will allow shareholders of record on December 9, 2004, 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 Primary Class 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.
32 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN EQUITY SERIES
- -------------------------------------------------------------------------------
ADJUSTED
FOREIGN FOREIGN FOREIGN FOREIGN
TAX SOURCE QUALIFIED SOURCE
PAID INCOME DIVIDENDS INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------
Australia ................. 0.0010 0.0209 0.0209 0.0090
Bermuda ................... 0.0000 0.0045 0.0045 0.0019
Canada .................... 0.0029 0.0140 0.0137 0.0062
Chile ..................... 0.0015 0.0061 0.0061 0.0026
Denmark ................... 0.0005 0.0025 0.0025 0.0011
Finland ................... 0.0031 0.0152 0.0111 0.0089
France .................... 0.0049 0.0262 0.0258 0.0115
Germany ................... 0.0048 0.0276 0.0274 0.0119
Hong Kong ................. 0.0000 0.0120 0.0000 0.0120
India ..................... 0.0000 0.0058 0.0030 0.0041
Italy ..................... 0.0028 0.0135 0.0126 0.0063
Japan ..................... 0.0011 0.0114 0.0114 0.0049
Mexico .................... 0.0000 0.0042 0.0042 0.0018
Netherlands ............... 0.0044 0.0212 0.0212 0.0091
New Zealand ............... 0.0004 0.0034 0.0034 0.0015
Norway .................... 0.0006 0.0030 0.0030 0.0013
Portugal .................. 0.0005 0.0028 0.0028 0.0012
Singapore ................. 0.0008 0.0028 0.0000 0.0028
South Korea ............... 0.0039 0.0174 0.0174 0.0075
Spain ..................... 0.0035 0.0225 0.0224 0.0097
Sweden .................... 0.0074 0.0377 0.0377 0.0162
Switzerland ............... 0.0012 0.0059 0.0059 0.0025
Taiwan .................... 0.0012 0.0042 0.0042 0.0018
United Kingdom ............ 0.0094 0.0946 0.0946 0.0405
-------------------------------------------------
TOTAL ..................... $ 0.0559 $ 0.3794 $ 0.3558 $ 0.1763
-------------------------------------------------
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.
Annual Report | 33
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN EQUITY SERIES
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 2005, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2004. 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 2004 individual income tax returns.
34 | Annual Report
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
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 (60) Director Since 1990 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power
Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power
Ltd. (1977-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) 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 (until 2002) (Consultant (2003)).
- -----------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil
Suite 2100 and gas); H.J. Heinz Company
Fort Lauderdale, FL 33394-3091 (processed foods and allied
products); RTI International
Metals, Inc. (manufacture and
distribution of titanium); Canadian
National Railway (railroad); and
White Mountains Insurance Group, Ltd.
(holding company).
- -----------------------------------------------------------------------------------------------------------------------------------
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).
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences
500 East Broward Blvd. Corporation; MedImmune, Inc.
Suite 2100 (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), White Mountains
Insurance Group, Ltd. (holding
company) (1987- 2004), and
Spacehab, Inc. (aerospace services)
(1994-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
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 (75) 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 (72) Director Since 2003 21 Director, White Mountains Insurance
500 East Broward Blvd. Group Ltd. (holding company); Amerada
Suite 2100 Hess Corporation (exploration and
Fort Lauderdale, FL 33394-3091 refining of oil and gas); and
Sentient Jet (private jet service);
and FORMERLY, Director, Becton
Dickinson and Co. (medical
technology), Cooper Industries
(electrical products and tools and
hardware), Health Net (formerly
Foundation Health), The Hertz
Corporation, Pacific Southwest
Airlines, The RCA Corporation, Unicom
(formerly Commonwealth Edison) and
UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977- 1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D.
TSERETOPOULOS (50) Director Since 1990 21 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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas); Total Logistics, Inc. (formerly
Fort Lauderdale, FL 33394-3091 C2, Inc. (operating and investment
business)); and Weatherford
International, Ltd (oilfield products
and servicing) (2004-present); and
FORMERLY, 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 Technology Ventures Group, LLC (investment firms) and Franklin Templeton
Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets
Investments LDC (until 2004) and 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 (71) Director, Director and Vice 142 None
One Franklin Parkway Vice President President since
San Mateo, CA 94403-1906 and Chairman 1993 and
of the Board Chairman of 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice Since 1996 Not Applicable Not Applicable
One Franklin Parkway President
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.
- -----------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources,
Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (40) Vice Since 2001 Not Applicable Not Applicable
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 (44) Vice Since 1990 Not Applicable Not Applicable
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 (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
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.
- -----------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior 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 (57) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
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. (64) Vice Since 1996 Not Applicable Not Applicable
One Franklin Parkway President
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 (64) Vice Since 1994 Not Applicable Not Applicable
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 (67) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President
Rockefeller Center - AML
New York, NY 10020-2302 Compliance
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 39
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (68) Vice Since 1993 Not Applicable Not Applicable
17th Floor, The Chater House President
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 (60) President and President since Not Applicable Not Applicable
1 Adelaide Street East, Chief 1993 and Chief
Suite 2101 Executive Executive Officer -
Toronto, Ontario Canada Officer - Investment
M5C 3B8 Investment Management
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.
- -----------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton
Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- -----------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice Since 2000 Not Applicable Not Applicable
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).
- -----------------------------------------------------------------------------------------------------------------------------------
40 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- -----------------------------------------------------------------------------------------------------------------------------------
* 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 to be an interested person of Templeton
Institutional Funds, Inc. (TIFI) 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 TIFI'S
advisers and distributor. Nicholas F. Brady is considered to be an
interested person of TIFI under the federal securities laws due to his
ownership interest in a subsidiary of Resources, as well as his director
positions with such company and certain other related companies.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. 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 HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND
WAS FORMERLY CHAIRMAN FROM 1980-2000 AND 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 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. 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 U.S. 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 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT
1-800/321-8563 TO REQUEST THE SAI.
Annual Report | 41
TEMPLETON INSTITUTIONAL FUNDS, INC.
SHAREHOLDER INFORMATION
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. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the Securities and Exchange Commission's
website at sec.gov and reflect the 12-month period beginning July 1, 2003, and
ending June 30, 2004.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
42 | Annual Report
This page intentionally left blank.
This page intentionally left blank.
[LOGO] FRANKLIN TEMPLETON INSTITUTIONAL
FRANKLIN(R) TEMPLETON(R) 600 Fifth Avenue
INSTITUTIONAL New York, NY 10020
FRANKLINTEMPLETONINSTITUTIONAL.COM
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
This report must be preceded or accompanied by the current Templeton
Institutional Funds, Inc., Foreign Equity Series prospectus, which contains more
complete information including charges, expenses, and risk factors. 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.
ZT454 A2004 02/05
ANNUAL REPORT |
- --------------------------------------------------------------------- 12 31 2004
THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
- --------------------------------------------------------------------------------
TEMPLETON INSTITUTIONAL FUNDS, INC.
---------------------------------------
Emerging Markets Series
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INSTITUTIONAL
FRANKLIN o TEMPLETON o FIDUCIARY
CONTENTS
ANNUAL REPORT
- --------------------------------------------------------------------------------
TIFI Emerging Markets Series .............................................. 2
Performance Summary ....................................................... 6
Your Fund's Expenses ...................................................... 8
Financial Highlights and Statement of Investments ......................... 10
Financial Statements ...................................................... 16
Notes to Financial Statements ............................................. 19
Report of Independent Registered Public Accounting Firm ................... 29
Tax Designation ........................................................... 30
Board Members and Officers ................................................ 33
Shareholder Information ................................................... 40
------------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
------------------------------------------------------
Annual Report | 1
ANNUAL REPORT
TIFI EMERGING MARKETS SERIES
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund invests at
least 80% of its net assets in securities issued by emerging market companies.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES.
CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT
FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT
MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This is the Templeton Institutional Funds, Inc. (TIFI) Emerging Markets Series
(the "Fund") annual report for the fiscal year ended December 31, 2004.
PERFORMANCE OVERVIEW
The Fund posted a 26.40% cumulative total return for the 12-month period ended
December 31, 2004. The Fund underperformed the S&P/IFCI Composite Index(1),
which returned 28.11% for the period, but outperformed the MSCI Emerging Markets
Index,(2),(3) which returned 25.95% during the same period.
ECONOMIC AND MARKET OVERVIEW
In terms of stock market performance and economic developments, 2004 was another
positive year for emerging markets. The MSCI Emerging Markets Index(2) recorded
a 25.95% gain for the period (in U.S. dollar terms) as strong stock prices and a
sliding U.S. dollar boosted performance in the fourth quarter. Despite recording
double-digit gains, Asian stock markets did not perform as well as those in
other emerging markets regions as rising interest rates in the United States,
high commodity prices, and concerns over China's overheating economy continued
to affect sentiment. In Africa, U.S. investors
(1) Source: Standard & Poor's Micropal. The S&P/International Finance
Corporation Investable (IFCI) Composite Index is a free float-adjusted,
market capitalization-weighted index that is designed to measure the
equity performance of global emerging markets. The index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
(2) Source: Standard & Poor's Micropal. The Morgan Stanley Capital
International (MSCI) Emerging Markets Index is a free float-adjusted,
market capitalization-weighted index that is designed to measure equity
market performance in the global emerging markets. The index is unmanaged
and includes reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio.
(3) All MSCI data is presented "as is." The Fund described herein is not
sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or
any MSCI data provider have any liability of any kind in connection with
the MSCI data or the Fund described herein. Copying or distributing the
MSCI data is strictly prohibited.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S
STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11.
2 | Annual Report
in the South African market benefited from a strengthening rand, which greatly
enlarged the performance of that market (in U.S. dollar terms).
Latin American and Eastern European markets outperformed their emerging market
counterparts as both regions continued to attract greater investor interest.
Most Latin American economies recorded strong economic growth, which in turn was
reflected in the strong stock market performance of those countries. In Eastern
Europe, new member countries began to see positive developments as a result of
accession into the European Union (EU) in the form of higher investment inflows,
which boosted local stock markets. The Turkish market also recorded strong gains
as investors reacted favorably to approval from the EU to begin formal accession
talks for October 2005 as well as the government's new US$10 billion stand-by
agreement with the International Monetary Fund. Bucking the regional trend, the
Russian market underperformed as foreign investors remained cautious due to the
decimation of Yukos by the Russian government and new tax claims on Vimpelcom.
On December 26, the largest earthquake in 40 years struck in the Indian Ocean,
just north of Sumatra. Measuring 8.9 on the Richter Scale, the earthquake
created monster tidal waves, also known as tsunamis, that devastated the coastal
areas of Indonesia, Sri Lanka, Thailand, India, and the Maldives. The remoteness
of some of these areas has complicated aid relief to the victims. While the
tsunamis have had a devastating impact on the people in the region, it is
estimated that their impact on the economies is quite minimal.
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
In Asia, the Fund's largest purchases were undertaken in South Korea and Taiwan
as we increased exposure to the electronics and semiconductor sectors. Key
purchases included Samsung Electronics, one of the world's
GEOGRAPHIC DISTRIBUTION ON 12/31/04
EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Asia .............................. 56.0%
Europe ............................ 20.1%
Middle-East/Africa ................ 12.1%
Latin America ..................... 11.6%
Short-Term Investments &
Other Net Assets .................. 0.2%
SECTOR DIVERSIFICATION ON 12/31/04
EQUITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
Consumer Staples 22.6%
Financials 15.1%
Information Technology 11.7%
Telecommunication Services 10.9%
Energy 10.5%
Industrials 9.4%
Materials 9.0%
Consumer Discretionary 6.9%
Utilities 2.3%
Health Care 1.4%
Short-Term Investments &
Other Net Assets 0.2%
Annual Report | 3
10 LARGEST EQUITY POSITIONS
ON 12/31/04
PERCENTAGE OF TOTAL NET ASSETS
Samsung Electronics Co. Ltd. 4.1%
Anglo American PLC 3.1%
SABMiller PLC 3.0%
Kimberly Clark de Mexico SA de CV, A 2.7%
Remgro Ltd. 2.5%
Fraser & Neave Ltd. 2.3%
Cia de Bebidas das Americas (Ambev),ADR, pfd. 2.3%
MOL Magyar Olaj-Es Gazipari RT 2.2%
Inbev 2.2%
China Mobile (Hong Kong) Ltd., fgn. 2.2%
FUND ASSET ALLOCATION ON 12/31/04
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Equity ............................ 99.8%
Short-Term Investments &
Other Net Assets .................. 0.2%
largest electronics manufacturers, and Taiwan Semiconductor Manufacturing
Company, a leading global integrated circuit producer. Additional purchases
included South Korea's Daewoo Shipbuilding & Marine Engineering, a major player
in the global shipbuilding industry, and MediaTek, Taiwan's biggest integrated
circuit design company. Net sales were seen in Indonesia as the market enjoyed a
strong run in 2004, triggering our sell targets.
The Fund invested in several western European-listed companies with significant
business exposure and growth opportunities in emerging markets. They include
Oriflame Cosmetics, a cosmetic company with sales operations in over 50
countries and market leadership in more than 30 of them; Inbev, the product of a
merger between Interbrew and Ambev; and HSBC Holdings, one of the largest
banking and financial services organizations in the world.
Exposure to Latin America was reduced during the reporting period as the Fund
undertook selective sales in Brazil, Mexico, and Argentina in addition to
selling its only holding in Peru. Allowing the Fund to realize gains,
significant sales included Grupo Carso and Tenaris. Benefiting from a
strengthening rand and high commodity prices in 2004, the Fund locked in strong
U.S. dollar returns via sales in South African companies Anglo American plc and
Sasol, and BHP Billiton in the United Kingdom.
In terms of performance, the Fund's underweight position, relative to the MSCI
Emerging Markets Index, in Russia, as well as overweight positions in Austria
and Singapore were positive contributors. The Fund's decision not to hold Yukos
in Russia helped its performance as that company's stock price continued to
tumble on concerns of the Russian government's treatment of its assets. In
Austria, the strongest contributors to performance were OMV and Bank Austria
Creditanstalt. We believe both companies are well positioned to benefit from
increasing integration with Central and Eastern Europe. However, the Fund's
underweight positions in Brazil, Mexico, and South Africa were negative for
relative performance. All three markets recorded strong U.S. dollar performances
in 2004, resulting in increasingly expensive valuations.
With regard to sector performance, the Fund's weighting in the energy sector, on
par with the index, performed extremely well. The Fund's positions in MOL, OMV,
and SK Corp. contributed to its performance from the energy sector. Overweight
positions in the food, beverage and tobacco and diversified financials sectors
also reaped significant benefits. Within the food, beverage and tobacco sector,
SABMiller and Ambev accounted for the greatest relative performance. The Fund's
underweight position in the banking sector and overweight holdings in the
telecommunications sector resulted in negative attribution effects during the
period.
4 | Annual Report
In general, if the value of the U.S. dollar goes up compared with a foreign
currency, an investment traded in that foreign currency will go down in value
because it will be worth fewer U.S. dollars. This can have a negative effect on
Fund performance. Conversely, when the U.S. dollar weakens in relation to a
foreign currency, an investment traded in that foreign currency will increase in
value, which can contribute to Fund performance. For the 12 months ended
December 31, 2004, the U.S. dollar declined in value relative to most non-U.S.
currencies. At the end of the period, the Fund's portfolio was invested
predominantly in securities with non-U.S. currency exposure, which resulted in a
positive effect on Fund performance. However, one cannot expect the same result
in future periods.
We thank you for your continued participation in the Fund and look forward to
serving your investment needs.
Sincerely,
[PHOTO OMMITED] /s/ Mark Mobius,
Mark Mobius, Ph.D.
Managing Director
Templeton Asset Management Ltd.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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
PERFORMANCE SUMMARY AS OF 12/31/04
TOTAL RETURNS
Your dividend income will vary depending on the dividends or interest paid by
the securities in the Fund's portfolio. Capital gain distributions are net
profits realized from the sale of portfolio securities. The performance table
and graph do not reflect any taxes due on Fund dividends, capital gain
distributions, if any, or any realized gains on the sale of Fund shares. Total
return reflects reinvestment of the Fund's dividends and capital gain
distributions, if any, and any unrealized gains or losses. The unmanaged indices
include reinvested dividends. They differ from the Fund in composition and do
not pay management fees or expenses. One cannot invest directly in an index.
- ---------------------------------------------------------------------------------------------------------------------------------
THREE FIVE TEN AVERAGE CUMULATIVE
ONE YEAR YEAR YEAR ANNUAL SINCE
YEAR AVERAGE AVERAGE AVERAGE SINCE INCEPTION(1),(2)
CUMULATIVE(1),(2) ANNUAL(1),(3) ANNUAL(1),(3) ANNUAL(1),(3) INCEPTION(1),(3) (5/03/93)
- ---------------------------------------------------------------------------------------------------------------------------------
TIFI Emerging Markets Series 26.40% 25.62% 5.07% 5.52% 6.19% 101.56%
- ---------------------------------------------------------------------------------------------------------------------------------
S&P/IFCI Composite Index(4) 28.11% 24.59% 6.08% 4.10% 6.84% 116.42%
- ---------------------------------------------------------------------------------------------------------------------------------
MSCI Emerging Markets Index(5),(6) 25.95% 22.76% 4.62% 3.30% 6.55% 109.62%
- ---------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563.
