UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDED
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06135
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TEMPLETON INSTITUTIONAL FUNDS, INC.
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
FOREIGN EQUTIY SERIES
ANNUAL REPORT 12/31/2005
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THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
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TEMPLETON INSTITUTIONAL FUNDS, INC.
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Foreign Equity Series
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INSTITUTIONAL
FRANKLIN o TEMPLETON o FIDUCIARY
CONTENTS
ANNUAL REPORT
TIFI Foreign Equity Series ....................................... 1
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 .......... 27
Tax Designation .................................................. 28
Board Members and Officers ....................................... 31
Shareholder Information .......................................... 38
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ANNUAL REPORT
TIFI FOREIGN EQUITY SERIES
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Foreign Equity Series seeks
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.
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PERFORMANCE DATA 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.
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GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Europe ................................................................. 62.0%
Asia ................................................................... 23.6%
North America .......................................................... 4.4%
Australia & New Zealand ................................................ 2.5%
Middle East & Africa ................................................... 1.8%
Latin America .......................................................... 1.2%
Short-Term Investments & Other Net Assets .............................. 4.5%
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This annual report for Templeton Institutional Funds, Inc. (TIFI) Foreign Equity
Series (the Fund) covers the fiscal year ended December 31, 2005.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 11.
Annual Report | 1
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Financials 22.4%
Consumer Discretionary 12.6%
Industrials 12.2%
Telecommunication Services 10.0%
Materials 8.3%
Information Technology 7.6%
Energy 7.3%
Health Care 6.3%
Utilities 5.5%
Consumer Staples 3.3%
Short-Term Investments & Other Net Assets 4.5%
PERFORMANCE OVERVIEW
For the year under review, the Fund posted a +13.61% cumulative total return.
The Fund underperformed its benchmarks, the Morgan Stanley Capital International
(MSCI) All Country (AC) World ex US Index and the MSCI Europe, Australasia, Far
East (EAFE) Index, which posted total returns of +17.11% and +14.02% for the
same period.(1) Please note that index performance information is provided for
reference and that we do not attempt to track an index, but rather undertake
investments on the basis of fundamental research. You can find the Fund's
long-term performance data in the Performance Summary beginning on page 6.
ECONOMIC AND MARKET OVERVIEW
The global economy overcame fears of derailment generated by higher energy costs
and advanced at a solid clip during 2005, with signs of firming recoveries in
Europe and Japan. Excluding the volatile energy and food sectors, inflation
remained relatively subdued worldwide, and monetary policy remained fairly
accommodative. The U.S. Federal Reserve Board raised the short-term federal
funds target rate with eight quarter-point increases, bringing it to 4.25%. The
European Central Bank (ECB) made one quarter-point rise in short-term rates, its
first increase after keeping rates at historically low levels for more than two
and a half years. Even after the increases, both rates remained at levels
considered accommodative for economic growth.
Strong demand for oil sustained high prices during most of the year, while
prices for other commodities such as industrial metals were also high, led by
copper, whose contract price rose 45.4% during 2005.(2) This contributed to
economic growth in countries such as Australia and Canada, and emerging markets
in Asia and Latin America that are tied to mining and industrial commodities.
(1) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global developed and emerging markets
excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market
performance in global developed markets excluding the U.S. and Canada. The
indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
(2) Source: New York Mercantile Exchange.
2 | Annual Report
In this environment, global equity markets performed strongly, particularly
outside the U.S. One-year total return for the MSCI AC World ex US Index was
+17.11% in U.S. dollar terms.(3) By comparison the total return for the MSCI USA
Index was +5.72%.(4) In terms of sectors, energy and materials led equity market
performance, and telecommunication services and consumer-related sectors lagged.
Among developed countries, the Japanese equity market performed well, returning
+44.70% in local currency terms for the year under review.(4) However, this
market benefited primarily from investors outside Japan, and the return was
significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast,
the conversion into dollars enhanced equity market returns in Brazil (+57.04%),
Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the
consensus of many analysts appeared to be that the U.S. dollar would decline in
value relative to major currencies. In fact, for the year the dollar appreciated
versus the yen, the euro, the pound and most other currencies.
INVESTMENT STRATEGY
We employ a bottom-up, value-oriented, long-term investment strategy. Our
in-depth fundamental internal research evaluates a company's potential to grow
earnings, asset value and/or cash flow over a five-year horizon. Stocks are
selected for purchase or sale utilizing strict valuation parameters, reflecting
our focus on individual companies rather than countries or sectors.
MANAGER'S DISCUSSION
During the year under review, the Fund continued to benefit from its
geographical and sector diversification. Each major geographical area and
industry group made a positive contribution to the Fund's total return.
In 2005, a main focus of the equity markets was high energy costs. It was not
surprising that energy stocks performed strongly. The energy sector was the best
performer in the MSCI AC World ex US Index (the Index) with a 32% total
return.(3) Although the Fund benefited on an absolute basis from its exposure to
the energy sector, it lagged the Index in relative terms.(5) This was due to our
underweighted position in exploration and production stocks,
(3) Source: Standard & Poor's Micropal. Please see footnote 1 for a
description of the MSCI AC World ex US Index.
(4) Source: Standard & Poor's Micropal. Individual country market returns are
measured by MSCI country-specific indexes. The MSCI USA Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the U.S.
(5) The energy sector comprises energy equipment and services; and oil, gas
and consumable fuels in the SOI.
TOP 10 EQUITY HOLDINGS
12/31/05
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Samsung Electronics Co. Ltd. 2.8%
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA
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Atlas Copco AB, A 1.6%
MACHINERY, SWEDEN
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Celesio AG 1.6%
HEALTH CARE PROVIDERS & SERVICES, GERMANY
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Rolls-Royce Group PLC, ord. & B 1.6%
AEROSPACE & DEFENSE, U.K
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E.ON AG 1.6%
ELECTRIC UTILITIES, GERMANY
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Housing Development Finance Corp. Ltd. 1.6%
THRIFTS & MORTGAGE FINANCE, INDIA
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Sanofi-Aventis, ord. & ADR 1.6%
PHARMACEUTICALS, FRANCE
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Koninklijke Philips Electronics NV, ord. & N.Y. 1.5%
HOUSEHOLD DURABLES, NETHERLANDS
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Royal Dutch Shell PLC, B, ADR 1.5%
OIL, GAS & CONSUMABLE FUELS, U.K.
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Nordea Bank AB, FDR 1.4%
COMMERCIAL BANKS, SWEDEN
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Annual Report | 3
which delivered strong performance. For the longer term, however, we remained
comfortable with the Fund's exposure to mostly European integrated oil and gas
companies.
Despite concerns in energy costs, equity markets seemed to reflect confidence in
a prolonged economic cycle (the current expansion is more than four years old).
The markets favored sectors traditionally considered cyclical, such as materials
and industrials.6 Along with energy, these two sectors provided the strongest
returns in the Index during 2005. The Fund's results from these sectors were
mixed, however.
On the positive side, large industrials holdings such as Rolls-Royce Group
(aircraft engines, U.K.) and Atlas Copco (construction and mining, Sweden)
posted strong total returns, 60% and 61%. Komatsu (construction equipment,
Japan) returned approximately 40% for the period we owned it and we sold our
stake by period-end. The Fund was overweighted in the industrials sector
relative to the Index, and these three holdings contributed to the Fund's strong
sector performance.
On the negative side, the Fund was underweighted in the strong performing metals
and mining industry and overweighted in the weaker paper and forest products
industry.(6) Although this hurt the Fund's near-term performance, during the
year we deliberately reduced our exposure to certain mining stocks and increased
our holdings in the paper industry. This was the result of our focus on
valuation parameters such as price-to-earnings and price-to-cash flow ratios.
While the first group of companies began to reach our target level, the second
group appeared undervalued to us, particularly on the three- to five-year
horizon. Thus, we felt comfortable adding to the paper companies, based on
valuation and our longer-term investment horizon.
From a sector perspective, the financials sector had the largest weighting in
the Fund and the Index.(7) Combined with strong returns for the year, this made
the financial holdings the strongest contributors to total returns for both the
Index and the Fund. The Fund also benefited from its exposure to some financial
companies in the emerging markets. Kookmin Bank, a retail-focused bank in South
Korea; ICICI Bank, a commercial bank in India; and
(6) The materials sector comprises chemicals, metals and mining, and paper and
forest products in the SOI. The industrials sector comprises aerospace and
defense, air freight and logistics, airlines, commercial services and
supplies, electrical equipment, industrial conglomerates, and machinery in
the SOI.
(7) The financials sector comprises capital markets, commercial banks,
insurance, real estate, and thrifts and mortgage finance in the SOI.
4 | Annual Report
Housing Development Finance, India's premier housing finance company; were the
top three contributors to performance among the Fund's financial holdings.
It is important to recognize the effect of currency movements on the Fund's
performance. In general, if the value of the U.S. dollar increases compared with
a foreign currency, an investment traded in that foreign currency will decrease
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 year ended
December 31, 2005, the U.S. dollar rose in value relative to most non-U.S.
currencies. As a result, the Fund's performance was negatively affected by the
portfolio's investment predominantly in securities with non-U.S. currency
exposure.
Thank you for your continued participation in the Fund. We look forward to
serving your future investment needs.