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TIFI Emerging IFC Investable MSCI Emerging
Inception Date Markets Series Composite Index Markets Index
May-1993 * $5,000,000.00 $5,000,000.00 $ 5,000,000.00
May-93 5,010,000.00 5,109,019.23 5,187,255.63
Jun-93 5,030,000.00 5,254,042.96 5,341,071.39
Jul-93 5,040,000.00 5,417,169.52 5,482,149.37
Aug-93 5,415,000.00 5,857,068.15 5,945,052.77
Sep-93 5,590,000.00 6,092,807.14 6,162,494.18
Oct-93 5,840,000.00 6,605,720.49 6,715,410.45
Nov-93 6,040,000.00 7,024,499.16 7,012,583.31
Dec-93 6,646,553.30 8,224,515.25 8,171,734.77
Jan-94 6,726,995.70 8,281,438.57 8,320,409.84
Feb-94 6,596,276.80 8,066,417.25 8,172,393.18
Mar-94 6,256,984.66 7,252,795.88 7,432,879.70
Apr-94 5,912,191.34 7,115,013.28 7,284,204.64
May-94 5,917,261.83 7,282,363.83 7,533,503.17
Jun-94 5,775,288.11 7,021,683.16 7,325,849.35
Jul-94 5,993,319.18 7,526,148.52 7,781,358.26
Aug-94 6,485,156.71 8,493,643.90 8,747,125.77
Sep-94 6,556,143.57 8,704,441.23 8,846,533.70
Oct-94 6,373,605.93 8,418,215.46 8,686,956.81
Nov-94 6,130,222.41 8,101,013.76 8,235,284.44
Dec-94 5,889,313.63 7,237,911.34 7,573,856.38
Jan-95 5,458,516.38 6,270,415.96 6,768,070.95
Feb-95 5,342,934.63 6,189,355.54 6,594,477.42
Mar-95 5,516,645.80 6,173,264.14 6,636,375.38
Apr-95 5,706,148.90 6,432,335.67 6,934,092.70
May-95 5,895,652.00 6,673,103.23 7,302,982.11
Jun-95 5,937,763.80 6,713,130.58 7,324,583.17
Jul-95 6,211,490.50 6,926,743.91 7,488,996.88
Aug-95 6,043,043.30 6,741,089.39 7,312,592.43
Sep-95 5,995,667.53 6,689,999.20 7,277,886.39
Oct-95 5,779,844.55 6,437,565.37 6,999,288.41
Nov-95 5,742,996.73 6,405,382.57 6,874,468.20
Dec-95 5,817,158.25 6,628,248.45 7,179,364.78
Jan-96 6,374,523.18 7,183,602.86 7,689,686.70
Feb-96 6,271,473.40 7,024,096.87 7,567,424.18
Mar-96 6,347,425.50 7,126,679.54 7,626,364.94
Apr-96 6,515,605.15 7,414,112.16 7,931,286.85
May-96 6,624,108.15 7,348,941.99 7,895,871.74
Jun-96 6,634,958.45 7,436,237.83 7,945,176.86
Jul-96 6,331,150.05 6,947,662.72 7,402,174.79
Aug-96 6,461,353.65 7,163,086.33 7,591,646.24
Sep-96 6,580,706.95 7,268,887.28 7,657,411.72
Oct-96 6,564,431.50 7,112,800.71 7,453,189.26
Nov-96 6,776,012.35 7,217,797.09 7,578,072.77
Dec-96 6,914,456.10 7,249,376.46 7,612,348.31
Jan-97 7,425,403.86 7,761,485.24 8,131,584.15
Feb-97 7,708,423.28 8,141,644.54 8,479,822.13
Mar-97 7,552,472.52 7,937,686.06 8,257,075.42
Apr-97 7,624,878.23 7,802,920.59 8,271,661.84
May-97 7,986,906.78 8,068,227.53 8,508,399.85
Jun-97 8,276,529.62 8,416,606.32 8,963,744.15
Jul-97 8,655,267.18 8,497,867.89 9,097,554.24
Aug-97 7,886,652.72 7,412,905.30 7,939,896.88
Sep-97 8,254,250.94 7,654,276.29 8,159,895.97
Oct-97 6,717,022.02 6,398,342.59 6,820,959.36
Nov-97 6,221,321.39 6,100,450.56 6,572,078.67
Dec-97 6,131,713.60 6,181,108.70 6,730,452.69
Jan-98 5,635,027.06 5,775,806.58 6,202,581.49
Feb-98 6,190,842.95 6,365,556.36 6,849,980.25
Mar-98 6,433,876.04 6,615,174.19 7,147,241.75
Apr-98 6,445,746.66 6,633,075.87 7,069,384.23
May-98 5,537,644.23 5,805,575.67 6,100,590.55
Jun-98 5,003,466.33 5,210,596.19 5,460,662.26
Jul-98 5,039,078.19 5,418,376.38 5,633,799.96
Aug-98 3,869,822.12 3,895,124.31 4,004,844.41
Sep-98 4,065,687.35 4,082,589.11 4,258,891.13
Oct-98 4,677,024.28 4,551,452.25 4,707,360.06
Nov-98 5,181,525.63 4,893,796.77 5,098,863.48
Dec-98 5,026,104.06 4,820,782.04 5,024,969.11
Jan-99 4,784,173.66 4,709,349.10 4,943,895.48
Feb-99 4,784,173.66 4,793,225.52 4,991,985.07
Mar-99 5,452,933.09 5,347,171.94 5,649,880.47
Apr-99 6,518,100.93 6,076,313.46 6,348,888.80
May-99 6,342,590.32 5,929,278.30 6,311,954.28
Jun-99 6,959,903.50 6,618,392.47 7,028,309.29
Jul-99 6,651,246.91 6,522,246.36 6,837,381.74
Aug-99 6,415,215.40 6,592,646.23 6,899,589.25
Sep-99 6,130,767.17 6,409,003.14 6,666,092.66
Oct-99 6,306,277.78 6,518,022.37 6,808,031.64
Nov-99 6,838,861.70 7,103,950.44 7,418,470.55
Dec-99 7,870,057.80 8,056,158.98 8,361,953.26
Jan-00 7,516,210.24 8,067,624.10 8,411,790.18
Feb-00 7,247,774.16 8,059,779.55 8,522,884.97
Mar-00 7,342,709.00 8,177,649.05 8,564,479.04
Apr-00 6,707,927.84 7,331,643.74 7,752,628.59
May-00 6,170,805.32 7,127,484.11 7,432,119.99
Jun-00 6,628,580.19 7,329,230.03 7,693,915.74
Jul-00 6,347,811.60 6,976,828.39 7,298,221.27
Aug-00 6,469,884.90 7,003,178.05 7,334,104.86
Sep-00 5,835,103.74 6,376,820.34 6,693,720.75
Oct-00 5,346,810.54 5,860,487.57 6,208,405.93
Nov-00 5,066,041.95 5,342,746.80 5,665,581.13
Dec-00 5,350,568.01 5,497,425.38 5,802,366.75
Jan-01 5,956,059.54 6,203,435.51 6,601,352.79
Feb-01 5,486,494.68 5,725,520.96 6,084,459.39
Mar-01 4,973,680.43 5,232,319.58 5,486,846.90
Apr-01 5,233,176.80 5,542,079.01 5,757,961.75
May-01 5,418,531.35 5,709,831.84 5,826,690.10
Jun-01 5,393,817.41 5,606,444.61 5,707,086.57
Jul-01 5,078,714.67 5,223,268.16 5,346,452.67
Aug-01 5,097,250.13 5,152,264.86 5,293,716.19
Sep-01 4,460,866.17 4,353,528.04 4,474,357.29
Oct-01 4,596,792.84 4,623,461.26 4,752,030.96
Nov-01 4,874,824.67 5,165,137.98 5,248,158.97
Dec-01 5,083,257.28 5,594,778.34 5,664,732.78
Jan-02 5,347,486.00 5,794,512.83 5,856,698.61
Feb-02 5,341,194.84 5,906,348.06 5,952,915.76
Mar-02 5,661,423.04 6,317,885.59 6,310,991.98
Apr-02 5,850,557.44 6,376,418.05 6,351,952.96
May-02 5,812,730.56 6,272,025.10 6,250,747.05
Jun-02 5,447,070.72 5,819,454.50 5,781,803.95
Jul-02 5,157,064.64 5,450,961.46 5,342,021.03
Aug-02 5,144,455.68 5,521,562.47 5,424,322.85
Sep-02 4,766,186.88 4,908,077.88 4,839,131.60
Oct-02 4,892,276.48 5,223,268.16 5,153,132.03
Nov-02 5,289,458.72 5,585,928.07 5,507,840.20
Dec-02 5,182,639.20 5,374,728.46 5,324,838.94
Jan-03 5,125,054.32 5,379,153.59 5,301,655.15
Feb-03 5,118,656.00 5,220,049.88 5,158,563.95
Mar-03 4,933,401.60 5,028,361.09 5,012,294.63
Apr-03 5,447,297.60 5,541,877.87 5,458,750.33
May-03 5,768,482.60 5,927,266.88 5,850,684.24
Jun-03 5,961,193.60 6,294,150.78 6,183,981.28
Jul-03 6,218,141.60 6,632,472.44 6,571,103.71
Aug-03 6,513,631.80 7,110,990.43 7,012,330.08
Sep-03 6,706,342.80 7,188,631.43 7,063,737.06
Oct-03 7,226,662.50 7,772,346.93 7,664,844.21
Nov-03 7,374,407.60 7,872,314.75 7,759,048.14
Dec-03 7,973,126.82 8,446,375.41 8,321,536.74
Jan-04 8,228,633.76 8,735,014.88 8,617,076.23
Feb-04 8,530,000.92 9,155,804.97 9,014,581.35
Mar-04 8,521,264.80 9,324,764.66 9,130,411.66
Apr-04 8,041,286.15 8,621,369.38 8,383,934.18
May-04 7,942,660.40 8,504,304.45 8,218,811.41
Jun-04 8,107,036.65 8,504,706.73 8,256,353.70
Jul-04 7,982,110.70 8,329,712.77 8,110,362.94
Aug-04 8,251,687.75 8,702,027.52 8,449,864.27
Sep-04 8,679,066.00 9,204,481.45 8,937,901.38
Oct-04 8,935,492.95 9,470,592.97 9,152,025.38
Nov-04 9,619,298.15 10,293,466.89 9,999,734.10
Dec-04 10,078,173.39 10,821,063.64 10,481,136.42
6 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY
VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS
INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE
ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(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) Cumulative total return shows the change in value of an investment over
the indicated periods. It assumes income dividends and capital gain
distributions are reinvested at net asset value, the account was
completely redeemed at the end of each period, and the deduction of all
applicable charges and fees.
(3) Average annual total return represents the change in value of an
investment over the indicated periods.
(4) Source: Standard & Poor's Micropal. The S&P/International Finance
Corporation Investable (IFCI) Composite Index is a free float-adjusted,
market capitalization-weighted index that is designed to measure the
equity performance of global emerging markets. The index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
(5) Source: Standard & Poor's Micropal. The Morgan Stanley Capital
International (MSCI) Emerging Markets Index is a free float-adjusted,
market capitalization-weighted index that is designed to measure equity
market performance in the global emerging markets. The index is unmanaged
and includes reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio.
(6) All MSCI data is presented "as is." The Fund described herein is not
sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or
any MSCI data provider have any liability of any kind in connection with
the MSCI data or the Fund described herein. Copying or distributing the
MSCI data is strictly prohibited.
Annual Report | 7
YOUR FUND'S EXPENSES
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
8 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES, IF APPLICABLE. Therefore, the second line for each class is
useful in comparing ongoing costs only, and will not help you compare total
costs of owning different funds. In addition, if transaction costs were
included, your total costs would have been higher. Please refer to the Fund
prospectus for additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE ON 6/30/04 VALUE ON 12/31/04 PERIOD* 6/30/04-12/31/04
- -----------------------------------------------------------------------------------------------------------
Actual $ 1,000.00 $ 1,243.10 $ 8.06
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,017.95 $ 7.25
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.43%
multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Annual Report | 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
EMERGING MARKETS SERIES
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.18 $ 8.10 $ 8.08 $ 8.66 $ 12.90
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ................... .21 .24 .14 .15 .13
Net realized and unrealized gains (losses) . 2.97 4.10 .02 (.58) (4.26)
---------------------------------------------------------------------------
Total from investment operations ............ 3.18 4.34 .16 (.43) (4.13)
---------------------------------------------------------------------------
Less distributions from net investment income (.27) (.26) (.14) (.15) (.11)
---------------------------------------------------------------------------
Redemption fees ............................. --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of year ................ $ 15.09 $ 12.18 $ 8.10 $ 8.08 $ 8.66
===========================================================================
Total return(b) ............................. 26.40% 53.84% 1.96% (5.00)% (32.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 2,063,532 $ 2,092,229 $ 1,234,595 $ 1,274,579 $ 1,676,028
Ratios to average net assets:
Expenses ................................... 1.45% 1.46% 1.49% 1.45% 1.47%
Net investment income ...................... 1.62% 2.52% 1.67% 1.85% 1.21%
Portfolio turnover rate ..................... 52.07% 46.83% 53.36% 64.92% 82.86%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.001 per share.
10 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 94.0%
ARGENTINA .3%
Tenaris SA, ADR ........................ Energy Equipment & Services 124,701 $ 6,097,879
--------------
AUSTRIA 2.9%
Bank Austria Creditanstalt ............. Commercial Banks 501,500 45,255,591
OMV AG ................................. Oil & Gas 48,632 14,630,120
--------------
59,885,711
--------------
BELGIUM 2.2%
Inbev .................................. Beverages 1,179,400 45,676,703
--------------
BRAZIL 1.5%
Centrais Eletricas Brasileiras SA ...... Electric Utilities 523,418,000 7,587,195
Centrais Eletricas Brasileiras SA
(Non-Taxable) Electric Utilities 82,221,000 1,191,833
Embraer-Empresa Brasileiras de
Aeronautica SA ........................ Aerospace & Defense 78,058 464,351
Embraer-Empresa Brasileira de
Aeronautica SA, ADR ................... Aerospace & Defense 1 11
Souza Cruz SA (Non-Taxable) ............ Tobacco 1,411,873 18,934,833
Unibanco Uniao de Bancos
Brasileiros SA, GDR ................... Commercial Banks 90,700 2,877,004
--------------
31,055,227
--------------
CHINA 7.4%
(a) Air China Ltd., 144A .................. Airlines 3,836,000 1,480,547
Aluminum Corp. of China Ltd., H ........ Metals & Mining 13,566,000 8,028,458
Anhui Conch Cement Co. Ltd. ............ Construction Materials 6,384,000 6,940,202
China Mobile (Hong Kong) Ltd., fgn. .... Wireless Telecommunication Services 13,403,000 45,436,529
China Petroleum & Chemical Corp., H .... Oil & Gas 25,700,000 10,580,486
China Resources Enterprise Ltd. ........ Distributors 14,440,000 22,571,789
China Travel International Investment
Hong Kong Ltd. ........................ Hotels Restaurants & Leisure 45,688,000 14,694,833
Denway Motors Ltd. ..................... Automobiles 10,393,000 3,710,448
Huadian Power International Corp.
Ltd., H ............................... Electric Utilities 19,420,000 5,746,449
Lenovo Group Ltd. ...................... Computers & Peripherals 4,216,045 1,261,103
PetroChina Co. Ltd., H ................. Oil & Gas 26,032,000 13,898,827
Shanghai Industrial Holdings Ltd. ...... Industrial Conglomerates 5,814,000 12,416,684
Travelsky Technology Ltd., H ........... IT Services 6,334,000 5,133,826
--------------
151,900,181
--------------
CROATIA .6%
Pliva D D, GDR, Reg S .................. Pharmaceuticals 1,032,800 12,858,360
--------------
GREECE 1.4%
Hellenic Telecommunications
Organization SA (OTE) ................. Diversified Telecommunication Services 468,640 8,407,183
Titan Cement Co. ....................... Construction Materials 664,140 19,646,979
--------------
28,054,162
--------------
Annual Report | 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HONG KONG 3.2%
Cheung Kong Holdings Ltd. .............. Real Estate 3,165,000 $ 31,557,161
Cheung Kong Infrastructure Holdings Ltd. Electric Utilities 2,382,000 6,879,876
Guoco Group Ltd. ....................... Diversified Financial Services 1,194,000 11,674,557
Henderson Investment Ltd. .............. Real Estate 4,770,000 6,965,251
MTR Corp. Ltd. ......................... Road & Rail 6,045,826 9,683,838
--------------
66,760,683
--------------
HUNGARY 3.9%
Egis RT ................................ Pharmaceuticals 22,359 1,348,717
Gedeon Richter Ltd. .................... Pharmaceuticals 105,988 13,314,486
Matav RT ............................... Diversified Telecommunication Services 3,946,593 18,892,103
MOL Magyar Olaj-Es Gazipari RT ......... Oil & Gas 650,154 45,730,256
--------------
79,285,562
--------------
INDIA 3.3%
Gail (India) Ltd. ...................... Gas Utilities 1,927,980 10,284,046
Hindustan Lever Ltd. ................... Household Products 6,636,800 22,020,365
Hindustan Petroleum Corp. Ltd. ......... Oil & Gas 2,709,000 25,085,653
Tata Motors Ltd. ....................... Automobiles 158,800 1,854,747
Tata Tea Ltd. .......................... Food Products 797,625 8,727,770
--------------
67,972,581
--------------
INDONESIA
PT Bank Danamon ........................ Commercial Banks 500,000 235,659
PT Perusahaan Gas Negara ............... Gas Utilities 350,000 71,640
--------------
307,299
--------------
MALAYSIA 1.2%
Kuala Lumpur Kepong Bhd. ............... Food Products 418,486 759,883
Resorts World Bhd. ..................... Hotels Restaurants & Leisure 3,836,000 10,094,737
SIME Darby Bhd. ........................ Industrial Conglomerates 3,895,600 6,150,947
Tanjong PLC ............................ Hotels Restaurants & Leisure 587,200 2,178,821
YTL Corp. Bhd. ......................... Electric Utilities 826,900 1,164,188
YTL Power International Bhd. ........... Water Utilities 8,343,900 3,952,374
--------------
24,300,950
--------------
MEXICO 4.0%
Fomento Economico Mexicano SA de CV
Femsa, ADR ............................ Beverages 327,190 17,213,466
Kimberly Clark de Mexico SA de CV, A ... Household Products 15,955,381 55,166,786
Telefonos de Mexico SA de CV
(Telmex), L, ADR ...................... Diversified Telecommunication Services 266,584 10,215,499
--------------
82,595,751
--------------
PHILIPPINES 1.3%
San Miguel Corp., B .................... Beverages 19,431,544 25,966,429
--------------
POLAND 3.2%
Polski Koncern Naftowy Orlen SA ........ Oil & Gas 2,328,571 29,218,252
Telekomunikacja Polska SA .............. Diversified Telecommunication Services 5,635,193 37,037,949
--------------
66,256,201
--------------
12 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
RUSSIA .8%
(b) Lukoil Holdings, ADR ................... Oil & Gas 142,350 $ 17,281,290
--------------
SINGAPORE 8.0%
Comfortdelgro Corp. Ltd. ............... Road & Rail 15,612,000 14,824,848
Dairy Farm International Holdings Ltd. . Food & Staples Retailing 3,171,319 7,674,592
Fraser & Neave Ltd. .................... Beverages 4,771,318 47,645,949
Keppel Corp. Ltd. ...................... Industrial Conglomerates 7,921,053 41,733,171
Singapore Press Holdings Ltd. .......... Media 3,232,500 9,109,539
Singapore Technologies Engineering Ltd. Aerospace & Defense 9,398,000 13,415,022
Singapore Telecommunications Ltd. ...... Diversified Telecommunication Services 19,195,428 27,988,188
(a) Suntec Real Estate Investment Trust .... Real Estate 3,308,000 2,249,513
--------------
164,640,822
--------------
SOUTH AFRICA 12.1%
Anglo American PLC ..................... Metals & Mining 2,713,904 63,955,196
Liberty Group Ltd. ..................... Insurance 61,975 728,603
Nedcor Ltd. ............................ Commercial Banks 1,053,819 14,472,572
Nedcor Ltd., 144A ...................... Commercial Banks 251,125 3,448,813
Old Mutual PLC ......................... Insurance 7,880,970 20,043,543
Remgro Ltd. ............................ Diversified Financial Services 3,137,613 52,262,165
SABMiller PLC .......................... Beverages 3,631,726 61,191,217
Sappi Ltd. ............................. Paper & Forest Products 917,500 13,442,630
Sasol Ltd. ............................. Oil & Gas 969,000 20,697,087
--------------
250,241,826
--------------
SOUTH KOREA 17.7%
CJ Corp. ............................... Food Products 386,390 26,426,209
(a) Daewoo Shipbuilding & Marine
Engineering Co. Ltd. .................. Machinery 2,043,510 30,399,975
(a) Hite Brewery Co. Ltd. .................. Beverages 277,400 22,911,225
(a) Hyundai Development Co. ................ Construction & Engineering 1,717,910 27,381,680
(a) Kangwon Land Inc. ...................... Hotels Restaurants & Leisure 2,296,897 29,842,798
(a) Kia Motors Corp. ....................... Automobiles 565,830 5,957,831
Korea Gas Corp. ........................ Gas Utilities 361,170 11,199,340
LG Chem Ltd. ........................... Chemicals 461,590 18,393,149
LG Electronics Inc. .................... Household Durables 175,230 10,850,312
LG Household & Health Care Ltd. ........ Household Products 373,070 9,892,554
(a) LG International Corp. ................. Trading Companies & Distributors 629,590 4,895,865
(a) LG Petrochemical Co. Ltd. .............. Chemicals 285,220 7,163,562
POSCO .................................. Metals & Mining 78,360 14,155,062
Samsung Electronics Co. Ltd. ........... Semiconductors & Semiconductor Equipment 194,480 84,634,119
Samsung Fine Chemicals Co. Ltd. ........ Chemicals 848,500 14,589,741
Samsung Heavy Industries Co. Ltd. ...... Machinery 4,320,670 26,962,450
SK Corp. ............................... Oil & Gas 107,580 5,913,159
SK Telecom Co. Ltd. .................... Wireless Telecommunication Services 66,120 12,582,728
--------------
364,151,759
--------------
Annual Report | 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SWEDEN .5%
(a) Oriflame Cosmetics, IDR ................ Personal Products 439,100 $ 10,178,274
--------------
TAIWAN 13.0%
Acer Inc. .............................. Computers & Peripherals 9,412,480 15,544,360
Chunghwa Telecom Co. Ltd. .............. Diversified Telecommunication Services 10,185,000 20,023,986
D-Link Corp. ........................... Communications Equipment 15,633,488 18,195,629
Delta Electronics Inc. ................. Electronic Equipment & Instruments 19,099,661 33,645,204
Elan Microelectronics Corp. ............ Semiconductors & Semiconductor Equipment 10,841,178 6,104,344
Kinpo Electronics Inc. ................. Office Electronics 4,926,360 2,146,275
Lite-on Technology Corp. ............... Computers & Peripherals 17,060,000 18,192,325
MediaTek Inc. .......................... Semiconductors & Semiconductor Equipment 1,591,000 10,810,192
Mega Financial Holdings Co. Ltd. ....... Commercial Banks 25,308,032 17,434,599
Premier Image Technology Corp. ......... Leisure Equipment & Products 3,021,000 2,974,435
President Chain Store Corp. ............ Food & Staples Retailing 6,175,010 9,906,433
Siliconware Precision
Industries Co. Ltd. ................... Semiconductors & Semiconductor Equipment 9,059,000 7,466,052
Sunplus Technology Co. Ltd. ............ Semiconductors & Semiconductor Equipment 7,953,010 11,157,730
Synnex Technology International Corp. .. Electronic Equipment & Instruments 1,967,300 2,902,371
Taiwan Cellular Corp. .................. Wireless Telecommunication Services 38,611,878 43,118,014
Taiwan Semiconductor Manufacturing Co. . Semiconductors & Semiconductor Equipment 15,202,000 24,149,135
UNI-President Enterprises Corp. ........ Food Products 30,200,180 15,769,833
Yuanta Core Pacific Securities Co. ..... Capital Markets 11,817,321 8,958,711
--------------
268,499,628
--------------
THAILAND .9%
BEC World Public Co. Ltd., fgn. ........ Media 5,417,500 2,187,960
(a) Kasikornbank Public Co. Ltd., fgn. ..... Commercial Banks 3,122,500 4,498,122
Land and House Public Co. Ltd., fgn. ... Real Estate 4,872,400 1,416,322
Shin Corp. Public Co. Ltd., fgn. ....... Wireless Telecommunication Services 303,300 310,135
Siam Cement Public Co. Ltd., fgn. ...... Construction Materials 210,100 1,491,681
Thai Airways International
Public Co. Ltd., fgn. ................. Airlines 339,400 423,442
(a) Thai Military Bank Public Co. Ltd., fgn. Commercial Banks 86,332,200 8,350,288
(a) True Corp., PLC, rts., 3/28/08 ........ Diversified Telecommunication Services 2,088,420 --
--------------
18,677,950
--------------
TURKEY 2.8%
(a) Arcelik AS, Br. ........................ Household Durables 4,144,860,210 25,357,877
Migros Turk T.A.S. ..................... Food & Staples Retailing 1,846,402,500 15,335,341
Tupras-Turkiye Petrol Rafineleri AS .... Oil & Gas 948,100,000 9,632,162
(a) Turk Hava Yollari Anonim
Ortakligi (THY), 144A ................. Airlines 498,278,000 2,937,568
Turkiye Is Bankasi AS, C ............... Commercial Banks 923,229,000 5,100,523
--------------
58,363,471
--------------
14 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
UNITED KINGDOM 1.8%
HSBC Holdings PLC ...................... Commercial Banks 1,621,407 $ 27,743,816
Provident Financial PLC ................ Consumer Finance 755,730 9,747,985
--------------
37,491,801
--------------
TOTAL COMMON STOCKS
(COST $1,303,529,081).................. 1,938,500,500
--------------
PREFERRED STOCKS 5.8%
BRAZIL 5.8%
Banco Bradesco SA, ADR, pfd. ........... Commercial Banks 1,527,473 38,278,461
Cia de Bebidas das Americas
(Ambev), ADR, pfd. .................... Beverages 1,658,000 46,971,140
Cia Vale do Rio Doce, A, ADR, pfd. ..... Metals & Mining 451,500 11,007,570
Petroleo Brasileiro SA, ADR, pfd. ...... Oil & Gas 471,955 17,089,491
Suzano Bahia Sul Papel e Cel, pfd., A .. Paper & Forest Products 403,005 2,083,305
Usinas Siderurgicas de Minas Gerais SA,
pfd. Metals & Mining 239,370 4,862,203
--------------
TOTAL PREFERRED STOCKS
(COST $85,484,411)..................... 120,292,170
--------------
TOTAL INVESTMENTS
(COST $1,389,013,492) 99.8%............ 2,058,792,670
OTHER ASSETS, LESS LIABILITIES .2%...... 4,739,067
--------------
NET ASSETS 100.0%....................... $2,063,531,737
==============
(a) Non-income producing.
(b) See Note 7 regarding other considerations.
Annual Report | See notes to financial statements. | 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004
---------------
EMERGING
MARKETS SERIES
---------------
Assets:
Investments in securities:
Cost ...................................................... $ 1,389,013,492
===============
Value ..................................................... 2,058,792,670
Foreign currency, at value (cost $1,178,121) ............... 1,169,178
Receivables:
Investment securities sold ................................ 21,183,452
Capital shares sold ....................................... 2,358,288
Dividends ................................................. 2,201,320
Foreign income tax receivable ............................. 1,196,587
---------------
Total assets .......................................... 2,086,901,495
---------------
Liabilities:
Payables:
Capital shares redeemed ................................... 3,036,398
Affiliates ................................................ 2,254,047
Funds advanced by custodian ................................ 16,989,718
Deferred tax ............................................... 823,690
Other liabilities .......................................... 265,905
---------------
Total liabilities ..................................... 23,369,758
---------------
Net assets, at value ................................ $ 2,063,531,737
===============
Net assets consist of:
Distributions in excess of net investment income ........... $ (24,856,992)
Net unrealized appreciation (depreciation) ................. 669,062,187
Accumulated net realized gain (loss) ....................... (357,265,668)
Capital shares ............................................. 1,776,592,210
---------------
Net assets, at value ........................................ $ 2,063,531,737
===============
Shares outstanding .......................................... 136,784,855
===============
Net asset value per share(a) ................................ $ 15.09
===============
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
16 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2004
---------------
EMERGING
MARKETS SERIES
---------------
Investment income:
Dividends (net of foreign taxes of $6,754,952) ............ $ 59,496,184
Interest (net of foreign taxes of $570) ................... 573,520
---------------
Total investment income ............................... 60,069,704
---------------
Expenses:
Management fees (Note 3) ................................... 24,162,871
Administrative fees (Note 3) ............................... 1,634,663
Transfer agent fees (Note 3) ............................... 15,395
Custodian fees (Note 4) .................................... 2,027,509
Reports to shareholders .................................... 17,200
Registration and filing fees ............................... 200,290
Professional fees .......................................... 170,200
Directors' fees and expenses ............................... 54,717
Other ...................................................... 60,130
---------------
Total expenses ............................................ 28,342,975
Expense reductions (Note 4) ............................... (3,661)
---------------
Net expenses .......................................... 28,339,314
---------------
Net investment income ............................... 31,730,390
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (net of foreign taxes of $6,579,346) .......... 273,346,139
Foreign currency transactions ............................. (1,120,140)
---------------
Net realized gain (loss) .............................. 272,225,999
Net change in unrealized appreciation (depreciation) on:
Investments ............................................... 144,192,988
Translation of assets and liabilities denominated in
foreign currencies ....................................... (343,039)
Deferred taxes ............................................ 7,834,479
---------------
Net change in unrealized appreciation (depreciation) .. 151,684,428
---------------
Net realized and unrealized gain (loss) ..................... 423,910,427
---------------
Net increase (decrease) in net assets resulting from
operations ................................................. $ 455,640,817
===============
Annual Report | See notes to financial statements. | 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2004 and 2003
----------------------------------
EMERGING MARKETS SERIES
----------------------------------
2004 2003
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................... $ 31,730,390 $ 37,583,452
Net realized gain (loss) from investments and foreign currency transactions .............. 272,225,999 86,593,773
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ........... 151,684,428 568,161,877
----------------------------------
Net increase (decrease) in net assets resulting from operations ...................... 455,640,817 692,339,102
Distributions to shareholders from net investment income .................................... (39,319,998) (43,484,955)
Capital share transactions (Note 2) ......................................................... (445,018,905) 208,779,714
Redemption fees ............................................................................. 913 --
----------------------------------
Net increase (decrease) in net assets ................................................ (28,697,173) 857,633,861
Net assets:
Beginning of year .......................................................................... 2,092,228,910 1,234,595,049
----------------------------------
End of year ................................................................................ $ 2,063,531,737 $ 2,092,228,910
==================================
Distributions in excess of net investment income included in net assets:
End of year ................................................................................ $ (24,856,992) $ (12,907,170)
==================================
18 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Emerging Markets Series (the Fund) is a separate, diversified series of
Templeton Institutional Funds, Inc. (the Company). The Company 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 issued by emerging market companies. The following
summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System, are valued at the last quoted sale price or the official closing price
of the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE on the day that the
value of the foreign security is determined. If no sale is reported at that
time, the foreign security will be valued within the range of the most recent
quoted bid and ask prices.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Occasionally, events occur between the
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the Fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
Annual Report | 19
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION (CONTINUED)
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 on the
Statement of Operations.
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 on these
contracts 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 AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. When the Fund invests in these securities, the Fund
records an estimated deferred tax liability for net unrealized gains.
20 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 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 expenses, during the reporting period. Actual results could differ from
those estimates.
G. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 1% of
the amount redeemed. Effective March 1, 2005, the fee will increase to 2%. Such
fees are retained by the Fund and accounted for as additional paid-in capital as
noted in the Statements of Changes in Net Assets.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund 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.
Annual Report | 21
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
2. CAPITAL STOCK
At December 31, 2004, 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,
2004 2003
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
Shares sold ................... 38,933,946 $ 502,321,321 50,763,689 $ 484,473,625
Shares issued in reinvestment
of distributions .............. 2,567,946 35,813,965 3,654,518 40,669,079
Shares redeemed ............... (76,560,769) (983,154,191) (34,900,576) (316,362,990)
--------------------------------------------------------------
Net increase (decrease) ....... (35,058,877) $(445,018,905) 19,517,631 $ 208,779,714
==============================================================
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of the
following entities:
- --------------------------------------------------------------------------------------
ENTITY AFFILIATION
- --------------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to TAML based on the Fund's average
daily net assets as follows:
- -----------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- -----------------------------------------------------------------------
1.250% Up to and including $1 billion
1.200% Over $1 billion, up to and including $5 billion
1.150% Over $5 billion, up to and including $10 billion
1.100% Over $10 billion, up to and including $15 billion
1.050% Over $15 billion, up to and including $20 billion
1.000% Over $20 billion
Prior to May 1, 2004, the Fund paid an investment management fee to TAML of
1.25% per year of the average daily net assets of the Fund.
22 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Fund pays its allocated share of an administrative fee to FT Services based
on the aggregate daily net assets of certain funds within the Company as
follows:
- -------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- -------------------------------------------------------------------------
0.150% Up to and including $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
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $15,395, of which $2,999 was paid to
Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At December 31, 2004 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:
2008 ................................................ $ 17,699,013
2009 ................................................ 248,561,095
2010................................................. 87,334,612
-------------
$ 353,594,720
=============
At December 31, 2004 the Fund had deferred currency losses occurring subsequent
to October 31, 2004 of $108,607. For tax purposes, such losses will be reflected
in the year ending December 31, 2005.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, passive
foreign investment company shares, and foreign taxes paid on net realized gains.
Annual Report | 23
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
5. INCOME TAXES (CONTINUED)
Net realized losses differ for financial statement and tax purposes primarily
due to differing treatments of wash sales, foreign currency transactions,
passive foreign investment company shares, and foreign taxes paid on net
realized gains.
At December 31, 2004, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments .................................. $ 1,428,740,590
===============
Unrealized appreciation .............................. $ 638,195,924
Unrealized depreciation .............................. (8,143,844)
---------------
Net unrealized appreciation (depreciation) ........... $ 630,052,080
===============
Distributable earnings - undistributed
ordinary income ..................................... $ 11,307,765
===============
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
---------------------------
2004 2003
---------------------------
Distributions paid from - ordinary income. $ 39,319,998 $ 43,484,955
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended December 31, 2004 aggregated $987,529,533 and $1,357,342,003,
respectively.
7. OTHER CONSIDERATIONS
Templeton Asset Management Ltd., as the Fund's Manager, may serve as a member on
the board of directors of certain companies in which the Fund invests and/or may
represent the Fund in certain corporate negotiations. At December 31, 2004, the
Manager serves in one or more of these capacities for Lukoil Holdings. As a
result of this involvement, the Manager may be in possession of certain material
non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time.
24 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
8. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
Annual Report | 25
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
8. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
26 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
8. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
Annual Report | 27
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
8. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
The Company and fund management strongly believes that the claims made in each
of the lawsuits identified above are without merit and intends to vigorously
defend against them. The Company cannot predict with certainty, however, the
eventual outcome of the remaining governmental investigations or private
lawsuits, nor whether they will have a material negative impact on the Company.
Public trust and confidence are critical to the Company's business and any
material loss of investor and/or client confidence could result in a significant
decline in assets under management by the Company, which would have an adverse
effect on the Company's future financial results. If the Company finds that it
bears responsibility for any unlawful or inappropriate conduct that caused
losses to the Fund, it is committed to making the Fund or its shareholders
whole, as appropriate. The Company is committed to taking all appropriate
actions to protect the interests of its funds' shareholders.
28 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the Emerging Markets Series of
Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004, 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards 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, 2004 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 9, 2005
Annual Report | 29
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED)
EMERGING MARKETS SERIES
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby
designates up to a maximum of $29,407,093 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2004. In January 2005, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2004. 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, 2004 more than 50% of the 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 Code. This
designation will allow shareholders of record on December 9, 2004, 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.
30 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
EMERGING MARKETS SERIES
- ------------------------------------------------------------------------
ADJUSTED
FOREIGN FOREIGN FOREIGN
FOREIGN TAX SOURCE QUALIFIED SOURCE
PAID INCOME DIVIDENDS INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- ------------------------------------------------------------------------
Austria ............. 0.0011 0.0043 0.0043 0.0018
Belgium ............. 0.0003 0.0011 0.0011 0.0005
Brazil .............. 0.0033 0.0216 0.0022 0.0203
China ............... 0.0000 0.0128 0.0057 0.0095
Croatia ............. 0.0000 0.0023 0.0000 0.0023
Czech Republic ...... 0.0006 0.0023 0.0023 0.0010
Egypt ............... 0.0000 0.0015 0.0015 0.0006
Greece .............. 0.0000 0.0041 0.0041 0.0018
Hong Kong ........... 0.0000 0.0212 0.0000 0.0212
Hungary ............. 0.0020 0.0076 0.0076 0.0033
India ............... 0.0477 0.0109 0.0109 0.0047
Indonesia ........... 0.0001 0.0004 0.0004 0.0002
Luxembourg .......... 0.0000 0.0017 0.0017 0.0007
Malaysia ............ 0.0017 0.0038 0.0000 0.0038
Mexico .............. 0.0000 0.0168 0.0164 0.0074
Philippines ......... 0.0009 0.0020 0.0020 0.0009
Poland .............. 0.0007 0.0025 0.0025 0.0011
Russia .............. 0.0003 0.0019 0.0017 0.0009
Singapore ........... 0.0071 0.0401 0.0000 0.0401
South Africa ........ 0.0019 0.0333 0.0221 0.0207
South Korea ......... 0.0097 0.0334 0.0319 0.0152
Spain ............... 0.0003 0.0012 0.0012 0.0005
Taiwan .............. 0.0186 0.0467 0.0000 0.0467
Thailand ............ 0.0001 0.0020 0.0020 0.0009
Turkey .............. 0.0000 0.0005 0.0005 0.0002
United Kingdom ...... 0.0001 0.0005 0.0005 0.0002
------------------------------------------------
TOTAL ............... $ 0.0965 $ 0.2765 $ 0.1226 $ 0.2065
================================================
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.