/s/ Gary P. Motyl
[PHOTO]
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, 2005, 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 12/31/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes that a
shareholder would pay 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 on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
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SYMBOL: TFEQX CHANGE 12/31/05 12/31/04
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Net Asset Value (NAV) +$2.04 $22.31 $20.27
DISTRIBUTIONS (1/1/05-12/31/05)
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Dividend Income $0.6603
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Long-Term Capital Gain $0.0388
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TOTAL $0.6991
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TIFI Foreign Equity Series paid distributions derived from long-term capital
gains of 3.88 cents ($0.0388) per share in December 2005. The Fund designates
such distributions as capital gain dividends per Internal Revenue Code Section
852(b)(3)(C).
PERFORMANCE(1)
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1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return(2) +13.61% +47.10% +163.19%
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Average Annual Total Return(3) +13.61% +8.03% +10.16%
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Value of $1,000,000 Investment(4) $1,136,107 $1,471,016 $2,631,882
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PERFORMANCE DATA 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.
6 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any Fund expenses, account fees and reinvested distributions.
The unmanaged indexes include reinvestment of any income or distributions. They
differ from the Fund in composition and do not pay management fees or expenses.
One cannot invest directly in an index. The Consumer Price Index (CPI),
calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of
the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
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12/31/05
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1-Year +13.61%
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5-Year +8.03%
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10-Year +10.16%
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1/1/96-12/31/05
$ Millions
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
TIFI FOREIGN MSCI AC WORLD
INCEPTION DATE EQUITY SERIES EX U.S. INDEX(5) MSCI EAFE INDEX(5) CPI(5)
- -------------- ------------- ---------------------- ------------------ -------------
Dec-95 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00
Jan-96 1,032,051.39 1,013,736.65 1,004,349.40 1,005,840.44
Feb-96 1,048,424.39 1,013,776.06 1,007,973.90 1,009,111.09
Mar-96 1,056,291.16 1,032,647.06 1,029,636.72 1,014,367.48
Apr-96 1,094,909.63 1,063,976.76 1,059,825.17 1,018,222.17
May-96 1,107,782.24 1,047,999.46 1,040,594.39 1,020,207.92
Jun-96 1,104,206.59 1,053,313.97 1,046,686.77 1,020,908.77
Jul-96 1,075,600.19 1,018,296.77 1,016,350.52 1,022,777.71
Aug-96 1,107,067.25 1,024,269.96 1,018,847.39 1,024,763.46
Sep-96 1,116,374.81 1,049,705.28 1,046,138.26 1,028,034.11
Oct-96 1,127,115.78 1,039,188.86 1,035,721.45 1,031,304.75
Nov-96 1,185,118.58 1,079,278.49 1,077,201.82 1,033,173.69
Dec-96 1,215,828.27 1,066,780.39 1,063,589.82 1,033,173.69
Jan-97 1,238,150.70 1,047,183.14 1,026,619.93 1,036,444.34
Feb-97 1,255,252.90 1,066,386.30 1,043,655.07 1,039,598.18
Mar-97 1,267,917.30 1,064,151.28 1,047,682.29 1,042,167.97
Apr-97 1,261,957.47 1,073,125.14 1,053,521.76 1,043,452.87
May-97 1,314,104.76 1,139,410.11 1,122,306.70 1,042,752.01
Jun-97 1,372,211.10 1,202,277.81 1,184,487.39 1,044,036.91
Jul-97 1,422,123.27 1,226,620.95 1,203,858.32 1,045,321.81
Aug-97 1,341,668.03 1,130,126.61 1,114,211.98 1,047,307.56
Sep-97 1,449,686.72 1,191,226.56 1,176,875.54 1,049,877.35
Oct-97 1,342,413.00 1,089,806.17 1,086,678.28 1,052,563.95
Nov-97 1,333,473.52 1,076,187.74 1,075,832.57 1,051,863.10
Dec-97 1,354,792.54 1,088,573.25 1,085,497.90 1,050,578.20
Jan-98 1,371,180.92 1,121,135.86 1,135,395.16 1,052,563.95
Feb-98 1,458,586.77 1,195,944.31 1,208,489.22 1,054,666.51
Mar-98 1,565,823.86 1,237,266.86 1,245,979.02 1,056,769.07
Apr-98 1,586,189.26 1,246,128.12 1,256,131.65 1,058,638.01
May-98 1,568,956.27 1,223,530.21 1,250,328.02 1,060,506.95
Jun-98 1,554,073.64 1,218,930.68 1,260,033.62 1,061,791.85
Jul-98 1,581,489.45 1,230,528.02 1,273,126.52 1,063,076.74
Aug-98 1,326,915.79 1,056,990.21 1,115,661.78 1,064,361.64
Sep-98 1,307,332.90 1,034,662.52 1,081,757.01 1,065,646.54
Oct-98 1,408,379.07 1,143,035.69 1,194,841.77 1,068,216.33
Nov-98 1,484,359.62 1,204,462.16 1,256,332.60 1,068,216.33
Dec-98 1,492,448.42 1,245,959.23 1,306,189.60 1,067,515.48
Jan-99 1,476,481.98 1,244,624.97 1,302,645.64 1,070,202.08
Feb-99 1,442,868.22 1,216,757.59 1,271,877.68 1,071,253.36
Mar-99 1,520,828.20 1,275,504.29 1,325,283.86 1,074,524.00
Apr-99 1,645,527.62 1,339,306.52 1,379,293.72 1,082,233.38
May-99 1,584,862.89 1,276,399.42 1,308,565.66 1,082,233.38
Jun-99 1,659,851.45 1,335,050.41 1,359,872.85 1,082,233.38
Jul-99 1,669,119.75 1,366,363.22 1,400,627.12 1,085,153.60
Aug-99 1,660,694.12 1,371,103.49 1,406,023.59 1,088,424.25
Sep-99 1,626,991.69 1,380,375.73 1,420,521.59 1,093,096.60
Oct-99 1,653,111.61 1,431,775.57 1,474,043.35 1,095,315.97
Nov-99 1,735,683.34 1,489,024.75 1,525,551.51 1,095,783.20
Dec-99 1,900,435.84 1,631,035.82 1,662,758.92 1,095,783.20
Jan-00 1,783,037.53 1,542,530.13 1,557,406.82 1,098,820.23
Feb-00 1,832,468.11 1,584,196.10 1,599,612.10 1,105,127.91
Mar-00 1,869,400.97 1,643,815.41 1,661,953.48 1,114,005.37
Apr-00 1,789,436.02 1,552,072.60 1,574,767.37 1,114,939.84
May-00 1,783,216.18 1,512,371.43 1,536,626.36 1,115,757.50
Jun-00 1,874,731.78 1,576,753.53 1,597,077.37 1,121,831.56
Jul-00 1,848,965.13 1,514,505.11 1,530,424.44 1,124,284.55
Aug-00 1,876,508.00 1,533,241.01 1,544,030.01 1,124,284.55
Sep-00 1,788,546.44 1,448,192.00 1,469,170.42 1,130,124.99
Oct-00 1,714,801.23 1,402,162.96 1,434,753.79 1,131,993.93
Nov-00 1,703,250.78 1,339,255.86 1,381,256.19 1,132,694.78
Dec-00 1,789,158.41 1,384,980.89 1,430,674.21 1,131,760.31
Jan-01 1,817,658.80 1,405,766.02 1,430,000.06 1,139,236.07
Feb-01 1,757,492.09 1,294,471.00 1,322,900.15 1,144,025.23
Mar-01 1,624,540.72 1,202,970.27 1,235,309.71 1,146,828.64
Apr-01 1,716,455.87 1,284,787.79 1,321,950.93 1,150,916.95
May-01 1,705,768.08 1,249,308.95 1,276,343.46 1,155,939.73
Jun-01 1,667,292.13 1,201,393.93 1,224,621.46 1,158,275.90
Jul-01 1,626,678.42 1,174,663.76 1,202,438.32 1,154,654.83
Aug-01 1,608,509.06 1,145,490.27 1,172,227.72 1,155,122.07
Sep-01 1,410,785.29 1,023,965.95 1,053,760.98 1,159,911.23
Oct-01 1,456,742.47 1,052,655.28 1,080,706.31 1,155,939.73
Nov-01 1,543,313.46 1,100,801.12 1,120,614.05 1,153,953.98
Dec-01 1,572,465.03 1,114,982.52 1,127,294.41 1,149,398.43
Jan-02 1,527,909.88 1,067,230.77 1,067,481.72 1,152,435.46
Feb-02 1,552,904.39 1,074,915.41 1,075,021.08 1,157,107.81
Mar-02 1,628,387.71 1,133,307.44 1,133,710.98 1,163,181.87
Apr-02 1,630,564.54 1,140,671.18 1,141,921.27 1,169,839.97
May-02 1,659,953.47 1,153,096.09 1,157,412.38 1,169,606.35
Jun-02 1,591,378.06 1,103,306.37 1,111,771.08 1,170,540.82
Jul-02 1,420,484.55 995,794.56 1,002,101.40 1,171,825.72
Aug-02 1,423,749.98 995,850.86 1,000,064.44 1,175,563.60
Sep-02 1,248,502.70 890,315.10 892,912.17 1,177,432.54
Oct-02 1,317,077.93 938,078.11 940,971.41 1,179,885.53
Nov-02 1,406,334.26 983,189.49 983,798.09 1,179,651.91
Dec-02 1,339,736.57 951,426.30 950,791.79 1,177,082.12
Jan-03 1,303,288.87 918,024.85 911,170.79 1,182,338.51
Feb-03 1,264,631.86 899,424.07 890,342.00 1,191,449.60
Mar-03 1,223,632.99 881,977.40 873,515.87 1,198,574.93
Apr-03 1,363,540.08 966,964.48 960,131.72 1,196,121.95
May-03 1,440,155.99 1,028,559.85 1,019,199.37 1,193,785.77
Jun-03 1,475,687.94 1,057,187.25 1,044,424.27 1,195,070.67
Jul-03 1,550,082.92 1,085,307.98 1,069,862.62 1,196,238.76
Aug-03 1,610,043.26 1,117,538.44 1,095,884.91 1,201,027.92
Sep-03 1,621,147.10 1,148,828.73 1,129,885.12 1,204,648.99
Oct-03 1,744,398.95 1,223,299.39 1,200,381.62 1,203,480.90
Nov-03 1,775,489.87 1,249,973.26 1,227,240.36 1,199,859.83
Dec-03 1,910,618.88 1,345,409.20 1,323,173.59 1,198,691.74
Jan-04 1,939,926.43 1,367,010.65 1,341,982.33 1,204,648.99
Feb-04 1,994,032.81 1,401,768.88 1,373,189.66 1,210,723.05
Mar-04 1,976,902.37 1,410,393.69 1,381,454.73 1,217,965.19
Apr-04 1,931,586.40 1,366,560.26 1,351,376.62 1,221,586.26
May-04 1,936,117.90 1,370,883.93 1,357,228.58 1,228,945.22
Jun-04 1,976,902.47 1,400,597.88 1,387,517.71 1,232,683.10
Jul-04 1,922,523.46 1,359,782.02 1,342,679.44 1,230,230.11
Aug-04 1,934,984.78 1,370,670.00 1,348,913.17 1,231,515.01
Sep-04 2,005,224.43 1,414,739.88 1,384,366.01 1,233,967.99
Oct-04 2,084,526.80 1,463,944.11 1,431,656.45 1,240,509.29
Nov-04 2,237,467.56 1,565,555.91 1,529,853.79 1,241,210.14
Dec-04 2,316,577.50 1,632,781.05 1,597,039.91 1,236,654.60
Jan-05 2,286,863.10 1,604,654.70 1,567,857.46 1,239,224.39
Feb-05 2,394,291.53 1,683,803.70 1,635,960.99 1,246,466.53
Mar-05 2,338,872.35 1,638,129.34 1,595,495.07 1,256,161.66
Apr-05 2,266,184.78 1,597,730.07 1,559,782.48 1,264,571.90
May-05 2,295,028.13 1,607,751.07 1,562,167.00 1,263,287.00
Jun-05 2,315,793.05 1,637,999.85 1,583,522.55 1,263,987.85
Jul-05 2,420,795.22 1,698,435.49 1,632,166.94 1,269,828.29