Annual Report | 31
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
EMERGING MARKETS SERIES
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 2005, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2004. 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 2004 individual income tax returns.
32 | Annual Report
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
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 (60) Director Since 1990 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power
Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power
Ltd. (1977-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) 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 (until 2002) (Consultant (2003)).
- -----------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas); H.J. Heinz Company (processed
Fort Lauderdale, FL 33394-3091 foods and allied products); RTI
International Metals, Inc.
(manufacture and distribution of
titanium); Canadian National Railway
(railroad); and White Mountains
Insurance Group, Ltd. (holding
company).
- -----------------------------------------------------------------------------------------------------------------------------------
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).
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences
500 East Broward Blvd. Corporation; MedImmune, Inc.
Suite 2100 (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), White Mountains
Insurance Group, Ltd. (holding
company) (1987- 2004), and Spacehab,
Inc. (aerospace services)
(1994-2003).
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004);
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 (75) 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 (72) Director Since 2003 21 Director, White Mountains Insurance
500 East Broward Blvd. Group Ltd. (holding company); Amerada
Suite 2100 Hess Corporation (exploration and
Fort Lauderdale, FL 33394-3091 refining of oil and gas); and
Sentient Jet (private jet service);
and FORMERLY, Director, Becton
Dickinson and Co. (medical
technology), Cooper Industries
(electrical products and tools and
hardware), Health Net (formerly
Foundation Health), The Hertz
Corporation, Pacific Southwest
Airlines, The RCA Corporation, Unicom
(formerly Commonwealth Edison) and
UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- -----------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1990 21 None
(50)
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas); Total Logistics, Inc. (formerly
Fort Lauderdale, FL 33394-3091 C2, Inc. (operating and investment
business)); and Weatherford
International, Ltd (oilfield products
and servicing) (2004-present); and
FORMERLY, 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 Technology Ventures Group, LLC (investment firms) and Franklin Templeton
Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets
Investments LDC (until 2004) and 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 (71) Director, Director and Vice 142 None
One Franklin Parkway Vice President since
San Mateo, CA 94403-1906 President 1993 and
and Chairman Chairman of the
of the Board 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice Since 1996 Not Applicable Not Applicable
One Franklin Parkway President
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.
- -----------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources,
Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (40) Vice Since 2001 Not Applicable Not Applicable
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 (44) Vice Since 1990 Not Applicable Not Applicable
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 (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
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.
- -----------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior 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 (57) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
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. (64) Vice Since 1996 Not Applicable Not Applicable
One Franklin Parkway President
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 (64) Vice Since 1994 Not Applicable Not Applicable
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 (67) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President
Rockefeller Center - AML
New York, NY 10020-2302 Compliance
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (68) Vice Since 1993 Not Applicable Not Applicable
17th Floor, The Chater House President
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 (60) President and President since Not Applicable Not Applicable
1 Adelaide Street East, Chief 1993 and Chief
Suite 2101 Executive Executive Officer -
Toronto, Ontario Canada Officer - Investment
M5C 3B8 Investment Management
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.
- -----------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton
Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- -----------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice Since 2000 Not Applicable Not Applicable
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).
- -----------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, Chief
FL 33394-3091 Accounting
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- -----------------------------------------------------------------------------------------------------------------------------------
* 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 to be an interested person of Templeton
Institutional Funds, Inc. (TIFI) 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 TIFI'S
advisers and distributor. Nicholas F. Brady is considered to be an
interested person of TIFI under the federal securities laws due to his
ownership interest in a subsidiary of Resources, as well as his director
positions with such company and certain other related companies.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. 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 HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND
WAS FORMERLY CHAIRMAN FROM 1980-2000 AND 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 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. 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 U.S. 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 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT
1-800/321-8563 TO REQUEST THE SAI.
Annual Report | 39
TEMPLETON INSTITUTIONAL FUNDS, INC.
SHAREHOLDER INFORMATION
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. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the Securities and Exchange Commission's
website at sec.gov and reflect the 12-month period beginning July 1, 2003 and
ending June 30, 2004.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
40 | Annual Report
[LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL
FRANKLIN(R) TEMPLETON(R)
INSTITUTIONAL 600 Fifth Avenue
New York, NY 10020
FRANKLINTEMPLETONINSTITUTIONAL.COM
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
INVESTMENT MANAGER
Templeton Asset Management Ltd.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
This report must be preceded or accompanied by the current Templeton
Institutional Funds, Inc., Emerging Markets Series prospectus, which contains
more complete information including charges, expenses, and risks factors. 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.
ZT456 A2004 02/05
ANNUAL REPORT
- --------------------------------------------------------------------------------
12 31 2004
THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
- --------------------------------------------------------------------------------
-------------------------------------
TEMPLETON INSTITUTIONAL FUNDS, INC.
-------------------------------------
Foreign Smaller Companies Series
[GRAPHIC OMITTED]
FRANKLIN[R] TEMPLETON[R]
INSTITUTIONAL
FRANKLIN o TEMPLETON o FIDUCIARY
Contents
ANNUAL REPORT
- --------------------------------------------------------------------------------
TIFI Foreign Smaller Companies Series ............................ 2
Performance Summary .............................................. 6
Your Fund's Expenses ............................................. 8
Financial Highlights and Statement of Investments ................ 10
Financial Statements ............................................. 15
Notes to Financial Statements .................................... 18
Report of Independent Registered Public Accounting Firm .......... 27
Tax Designation .................................................. 28
Board Members and Officers ....................................... 31
Shareholder Information .......................................... 38
-------------------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-------------------------------------------------------------
Annual Report | 1
Annual Report
TIFI Foreign Smaller Companies Series
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund invests at
least 80% of its net assets in investments of smaller companies located outside
the U.S., including emerging markets.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR
CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This is the Templeton Institutional Funds, Inc. (TIFI) Foreign Smaller Companies
Series (the "Fund") annual report for the fiscal year ended December 31, 2004.
PERFORMANCE OVERVIEW
The Fund posted a 21.28% cumulative total return for the 12-month period ended
December 31, 2004. The Fund underperformed its benchmark, the S&P/Citigroup
Global ex-U.S. <$2 Billion Index 1, which returned 29.98% during the same
period.
ECONOMIC AND MARKET OVERVIEW
The international equity markets were range-bound with relatively unimpressive
returns for the first three quarters of the year, but rebounded in the fourth
quarter. Several factors explain this pattern. The high price of oil (hovering
around $43 a barrel as of the end of the period) triggered worries about
inflation, decreased spending due to cautionary consumer and business sentiment,
and slower economic and corporate profit growth. Global interest rates, which
have remained historically low, have increased in several countries, including
the U.S. and the UK. For other areas, such as the euro zone, the expectation was
that short-term rates eventually should follow suit and begin to rise. The U.S.
presidential election also added uncertainty to the markets during the year,
creating a wait-and-see effect. Importantly, given our long-term, bottom-up
investment strategy, we were able to take advantage of the recent volatility
1. Source: Standard & Poor's Micropal. The S&P/Citigroup Global ex-U.S. <$2
Billion Index is a free float-adjusted, market capitalization-weighted index
designed to measure the performance of global developed and emerging market
equity securities, excluding the United States, with market capitalizations less
than $2 billion. The index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11.
2 | Annual Report
in the equity markets by using short-term weakness to build positions of
securities that we believe are attractively valued.
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 five to seven 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 due to an adverse turn in the business
cycle, a restructuring, or temporary difficulties to which our analysis
indicates the market may be overreacting.
MANAGER'S DISCUSSION
During the period under review, the Fund benefited from the strong performance
of several stocks. For example, we owned shares of Tokyo Individualized
Educational Institute. Tokyo Individualized Educational Institute is a 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 education-related companies seek to attract only the brighter students. In
the past, a shortage of managers constrained the company's growth. The company
performed well as a result of a highly successful management-training program.
This program allowed the company to improve upon the quality of services it
provides, which has increased the company's ability to retain current students
and improve upon enrollment growth. A rise in per-school enrollments is very
important as it leads to revenue growth and improved operating margins. There
are significant economies of scale in this business because fixed costs per
student decrease sharply as new students are added. We continue to hold shares
at the end of the period as we believe the market is still undervaluing the
effects of future enrollment growth on the company's earnings.
Kidde PLC, a leading fire and safety products manufacturer for aerospace,
industrial, and retail markets, also performed well during the period. In
aerospace and defense, the company holds the number one global position for fire
safety systems located on aircrafts. In the company's residential and commercial
division, it is the market leader for carbon monoxide alarms, a leading
[graphic omitted]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS]
GEOGRAPHIC DISTRIBUTION ON 12/31/042
EQUITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
Europe ................................. 34.6%
Asia ................................... 30.4%
North America .......................... 9.9%
Australia & New Zealand ................ 6.5%
Latin America .......................... 1.9%
Middle East/Africa ..................... 1.3%
Short-Term Investments &
Other Net Assets ....................... 15.4%
SECTOR DIVERSIFICATION ON 12/31/04
EQUITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
- ------------------------------------------
Industrials 22.2%
- ------------------------------------------
Consumer Discretionary 20.2%
- ------------------------------------------
Financials 12.6%
- ------------------------------------------
Materials 7.0%
- ------------------------------------------
Consumer Staples 6.7%
- ------------------------------------------
Information Technology 5.7%
- ------------------------------------------
Energy 4.0%
- ------------------------------------------
Health Care 3.9%
- ------------------------------------------
Utilities 1.2%
- ------------------------------------------
Telecommunication Services 1.1%
- ------------------------------------------
Short-Term Investments &
Other Net Assets 15.4%
- ------------------------------------------
Annual Report | 3
10 LARGEST EQUITY POSITIONS
ON 12/31/04
PERCENTAGE OF TOTAL NET ASSETS
- ----------------------------------------
Iluka Resources Ltd. 2.4%
- ----------------------------------------
Amer Group Ltd., A 1.7%
- ----------------------------------------
Aalberts Industries NV 1.5%
- ----------------------------------------
Hansol Paper Co. Ltd. 1.4%
- ----------------------------------------
Sol Melia SA 1.4%
- ----------------------------------------
Geest PLC 1.4%
- ----------------------------------------
Hugo Boss AG, pfd. 1.4%
- ----------------------------------------
Bodycote International PLC,
Common & Restricted 1.3%
- ----------------------------------------
D. Carnegie & Co. AB 1.3%
- ----------------------------------------
Techtronic Industries Co. Ltd. 1.3%
- ----------------------------------------
[graphic omitted]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS]
FUND ASSET ALLOCATION ON 12/31/04
Equity ............................... 84.6
Short-Term Investments &
Other Net Assets ..................... 15.4
provider of fire blankets and escape ladders, and is one of the key players in
the fire extinguisher market. The company has performed well as it operates in a
growth industry driven by regulatory demand and increasing consumer awareness of
the need for safety products and systems. During the period, Kidde announced
that it accepted a takeover offer from United Technologies, a large U.S.-based
multinational. As a result of the offer, the stock price increased materially,
and we chose to sell our shares in the market.
Another company that performed well during the period was Aalberts Industries
NV, a Dutch engineering group that manufactures high-grade industrial products.
The company is a strong beneficiary of improving economic conditions in the
European economy, as it is a leading supplier to many European industrial
companies. Operating margins are expected to improve as capacity utilization
rates are expected to rise with the economic strengthening in the region. We
also believe the company is attractive because it has an outstanding track
record of finding accretive acquisitions. This trend should continue because of
the fragmentation of the markets in which Aalberts operates. We believe the
company has significant future earnings prospects and remains undervalued with a
forward price-to-earnings ratio of just under 15x.
In general, if the value of the U.S. dollar goes up compared with a foreign
currency, an investment traded in that foreign currency will go down in value
because it will be worth fewer U.S. dollars. This can have a negative effect on
Fund performance. Conversely, when the U.S. dollar weakens in relation to a
foreign currency, an investment traded in that foreign currency will increase in
value, which can contribute to Fund performance. For the 12 months ended
December 31, 2004, the U.S. dollar declined in value relative to most non-U.S.
currencies. At the end of the period, the Fund's portfolio was invested
predominantly in securities with non-U.S. currency exposure, which resulted in a
positive effect on Fund performance. However, one cannot expect the same result
in future periods.
Negatively affecting performance during the period was our holdings in Sons of
Gwalia, Ltd. a gold and tantalum mining company with operations in Western
Australia. This stock has been a large disappointment because of significant
write-downs of its gold assets, as the company's over-leveraged balance sheet
did not allow the company to develop production capability to cover its hedges.
The stock was suspended from trading and we have written down our position as
the company is in the hands of creditors.
Also hindering performance during the period was Vestas Wind Systems, AS,
Denmark's developer and manufacturer of windmills, as the company reduced
earnings expectation for 2005 during the period. However, consistent with our
focus on long-term value, we continue to hold the stock because of the
4 | Annual Report
positive growth outlook for wind power. In addition, the company's competitive
position remains strong, and we estimate that normal operating profitability is
substantially higher than the low profitability the company generates currently.
We thank you for your continued participation in the Fund and look forward to
serving your investment needs.
Sincerely,
[PHOTO OMITTED]
/s/Cindy L. Sweeting
- --------------------
Cindy L. Sweeting
[PHOTO OMITTED]
/s/Simon Rudolph
- ----------------
Simon Rudolph
[PHOTO OMITTED]
/s/Tucker Scott
- ---------------
Tucker Scott
Portfolio Management Team
TIFI Foreign Smaller Companies Series
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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
Performance Summary as of 12/31/04
TOTAL RETURNS
Your dividend income will vary depending on the dividends or interest paid by
the securities in the Fund's portfolio. Capital gain distributions are net
profits realized from the sale of portfolio securities. The performance table
and graph do not reflect any taxes due on Fund dividends, capital gain
distributions, if any, or any realized gains on the sale of Fund shares. Total
return reflects reinvestment of the Fund's dividends and capital gain
distributions, if any, and any unrealized gains or losses. The unmanaged index
includes reinvested dividends. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE CUMULATIVE
ANNUAL SINCE
ONE YEAR SINCE INCEPTION 1,2
CUMULATIVE 1,2 INCEPTION 1,3 (10/21/02)
- ---------------------------------------------------------------------------------------------------------------------------
TIFI Foreign Smaller Companies Series 21.28% 32.41% 85.22%
- ---------------------------------------------------------------------------------------------------------------------------
S&P/Citigroup Global ex-U.S. <$2 Billion Index4 29.98% 41.43% 114.06%
- ---------------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563.
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT
[graphic omitted]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS]
TIFI - Foreign Smaller S&P/CitiGroup Global
Companies Series ex U.S. < 2 Billion Index
Inception Date
Oct-2002 * $5,000,000.00 $ 5,000,000.00
Oct-02 5,060,000.00 5,013,199.00
Nov-02 5,160,000.00 5,196,018.84
Dec-02 5,050,000.00 5,172,103.64
Jan-03 4,895,000.00 5,176,886.80
Feb-03 4,730,000.00 5,121,084.10
Mar-03 4,750,000.00 5,057,841.28
Apr-03 5,110,000.00 5,426,138.61
May-03 5,535,000.00 5,892,223.30
Jun-03 5,765,000.00 6,193,026.01
Jul-03 6,090,000.00 6,428,460.09
Aug-03 6,435,000.00 6,830,238.84
Sep-03 6,585,000.00 7,175,152.24
Oct-03 7,060,000.00 7,701,822.77
Nov-03 7,155,000.00 7,737,429.84
Dec-03 7,636,009.88 8,234,338.41
Jan-04 7,901,255.38 8,555,867.92
Feb-04 8,120,593.00 8,866,768.48
Mar-04 8,019,733.32 9,210,087.09
Apr-04 7,834,305.96 8,830,098.24
May-04 7,849,758.24 8,703,080.81
Jun-04 8,096,994.72 9,025,672.69
Jul-04 7,875,512.04 8,722,212.42
Aug-04 7,860,059.76 8,841,257.54
Sep-04 8,112,447.00 9,176,604.67
Oct-04 8,313,326.64 9,454,655.79
Nov-04 8,895,362.52 10,197,025.91
Dec-04 9,261,194.88 10,703,055.36
6 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY
VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS
INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE
ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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. Cumulative total return shows the change in value of an investment over the
indicated periods. It assumes income dividends and capital gain distributions
are reinvested at net asset value, the account was completely redeemed at the
end of each period, and the deduction of all applicable charges and fees.
3. Average annual total return represents the change in value of an investment
over the indicated periods.
4. Source: Standard & Poor's Micropal. The S&P/Citigroup Global ex-U.S. <$2
Billion Index is a free float-adjusted, market capitalization-weighted index
designed to measure the performance of global developed and emerging market
equity securities, excluding the United States, with market capitalizations less
than $2 billion. The index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
Annual Report | 7
Your Fund's Expenses
As a Fund Shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases, if
applicable, and redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, if applicable, and other Fund expenses. All mutual funds have
ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) of the table below provides actual account values and
expenses. The "Ending Account Value" is derived from the Fund's actual return,
which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) of the table below can help you
compare ongoing costs of investing in the Fund with those of other mutual funds.
This information may not be used to estimate the actual ending account balance
or expenses you paid during the period. The hypothetical "Ending Account Value"
is based on the actual expense ratio for the Fund and an assumed 5% annual rate
of return before expenses, which does not represent the Fund's actual return.
The figure under the heading "Expenses Paid During Period" shows the
hypothetical expenses your account would have incurred under this scenario. You
can compare this figure with the 5% hypothetical examples that appear in the
shareholder reports of other funds.