Aug-05 2,461,180.02 1,741,902.98 1,673,880.49 1,276,369.58
Sep-05 2,536,189.13 1,831,754.18 1,748,770.29 1,292,021.96
Oct-05 2,443,879.70 1,765,069.50 1,697,817.49 1,294,591.75
Nov-05 2,507,349.81 1,824,412.96 1,739,799.65 1,284,195.77
Dec-05 2,631,882.22 1,912,192.40 1,820,870.43 1,279,056.19
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN
DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER
LIQUIDITY. THESE AND OTHER RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S
PROSPECTUS.
(1) Past expense reductions by the Fund's manager and administrator increased
the Fund's total returns. If the manager and administrator had not taken
this action, the Fund's total returns would have been lower.
(2) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4) These figures represent the value of a hypothetical $1,000,000 investment
in the Fund over the periods indicated.
(5) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a
free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global developed and emerging markets
excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market
performance in global developed markets excluding the U.S. and Canada.
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 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 Fund's actual expense ratio 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. 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*
7/1/05 12/31/05 7/1/05-12/31/05
- -------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,136.50 $4.36
- -------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000.00 $1,021.12 $4.13
- -------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 0.81%, multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Annual Report | 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOREIGN EQUITY SERIES
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 20.27 $ 16.95 $ 12.13 $ 14.47 $ 16.95
------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... 0.42 0.33 0.25 0.23 0.25
Net realized and unrealized gains (losses) ... 2.32 3.25 4.87 (2.37) (2.28)
------------------------------------------------------------------------------
Total from investment operations ................ 2.74 3.58 5.12 (2.14) (2.03)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.66) (0.26) (0.30) (0.20) (0.28)
Net realized gains ........................... (0.04) -- -- -- (0.17)
------------------------------------------------------------------------------
Total distributions ............................. (0.70) (0.26) (0.30) (0.20) (0.45)
------------------------------------------------------------------------------
Redemption fees ................................. --(b) --(b) -- -- --
------------------------------------------------------------------------------
Net asset value, end of year .................... $ 22.31 $ 20.27 $ 16.95 $ 12.13 $ 14.47
==============================================================================
Total return .................................... 13.61% 21.25% 42.61% (14.80)% (12.11)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 6,245,721 $ 5,658,170 $ 4,642,764 $ 3,164,910 $ 3,551,516
Ratios to average net assets:
Expenses ..................................... 0.81% 0.82% 0.83% 0.83% 0.84%
Net investment income ........................ 2.01% 1.89% 1.85% 1.68% 1.62%
Portfolio turnover rate ......................... 12.97% 18.25% 8.93% 16.26% 15.38%
(a) Based on average daily shares outstanding.
(b) Amount is less than $0.01 per share.
10 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 95.5%
AUSTRALIA 2.5%
Alumina Ltd. .................................. Metals & Mining 9,790,288 $ 53,287,960
AMP Ltd. ...................................... Insurance 340,096 1,918,481
National Australia Bank Ltd. .................. Commercial Banks 2,903,680 69,011,820
Qantas Airways Ltd. ........................... Airlines 11,228,850 33,277,168
-------------
157,495,429
-------------
BERMUDA 1.4%
ACE Ltd. ...................................... Insurance 1,108,930 59,261,219
XL Capital Ltd., A ............................ Insurance 450,020 30,322,348
-------------
89,583,567
-------------
CANADA 2.7%
Alcan Inc. .................................... Metals & Mining 1,066,343 43,817,037
BCE Inc. ...................................... Diversified Telecommunication Services 2,469,060 59,203,908
BCE Inc. (USD Traded) ......................... Diversified Telecommunication Services 5,920 141,784
(a) Celestica Inc. ................................ Electronic Equipment & Instruments 9,815 103,646
Husky Energy Inc. ............................. Oil, Gas & Consumable Fuels 1,328,990 67,461,421
-------------
170,727,796
-------------
CHINA 0.7%
China Mobile (Hong Kong) Ltd. ................. Wireless Telecommunication Services 8,492,000 40,194,799
-------------
DENMARK 0.9%
TDC AS ........................................ Diversified Telecommunication Services 531,490 31,835,596
(a) Vestas Wind Systems AS ........................ Electrical Equipment 111,445 18,252,790
(a),(b) Vestas Wind Systems AS, 144A .................. Electrical Equipment 340,168 5,586,435
-------------
55,674,821
-------------
FINLAND 2.3%
M-real OYJ, B ................................. Paper & Forest Products 2,306,820 11,524,520
(b) M-real OYJ, B, 144A ........................... Paper & Forest Products 1,922,350 9,603,766
Stora Enso OYJ, R (EUR/FIM Traded) ............ Paper & Forest Products 1,673,625 22,666,312
Stora Enso OYJ, R (SEK Traded) ................ Paper & Forest Products 2,814,636 38,081,099
UPM-Kymmene OYJ ............................... Paper & Forest Products 3,278,200 64,267,656
-------------
146,143,353
-------------
FRANCE 7.5%
Accor SA ...................................... Hotels, Restaurants & Leisure 494,470 27,196,676
AXA SA ........................................ Insurance 2,311,148 74,584,794
France Telecom SA ............................. Diversified Telecommunication Services 3,183,580 79,108,817
Michelin SA, B ................................ Auto Components 1,341,820 75,422,627
Sanofi-Aventis ................................ Pharmaceuticals 1,106,500 96,934,823
Sanofi-Aventis, ADR ........................... Pharmaceuticals 6,813 299,091
Suez SA ....................................... Multi-Utilities 2,075,810 64,630,874
Suez SA, ADR .................................. Multi-Utilities 7,250 226,490
Total SA, B ................................... Oil, Gas & Consumable Fuels 201,687 50,666,391
-------------
469,070,583
-------------
GERMANY 8.8%
BASF AG ....................................... Chemicals 534,020 40,922,279
BASF AG, ADR .................................. Chemicals 6,430 491,766
Bayer AG, Br. ................................. Chemicals 1,039,720 43,363,639
Bayerische Motoren Werke AG ................... Automobiles 1,389,960 60,883,654
Annual Report | 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
GERMANY (CONTINUED)
Celesio AG .................................... Health Care Providers & Services 1,178,552 $ 101,126,184
Deutsche Post AG .............................. Air Freight & Logistics 3,524,380 85,616,362
E.ON AG ....................................... Electric Utilities 956,750 99,061,438
Merck KGaA .................................... Pharmaceuticals 81,272 6,739,781
Muenchener Rueckversicherungs-
Gesellschaft AG ............................. Insurance 321,287 43,501,272
Siemens AG .................................... Industrial Conglomerates 815,230 69,845,014
-------------
551,551,389
-------------
HONG KONG 2.0%
Cheung Kong (Holdings) Ltd. ................... Real Estate 2,550,000 26,162,195
Cheung Kong (Holdings) Ltd., ADR .............. Real Estate 31,535 323,539
Hutchison Whampoa Ltd. ........................ Industrial Conglomerates 5,342,550 50,885,366
Hutchison Whampoa Ltd., ADR ................... Industrial Conglomerates 4,795 228,351
Swire Pacific Ltd., A ......................... Real Estate 5,440,500 48,836,200
Swire Pacific Ltd., B ......................... Real Estate 154,500 269,002
-------------
126,704,653
-------------
INDIA 3.5%
Housing Development Finance Corp. Ltd. ........ Thrifts & Mortgage Finance 3,668,470 98,272,926
ICICI Bank Ltd. ............................... Commercial Banks 4,935,848 64,140,245
Satyam Computer Services Ltd. ................. IT Services 3,347,536 54,890,812
Satyam Computer Services Ltd., ADR ............ IT Services 47,700 1,745,343
-------------
219,049,326
-------------
ISRAEL 0.7%
(a) Check Point Software Technologies Ltd. ........ Software 2,073,240 41,672,124
-------------
ITALY 1.7%
Eni SpA ....................................... Oil, Gas & Consumable Fuels 2,433,040 67,486,704
UniCredito Italiano SpA ....................... Commercial Banks 5,363,030 36,951,315
-------------
104,438,019
-------------
JAPAN 8.4%
Fuji Photo Film Co. Ltd. ...................... Leisure Equipment & Products 1,053,900 34,823,435
Hitachi Ltd. .................................. Electronic Equipment & Instruments 6,516,000 43,889,011
Hitachi Ltd., ADR ............................. Electronic Equipment & Instruments 2,275 153,335
Mabuchi Motor Co. Ltd. ........................ Electronic Equipment & Instruments 650,600 36,104,634
NEC Corp. ..................................... Computers & Peripherals 3,873,000 24,085,250
NEC Corp., ADR ................................ Computers & Peripherals 14,625 90,529
Nintendo Co. Ltd. ............................. Software 416,100 50,236,592
Nippon Telegraph & Telephone Corp. ............ Diversified Telecommunication Services 10,115 45,934,424
Nippon Telegraph & Telephone Corp., ADR ....... Diversified Telecommunication Services 6,815 155,450
Nomura Holdings Inc. .......................... Capital Markets 2,770,700 53,052,461
Ono Pharmaceutical Co. Ltd. ................... Pharmaceuticals 977,000 44,119,377
Seiko Epson Corp. ............................. Computers & Peripherals 922,000 23,161,315
Sompo Japan Insurance Inc. .................... Insurance 6,208,000 83,891,892
SONY Corp. .................................... Household Durables 1,130,000 46,145,895
SONY Corp., ADR ............................... Household Durables 4,405 179,724
Takeda Pharmaceutical Co. Ltd. ................ Pharmaceuticals 763,500 41,270,270
-------------
527,293,594
-------------
12 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MEXICO 1.2%
Telefonos de Mexico SA de CV
(Telmex), L, ADR ............................ Diversified Telecommunication Services 2,933,954 $ 72,409,985
-------------
NETHERLANDS 6.0%
Akzo Nobel NV, ADR ............................ Chemicals 5,290 243,763
ING Groep NV .................................. Capital Markets 2,548,410 88,396,202
ING Groep NV, ADR ............................. Capital Markets 12,965 451,441
Koninklijke Philips Electronics NV ............ Household Durables 2,954,061 91,800,585
Koninklijke Philips Electronics NV,
(N.Y. shs.) ................................. Household Durables 11,935 371,178
SBM Offshore NV ............................... Energy Equipment & Services 603,625 48,771,550
Unilever NV ................................... Food Products 1,093,340 74,878,181
Unilever NV, (N.Y. shs.) ...................... Food Products 2,540 174,371
VNU NV ........................................ Media 1,211,760 40,181,524
Wolters Kluwer NV ............................. Media 1,499,375 30,317,600
-------------
375,586,395
-------------
NORWAY 0.8%
Telenor ASA ................................... Diversified Telecommunication Services 5,272,050 51,747,261
-------------
PORTUGAL 0.7%
Portugal Telecom SGPS SA ...................... Diversified Telecommunication Services 4,496,290 45,511,077
-------------
SINGAPORE 0.9%
DBS Group Holdings Ltd. ....................... Commercial Banks 5,624,185 55,803,874
DBS Group Holdings Ltd., ADR .................. Commercial Banks 7,605 301,831
-------------
56,105,705
-------------
SOUTH AFRICA 1.1%
Sappi Ltd. .................................... Paper & Forest Products 3,237,666 37,102,040
Sappi Ltd., ADR ............................... Paper & Forest Products 2,726,730 30,893,851
-------------
67,995,891
-------------
SOUTH KOREA 7.3%
Kookmin Bank .................................. Commercial Banks 900,573 68,380,977
Kookmin Bank, ADR ............................. Commercial Banks 216,498 16,174,566
Korea Electric Power Corp. .................... Electric Utilities 1,146,540 43,016,588
Korea Electric Power Corp., ADR ............... Electric Utilities 12,195 237,680
KT Corp., ADR ................................. Diversified Telecommunication Services 903,955 19,480,230
LG Electronics Inc. ........................... Household Durables 938,340 83,169,987
POSCO ......................................... Metals & Mining 224,020 44,915,176
POSCO, ADR .................................... Metals & Mining 4,080 202,001
Samsung Electronics Co. Ltd. .................. Semiconductors & Semiconductor Equipment 270,520 176,945,588
-------------
452,522,793
-------------
SPAIN 5.0%
Banco Santander Central Hispano SA ............ Commercial Banks 4,618,890 60,969,014
Endesa SA ..................................... Electric Utilities 1,635,640 43,025,751
Iberdrola SA, Br. ............................. Electric Utilities 2,011,074 54,972,902
Repsol YPF SA ................................. Oil, Gas & Consumable Fuels 2,520,610 73,615,877
Telefonica SA ................................. Diversified Telecommunication Services 5,433,139 81,750,995
Telefonica SA, ADR ............................ Diversified Telecommunication Services 8,892 400,318
-------------
314,734,857
-------------
Annual Report | 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SWEDEN 7.5%
Atlas Copco AB, A ............................. Machinery 4,621,920 $ 102,961,405
Autoliv Inc. .................................. Auto Components 830,940 37,741,295
Autoliv Inc., IDR ............................. Auto Components 9,100 411,164
Electrolux AB, B .............................. Household Durables 2,311,080 60,063,938
ForeningsSparbanken AB (Swedbank), A .......... Commercial Banks 1,405,980 38,310,323
Nordea Bank AB, FDR ........................... Commercial Banks 8,593,898 89,835,416
Securitas AB, B ............................... Commercial Services & Supplies 1,926,540 32,005,950
Svenska Cellulosa AB, B ....................... Paper & Forest Products 1,294,903 48,403,019
Volvo AB, B ................................... Machinery 1,227,585 57,860,497
--------------
467,593,007
--------------
SWITZERLAND 3.5%
Adecco SA ..................................... Commercial Services & Supplies 1,031,040 47,559,295
Lonza Group AG ................................ Chemicals 420,110 25,710,252
Nestle SA ..................................... Food Products 267,320 79,967,087
Nestle SA, ADR ................................ Food Products 2,310 172,756
Swiss Reinsurance Co. ......................... Insurance 871,120 63,788,197
Swiss Reinsurance Co., ADR .................... Insurance 3,295 241,278
UBS AG ........................................ Capital Markets 4,755 452,438
--------------
217,891,303
--------------
TAIWAN 0.8%
Chunghwa Telecom Co. Ltd., ADR ................ Diversified Telecommunication Services 1,223,460 22,450,491
(b) Compal Electronics Inc., GDR, 144A ............ Computers & Peripherals 4,162,317 21,144,570
Compal Electronics Inc., GDR, Reg S ........... Computers & Peripherals 1,103,174 5,604,124
--------------
49,199,185
--------------
UNITED KINGDOM 17.3%
Amvescap PLC .................................. Capital Markets 3,236,560 24,612,060
BAE Systems PLC ............................... Aerospace & Defense 5,617,238 36,892,995
BP PLC ........................................ Oil, Gas & Consumable Fuels 4,940,110 52,610,122
(a) British Airways PLC ........................... Airlines 9,058,170 52,050,988
(a) British Airways PLC, ADR ...................... Airlines 8,225 472,937
British Sky Broadcasting Group PLC ............ Media 6,149,950 52,533,082
Cadbury Schweppes PLC ......................... Food Products 5,278,910 49,906,142
Compass Group PLC ............................. Hotels, Restaurants & Leisure 14,860,370 56,374,183
GlaxoSmithKline PLC ........................... Pharmaceuticals 2,786,240 70,417,785
HSBC Holdings PLC ............................. Commercial Banks 3,254,421 52,256,088
HSBC Holdings PLC, ADR ........................ Commercial Banks 3,790 304,981
National Grid PLC ............................. Electric Utilities 4,010,399 39,259,240
Pearson PLC ................................... Media 3,511,000 41,528,435
Rentokil Initial PLC .......................... Commercial Services & Supplies 6,043,130 16,998,936
(a) Rolls-Royce Group PLC ......................... Aerospace & Defense 13,555,704 99,701,166
(a) Rolls-Royce Group PLC, B ...................... Aerospace & Defense 452,760,513 798,425
Royal Bank of Scotland Group PLC .............. Commercial Banks 2,923,660 88,276,687
Royal Dutch Shell PLC, B, ADR ................. Oil, Gas & Consumable Fuels 1,415,307 91,329,761
Shire PLC ..................................... Pharmaceuticals 2,293,320 29,354,834
Shire PLC, ADR ................................ Pharmaceuticals 8,590 333,206
14 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
UNITED KINGDOM (CONTINUED)
Smiths Group PLC .............................. Industrial Conglomerates 2,980,820 $ 53,642,558
Standard Chartered PLC ........................ Commercial Banks 2,715,610 60,503,320
Vodafone Group PLC ............................ Wireless Telecommunication Services 36,522,370 78,857,811
Yell Group PLC ................................ Media 3,309,540 30,547,762
--------------
1,079,563,504
--------------
UNITED STATES 0.3%
News Corp., A ................................. Media 1,089,919 16,948,240
--------------
TOTAL COMMON STOCKS
(COST $3,771,905,956) ...................... 5,967,408,656
--------------
----------------
SHARES/PRINCIPAL
AMOUNT
----------------
SHORT TERM INVESTMENTS 4.7%
UNITED STATES ( COST $125,724,058) 2.0%
(c) U.S. Treasury Bills, 1/05/06 - 3/30/06 ........ 126,000,000 125,757,424
--------------
TOTAL INVESTMENTS BEFORE
MONEY FUND (COST $3,897,630,014) ........... 6,093,166,080
--------------
UNITED STATES ( COST $165,798,478) 2.7%
(d) Franklin Institutional Fiduciary Trust
Money Market Portfolio ..................... 165,798,478 165,798,478
--------------
TOTAL INVESTMENTS
(COST $4,063,428,492) 100.2% ............... 6,258,964,558
OTHER ASSETS, LESS LIABILITIES (0.2)% ......... (13,244,008)
--------------
NET ASSETS 100.0% ............................. $6,245,720,550
==============
SELECTED CURRENCY ABBREVIATIONS
EUR - Euro
FIM - Finnish Markka
SEK - Swedish Krona
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FDR - Foreign Depository Receipt
GDR - Global Depository Receipt
IDR - International Deposit Receipt
(a) Non-income producing.