8 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is
useful in comparing ongoing costs only, and will not help you compare total
costs of owning different funds. In addition, if transaction costs were
included, your total costs would have been higher. Please refer to the Fund
prospectus for additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 6/30/04 VALUE 12/31/04 PERIOD* 6/30/04-12/31/04
- ---------------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,143.80 $5.12
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000.00 $1,020.36 $4.82
- ---------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio, net of fee waivers,
of 0.95% multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
Annual Report | 9
Templeton Institutional Funds, Inc.
FINANCIAL HIGHLIGHTS
FOREIGN SMALLER COMPANIES SERIES
-----------------------------------------
YEAR ENDED DECEMBER 31,
2004 2003 2002C
-----------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................................................... $14.97 $10.10 $10.00
-----------------------------------------
Income from investment operations:
Net investment income (loss) a ........................................................ .21 .17 (.01)
Net realized and unrealized gains (losses) ............................................ 2.93 4.99 .11
-----------------------------------------
Total from investment operations ....................................................... 3.14 5.16 .10
-----------------------------------------
Less distributions from:
Net investment income ................................................................. (.16) (.13) --
Net realized gains .................................................................... (.50) (.16) --
-----------------------------------------
Total distributions .................................................................... (.66) (.29) --
-----------------------------------------
Net asset value, end of year ........................................................... $17.45 $14.97 $10.10
=========================================
Total return b ......................................................................... 21.28% 51.21% 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................................................ $97,495 $33,583 $6,195
Ratios to average net assets:
Expenses .............................................................................. 1.16% 1.58% 7.71%d
Expenses, net of waiver and payments by affiliate ..................................... .95% .95% .95%d
Net investment income (loss) .......................................................... 1.34% 1.40% (.55)%d
Portfolio turnover rate ................................................................ 27.51% 12.58% --
aBased on average daily shares outstanding.
bTotal return is not annualized for periods less than one year.
cFor the period October 21, 2002 (commencement date) to December 31, 2002.
dAnnualized.
10 | See notes to financial statements. | Annual Report
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 82.8%
AUSTRALIA 6.5%
APN News & Media Ltd. ........................ Media 121,050 $ 487,971
APN News & Media Ltd., 144A .................. Media 19,600 79,010
Billabong International Ltd. ................. Textiles Apparel & Luxury Goods 91,610 821,052
Iluka Resources Ltd. ......................... Metals & Mining 465,410 2,291,440
John Fairfax Holdings Ltd. ................... Media 222,990 794,180
Mayne Group Ltd. ............................. Health Care Providers & Services 205,910 686,608
Promina Group Ltd. ........................... Insurance 282,060 1,192,223
------------
6,352,484
------------
BAHAMAS .6%
a Steiner Leisure Ltd. ......................... Specialty Retail 18,100 540,828
------------
BELGIUM 1.2%
Barco NV ..................................... Electronic Equipment & Instruments 13,130 1,212,474
------------
CANADA 9.3%
CAE Inc. ..................................... Aerospace & Defense 224,800 946,546
a GSI Lumonics Inc. ............................ Machinery 48,780 558,020
Laurentian Bank of Canada .................... Commercial Banks 40,390 810,595
Legacy Hotels ................................ Real Estate 157,500 948,139
Linamar Corp. ................................ Auto Components 91,400 1,173,602
North West Company Fund ...................... Diversified Financial Services 46,480 1,121,938
a Precision Drilling Corp. ..................... Energy Equipment & Services 19,040 1,198,900
Quebecor World Inc. .......................... Commercial Services & Supplies 43,280 931,024
Sobeys Inc. .................................. Food & Staples Retailing 15,700 451,620
Torstar Corp., B ............................. Media 30,030 550,849
Transcontinental Inc., B ..................... Commercial Services & Supplies 22,000 426,114
------------
9,117,347
------------
CHINA 2.7%
a China Power International Development Ltd.,
144A ........................................ Electric Utilities 583,000 215,640
China Resources Power Co. Ltd. ............... Electric Utilities 1,748,000 950,147
TCL International Holdings Inc. .............. Household Durables 2,158,000 555,269
Travelsky Technology Ltd., H ................. IT Services 231,000 187,230
Weiqiao Textile Co. Ltd. ..................... Textiles Apparel & Luxury Goods 372,000 586,275
Weiqiao Textile Co. Ltd., 144A ............... Textiles Apparel & Luxury Goods 82,000 129,233
------------
2,623,794
------------
DENMARK 1.7%
ISS AS ....................................... Commercial Services & Supplies 12,080 673,174
a Vestas Wind Systems AS ....................... Electrical Equipment 68,440 848,923
a Vestas Wind Systems AS, 144A ................. Electrical Equipment 14,740 182,833
------------
1,704,930
------------
FINLAND 5.0%
Amer Group Ltd., A ........................... Leisure Equipment & Products 93,720 1,637,417
Huhtamaki OYJ ................................ Containers & Packaging 52,280 839,976
KCI Konecranes International PLC ............. Machinery 8,920 395,270
Metso OYJ .................................... Machinery 67,060 1,065,159
Orion OYJ .................................... Pharmaceuticals 55,430 899,237
------------
4,837,059
------------
Annual Report | 11
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
GERMANY 1.0%
Celesio AG ................................... Health Care Providers & Services 4,710 $ 381,571
a Jenoptik AG .................................. Semiconductors & Semiconductor Equipment 51,890 550,643
------------
932,214
------------
HONG KONG 11.7%
Asia Satellite Telecommunications
Holdings Ltd. ............................... Diversified Telecommunication Services 213,000 405,568
ASM Pacific Technology Ltd. .................. Semiconductors & Semiconductor Equipment 215,000 774,496
China Pharmaceutical Enterprise & Investment
Corp. Ltd. .................................. Pharmaceuticals 2,730,975 720,268
Dah Sing Financial Holdings Ltd. ............. Commercial Banks 118,000 914,664
Fountain Set Holdings Ltd. ................... Textiles Apparel & Luxury Goods 976,000 634,109
Giordano International Ltd. .................. Specialty Retail 1,748,000 1,096,323
Hang Lung Group Ltd. ......................... Real Estate 305,000 600,363
Hopewell Holdings Ltd. ....................... Transportation Infrastructure 329,000 844,425
Lerado Group Holdings Co. Ltd. ............... Household Durables 1,607,186 246,057
Li & Fung Ltd. ............................... Distributors 162,000 273,029
Moulin International Holdings Ltd. ........... Personal Products 1,680,000 1,145,533
Ngai Lik Industrial Holding Ltd. ............. Household Durables 2,352,000 593,083
Techtronic Industries Co. Ltd. ............... Household Durables 584,000 1,273,518
Texwinca Holdings Ltd. ....................... Textiles Apparel & Luxury Goods 611,000 577,765
Wing Hang Bank Ltd. .......................... Commercial Banks 91,000 638,058
Wing Lung Bank Ltd. .......................... Commercial Banks 80,500 652,468
------------
11,389,727
------------
INDIA 1.6%
Satyam Computers Services Ltd. ............... IT Services 60,183 570,382
a Tata Motors Ltd., ADR ........................ Automobiles 83,060 990,075
------------
1,560,457
------------
INDONESIA .7%
PT Indosat (Persero) TBK ..................... Diversified Telecommunication Services 1,043,900 646,639
------------
ISRAEL 1.3%
a Orbotech Ltd. ................................ Electronic Equipment & Instruments 57,880 1,225,320
------------
ITALY .5%
Banca Popolare di Verona e SCRL .............. Commercial Banks 24,260 492,495
------------
JAPAN 4.8%
Japan Airport Terminal Co. Ltd. .............. Transportation Infrastructure 61,000 594,396
Kikkoman Corp. ............................... Food Products 56,000 534,192
Meitec Corp. ................................. Commercial Services & Supplies 25,200 939,895
Sangetsu Co. Ltd. ............................ Household Durables 25,300 617,555
Sohgo Security Services Co. Ltd. ............. Commercial Services & Supplies 70,700 1,038,203
Tokyo Individualized Educational Institute Inc. Commercial Services & Supplies 48,340 358,703
a Tokyo Individualized Educational Institute
Inc., New Line ............................. Commercial Services & Supplies 96,680 567,318
------------
4,650,262
------------
12 | Annual Report
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
LUXEMBOURG .7%
a Thiel Logistik AG ............................ IT Services 115,440 $ 646,973
------------
MEXICO 1.5%
Grupo Aeroportuario del Sureste SA de CV,
ADR ......................................... Transportation Infrastructure 31,810 870,003
Grupo Continental SA ......................... Beverages 311,440 598,547
------------
1,468,550
------------
NETHERLANDS 6.9%
Aalberts Industries NV ....................... Industrial Conglomerates 29,747 1,441,090
Arcadis NV ................................... Construction & Engineering 17,400 323,482
Draka Holding NV ............................. Electrical Equipment 61,900 898,781
Draka Holding NV, 144A ....................... Electrical Equipment 15,715 228,180
IHC Caland NV ................................ Energy Equipment & Services 6,480 411,001
Imtech NV .................................... Construction & Engineering 29,970 1,055,368
OPG Groep NV ................................. Health Care Providers & Services 19,090 1,113,920
Vedior NV .................................... Commercial Services & Supplies 77,790 1,265,676
------------
6,737,498
------------
NORWAY 1.2%
Prosafe ASA .................................. Energy Equipment & Services 44,510 1,203,677
------------
SINGAPORE 1.8%
Huan Hsin Holdings Ltd. ...................... Communications Equipment 479,000 242,097
OSIM International Ltd. ...................... Personal Products 1,414,800 767,076
Want Want Holdings Ltd. ...................... Food Products 848,000 758,960
------------
1,768,133
------------
SOUTH KOREA 4.4%
a Bank of Pusan ................................ Commercial Banks 159,720 1,226,598
a Daegu Bank Co. Ltd. .......................... Commercial Banks 127,000 883,308
a Halla Climate Control Co. Ltd. ............... Auto Components 81,760 809,544
a Hansol Paper Co. Ltd. ........................ Paper & Forest Products 136,280 1,355,954
------------
4,275,404
------------
SPAIN 2.5%
Actividades de Construcciones y Servicios SA . Construction & Engineering 12,160 277,219
Sol Melia SA ................................. Hotels Restaurants & Leisure 135,760 1,344,851
Transportes Azkar SA ......................... Air Freight & Logistics 102,390 872,563
------------
2,494,633
------------
SWEDEN 2.7%
D. Carnegie & Co. AB ......................... Capital Markets 98,970 1,281,126
Kungsleden AB ................................ Real Estate 15,630 590,504
Observer AB .................................. Media 150,070 790,591
------------
2,662,221
------------
SWITZERLAND 3.8%
Gurit Heberlein AG, Br. ...................... Chemicals 1,150 938,013
Kuoni Reisen Holding AG, B ................... Hotels Restaurants & Leisure 340 149,260
Annual Report | 13
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SWITZERLAND (CONT.)
Lindt & Spruengli Chocolate Works Ltd. ....... Food Products 700 $ 994,425
SIG Holding AG ............................... Machinery 3,440 785,285
Vontobel Holding AG .......................... Capital Markets 34,920 812,485
------------
3,679,468
------------
TAIWAN 2.5%
Fu Sheng Industrial .......................... Industrial Conglomerates 635,000 946,807
Giant Manufacturing Co. ...................... Leisure Equipment & Products 322,000 552,029
a KYE Systems Corp. ............................ Computers & Peripherals 227,000 167,805
Taiwan Fu Hsing .............................. Household Durables 525,000 571,406
a Taiwan Green Point Enterprises Co. Ltd. ...... Machinery 80,000 249,135
------------
2,487,182
------------
THAILAND .2%
BEC World Public Co. Ltd., fgn. .............. Media 447,000 180,529
------------
UNITED KINGDOM 6.0%
Bodycote International PLC ................... Machinery 378,950 1,189,265
Bodycote International PLC, 144A ............. Machinery 35,200 110,469
Burberry Group PLC ........................... Textiles Apparel & Luxury Goods 40,200 309,421
DS Smith PLC ................................. Containers & Packaging 309,210 924,401
Geest PLC .................................... Food Products 107,710 1,316,966
Homeserve .................................... Commercial Services & Supplies 59,846 875,324
John Wood Group .............................. Energy Equipment & Services 450,220 1,158,000
------------
5,883,846
------------
TOTAL COMMON STOCKS (COST $61,834,972) ....... 80,774,144
------------
PREFERRED STOCKS 1.8%
BRAZIL .4%
Aracruz Celulose SA, ADR, pfd. ............... Paper & Forest Products 11,480 432,796
------------
GERMANY 1.4%
Hugo Boss AG, pfd. ........................... Textiles Apparel & Luxury Goods 40,110 1,312,833
------------
TOTAL PREFERRED STOCKS (COST $1,049,277) ..... 1,745,629
------------
------------------
PRINCIPAL AMOUNT
------------------
SHORT TERM INVESTMENTS (COST $7,803,938) 8.0%
b U.S. Treasury Bills, 1/06/05 - 3/31/05 ....... $7,827,000 7,805,675
------------
TOTAL INVESTMENTS (COST $70,688,187) 92.6% 90,325,448
OTHER ASSETS, LESS LIABILITIES 7.4% .......... 7,169,475
------------
NET ASSETS 100.0% ............................ $97,494,923
============
aNon-income producing.
bSecurity is traded on a discount basis with no stated coupon rate.
14 | See notes to financial statements. | Annual Report
Templeton Institutional Funds, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004
------------------
FOREIGN SMALLER
COMPANIES SERIES
------------------
Assets:
Investments in securities:
Cost .............................................................................................. $70,688,187
==================
Value ............................................................................................. 90,325,448
Foreign currency, at value (cost $837,678) ......................................................... 856,588
Receivables:
Investment securities sold ........................................................................ 47,073
Capital shares sold ............................................................................... 6,331,434
Dividends ......................................................................................... 72,889
------------------
Total assets .................................................................................. 97,633,432
------------------
Liabilities:
Payables:
Investment securities purchased ................................................................... 54,128
Affiliates ........................................................................................ 40,737
Funds advanced by custodian ........................................................................ 3,743
Deferred tax ....................................................................................... 3,698
Other liabilities .................................................................................. 36,203
------------------
Total liabilities ............................................................................. 138,509
------------------
Net assets, at value ........................................................................ $97,494,923
==================
Net assets consist of:
Distributions in excess of net investment income ................................................... $ (36,766)
Net unrealized appreciation (depreciation) ......................................................... 19,654,558
Accumulated net realized gain (loss) ............................................................... 1,248,546
Capital shares ..................................................................................... 76,628,585
------------------
Net assets, at value ................................................................................ $97,494,923
==================
Shares outstanding .................................................................................. 5,586,575
==================
Net asset value per share a ......................................................................... $17.45
==================
aRedemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 15
Templeton Institutional Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2004
------------------
FOREIGN SMALLER
COMPANIES SERIES
------------------
Investment income:
Dividends (net of foreign taxes of $123,167) ....................................................... $ 1,144,218
Interest (net of foreign taxes of $40) ............................................................. 62,804
------------------
Total investment income ....................................................................... 1,207,022
------------------
Expenses:
Management fees (Note 3) ........................................................................... 396,608
Administrative fees (Note 3) ....................................................................... 105,762
Transfer agent fees (Note 3) ....................................................................... 12,082
Custodian fees (Note 4) ............................................................................ 21,200
Reports to shareholders ............................................................................ 28,200
Registration and filing fees ....................................................................... 21,940
Professional fees .................................................................................. 20,950
Directors' fees and expenses ....................................................................... 6,800
Other .............................................................................................. 4,650
------------------
Total expenses ................................................................................ 618,192
Expenses waived/paid by affiliate (Note 3) .................................................... (112,542)
Expense reductions (Note 4) ................................................................... (9,960)
------------------
Net expenses ............................................................................... 495,690
------------------
Net investment income .................................................................... 711,332
------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ....................................................................................... 3,098,838
Foreign currency transactions ..................................................................... (25,743)
------------------
Net realized gain (loss) ...................................................................... 3,073,095
Net change in unrealized appreciation (depreciation) on:
Investments ....................................................................................... 10,379,121
Translation of assets and liabilities denominated in foreign currencies ........................... 21,663
Deferred taxes .................................................................................... 2,510
------------------
Net change in unrealized appreciation (depreciation) .......................................... 10,403,294
------------------
Net realized and unrealized gain (loss) ............................................................. 13,476,389
------------------
Net increase (decrease) in net assets resulting from operations ..................................... $14,187,721
==================
16 | See notes to financial statements. | Annual Report
Templeton Institutional Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2004 and 2003
------------------------------------
FOREIGN SMALLER COMPANIES SERIES
------------------------------------
2004 2003
------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .............................................................. $ 711,332 $ 277,742
Net realized gain (loss) from investments and foreign currency transactions ........ 3,073,095 676,438
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ........ 10,403,294 9,256,404
------------------------------------
Net increase (decrease) in net assets resulting from operations ................. 14,187,721 10,210,584
Distributions to shareholders from:
Net investment income .............................................................. (752,060) (271,177)
Net realized gains ................................................................. (2,184,958) (354,366)
------------------------------------
Total distributions to shareholders ................................................. (2,937,018) (625,543)
Capital share transactions (Note 2) ................................................. 52,661,504 17,802,794
------------------------------------
Net increase (decrease) in net assets ........................................... 63,912,207 27,387,835
Net assets:
Beginning of year ................................................................... 33,582,716 6,194,881
------------------------------------
End of year ......................................................................... $97,494,923 $33,582,716
====================================
Distributions in excess of net investment income/undistributed net investment income
included in net assets:
End of year ......................................................................... $ (36,766) $ 29,067
====================================
Annual Report | See notes to financial statements. | 17
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Foreign Smaller Companies Series (the Fund) is a separate, diversified series of
Templeton Institutional Funds, Inc. (the Company). The Company 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 on a securities exchange or on the NASDAQ National Market
System, are valued at the last quoted sale price or the official closing price
of the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
U.S. Government securities generally trade in the over-the-counter market rather
than on a securities exchange. The Fund may utilize independent pricing
services, quotations from bond dealers, and information with respect to bond and
note transactions, to assist in determining a current market value for each
security. The Fund's pricing services may use valuation models or matrix pricing
which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE on the day that the
value of the foreign security is determined. If no sale is reported at that
time, the foreign security will be valued within the range of the most recent
quoted bid and ask prices.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Occasionally, events occur between the
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the Fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Fund's Board of Directors.