(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2005, the aggregate value of these securities was $36,334,771,
representing 0.58% of net assets.
(c) The security is traded on a discount basis with no stated coupon rate.
(d) See Note 8 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
Annual Report | See notes to financial statements. | 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
----------------
FOREIGN
EQUITY SERIES
----------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................ $ 3,897,630,014
Cost - Sweep Money Fund (Note 8) ................................... 165,798,478
----------------
Total cost of investments .......................................... 4,063,428,492
================
Value - Unaffiliated issuers ....................................... 6,093,166,080
Value - Sweep Money Fund (Note 8) .................................. 165,798,478
----------------
Total value of investments ......................................... 6,258,964,558
Cash .................................................................. 1,946,321
Foreign currency, at value (cost $779,222) ............................ 792,576
Receivables:
Investment securities sold ......................................... 8,567,944
Capital shares sold ................................................ 2,574,097
Dividends .......................................................... 7,554,380
----------------
Total assets .................................................... 6,280,399,876
----------------
Liabilities:
Payables:
Investment securities purchased .................................... 2,546,080
Capital shares redeemed ............................................ 27,488,572
Affiliates ......................................................... 3,986,665
Accrued expenses and other liabilities ................................ 658,009
----------------
Total liabilities ............................................... 34,679,326
----------------
Net assets, at value ......................................... $ 6,245,720,550
----------------
Net assets consist of:
Paid-in capital ....................................................... $ 4,073,027,328
Distributions in excess of net investment income ...................... (61,250,841)
Net unrealized appreciation (depreciation) ............................ 2,195,458,711
Accumulated net realized gain (loss) .................................. 38,485,352
----------------
Net assets, at value ......................................... $ 6,245,720,550
----------------
Shares outstanding .................................................... 279,921,788
----------------
Net asset value per share(a) .......................................... $ 22.31
----------------
(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, 2005
----------------
FOREIGN
EQUITY SERIES
----------------
Investment income:
Dividends (net of foreign taxes of $14,682,522)
Unaffiliated issuers ............................................... $ 152,700,060
Sweep Money Fund (Note 8) .......................................... 3,422,450
Interest .............................................................. 6,851,467
Other income (Note 9) ................................................. 295,011
----------------
Total investment income ........................................... 163,268,988
----------------
Expenses:
Management fees (Note 3a) ............................................. 39,020,252
Administrative fees (Note 3b) ......................................... 4,770,205
Transfer agent fees (Note 3c) ......................................... 63,600
Custodian fees (Note 4) ............................................... 2,354,500
Reports to shareholders ............................................... 82,700
Registration and filing fees .......................................... 96,000
Professional fees ..................................................... 140,159
Directors' fees and expenses .......................................... 109,028
Other ................................................................. 137,900
----------------
Total expenses .................................................. 46,774,344
Expense reductions (Note 4) ..................................... (137,236)
----------------
Net expenses ................................................. 46,637,108
----------------
Net investment income ..................................... 116,631,880
----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................ 309,554,006
Foreign currency transactions ...................................... (985,061)
----------------
Net realized gain (loss) ........................................ 308,568,945
----------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................ 328,671,930
Translation of assets and liabilities denominated in foreign
currencies ....................................................... (302,364)
Change in deferred taxes on unrealized appreciation ................... 332,213
----------------
Net change in unrealized appreciation (depreciation) ............ 328,701,779
----------------
Net realized and unrealized gain (loss) .................................. 637,270,724
----------------
Net increase (decrease) in net assets resulting from operations .......... $ 753,902,604
================
Annual Report | See notes to financial statements. | 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------
FOREIGN EQUITY SERIES
YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .............................................................. $ 116,631,880 $ 92,898,790
Net realized gain (loss) from investments and foreign currency transactions ........ 308,568,945 98,531,192
Net change in unrealized appreciation (depreciation) on investments, translation
of assets and liabilities denominated in foreign currencies, and deferred taxes .. 328,701,779 805,740,566
---------------------------------
Net increase (decrease) in net assets resulting from operations ................. 753,902,604 997,170,548
---------------------------------
Distributions to shareholders from:
Net investment income .............................................................. (183,533,480) (72,392,703)
Net realized gains ................................................................. (10,751,350) --
---------------------------------
Total distributions to shareholders ...................................................... (194,284,830) (72,392,703)
---------------------------------
Capital share transactions (Note 2) ...................................................... 27,925,243 90,602,987
---------------------------------
Redemption fees .......................................................................... 7,845 24,434
---------------------------------
Net increase (decrease) in net assets ........................................... 587,550,862 1,015,405,266
Net assets:
Beginning of year ..................................................................... 5,658,169,688 4,642,764,422
---------------------------------
End of year ........................................................................... $ 6,245,720,550 $ 5,658,169,688
=================================
Distributions in excess of net investment income/Undistributed net investment income
included in net assets:
End of year ........................................................................... $ (61,250,841) $ 6,273,524
=================================
18| See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment
Company Act of 1940 as an open-end investment company, consisting of four
separate series. The Foreign Equity Series (the Fund) included in this report is
diversified. The financial statements of the remaining funds in the series are
presented separately.
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.
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. 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 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.
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. 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. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into
Annual Report | 19
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
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, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
20 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME TAXES AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
The Fund is subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
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 is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with generally accepted accounting principles. These differences may
be permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
Common expenses incurred by TIFI are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets of TIFI. Fund
specific expenses are charged directly to the fund that incurred the expense.
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.
Annual Report | 21
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such
fees are retained by the Fund and accounted for as an addition to paid-in
capital.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities 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, 2005, there were 1.14 billion shares authorized ($0.01 par
value) for TIFI, of which 695 million have been classified as Fund shares.
Transactions in the Fund's shares were as follows:
-------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
Shares sold ...................... 43,810,911 $ 915,696,969 47,051,626 $ 832,987,696
Shares issued in reinvestment
of distributions .............. 7,621,447 166,418,307 3,305,980 62,226,817
Shares redeemed .................. (50,689,026) (1,054,190,033) (45,065,673) (804,611,526)
-------------------------------------------------------------
Net increase (decrease) .......... 743,332 $ 27,925,243 5,291,933 $ 90,602,987
=============================================================
22 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------
SUBSIDIARY 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 average daily net
assets of the Fund 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% In excess of $20 billion
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 TIFI 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 $63,600, of which $17,290 was retained by
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, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 23
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
5. INCOME TAXES
During the year ended December 31, 2005, the Fund utilized $259,639,339 of
capital loss carryforwards.
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2005, the Fund deferred realized currency losses of
$362,296.
The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:
---------------------------
2005 2004
---------------------------
Distributions paid from:
Ordinary income .......... $183,533,480 $ 72,392,703
Long term capital gain ... 10,751,350 --
---------------------------
$194,284,830 $ 72,392,703
===========================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and passive foreign
investment company shares.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At December 31, 2005, 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 ....................................... $ 4,147,343,830
===============
Unrealized appreciation ................................... $ 2,241,939,513
Unrealized depreciation ................................... (130,318,785)
---------------
Net unrealized appreciation (depreciation) ................ $ 2,111,620,728
===============
Undistributed ordinary income ............................. $ 22,349,090
Undistributed long term capital gains ..................... 39,163,054
===============
Distributable earnings .................................... $ 61,512,144
===============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2005, aggregated $733,996,468 and $712,407,023,
respectively.
24 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
7. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
8. 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 and administrative fees
paid by the Sweep Money Fund.
9. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds and are recorded as
other income in the current period. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.
Annual Report | 25
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
9. REGULATORY MATTERS (CONTINUED)
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intends to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company 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.
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 EQUITY SERIES
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Foreign Equity Series (one of the
funds constituting the Templeton Institutional Funds, Inc., hereafter referred
to as the "Fund") at December 31, 2005, 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, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 10, 2006
Annual Report | 27
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED)
FOREIGN EQUITY SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $49,914,404 as a
capital gain dividend for the fiscal year ended December 31, 2005.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $148,351,567 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $10,273,917 as interest-related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 15, 2005.
At December 31, 2005, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the table
below, the Fund designates to shareholders the foreign source income and foreign
taxes paid as allowed, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on December 15, 2005, 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, and foreign qualified dividends as designated by
the Fund to shareholders of record.
28 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN EQUITY SERIES
Record Date: 12/15/2005
- --------------------------------------------------------------------------------
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------------
Australia ................ $ 0.0003 $ 0.0247 $ 0.0247
Bermuda .................. 0.0000 0.0050 0.0050
Canada ................... 0.0028 0.0140 0.0140
China .................... 0.0000 0.0026 0.0000
Denmark .................. 0.0006 0.0032 0.0032
Finland .................. 0.0035 0.0173 0.0121
France ................... 0.0054 0.0274 0.0274
Germany .................. 0.0054 0.0323 0.0320
Hong Kong ................ 0.0000 0.0134 0.0000
India .................... 0.0000 0.0074 0.0036
Italy .................... 0.0031 0.0152 0.0152
Japan .................... 0.0016 0.0165 0.0165
Mexico ................... 0.0000 0.0052 0.0052
Netherlands .............. 0.0054 0.0267 0.0267
New Zealand .............. 0.0000 0.0002 0.0002
Norway ................... 0.0013 0.0065 0.0065
Portugal ................. 0.0009 0.0053 0.0053
Singapore ................ 0.0000 0.0046 0.0000
South Africa ............. 0.0000 0.0026 0.0026
South Korea .............. 0.0047 0.0208 0.0208
Spain .................... 0.0050 0.0293 0.0292
Sweden ................... 0.0073 0.0498 0.0498
Switzerland .............. 0.0033 0.0110 0.0110
Taiwan ................... 0.0021 0.0072 0.0049
United Kingdom ........... 0.0000 0.0969 0.0948
-------------------------------------------------
TOTAL .................... $ 0.0527 $ 0.4451 $ 0.4107
=================================================
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or as a tax
deduction.
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 that have not been adjusted for the
rate differential applicable to such dividend income.(1)
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.(1)
Annual Report | 29
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN EQUITY SERIES
In January 2006, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2005 individual income
tax returns.
(1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
30 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
BOARD MEMBERS AND OFFICERS
The name, year of birth 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods
500 East Broward Blvd. (meat 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 (1944) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Director Since 1992 141 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 (1952) Director Since 1996 136 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 | 31
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Director Since 1993 140 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).
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation
500 East Broward Blvd. 2005 (assisted living).
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga
Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co.
Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since 2003 101 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 Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Director Since October 16 None
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow of The Brookings Institute
(2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice
(2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None
(1954)
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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas), and Weatherford International,
Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing)
(2004-present); and FORMERLY,
Director, H.J. Heinz Company
(processed foods and allied products)
(1987-1988; 1993-2003); and Total
Logistics, Inc. (operating and
investment business) (until 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 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 42 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) 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.; and officer and/or director or trustee, as the case
may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) 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 14 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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. (1940) 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.; 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 45 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) 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 32 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) 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, Franklin Templeton Institutional
Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (1936) 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable
500 East Broward Blvd. Chief 2005
Suite 2100 Executive
Fort Lauderdale, FL 33394-3091 Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
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 14 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 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:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 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 FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO 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. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF
SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO
1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS
A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT
MR. OLSON AND MR. NIEMIEC 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. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS
DEFINED UNDER THE APPLICABLE 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 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 U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. 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
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[LOGO](R)
FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL
INSTITUTIONAL 600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
franklintempletoninstitutional.com
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges,
and expenses before investing. 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. The prospectus
contains this and other information; please read it carefully before investing.
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 A2005 02/06
EMERGING MARKETS SERIES
ANNUAL REPORT 12 31 2005
- --------------------------------------------------------------------------------
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
TIFI Emerging Markets Series ............................................. 1
Performance Summary ...................................................... 6
Your Fund's Expenses ..................................................... 8
Financial Highlights and Statement of Investments ........................ 10
Financial Statements ..................................................... 17
Notes to Financial Statements ............................................ 20
Report of Independent Registered Public Accounting Firm .................. 28
Tax Designation .......................................................... 29
Board Members and Officers ............................................... 32
Shareholder Information .................................................. 39
- --------------------------------------------------------------------------------
ANNUAL REPORT
TIFI EMERGING MARKETS SERIES
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Emerging Markets Series seeks
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 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 annual report for Templeton Institutional Funds, Inc. (TIFI) Emerging
Markets Series (the Fund) covers the fiscal year ended December 31, 2005.
PERFORMANCE OVERVIEW
TIFI Emerging Markets Series posted a +28.09% cumulative total return for the 12
months ended December 31, 2005. The Fund underperformed the Standard &
Poor's/International Finance Corporation Investable (S&P/IFCI) Composite Index
and the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index,
which returned +35.19% and +34.54% during the same period.(1)
ECONOMIC AND MARKET OVERVIEW
During the year under review, most Asian economies recorded robust growth,
particularly those of China and India, which attracted new investment. China had
a record year with new equity issuance, while India experienced record foreign
fund inflows in 2005. In Latin America, market sentiment was
(1) Source: Standard & Poor's Micropal. The S&P/IFCI Composite Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity performance in global emerging markets. The MSCI EM Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global emerging markets. The indexes are
unmanaged and include 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 NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 11.
Annual Report | 1
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Asia ................................................. 60.1%
Europe ............................................... 16.0%
Latin America ........................................ 14.2%
Middle East & Africa ................................. 9.1%
North America ........................................ 0.4%
Short-Term Investments & Other Net Assets ............ 0.2%
positive as the region's risk profile improved, economies' financial positions
improved, and governments reduced interest rates in light of subdued inflation
and sustained economic recovery.
Eastern Europe experienced greater integration with Western Europe, implemented
reforms, and had benign inflation and falling interest rates, which contributed
to a favorable investment environment. Russia's market was one of the strongest
emerging markets performers as the MSCI Russia Index returned +73.77% in
2005.(2) High commodity prices, especially for oil, provided a boost to the
Russian economy. In Turkey, European Union accession talks, robust gross
domestic product growth, implementation of key reforms, and International
Monetary Fund support provided investors with reasons to remain confident.
In this environment, emerging markets had another strong year in 2005, as
measured by the MSCI EM Index. Latin America and Eastern Europe led emerging
markets performance, while emerging Asian markets, although experiencing
double-digit returns, lagged the overall index. Rising U.S. interest rates
seemed to lead investors to adopt a more cautious stance toward investing in
Asia. However, in fourth quarter 2005, Asian markets experienced higher returns
relative to Latin American and Eastern European markets largely due to the U.S.
Federal Reserve Board's signaling a possible halt to raising interest rates in
the near future. High commodity prices and market stability allowed South
Africa's stock prices to continue their upward trend during the year, while
positive developments in Turkey led the country's equity market to end 2005 up
significantly.
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
price/earnings ratio, profit margins and liquidation value. During our analysis,
we also consider the company's position in its sector, the economic framework
and political environment.
(2) Source: Standard & Poor's Micropal. The MSCI Russia Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in Russia.
2 | Annual Report
MANAGER'S DISCUSSION
In terms of performance relative to the MSCI EM Index, the Fund benefited from
underweighted exposure to and stock selection in Taiwan and Malaysia. The Fund's
exposure to South Korea, which was roughly in line with the index, also helped
performance due to the Fund's overweighted positions in strong performing stocks
such as Hyundai Development, Samsung Heavy Industries, and Daewoo Shipbuilding &
Marine Engineering. On the other hand, the Fund's underweighted exposure to
Mexico and Russia hindered results relative to the index. The Fund's U.K.
holdings underperformed the index during the period, thus hurting relative
performance. However, we believed those companies were well positioned in their
respective areas to benefit from growing demand for financial and banking
services in emerging markets.