18 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 on these
contracts 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 AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
Annual Report | 19
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME AND DEFERRED TAXES (CONTINUED)
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. When the Fund invests in these securities, the Fund
records an estimated deferred tax liability for net unrealized gains.
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.
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 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 expenses during the reporting period. Actual results could differ from those
estimates.
G. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 1% of
the amount redeemed. Effective March 1, 2005, the fee will increase to 2%. Such
fees are retained by the Fund and accounted for as additional paid-in capital.
There were no redemption fees for the year.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund 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.
20 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
2. CAPITAL STOCK
At December 31, 2004, 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 DECEMBER 31,
2004 2003
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
Shares sold ..................... 3,247,849 $51,064,194 1,664,949 $18,209,070
Shares issued in reinvestment
of distributions ................ 149,768 2,467,773 36,517 524,024
Shares redeemed ................. (54,830) (870,463) (70,813) (930,300)
-------------------------------------------------------------------
Net increase (decrease) ......... 3,342,787 $52,661,504 1,630,653 $17,802,794
===================================================================
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of the
following entities:
- ---------------------------------------------------------------------------------------------------------------------------
ENTITY AFFILIATION
- ---------------------------------------------------------------------------------------------------------------------------
Templeton Investment Counsel, LLC (TIC) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to TIC based on the Fund's average
daily net assets as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.750% Up to and including $1 billion
0.730% Over $1 billion, up to and including $5 billion
0.710% Over $5 billion, up to and including $10 billion
0.690% Over $10 billion, up to and including $15 billion
0.670% Over $15 billion, up to and including $20 billion
0.650% Over $20 billion
Prior to May 1, 2004, the Fund paid an investment management fee to TIC of .75%
per year of the average daily net assets of the Fund.
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of .20% per year of the
Fund's average daily net assets.
Annual Report | 21
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $12,082, of which $7,666 was paid to
Investor Services.
D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT
The investment manager and administrator have agreed in advance to voluntarily
waive their respective fees and assume payment of other expenses, through May 1,
2005, as noted in the Statement of Operations. Total expenses waived are not
subject to reimbursement by the Fund subsequent to the Fund's fiscal year end.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, passive
foreign investment company shares, and organization costs.
Net realized gains differ for financial statement and tax purposes primarily due
to differing treatments of wash sales and foreign currency transactions.
At December 31, 2004, 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 .................................... $70,825,810
=============
Unrealized appreciation ................................ $19,955,962
Unrealized depreciation ................................ (456,324)
-------------
Net unrealized appreciation (depreciation) ............. $19,499,638
=============
Undistributed ordinary income .......................... $ 790,400
Undistributed long term capital gains .................. 559,508
-------------
Distributable earnings ................................. $ 1,349,908
=============
22 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
-------------------------
2004 2003
-------------------------
Distributions paid from:
Ordinary income ......................... $1,758,770 $625,543
Long term capital gain .................. 1,178,248 --
-------------------------
......................................... $2,937,018 $625,543
=========================
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended December 31, 2004 aggregated $51,827,373 and $13,089,055,
respectively.
7. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
Annual Report | 23
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
24 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
7. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
Annual Report | 25
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
7. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
The Company and fund management strongly believes that the claims made in each
of the lawsuits identified above are without merit and intends to vigorously
defend against them. The Company cannot predict with certainty, however, the
eventual outcome of the remaining governmental investigations or private
lawsuits, nor whether they will have a material negative impact on the Company.
Public trust and confidence are critical to the Company's business and any
material loss of investor and/or client confidence could result in a significant
decline in assets under management by the Company, which would have an adverse
effect on the Company's future financial results. If the Company finds that it
bears responsibility for any unlawful or inappropriate conduct that caused
losses to the Fund, it is committed to making the Fund or its shareholders
whole, as appropriate. The Company is committed to taking all appropriate
actions to protect the interests of its funds' shareholders.
26 | Annual Report
Templeton Institutional Funds, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the Foreign Smaller Companies
Series of Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004,
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 two years in the period then ended and for the period
from October 21, 2002 (commencement 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards 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, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 9, 2005
Annual Report | 27
Templeton Institutional Funds, Inc.
TAX DESIGNATION (UNAUDITED)
FOREIGN SMALLER COMPANIES SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby
designates $1,716,508 as a capital gain dividend for the fiscal year ended
December 31, 2004.
Under Section 854(b)(2) of the Code, the Fund hereby designates up to a maximum
of $928,143 as qualified dividends for purposes of the maximum rate under
Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In
January 2005, shareholders will receive Form 1099-DIV which will include their
share of qualified dividends distributed during the calendar year 2004.
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, 2004, 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 Code. This designation will allow shareholders of record on
December 9, 2004, 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.
28 | Annual Report
Templeton Institutional Funds, Inc.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
- ----------------------------------------------------------------------------------------------------------
FOREIGN ADJUSTED
FOREIGN TAX FOREIGN QUALIFIED FOREIGN
PAID SOURCE INCOME DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
- ----------------------------------------------------------------------------------------------------------
Australia .................................. 0.0012 0.0222 0.0222 0.0095
Belgium .................................... 0.0005 0.0027 0.0027 0.0012
Bermuda .................................... 0.0000 0.0005 0.0004 0.0003
Brazil ..................................... 0.0002 0.0029 0.0025 0.0015
Canada ..................................... 0.0047 0.0244 0.0125 0.0173
China ...................................... 0.0000 0.0013 0.0000 0.0013
Denmark .................................... 0.0001 0.0007 0.0007 0.0003
Finland .................................... 0.0037 0.0200 0.0200 0.0086
France ..................................... 0.0000 0.0001 0.0001 0.0000
Germany .................................... 0.0006 0.0040 0.0008 0.0035
Hong Kong .................................. 0.0000 0.0304 0.0000 0.0304
India ...................................... 0.0000 0.0020 0.0020 0.0009
Indonesia .................................. 0.0003 0.0015 0.0015 0.0006
Italy ...................................... 0.0002 0.0010 0.0010 0.0004
Japan ...................................... 0.0006 0.0072 0.0070 0.0032
Mexico ..................................... 0.0000 0.0039 0.0039 0.0017
Netherlands ................................ 0.0022 0.0121 0.0121 0.0052
New Zealand ................................ 0.0003 0.0018 0.0018 0.0008
Norway ..................................... 0.0016 0.0087 0.0087 0.0037
Singapore .................................. 0.0001 0.0029 0.0000 0.0029
South Korea ................................ 0.0013 0.0064 0.0064 0.0027
Spain ...................................... 0.0004 0.0024 0.0024 0.0010
Sweden ..................................... 0.0006 0.0032 0.0032 0.0014
Switzerland ................................ 0.0008 0.0044 0.0044 0.0019
Taiwan ..................................... 0.0006 0.0023 0.0000 0.0023
Thailand ................................... 0.0003 0.0024 0.0024 0.0010
United Kingdom ............................. 0.0039 0.0314 0.0297 0.0144
------------------------------------------------------
TOTAL ...................................... $0.0242 $0.2028 $0.1484 $0.1180
======================================================
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.
Annual Report | 29
Templeton Institutional Funds, Inc.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
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 2005, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2004. 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 2004 individual income tax returns.
30 | Annual Report
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat
500 East Broward Blvd. packing company).
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 (60) Director Since 1990 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power
Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic
Equipment & Power Ltd. (1977-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) 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 (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess
500 East Broward Blvd. Corporation (exploration and
Suite 2100 refining of oil and gas); H.J.
Fort Lauderdale, FL 33394-3091 Heinz Company (processed foods
and allied products); RTI
International Metals, Inc.
(manufacture and distribution
of titanium); Canadian
National Railway (railroad);
and White Mountains Insurance
Group, Ltd. (holding company).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences
500 East Broward Blvd. Corporation; MedImmune, Inc.
Suite 2100 (biotechnology); and
Fort Lauderdale, FL 33394-3091 Overstock.com (Internet
services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently known
as MCI WorldCom, Inc. and
WorldCom, Inc.) (communications
services) (1988-2002), White
Mountains Insurance Group, Ltd.
(holding company) (1987-2004),
and Spacehab, Inc. (aerospace
services) (1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company)
(2001-2004); 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 (75) 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 (72) Director Since 2003 21 Director, White Mountains
500 East Broward Blvd. Insurance Group Ltd. (holding
Suite 2100 company); Amerada Hess
Fort Lauderdale, FL 33394-3091 Corporation (exploration and
refining of oil and gas); and
Sentient Jet (private jet
service); and FORMERLY,
Director, Becton Dickinson
and Co. (medical technology),
Cooper Industries (electrical
products and tools and
hardware), Health Net
(formerly Foundation Health),
The Hertz Corporation,
Pacific Southwest Airlines,
The RCA Corporation, Unicom
(formerly Commonwealth
Edison) and UAL Corporation
(airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS (50) Director Since 1990 21 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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess
500 East Broward Blvd. Corporation (exploration and
Suite 2100 refining of oil and gas);
Fort Lauderdale, FL 33394-3091 Total Logistics, Inc.
(formerly C2, Inc.
(operating and investment
business)); and Weatherford
International, Ltd (oilfield
products and servicing)
(2004-present); and
FORMERLY, 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 Technology Ventures Group, LLC (investment firms) and Franklin Templeton
Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets
Investments LDC (until 2004) and 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 (71) Director, Vice Director and Vice 142 None
One Franklin Parkway President President since
San Mateo, CA 94403-1906 and Chairman 1993 and
of the Board Chairman of 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice President Since 1996 Not Applicable Not 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.; 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.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources,
Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (40) Vice President Since 2001 Not Applicable Not 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 (44) Vice President Since 1990 Not Applicable Not 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 (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer -
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.
- ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior 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 (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
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. (64) Vice President Since 1996 Not Applicable Not 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 (64) Vice President Since 1994 Not Applicable Not Applicable
500 East Broward 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 (67) Vice President Since 2002 Not Applicable Not Applicable.
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-2302
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (68) Vice President Since 1993 Not Applicable Not Applicable
17th Floor, 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 (60) President and President since Not Applicable Not Applicable
1 Adelaide Street East, Chief Executive 1993 and Chief
Suite 2101 Officer - Executive Officer -
Toronto, Ontario Canada Investment Investment
M5C 3B8 Management 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.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton
Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
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).
- ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton
Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
*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 to be an interested person of Templeton
Institutional Funds, Inc. (TIFI) 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 TIFI'S advisers and
distributor. Nicholas F. Brady is considered to be an interested person of TIFI
under the federal securities laws due to his ownership interest in a subsidiary
of Resources, as well as his director positions with such company and certain
other related companies.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. 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 HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND
WAS FORMERLY CHAIRMAN FROM 1980-2000 AND 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 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. 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 U.S. 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 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT
1-800/321-8563 TO REQUEST THE SAI.
Annual Report | 37
Templeton Institutional Funds, Inc.
SHAREHOLDER INFORMATION
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. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the Securities and Exchange Commission's
website at sec.gov and reflect the 12-month period beginning July 1, 2003 and
ending June 30, 2004.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
38 | Annual Report
This page intentionally left blank.
This page intentionally left blank.
[GRAPHIC OMITTED]
FRANKLIN[R] TEMPLETON[R]
INSTITUTIONAL
FRANKLIN TEMPLETON INSTITUTIONAL
600 Fifth Avenue
New York, NY 10020
FRANKLINTEMPLETONINSTITUTIONAL.COM
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
This report must be preceded or accompanied by the current Templeton
Institutional Funds, Inc., Foreign Smaller Companies Series prospectus, which
contains more complete information including charges, expenses, and risk
factors. 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.
ZT458 A2004 02/05
ANNUAL REPORT | 12 31 2004
- --------------------------------------------------------------------------------
THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
- --------------------------------------------------------------------------------
TEMPLETON INSTITUTIONAL FUNDS, INC.
- --------------------------------------------------------------------------------
Franklin Templeton Non-U.S. Core Equity Series
[LOGO OMITTED]
FRANKLIN[R] TEMPLETON[R]
INSTITUTIONAL
FRANKLIN O TEMPLETON O FIUCIARY
Contents
ANNUAL REPORT
- --------------------------------------------------------------------------------
TIFI Franklin Templeton Non-U.S. Core Equity Series ............... 2
Performance Summary ............................................... 7
Your Fund's Expenses............................................... 9
Financial Highlights and Statement of Investments ................. 11
Financial Statements .............................................. 17
Notes to Financial Statements ..................................... 20
Report of Independent Registered Public Accounting Firm ........... 29
Tax Designation ................................................... 30
Board Members and Officers ........................................ 33
Shareholder Information............................................ 40
-----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-----------------------------------------------------
Annual Report | 1
Annual Report
TIFI Franklin Templeton Non-U.S.
Core Equity Series
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is
long-term capital growth. The Fund invests primarily in the equity securities of
companies located outside the U.S., including emerging markets. Under normal
conditions, the Fund will invest at least 80% of its net assets in foreign
(non-U.S.) equity securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR
CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This is the Templeton Institutional Funds, Inc. (TIFI) Franklin Templeton
Non-U.S. Core Equity Series (the "Fund") annual report for the fiscal year ended
December 31, 2004.
PERFORMANCE OVERVIEW
The Fund posted a 18.77% cumulative total return for the 12-month period ended
December 31, 2004. The Fund underperformed its benchmark, the MSCI EAFE Index
1,2, which returned 20.70% during the same period.
ECONOMIC AND MARKET OVERVIEW
The global economic recovery continued through 2004, and global equity markets
rose for the second year in a row. The majority of performance for the year came
in the fourth quarter after the conclusion of the presidential election in the
United States. For most of the year, the markets were concerned about rising
energy prices and interest rates, as well as the uncertainty surrounding the
U.S. presidential election. For the year, the MSCI EAFE Index returned 20.70%
(in US dollars), of which 15.36% was during the fourth quarter. Value
1. Souce: Standard & Poor's Micropal. The Morgan Stanley Capital International
(MSCI) Europe, Australasia, and Far East (EAFE) Index is a free float-adjusted,
capitalization-weighted index that is designed to measure equity market
performance in the global developed markets, excluding the United States and
Canada. The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. All MSCI data is presented "as is." The Fund described herein is not
sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any
MSCI data provider have any liability of any kind in connection with the MSCI
data or the Fund described herein. Copying or distributing the MSCI data is
strictly prohibited.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12.
2 | Annual Report
outpaced growth again in 2004, as the MSCI EAFE Value Index 2,3 returned 24.88%
versus only 16.48% for the MSCI EAFE Growth 2,4 Index.
Geographically, the Asia Pacific (ex-Japan) region was a strong performing area
of the MSCI EAFE Index in 2004, returning 29.6%. This region was led by New
Zealand (37.5%) and Australia (32.0%). Europe dominated the list of best
performing countries in the MSCI EAFE Index 1,2, with Austria the top performer
at 72.3% for the year. Norway was second, as the country benefited from high oil
prices. Greece, Belgium, and Ireland rounded out the top five.
Relative sector performance paralleled the gap between growth and value style
performance. Sectors that are more heavily weighted in the MSCI EAFE Value
Index, including the utilities and financials sectors, significantly
outperformed mainstay growth sectors such as technology and health care. The
continued lack of capital spending, compounded by overcapacity issues in the
semiconductor industry, hindered the performance of the technology sector.
Meanwhile, the health care sector suffered from regulatory and drug-specific
issues in the large cap pharmaceuticals group.
Energy was one of the top performing sectors of 2004, as continued unrest in the
Middle East and speculative buying helped push the price per barrel of oil up to
$56 in October. While prices fell from their October high to close the year at
$43 per barrel, oil prices rose almost 34% in 2004. This rise in oil prices
triggered investor worries about inflation, decreased spending (due to
cautionary consumer and business sentiment), and slower economic and corporate
profit growth.
During the last few weeks of 2004, the U.S. dollar fell to its lowest price
against the euro since the euro was introduced in 1999, and to a five-year low
GEOGRAPHIC DISTRIBUTION ON 12/31/04
EQUITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
[PIE CHART OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS TO FOLLOW:
Europe 62.0%
Asia 25.7%
Australia & New Zealand 3.1%
North America 3.0%
Latin America 2.9%
MIddle East/Africa 1.8%
Short-Term Investments &
Other Net Assets 1.5%
SECTOR DIVERSIFICATION ON 12/31/04
EQUITY ASSETS AS A PERCENTAGE OF
TOTAL NET ASSETS
- --------------------------------------
Financials 24.8%
- --------------------------------------
Consumer Discretionary 13.8%
- --------------------------------------
Industrials 12.0%
- --------------------------------------
Telecommunication Services 9.8%
- --------------------------------------
Information Technology 9.2%
- --------------------------------------
Health Care 8.4%
- --------------------------------------
Materials 7.2%
- --------------------------------------
Energy 5.2%
- --------------------------------------
Consumer Staples 4.8%
- --------------------------------------
Utilities 3.3%
- --------------------------------------
Short-Term Investments & Other
Net Assets 1.5%
- --------------------------------------
3. Source: Standard & Poor's Micropal. 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.
4. Source: Standard & Poor's Micropal. 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.
Annual Report | 3
versus the yen. The dollar fell against most of the world's major currencies in
2004, making American exports more affordable around the world, but hindering
the European and Japanese economies that are dependent upon exports to the
United States. The effects of the weak dollar were felt acutely in Japan, where
a slowdown in exports caused a 0.6% contraction in GDP for the second quarter of
2004, followed by a disappointing 0.0% growth rate in the third quarter of 2004.
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
Currency exposures were an important driver of the Fund's performance for 2004.
The decline in the U.S. dollar benefited U.S.-based fund investors as foreign
assets appreciated in U.S. dollar terms. For example, the MSCI EAFE Index
returned 13.1% in local currency terms, but 20.7% in U.S. dollars. Likewise,
about a third of the Fund's performance in 2004 was driven by currency gains.
In general, if the value of the U.S. dollar goes up compared with a foreign
currency, an investment traded in that foreign currency will go down in value
because it will be worth fewer U.S. dollars. This can have a negative effect on
Fund performance. Conversely, when the U.S. dollar weakens in relation to a
foreign currency, an investment traded in that foreign currency will increase in
value, which can contribute to Fund performance. For the 12 months ended
December 31, 2004, the U.S. dollar declined in value relative to most non-U.S.
currencies. At the end of the period, the Fund's portfolio was invested
predominantly in securities with non-U.S. currency exposure, which resulted in a
positive effect on Fund performance. However, one cannot expect the same result
in future periods.