At the sector level, stock selection in the capital goods sector benefited
performance relative to the MSCI EM Index.(3) We benefited from stock selection
among banks, as well as underweighted allocations to the insurance and
technology hardware and equipment sectors, which underperformed the overall
index.(4) In contrast, the Fund's overweighted exposure to Taiwan Mobile hurt
relative performance. In addition, our lack of holdings in America Movil and
Orascom Telecom hindered the Fund's relative results. We did not own those two
stocks due to expensive valuations and the availability of what we considered
more attractively valued telecommunications stocks in other markets. Similarly,
our stock selection and underweighted position in energy sector stocks and our
stock selection in the food, beverage and tobacco sector hindered performance
during the period.(5)
During the year under review, the Fund's exposure to Asia increased as we found
stocks trading at what we considered attractive valuations. We made the largest
purchases in Taiwan, Thailand and China H shares (Hong Kong-listed companies),
while also adding significant investments in Malaysia and Indonesia. Key
purchases included initiating positions in Maxis Communications, one of
Malaysia's prominent integrated telecommunication services providers, and China
Construction Bank, a major commercial bank in China. We also added to existing
positions in PetroChina, a dominant participant in China's oil and gas sector;
Mega Financial Holding, a leading financial holding company in Taiwan; and
Kasikornbank, one of Thailand's
TOP 10 COUNTRIES
12/31/05
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
South Korea 20.5%
- --------------------------------------------------------------------------------
Taiwan 13.6%
- --------------------------------------------------------------------------------
Brazil 9.7%
- --------------------------------------------------------------------------------
China 9.6%
- --------------------------------------------------------------------------------
South Africa 9.1%
- --------------------------------------------------------------------------------
Mexico 4.2%
- --------------------------------------------------------------------------------
Singapore 4.1%
- --------------------------------------------------------------------------------
Russia 4.0%
- --------------------------------------------------------------------------------
Thailand 3.4%
- --------------------------------------------------------------------------------
India 3.1%
- --------------------------------------------------------------------------------
(3) The capital goods sector comprises aerospace and defense, building
products, construction and engineering, electrical equipment, industrial
conglomerates, and machinery in the SOI.
(4) The bank sector comprises commercial banks in the SOI. The technology
hardware and equipment sector comprises communications equipment,
computers and peripherals, and electronic equipment and instruments in the
SOI.
(5) The food, beverage and tobacco sector comprises beverages, food products
and tobacco in the SOI.
Annual Report | 3
TOP 10 EQUITY HOLDINGS
12/31/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Samsung Electronics Co. Ltd. 4.3%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, SOUTH KOREA
- --------------------------------------------------------------------------------
Petroleo Brasileiro SA, ADR, pfd. 2.7%
OIL, GAS & CONSUMABLE FUELS, BRAZIL
- --------------------------------------------------------------------------------
China Mobile (Hong Kong) Ltd. 2.5%
WIRELESS TELECOMMUNICATION
SERVICES, CHINA
- --------------------------------------------------------------------------------
Remgro Ltd. 2.2%
DIVERSIFIED FINANCIAL SERVICES,
SOUTH AFRICA
- --------------------------------------------------------------------------------
PetroChina Co. Ltd., H,
common & restricted 2.2%
OIL, GAS & CONSUMABLE FUELS, CHINA
- --------------------------------------------------------------------------------
Anglo American PLC 2.0%
METALS & MINING, SOUTH AFRICA
- --------------------------------------------------------------------------------
Banco Bradesco SA, ADR, pfd. 2.0%
COMMERCIAL BANKS, BRAZIL
- --------------------------------------------------------------------------------
Kimberly Clark de Mexico SA de CV, A 2.0%
HOUSEHOLD PRODUCTS, MEXICO
- --------------------------------------------------------------------------------
Companhia Vale do Rio Doce,
ADR, pfd., A 1.7%
METALS & MINING, BRAZIL
- --------------------------------------------------------------------------------
Daewoo Shipbuilding &
Marine Engineering Co. Ltd. 1.6%
MACHINERY, SOUTH KOREA
- --------------------------------------------------------------------------------
largest banks. Conversely, we reduced exposure to Singapore and Hong Kong as we
sold some shares as selective stocks reached our sale price targets.
In Latin America, we increased our allocations to Brazil and Mexico, while
eliminating exposure to Argentina via the sale of Tenaris. Brazil and Mexico
benefited from greater investor interest and fund inflows during 2005.
Significant purchases included adding to Petroleo Brasileiro (Petrobras),
Brazil's national oil and gas company with activities in the exploration,
production, refining, transportation and distribution of oil and its byproducts;
Companhia Vale do Rio Doce, a Brazilian producer of iron ore that is among the
world's largest; and Telefonos de Mexico, Mexico's nationwide provider of
fixed-line telephone services and the leading Internet and local and
long-distance services provider. We also initiated exposure to Panama during the
period.
The Fund's largest sales were in Europe as some stock valuations grew
increasingly expensive due to the region's strong market performances.
Significant sales included stocks from Austria, Belgium, Greece, Hungary and
Poland. As we searched for undervalued stocks in the region, in line with our
strategy, we made selective purchases in Russia, Finland and the U.K. Key
purchases included initiating positions in Mining and Metallurgical Co. Norilsk
Nickel, one of the world's largest precious metals companies; Mobile
Telesystems, one of Eastern Europe's and Russia's largest mobile
telecommunication services providers; and Nokian Renkaat, a well-known Finnish
tire manufacturer with significant exposure to Russia's market. We also added to
our positions in HSBC Holdings, one of the world's largest banking and financial
services organizations; and Provident Financial, a consumer finance company with
exposure to Central and Eastern Europe, as well as Latin America. In addition,
we trimmed our South African holdings during the period as we realized profits
on selective stocks.
4 | Annual Report
We thank you for your continued participation in the Fund and look forward to
serving your future investment needs.
[PHOTO] /s/ Mark Mobius
Mark Mobius
Managing Director
Templeton Asset Management Ltd.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2005, 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 12/31/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes that a
shareholder would pay 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 on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
SYMBOL: TEEMX CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.84 $ 18.93 $ 15.09
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $ 0.3765
- --------------------------------------------------------------------------------
PERFORMANCE(1)
- --------------------------------------------------------------------------------
1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return(2) +28.09% +141.27% +121.92%
- --------------------------------------------------------------------------------
Average Annual Total Return(3) +28.09% +19.26% +8.30%
- --------------------------------------------------------------------------------
Value of $1,000,000 Investment(4) $1,280,944 $2,412,749 $2,219,224
- --------------------------------------------------------------------------------
PERFORMANCE DATA 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.
6 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any Fund expenses, account fees and reinvested distributions.
The unmanaged indexes include reinvestment of any income or distributions. They
differ from the Fund in composition and do not pay management fees or expenses.
One cannot invest directly in an index.
1/1/96-12/31/05
$ Millions
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
TIFI Emerging S&P/IFCI MSCI EM
Inception Date Markets Series Composite Index(5) Index(5)
- -------------- -------------- ------------------- -----------------
12/01/95 1000000.00 1000000.00 1000000.00
01/01/96 1095813.90 1083786.00 1071081.76
02/01/96 1078099.20 1059721.42 1054052.05
03/01/96 1091155.73 1075198.01 1062261.80
04/01/96 1120066.42 1118562.80 1104733.79
05/01/96 1138718.60 1108730.62 1099800.88
06/01/96 1140583.83 1121900.89 1106668.50
07/01/96 1088357.61 1048189.85 1031034.78
08/01/96 1110740.32 1080690.68 1057425.90
09/01/96 1131258.00 1096652.81 1066586.24
10/01/96 1128460.08 1073104.12 1038140.49
11/01/96 1164831.92 1088944.86 1055535.27
12/01/96 1188631.11 1093709.22 1060309.45
01/01/97 1276465.48 1170970.78 1132632.82
02/01/97 1325117.95 1228325.19 1181138.22
03/01/97 1298309.17 1197554.09 1150112.26
04/01/97 1310756.02 1177222.10 1152143.97
05/01/97 1372990.78 1217248.81 1185118.75
06/01/97 1422778.34 1269808.52 1248542.79
07/01/97 1487885.55 1282068.40 1267180.94
08/01/97 1355756.77 1118380.72 1105933.06
09/01/97 1418948.71 1154796.22 1136576.32
10/01/97 1154691.35 965314.24 950078.39
11/01/97 1069477.84 920371.44 915412.28
12/01/97 1054073.85 932540.28 937471.89
01/01/98 968691.10 871392.59 863945.72
02/01/98 1064238.99 960367.80 954120.66
03/01/98 1106017.57 998027.49 995525.64
04/01/98 1108058.17 1000728.31 984681.02
05/01/98 951950.76 875883.83 849739.60
06/01/98 860122.84 786119.62 760605.21
07/01/98 866244.77 817467.30 784721.23
08/01/98 665243.41 587655.15 557827.12
09/01/98 698913.68 615937.85 593212.81
10/01/98 804005.86 686674.96 655679.19
11/01/98 890732.32 738324.28 710210.95