10 LARGEST EQUITY POSITIONS
ON 12/31/04
PERCENTAGE OF TOTAL NET ASSETS
- --------------------------------------
Telefonica SA 1.6%
- --------------------------------------
Esprit Holdings 1.5%
- --------------------------------------
Atlas Copco AB, A 1.4%
- --------------------------------------
Smith & Nephew PLC 1.4%
- --------------------------------------
Sompo Japan Insurance Inc. 1.4%
- --------------------------------------
Tesco PLC 1.4%
- --------------------------------------
Sun Hung Kai Properties Ltd. 1.4%
- --------------------------------------
ING Groep NV 1.4%
- --------------------------------------
Anglo Irish Bank Corp. PLC 1.4%
- --------------------------------------
Sanofi-Aventis 1.3%
- --------------------------------------
FUND ASSET ALLOCATION ON 12/31/04
[PIE CHART OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS TO FOLLOW:
Equity 98.5%
Short-Term Investments &
Other Net Assets 1.5%
4 | Annual Report
The Fund's allocation between the growth and value portions was not altered over
the course of the year. The value portion of the Fund has increased relative to
the growth portion, but not sufficiently to require a rebalancing.
In the growth portion of the portfolio, both sector allocations and stock
selection contributed positively to relative performance versus the MSCI EAFE
Growth Index. An overweighting in the financials sector was the largest positive
sector contribution to relative performance, while an underweighting to the
materials sector was the largest negative contributor to performance, but
relatively small in magnitude. Within the financials sector, the majority of
outperformance came from real estate companies in Hong Kong, which posted very
strong gains in 2004 in large part due to the strong economic growth in China.
Stock selection in the growth portion of the Fund was particularly strong in the
consumer staples, energy, financials and telecommunications sectors, but was
partially offset by poor stock selection in the industrials sector. The poor
stock selection in the industrials sector stemmed from holdings in Japan and
Europe that suffered from lower than expected global capital expenditure
spending in 2004. Some positions in this sector were reduced during the fourth
quarter.
The value portion of the Fund benefited from its sector and geographical
diversification, generating positive returns in all major sectors and areas of
the world. On a sector basis, the largest contributions to returns came from the
industrials, financials, health care, and materials sectors. Excluding
financials, the value portion of the Fund maintained overweight positions in all
of these sectors relative to the MSCI EAFE Value Index, which contributed to
provide excess returns.
On the negative side, the value portion of the Fund underperformed due to poor
stock selection in the consumer discretionary sector, but this was mitigated by
an underweighting in the sector. Underweighted positions in the technology and
utilities sectors also detracted from relative performance, but were offset by
strong stock selection in both of the sectors.
Annual Report | 5
We thank you for your continued participation in the Fund 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
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS 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.
6 | Annual Report
Performance Summary as of 12/31/04
TOTAL RETURNS
Your dividend income will vary depending on the dividends or interest paid by
the securities in the Fund's portfolio. Capital gain distributions are net
profits realized from the sale of portfolio securities. The performance table
and graph do not reflect any taxes due on Fund dividends, capital gain
distributions, if any, or any realized gains on the sale of Fund shares. Total
return reflects reinvestment of the Fund's dividends and capital gain
distributions, if any, and any unrealized gains or losses. The unmanaged index
includes reinvested dividends. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
- ---------------------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE SINCE
ONE YEAR ANNUAL SINCE INCEPTION 1,2
CUMULATIVE 1,2 INCEPTION 1,3 (9/03/02)
- ---------------------------------------------------------------------------------------------------------
TIFI Franklin Templeton Non-U.S. Core Equity Series 18.77% 19.75% 52.11%
- ---------------------------------------------------------------------------------------------------------
MSCI EAFE Index 4,5 20.70% 24.22% 65.64%
- ---------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563.
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT
(9/03/02-12/31/04)
Millions
[LINE CHART OMITTED]
TIFI Franklin Templeton Non-U.S. Core Equity Series MSCI EAFE Index
Sep-02 $5,000,000.00 $5,000,000.00
Oct-02 4,670,000.00 4,630,500.00
Nov-02 4,795,000.00 4,879,620.00
Dec-02 5,015,000.00 5,101,640.00
Jan-03 4,747,450.00 4,930,740.00
Feb-03 4,516,360.00 4,725,130.00
Mar-03 4,395,790.00 4,616,920.00
Apr-03 4,295,610.00 4,529,660.00
May-03 4,768,430.00 4,979,000.00
Jun-03 5,045,080.00 5,285,210.00
Jul-03 5,115,500.00 5,415,760.00
Aug-03 5,271,430.00 5,547,900.00
Sep-03 5,417,300.00 5,682,720.00
Oct-03 5,482,690.00 5,858,880.00
Nov-03 5,844,850.00 6,224,470.00
Dec-03 5,975,630.00 6,363,900.00
Jan-04 6,403,740.00 6,861,560.00
Feb-04 6,547,640.00 6,958,990.00
Mar-04 6,696,680.00 7,121,140.00
Apr-04 6,635,010.00 7,163,870.00
May-04 6,485,970.00 7,007,690.00
Jun-04 6,501,390.00 7,037,830.00
Jul-04 6,614,450.00 7,194,770.00
Aug-04 6,393,460.00 6,962,380.00
Sep-04 6,393,460.00 6,994,410.00
Oct-04 6,578,480.00 7,178,360.00
Nov-04 6,820,030.00 7,423,860.00
Dec-04 7,318,560.00 7,933,130.00
7,605,572.00 8,281,400.00
Annual Report | 7
Performance Summary (CONTINUED)
ENDNOTES
THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY
VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS
INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE
ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
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. Cumulative total return shows the change in value of an investment over the
indicated periods. It assumes income dividends and capital gain distributions
are reinvested at net asset value, the account was completely redeemed at the
end of each period, and the deduction of all applicable charges and fees.
3. Average annual total return represents the change in value of an investment
over the indicated periods.
4. The MSCI Europe, Australasia, and Far East (EAFE) Index is a free
float-adjusted, capitalization-weighted index that is designed to measure equity
market performance in the global developed markets, excluding the United States
and Canada. The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
5. All MSCI data is presented "as is." The Fund described herein is not
sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any
MSCI data provider have any liability of any kind in connection with the MSCI
data or the Fund described herein. Copying or distributing the MSCI data is
strictly prohibited.
8 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 9
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES, IF APPLICABLE. Therefore, the second line for each class is
useful in comparing ongoing costs only, and will not help you compare total
costs of owning different funds. In addition, if transaction costs were
included, your total costs would have been higher. Please refer to the Fund
prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE ON 6/30/04 VALUE ON 12/31/04 PERIOD* 6/30/04-12/31/04
- -------------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,149.80 $4.54
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000.00 $1,020.91 $4.27
- -------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio, net of fee waivers,
of 0.84% multiplied by the average account value over the period, multiplied by
184/366 to reflect the one-half year period.
10 | Annual Report
Templeton Institutional Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
----------------------------------
YEAR ENDED DECEMBER 31,
2004 2003 2002 C
----------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................... $12.46 $9.45 $10.00
----------------------------------
Income from investment operations:
Net investment income a .................................... .19 .19 .01
Net realized and unrealized gains (losses) ................. 2.12 3.09 (.51)
----------------------------------
Total from investment operations ............................ 2.31 3.28 (.50)
----------------------------------
Less distributions from:
Net investment income ...................................... (.17) (.27) (.05)
Net realized gains ......................................... (.37) -- --
----------------------------------
Total distributions ......................................... (.54) (.27) (.05)
----------------------------------
Net asset value, end of year ................................ $14.23 $12.46 $ 9.45
----------------------------------
Total return b .............................................. 18.77% 34.89% (5.05)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................. $2,846 $2,493 $2,942
Ratios to average net assets:
Expenses ................................................... 2.53% 5.31% 5.47%d
Expenses, net of waiver and payments by affiliate .......... .84% .84% .84%d
Net investment income ...................................... 1.45% 1.87% .28%d
Portfolio turnover rate ..................................... 24.45% 39.97% 6.36%
<FN>
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 (commencement date) to December 31, 2002.
d Annualized.
</FN>
Annual Report | See notes to financial statements. | 11
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 98.5%
AUSTRALIA 3.1%
AMP Ltd. ............................................. Insurance 1,370 $ 7,785
Qantas Airways Ltd. .................................. Airlines 4,970 14,433
QBE Insurance Group Ltd. ............................. Insurance 2,000 24,030
St. George Bank Ltd. ................................. Commercial Banks 1,500 29,647
Woodside Petroleum Ltd. .............................. Oil & Gas 800 12,587
-----------
88,482
-----------
AUSTRIA 1.1%
Erste Bank der Oester Sparkassen AG .................. Commercial Banks 600 31,998
-----------
BERMUDA 1.0%
ACE Ltd. ............................................. Insurance 640 27,360
-----------
CANADA 2.0%
Alcan Inc. ........................................... Metals & Mining 300 14,708
BCE Inc. ............................................. Diversified Telecommunication Services 1,060 25,560
Encana Corp. ......................................... Oil & Gas 300 17,109
-----------
57,377
-----------
CHINA 1.1%
China Mobile (Hong Kong) Ltd., fgn. .................. Wireless Telecommunication Services 4,450 15,086
Huaneng Power International Inc., H .................. Electric Utilities 20,000 14,924
-----------
30,010
-----------
DENMARK .4%
TDC AS ............................................... Diversified Telecommunication Services 140 5,918
a Vestas Wind Systems AS ............................... Electrical Equipment 370 4,589
a Vestas Wind Systems AS, 144A ......................... Electrical Equipment 123 1,526
-----------
12,033
-----------
FINLAND 1.0%
Stora Enso OYJ, R (EUR/FIM Traded) ................... Paper & Forest Products 1,820 27,809
-----------
FRANCE 5.3%
Accor SA ............................................. Hotels Restaurants & Leisure 140 6,119
AXA SA ............................................... Insurance 610 15,049
Dassault Systemes SA ................................. Software 350 17,621
Essilor International SA ............................. Health Care Equipment & Supplies 100 7,823
Michelin SA, B ....................................... Auto Components 530 33,939
Sanofi-Aventis ....................................... Pharmaceuticals 480 38,300
Suez SA .............................................. Multi-Utilities & Unregulated Power 1,190 31,683
-----------
150,534
-----------
GERMANY 8.9%
BASF AG .............................................. Chemicals 350 25,134
Bayer AG, Br. ........................................ Chemicals 510 17,232
Celesio AG ........................................... Health Care Providers & Services 460 37,266
Deutsche Post AG ..................................... Air Freight & Logistics 1,520 34,776
E.ON AG .............................................. Electric Utilities 260 23,702
12 | Annual Report
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
GERMANY (CONT.)
Puma AG .............................................. Textiles Apparel & Luxury Goods 120 $ 32,715
SAP AG ............................................... Software 150 26,706
Siemens AG ........................................... Industrial Conglomerates 400 33,849
Volkswagen AG ........................................ Automobiles 460 20,818
-----------
252,198
-----------
HONG KONG 5.7%
Esprit Holdings ...................................... Specialty Retail 7,000 42,327
Hang Seng Bank ....................................... Commercial Banks 900 12,505
Sun Hung Kai Properties Ltd. ......................... Real Estate 4,000 40,012
Swire Pacific Ltd., A ................................ Industrial Conglomerates 2,000 16,725
Television Broadcasts Ltd. ........................... Media 5,000 23,222
Wharf Holdings Ltd. .................................. Real Estate 8,000 27,995
-----------
162,786
-----------
IRISH REPUBLIC 1.4%
Anglo Irish Bank Corp. PLC ........................... Commercial Banks 1,600 38,713
-----------
ISRAEL 1.8%
a Check Point Software Technologies Ltd. ............... Software 1,160 28,571
Teva Pharmaceutical Industries Ltd., ADR ............. Pharmaceuticals 800 23,888
-----------
52,459
-----------
ITALY 4.6%
Arnoldo Mondadori Editore SpA ........................ Media 2,100 24,194
Eni SpA .............................................. Oil & Gas 780 19,497
Luxottica Group SpA, ADR ............................. Textiles Apparel & Luxury Goods 700 14,273
Mediaset SpA ......................................... Media 2,000 25,322
Riunione Adriatica di Sicurta SpA .................... Insurance 1,294 29,219
Saipem SpA ........................................... Energy Equipment & Services 1,500 18,014
-----------
130,519
-----------
JAPAN 13.8%
Acom Co. Ltd. ........................................ Consumer Finance 300 22,466
Asahi Glass Co. Ltd. ................................. Building Products 3,000 33,099
Canon Inc., ADR ...................................... Office Electronics 350 18,991
East Japan Railway Co. ............................... Road & Rail 5 27,827
Fanuc Ltd. ........................................... Machinery 200 13,083
Fast Retailing Co. Ltd. .............................. Specialty Retail 500 38,078
Fujitsu Ltd. ......................................... Computers & Peripherals 2,000 13,025
KAO Corp. ............................................ Household Products 600 15,349
Mitsui Fudosan Co. Ltd. .............................. Real Estate 1,000 12,156
Net One Systems Co. Ltd. ............................. IT Services 4 16,676
Nintendo Co. Ltd. .................................... Software 100 12,566
Nippon Telegraph & Telephone Corp. ................... Diversified Telecommunication Services 6 26,948
Seiko Epson Corp. .................................... Computers & Peripherals 400 17,809
SMC Corp. ............................................ Machinery 100 11,453
Annual Report | 13
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
JAPAN (CONT.)
Sompo Japan Insurance Inc. ........................... Insurance 4,000 $ 40,773
Sony Corp. ........................................... Household Durables 900 34,798
Takeda Pharmaceutical Co. Ltd. ....................... Pharmaceuticals 200 10,076
Trend Micro Inc. ..................................... Software 500 26,997
-----------
392,170
-----------
MEXICO 2.9%
America Movil SA de CV, L, ADR ....................... Wireless Telecommunication Services 600 31,410
Grupo Financiero Banorte SA de CV, O ................. Commercial Banks 4,000 25,218
Telefonos de Mexico SA de CV (Telmex), L, ADR ........ Diversified Telecommunication Services 650 24,908
-----------
81,536
-----------
NETHERLANDS 4.3%
Akzo Nobel NV ........................................ Chemicals 630 26,827
IHC Caland NV ........................................ Energy Equipment & Services 410 26,004
ING Groep NV ......................................... Diversified Financial Services 1,290 38,967
Koninklijke Philips Electronics NV ................... Household Durables 1,130 29,917
-----------
121,715
-----------
NORWAY 1.0%
Norske Skogindustrier ASA, A ......................... Paper & Forest Products 1,340 28,946
-----------
PORTUGAL 1.0%
Portugal Telecom SA, SGPS ............................ Diversified Telecommunication Services 2,310 28,526
-----------
RUSSIA .6%
b Lukoil Holdings, ADR ................................. Oil & Gas 140 17,150
-----------
SINGAPORE .3%
DBS Group Holdings Ltd. .............................. Commercial Banks 1,000 9,863
-----------
SOUTH KOREA 3.3%
a Kookmin Bank, ADR .................................... Commercial Banks 740 28,919
KT Corp., ADR ........................................ Diversified Telecommunication Services 1,100 23,991
POSCO, ADR ........................................... Metals & Mining 300 13,359
Samsung Electronics Co. Ltd., GDR, 144A .............. Semiconductors & Semiconductor Equipment 130 28,405
-----------
94,674
-----------
SPAIN 3.7%
Banco Santander Central Hispano SA ................... Commercial Banks 2,950 36,549
Telefonica Moviles SA ................................ Wireless Telecommunication Services 2,000 25,131
Telefonica SA ........................................ Diversified Telecommunication Services 2,370 44,575
-----------
106,255
-----------
SWEDEN 3.7%
Atlas Copco AB, A .................................... Machinery 910 41,092
Nordea Bank AB, FDR .................................. Commercial Banks 2,260 22,863
Securitas AB, B ...................................... Commercial Services & Supplies 480 8,236
Volvo AB, B .......................................... Machinery 840 33,316
-----------
105,507
-----------
14 | Annual Report
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SWITZERLAND 5.1%
Adecco SA ............................................ Commercial Services & Supplies 100 $ 5,066
Credit Suisse Group .................................. Capital Markets 300 12,591
Lonza Group AG ....................................... Chemicals 110 6,181
Roche Holding AG ..................................... Pharmaceuticals 300 34,295
Swiss Reinsurance Co. ................................ Insurance 340 24,120
Syngenta AG .......................................... Chemicals 200 21,212
Synthes Inc. ......................................... Health Care Equipment & Supplies 180 20,150
UBS AG ............................................... Capital Markets 250 20,853
-----------
144,468
-----------
TAIWAN 1.5%
Chunghwa Telecom Co. Ltd., ADR ....................... Diversified Telecommunication Services 700 14,735
Compal Electronics Inc., 144A ........................ Computers & Peripherals 400 1,992
Compal Electronics Inc., GDR, Reg S .................. Computers & Peripherals 1,000 4,980
Taiwan Semiconductor Manufacturing Co. Ltd., ADR ..... Semiconductors & Semiconductor Equipment 2,500 21,225
-----------
42,932
-----------
UNITED KINGDOM 19.9%
BAE Systems PLC ...................................... Aerospace & Defense 6,900 30,528
BHP Billiton PLC ..................................... Metals & Mining 2,010 23,554
BP PLC ............................................... Oil & Gas 1,560 15,211
Cadbury Schweppes PLC ................................ Food Products 3,700 34,445
Compass Group PLC .................................... Hotels Restaurants & Leisure 2,870 13,565
Diageo PLC ........................................... Beverages 1,800 25,671
Exel PLC ............................................. Air Freight & Logistics 500 6,939
HBOS PLC ............................................. Commercial Banks 1,500 24,401
HSBC Holdings PLC .................................... Commercial Banks 1,200 20,533
Man Group PLC ........................................ Capital Markets 800 22,604
National Grid Transco PLC ............................ Multi-Utilities & Unregulated Power 2,350 22,396
Next PLC ............................................. Multiline Retail 500 15,835
Pearson PLC .......................................... Media 600 7,238
Reckitt Benckiser PLC ................................ Household Products 700 21,149
Rentokil Initial PLC ................................. Commercial Services & Supplies 1,570 4,452
Royal Bank of Scotland Group PLC ..................... Commercial Banks 800 26,903
Shell Transport & Trading Co. PLC .................... Oil & Gas 2,790 23,777
Shire Pharmaceuticals Group PLC ...................... Pharmaceuticals 2,870 30,133
Smith & Nephew PLC ................................... Health Care Equipment & Supplies 4,000 40,923
Smiths Group PLC ..................................... Industrial Conglomerates 1,290 20,354
Standard Chartered PLC ............................... Commercial Banks 1,630 30,302
Tesco PLC ............................................ Food & Staples Retailing 6,500 40,143
The Sage Group PLC ................................... Software 6,700 26,010
Vodafone Group PLC ................................... Wireless Telecommunication Services 3,990 10,818
Annual Report | 15
Templeton Institutional Funds, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
UNITED KINGDOM (CONT.)
WPP Group PLC ........................................ Media 2,200 $ 24,197
Yell Group PLC ....................................... Media 670 5,659
-----------
567,740
-----------
TOTAL COMMON STOCKS (COST $1,882,447) 98.5% .......... 2,803,760
OTHER ASSETS, LESS LIABILITIES 1.5% .................. 42,204
-----------
NET ASSETS 100.0% .................................... $2,845,964
===========
<FN>
CURRENCY ABBREVIATIONS: | EUR - Euro | FIM - Finnish Markka
a Non-income producing.
b See Note 7 regarding other considerations.
</FN>
16 | See notes to financial statements. | Annual Report
Templeton Institutional Funds, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004
------------------
FRANKLIN TEMPLETON
NON-U.S. CORE
EQUITY SERIES
------------------
Assets:
Investments in securities:
Cost ............................................................... $1,882,447
------------------
Value .............................................................. 2,803,760
Cash ................................................................ 37,665
Foreign currency, at value (cost $11,773) ........................... 13,054
Receivables:
Dividends .......................................................... 4,567
Affiliates ......................................................... 11,378
------------------
Total assets ................................................... 2,870,424
------------------
Liabilities:
Other liabilities ................................................... 24,460
------------------
Net assets, at value .......................................... $2,845,964
------------------
Net assets consist of:
Undistributed net investment income ................................. $ 1,938
Net unrealized appreciation (depreciation) .......................... 922,813
Accumulated net realized gain (loss) ................................ 8,736
Capital shares ...................................................... 1,912,477
------------------
Net assets, at value ................................................. $2,845,964
------------------
Shares outstanding ................................................... 200,000
------------------
Net asset value per share a .......................................... $14.23
------------------
<FN>
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
</FN>
Annual Report | See notes to financial statements. | 17
Templeton Institutional Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2004
------------------
FRANKLIN TEMPLETON
NON-U.S. CORE
EQUITY SERIES
------------------
Investment income:
Dividends (net of foreign taxes of $6,774) ..................................... $ 57,859
Interest ....................................................................... 952
------------------
Total investment income ................................................... 58,811
------------------
Expenses:
Management fees (Note 3) ....................................................... 18,124
Administrative fees (Note 3) ................................................... 5,178
Transfer agent fees (Note 3) ................................................... 130
Custodian fees (Note 4) ........................................................ 800
Registration and filing fees ................................................... 16,672
Professional fees .............................................................. 16,550
Directors' fees and expenses ................................................... 5,500
Other .......................................................................... 2,600
------------------
Total expenses ............................................................ 65,554
Expenses waived/paid by affiliate (Note 3) ................................ (43,796)
Expense reductions (Note 4) ............................................... (413)
------------------
Net expenses .......................................................... 21,345
------------------
Net investment income ............................................... 37,466
------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................... 123,463
Foreign currency transactions ................................................. 237
------------------
Net realized gain (loss) .................................................. 123,700
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................... 298,823
Translation of assets and liabilities denominated in foreign currencies ....... 1,259
------------------
Net change in unrealized appreciation (depreciation) ...................... 300,082
------------------
Net realized and unrealized gain (loss) ......................................... 423,782
------------------
Net increase (decrease) in net assets resulting from operations ................. $461,248
------------------
18 | See notes to financial statements. | Annual Report
Templeton Institutional Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2004 and 2003
-------------------------------
FRANKLIN TEMPLETON
NON-U.S. CORE EQUITY SERIES
-------------------------------
2004 2003
-------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 37,466 $ 45,545
Net realized gain (loss) from investments and foreign currency transactions ............ 123,700 (29,945)
Net change in unrealized appreciation (depreciation) on investments and translation of
asset and liabilities denominated in foreign currencies ............................... 300,082 672,942
-------------------------------
Net increase (decrease) in net assets resulting from operations .................... 461,248 688,542
Distributions to shareholders from:
Net investment income .................................................................. (34,900) (55,229)
Net realized gains ..................................................................... (73,360) --
-------------------------------
Total distributions to shareholders ..................................................... (108,260) (55,229)
Capital share transactions (Note 2) ..................................................... -- (1,082,722)
-------------------------------
Net increase (decrease) in net assets .............................................. 352,988 (449,409)
Net assets
Beginning of year ....................................................................... 2,492,976 2,942,385
-------------------------------
End of year ............................................................................. $2,845,964 $2,492,976
-------------------------------
Undistributed net investment income/distributions in excess of net investment income
included in net assets:
End of year ............................................................................. $ 1,938 $ (541)
-------------------------------
Annual Report | See notes to financial statements. | 19
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
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). The
Company 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 on a securities exchange or on the NASDAQ National Market
System, are valued at the last quoted sale price or the official closing price
of the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE on the day that the
value of the foreign security is determined. If no sale is reported at that
time, the foreign security will be valued within the range of the most recent
quoted bid and ask prices.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Occasionally, events occur between the
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the Fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
20 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION (CONTINUED)
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 on the
Statement of Operations.
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 on these
contracts 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 U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
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.
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 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 | 21
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 expenses during the reporting period. Actual results could differ from those
estimates.
G. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 1% of
the amount redeemed. Effective March 1, 2005 the fee will increase to 2%. Such
fees are retained by the Fund and accounted for as additional paid-in capital.
There were no redemption fees for the year.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund 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, 2004, 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 DECEMBER 31,
2004 2003
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
Shares sold .................... -- $ -- -- $ --
Shares issued in reinvestment
of distributions ............... -- -- 667 6,169
Shares redeemed ................ -- -- (112,026) (1,088,891)
--------------------------------------------------------------
Net increase (decrease) ........ -- $ -- (111,359) $(1,082,722)
--------------------------------------------------------------
Franklin Advisers, Inc. (an affiliate of the Fund's investment manager) is the
record owner of 100% of the Fund shares as of December 31, 2004.
22 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers and directors of
the following entities:
- ---------------------------------------------------------------------------------------
ENTITY AFFILIATION
- ---------------------------------------------------------------------------------------
Franklin Templeton Asset Strategies, LLC (Asset Strategies) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin/Templeton Distributors, Inc (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Asset Strategies based on the
Fund's average daily net assets as follows:
- ---------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ---------------------------------------------------------------------------
0.70% Up to and including $1 billion
0.68% Over $1 billion, up to and including $5 billion
0.66% Over $5 billion, up to and including $10 billion
0.64% Over $10 billion, up to and including $15 billion
0.62% Over $15 billion, up to and including $20 billion
0.60% Over $20 billion
Prior to May 1, 2004, the Fund paid an investment management fee to Asset
Strategies of 0.70% per year of the average daily net assets of the Fund.
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of .20% per year of the
Fund's average daily net assets.
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $130, of which $24 was paid to Investor
Services.
D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT
The investment manager and administrator have agreed in advance to voluntarily
waive their respective fees and assume payment of other expenses, through May 1,
2005, as noted in the Statement of Operations. Total expenses waived are not
subject to reimbursement by the Fund subsequent to the Fund's fiscal year end.
Annual Report | 23
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, passive
foreign investment company shares, and organization costs.
Net realized gains differ for financial statement and tax purposes primarily due
to differing treatments of foreign currency transactions and wash sales.
At December 31, 2004, 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 .................................... $1,894,569
-----------
Unrealized appreciation ................................ $ 913,174
Unrealized depreciation ................................ (3,983)
-----------
Net unrealized appreciation (depreciation) ............. $ 909,191
-----------
Undistributed ordinary income .......................... $ 5,575
Undistributed long term capital gains .................. 17,614
-----------
Distributable earnings ................................. $ 23,189
-----------
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
------------------------
2004 2003
------------------------
Distributions paid from:
Ordinary income .......................... $ 34,900 $55,229
Long term capital gain ................... 73,360 --
------------------------
$108,260 $55,229
------------------------
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended December 31, 2004 aggregated $612,111 and $694,435, respectively.
24 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
7. OTHER CONSIDERATIONS
An officer of Templeton Institutional Funds, Inc. may serve as a member on the
board of directors of certain companies in which the Fund invests and/or may
represent the Fund in certain corporate negotiations. At December 31, 2004, an
officer serves in one or more of these capacities for Lukoil Holdings. As a
result of this involvement, the officer may be in possession of certain material
non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time.
8. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
Annual Report | 25
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
8. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty,
26 | Annual Report
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
8. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
$14 million to the funds, to be allocated by an independent distribution
consultant to be paid for by FTDI, and $2 million to the CAGO for its
investigative costs.
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
OTHER LEGAL PROCEEDINGS
The Company, and other funds, and certain current and former officers,
employees, and directors have been named in multiple lawsuits in different
federal courts in Nevada, California, Illinois, New York and Florida, alleging
violations of various federal securities laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
Annual Report | 27
Templeton Institutional Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
8. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
The Company's management strongly believes that the claims made in each of the
lawsuits identified above are without merit and intends to vigorously defend
against them. The Company cannot predict with certainty, however, the eventual
outcome of the remaining governmental investigations or private lawsuits, nor
whether they will have a material negative impact on the Company. Public trust
and confidence are critical to the Company's business and any material loss of
investor and/or client confidence could result in a significant decline in
assets under management by the Company, which would have an adverse effect on
the Company's future financial results. If the Company finds that it bears
responsibility for any unlawful or inappropriate conduct that caused losses to
the Fund, it is committed to making the Fund or its shareholders whole, as
appropriate. The Company is committed to taking all appropriate actions to
protect the interests of its funds' shareholders.
28 | Annual Report
Templeton Institutional Funds, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the Franklin Templeton Non-U.S.
Core Equity Series of Templeton Institutional Funds, Inc. (the "Fund") at
December 31, 2004, 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 two years in the period then ended and
for the period September 3, 2002 (commencement 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards 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, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 9, 2005
Annual Report | 29
Templeton Institutional Funds, Inc.
TAX DESIGNATION (UNAUDITED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby
designates $90,974 as a capital gain dividend for the fiscal year ended December
31, 2004.
Under Section 854(b)(2) of the Code, the Fund hereby designates up to a maximum
of $58,685 as qualified dividends for purposes of the maximum rate under Section
1(h)(11) of the Code for the fiscal year ended December 31, 2004. In January
2005, shareholders will receive Form 1099-DIV which will include their share of
qualified dividends distributed during the calendar year 2004. 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, 2004, more than 50% of the Franklin Templeton Non-U.S. Core
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 Code. This designation will allow shareholders of record on
December 9, 2004, 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.
30 | Annual Report
Templeton Institutional Funds, Inc.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
- ----------------------------------------------------------------------------------------------
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 0.0094 0.0094 0.0040
Austria ....................... 0.0001 0.0006 0.0006 0.0003
Bermuda ....................... 0.0000 0.0018 0.0018 0.0008
Canada ........................ 0.0010 0.0047 0.0047 0.0020
China ......................... 0.0000 0.0018 0.0015 0.0009
Denmark ....................... 0.0002 0.0010 0.0010 0.0004
Finland ....................... 0.0008 0.0035 0.0035 0.0015
France ........................ 0.0028 0.0134 0.0131 0.0059
Germany ....................... 0.0028 0.0159 0.0159 0.0068
Hong Kong ..................... 0.0000 0.0175 0.0000 0.0175
Ireland ....................... 0.0000 0.0016 0.0016 0.0007
Israel ........................ 0.0001 0.0001 0.0001 0.0000
Italy ......................... 0.0028 0.0131 0.0131 0.0056
Japan ......................... 0.0011 0.0105 0.0100 0.0048
Mexico ........................ 0.0000 0.0043 0.0043 0.0018
Netherlands ................... 0.0026 0.0122 0.0122 0.0052
Norway ........................ 0.0009 0.0041 0.0041 0.0018
Portugal ...................... 0.0004 0.0021 0.0021 0.0009
Russia ........................ 0.0003 0.0024 0.0024 0.0010
Singapore ..................... 0.0002 0.0007 0.0000 0.0007
South Korea ................... 0.0023 0.0096 0.0096 0.0041
Spain ......................... 0.0014 0.0093 0.0083 0.0046
Sweden ........................ 0.0036 0.0168 0.0168 0.0072
Switzerland ................... 0.0012 0.0061 0.0057 0.0028
Taiwan ........................ 0.0015 0.0038 0.0038 0.0016
United Kingdom ................ 0.0076 0.0596 0.0596 0.0255
---------------------------------------------------------
TOTAL ......................... $0.0339 $0.2259 $0.2052 $0.1084
---------------------------------------------------------
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.
Annual Report | 31
Templeton Institutional Funds, Inc.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
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 2005, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2004. 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 2004 individual income tax returns.
32 | Annual Report
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
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 (60) Director Since 1990 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo
Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic
Equipment & Power Ltd. (1977-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) 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 (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas); H.J. Heinz Company (processed
Fort Lauderdale, FL 33394-3091 foods and allied products); RTI
International Metals, Inc. (manufacture
and distribution of titanium); Canadian
National Railway (railroad); and White
Mountains Insurance Group, Ltd.
(holding company).
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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences
500 East Broward Blvd. Corporation; MedImmune, Inc.
Suite 2100 (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), White Mountains
Insurance Group, Ltd. (holding
company) (1987-2004), and Spacehab,
Inc. (aerospace services)
(1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company)
(2001-2004); 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 (75) 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 (72) Director Since 2003 21 Director, White Mountains Insurance
500 East Broward Blvd. Group Ltd. (holding company);
Suite 2100 Amerada Hess Corporation (exploration
Fort Lauderdale, FL 33394-3091 and refining of oil and gas); and
Sentient Jet (private jet service);
and FORMERLY, Director, Becton
Dickinson and Co. (medical
technology), Cooper Industries
(electrical products and tools and
hardware), Health Net (formerly
Foundation Health), The Hertz
Corporation, Pacific Southwest
Airlines, The RCA Corporation,
Unicom (formerly Commonwealth
Edison) and UAL Corporation
(airlines).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief
Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL
Corporation (airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1990 21 None
(50)
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil
Suite 2100 and gas); Total Logistics, Inc.
Fort Lauderdale, FL 33394-3091 (formerly C2, Inc. (operating and
investment business)); and
Weatherford International, Ltd.
(oilfield products and servicing)
(2004-present); and FORMERLY,
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 Technology Ventures Group, LLC (investment firms) and Franklin
Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby
Emerging Markets Investments LDC (until 2004) and 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 (71) Director, Vice Director and 142 None
One Franklin Parkway President Vice President
San Mateo, CA 94403-1906 and Chairman since 1993 and
of the Board Chairman of 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (59) Vice President Since 1996 Not Applicable Not 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.; 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.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin
Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (40) Vice President Since 2001 Not Applicable Not 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 (44) Vice President Since 1990 Not Applicable Not 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 (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer -
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.
- ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior 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 (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
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. (64) Vice President Since 1996 Not Applicable Not 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 (64) Vice President Since 1994 Not Applicable Not Applicable
500 East Broward 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 (67) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-2302
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch
Chemicals, Inc. and Lingnan Foundation; 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (68) Vice President Since 1993 Not Applicable Not Applicable
17th Floor, 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 (60) President and President since Not Applicable Not Applicable
1 Adelaide Street East, Chief 1993 and Chief
Suite 2101 Executive Executive
Toronto, Ontario Canada Officer - Officer -
M5C 3B8 Investment Investment
Management 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.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary,
Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company
of America (1997-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
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).
- ------------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton
Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
*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 to be an interested person of Templeton
Institutional Funds, Inc. (TIFI) 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 TIFI'S advisers and
distributor. Nicholas F. Brady is considered to be an interested person of TIFI
under the federal securities laws due to his ownership interest in a subsidiary
of Resources, as well as his director positions with such company and certain
other related companies.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. 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 HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND
WAS FORMERLY CHAIRMAN FROM 1980-2000 AND 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 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. 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 U.S. 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 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT
1-800/321-8563 TO REQUEST THE SAI.
Annual Report | 39
Templeton Institutional Funds, Inc.
SHAREHOLDER INFORMATION
FRANKLIN TEMPLETON NON-U.S. CORE 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. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the Securities and Exchange Commission's
website at sec.gov and reflect the 12-month period beginning July 1, 2003 and
ending June 30, 2004.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
40 | Annual Report
[LOGO OMITTED] FRANKLIN TEMPLETON INSTITUTIONAL
FRANKLIN[R] TEMPLETON[R] 600 Fifth Avenue
INSTITUTIONAL NEW YORK, NEW YORK 10020
FRANKLINTEMPLETONINSTITUTIONAL.COM
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
INVESTMENT MANAGER
Franklin Templeton Alternative Strategies, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
This report must be preceded or accompanied by the current Templeton
Institutional Funds, Inc., Franklin Templeton Non-U.S. Core Equity Series
prospectus, which contains more complete information including charges,
expenses, and risk factors. 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.
ZT459 A2004 02/05
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 11(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 $131,082 for the fiscal year ended December 31, 2004 and $232,130 for the
fiscal year ended December 31, 2003.
(b) Audit-Related Fees
There were no 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.
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 their financial statements
were $48,949 for the fiscal year ended December 31, 2004 and $3,134 for the
fiscal year ended December 31, 2003. The services for which these fees were paid
included 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.
There were no 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.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $2,813 for the fiscal year ended December 31,
2004 and $0 for the fiscal year ended December 31, 2003. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate 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 not reported
in paragraphs (a)-(c) of Item 4 were $97,187 for the fiscal year ended December
31, 2004 and $12,000 for the fiscal year ended December 31, 2003. The services
for which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process and
a review of an ICI transfer agent survey.
(e) (1) The registrant'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
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; 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 $148,949 for the fiscal year ended December 31, 2004 and $15,134
for the fiscal year ended December 31, 2003.
(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.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosures
herein.
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
(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
Galen G. Vetter, 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
Galen G. Vetter, 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 18, 2005
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 18, 2005
By /s/GALEN G. VETTER
-------------------------
Galen G. Vetter
Chief Financial Officer
Date: February 18, 2005