12/01/98 864014.53 727308.59 699918.34
01/01/99 822425.45 710496.77 688625.75
02/01/99 822425.25 723151.15 695324.06
03/01/99 937388.56 806724.73 786961.05
04/01/99 1120496.79 916729.89 884324.59
05/01/99 1090325.63 900342.91 879180.05
06/01/99 1196445.21 998513.03 978959.77
07/01/99 1143385.66 984007.53 952365.84
08/01/99 1102810.36 994628.71 961030.60
09/01/99 1053912.27 966922.59 928507.31
10/01/99 1084083.56 983370.25 948277.72
11/01/99 1175637.46 1071768.88 1033304.59
12/01/99 1352905.58 1215428.03 1164720.49
01/01/00 1292077.46 1217157.77 1171662.18
02/01/00 1245931.90 1215974.27 1187136.36
03/01/00 1262251.30 1233757.17 1192929.92
04/01/00 1153128.85 1106120.84 1079848.82
05/01/00 1060794.51 1075319.39 1035205.79
06/01/00 1139488.29 1105756.68 1071670.82
07/01/00 1091222.61 1052590.05 1016555.29
08/01/00 1112207.60 1056565.41 1021553.45
09/01/00 1003085.25 962067.19 932355.57
10/01/00 919144.82 884168.36 864757.00
11/01/00 870878.91 806057.11 789147.97
12/01/00 919790.34 829393.38 808200.58
01/01/01 1023877.59 935908.72 919489.81
02/01/01 943156.96 863806.03 847492.72
03/01/01 855001.60 789397.02 764252.42
04/01/01 899610.43 836130.25 802015.49
05/01/01 931474.04 861439.02 811588.53
06/01/01 927225.59 845841.05 794929.18
07/01/01 873057.41 788031.44 744697.17
08/01/01 876243.78 777319.21 737351.61
09/01/01 766846.02 656814.25 623224.68
10/01/01 790212.49 697538.92 661901.31
11/01/01 838007.45 779261.37 731006.03
12/01/01 873838.18 844080.96 789029.80
01/01/02 919260.37 874214.79 815768.36
02/01/02 918178.80 891087.31 829170.26
03/01/02 973227.67 953175.74 879046.01
04/01/02 1005740.76 962006.49 884751.39
05/01/02 999238.28 946256.79 870654.61
06/01/02 936379.53 877977.73 805336.42
07/01/02 886525.92 822383.39 744079.90
08/01/02 884358.29 833034.93 755543.56
09/01/02 819331.78 740478.86 674033.39
10/01/02 841007.25 788031.44 717769.91
11/01/02 909284.98 842745.73 767176.54
12/01/02 890922.10 810851.82 741686.64
01/01/03 881022.88 811580.13 738457.41
02/01/03 879923.19 787545.90 718526.51
03/01/03 848077.13 758625.92 698152.94
04/01/03 936418.51 836069.55 760338.90
05/01/03 991631.85 894243.32 814930.63
06/01/03 1024759.81 949594.88 861354.93
07/01/03 1068930.72 1000637.27 915276.48
08/01/03 1119727.02 1072831.00 976734.06
09/01/03 1152855.08 1084544.65 983894.44
10/01/03 1242300.76 1172639.82 1067621.50
11/01/03 1267698.92 1187691.56 1080742.99
12/01/03 1370621.66 1274299.76 1159090.95
01/01/04 1414544.75 1317846.63 1200256.08
02/01/04 1466351.32 1381361.33 1255623.81
03/01/04 1464849.59 1407125.30 1271757.59
04/01/04 1382338.72 1300731.34 1167782.17
05/01/04 1365384.15 1283039.48 1144782.53
06/01/04 1393641.45 1283100.17 1150011.73
07/01/04 1372165.92 1256698.93 1129676.95
08/01/04 1418507.47 1312869.84 1176965.44
09/01/04 1491975.97 1388674.78 1244943.20
10/01/04 1536057.25 1428822.87 1274768.13
11/01/04 1653607.19 1552969.38 1392843.85
12/01/04 1732489.96 1632567.60 1459897.46
01/01/05 1719860.98 1636512.61 1464518.20
02/01/05 1853040.94 1773890.09 1593115.81
03/01/05 1764010.13 1663126.27 1488159.80
04/01/05 1709784.04 1625861.07 1448495.53
05/01/05 1777860.84 1686796.35 1499500.01
06/01/05 1835547.43 1743665.22 1551255.80
07/01/05 1939396.57 1864352.26 1661019.49
08/01/05 1930179.89 1880041.27 1675971.63
09/01/05 2085935.76 2055594.33 1832251.34
10/01/05 1969404.43 1921676.33 1712538.95
11/01/05 2121690.10 2077595.36 1854332.12
12/01/05 2219224.13 2207113.16 1964180.46
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
12/31/05
- --------------------------------------------------
1-Year +28.09%
- --------------------------------------------------
5-Year +19.26%
- --------------------------------------------------
10-Year +8.30%
- --------------------------------------------------
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 expense reductions by the Fund's manager and administrator increased
the Fund's total returns. If the manager and administrator had not taken
this action, the Fund's total returns would have been lower.
(2) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4) These figures represent the value of a hypothetical $1,000,000 investment
in the Fund over the periods indicated.
(5) Source: Standard & Poor's Micropal. The S&P/IFCI Composite Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global emerging markets. The MSCI EM Index is
a free float-adjusted, market capitalization-weighted index designed to
measure equity market performance in global emerging markets.
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) 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 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 Fund's actual expense ratio 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 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 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000.00 $ 1,209.00 $ 7.85
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,018.10 $ 7.17
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 1.41%, multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Annual Report | 9
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
EMERGING MARKETS SERIES
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 15.09 $ 12.18 $ 8.10 $ 8.08 $ 8.66
----------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... 0.33 0.21 0.24 0.14 0.15
Net realized and unrealized gains (losses) .... 3.89 2.97 4.10 0.02 (0.58)
----------------------------------------------------------------------
Total from investment operations ................. 4.22 3.18 4.34 0.16 (0.43)
----------------------------------------------------------------------
Less distributions from net investment income .... (0.38) (0.27) (0.26) (0.14) (0.15)
----------------------------------------------------------------------
Redemption fees .................................. --(b) --(b) -- -- --
----------------------------------------------------------------------
Net asset value, end of year ..................... $ 18.93 $ 15.09 $ 12.18 $ 8.10 $ 8.08
======================================================================
Total return ..................................... 28.09% 26.40% 53.84% 1.96% (5.00)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $2,841,536 $2,063,532 $2,092,229 $1,234,595 $1,274,579
Ratios to average net assets:
Expenses ...................................... 1.42% 1.45% 1.46% 1.49% 1.45%
Net investment income ......................... 1.98% 1.62% 2.52% 1.67% 1.85%
Portfolio turnover rate .......................... 36.42% 52.07% 46.83% 53.36% 64.92%
(a) Based on average daily shares outstanding.
(b) Amount is less than $0.01 per share.
10 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.1%
AUSTRIA 0.4%
Wienerberger AG .............................. Building Products 299,150 $ 11,970,227
-------------
BRAZIL 2.0%
Centrais Eletricas Brasileiras SA
(Non Taxable) .............................. Electric Utilities 844,670,000 13,726,834
Centrais Eletricas Brasileiras SA
(Taxable) .................................. Electric Utilities 523,418,000 8,506,128
Companhia de Bebidas das Americas (AmBev) .... Beverages 32,034,000 10,302,172
Embraer-Empresa Bras de Aeronautica SA ....... Aerospace & Defense 71,958 553,925
Souza Cruz SA (Non Taxable) .................. Tobacco 1,975,316 24,498,210
-------------
57,587,269
-------------
CHINA 9.6%
Aluminum Corp. of China Ltd., H .............. Metals & Mining 35,070,000 26,685,883
Anhui Conch Cement Co. Ltd., H ............... Construction Materials 8,854,000 10,905,277
(a) China Construction Bank, H ................... Commercial Banks 1,920,000 668,588
(a),(b) China Construction Bank, H, 144A ............. Commercial Banks 57,914,000 20,166,992
China International Marine Containers
(Group), Co. Ltd., B ....................... Machinery 3,331,900 2,685,751
China Mobile (Hong Kong) Ltd. ................ Wireless Telecommunication Services 14,885,000 70,454,496
China Resources Enterprise Ltd. .............. Distributors 13,688,000 24,450,265
China Travel International Investment
Hong Kong Ltd. ............................. Hotels, Restaurants & Leisure 16,246,000 3,897,205
Chongqing Changan Automobile
Co. Ltd., B ................................ Automobiles 5,498,286 1,552,978
Denway Motors Ltd. ........................... Automobiles 46,005,000 15,278,337
GOME Electrical Appliances Holdings Ltd. ..... Specialty Retail 2,780,000 1,882,339
Huadian Power International Corp. Ltd., H .... Independent Power Producers & Energy Traders 20,920,000 5,342,206
Huaneng Power International, Inc., H ......... Independent Power Producers & Energy Traders 6,300,000 4,143,855
PetroChina Co. Ltd., H ....................... Oil, Gas & Consumable Fuels 58,852,000 48,197,971
(b) PetroChina Co. Ltd., H, 144A ................. Oil, Gas & Consumable Fuels 16,358,000 13,396,697
Shanghai Industrial Holdings Ltd. ............ Industrial Conglomerates 7,249,000 15,098,870
TCL Multimedia Technology Holdings Ltd. ...... Household Durables 3,586,000 517,991
Travelsky Technology Ltd., H ................. IT Services 7,810,000 7,201,963
-------------
272,527,664
-------------
CROATIA 0.7%
Pliva d.d., GDR, Reg S ....................... Pharmaceuticals 1,453,900 18,944,317
-------------
CZECH REPUBLIC 0.1%
Philip Morris CR AS .......................... Tobacco 2,043 1,517,429
-------------
FINLAND 0.4%
Nokian Renkaat OYJ ........................... Auto Components 800,670 10,094,850
-------------
Annual Report | 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
HONG KONG 2.2%
Cheung Kong (Holdings) Ltd. .................. Real Estate 3,165,000 $ 32,471,900
Cheung Kong Infrastructure
Holdings Ltd. .............................. Electric Utilities 2,382,000 7,495,928
Dairy Farm International Holdings Ltd. ....... Food & Staples Retailing 3,187,519 11,538,819
MTR Corp. Ltd. ............................... Road & Rail 6,240,564 12,274,039
-------------
63,780,686
-------------
HUNGARY 2.4%
BorsodChem Rt. ............................... Chemicals 508,584 5,482,229
Gedeon Richter Ltd. .......................... Pharmaceuticals 105,988 19,032,339
Magyar Telekom Ltd. .......................... Diversified Telecommunication Services 4,927,393 22,053,992
MOL Magyar Olaj-es Gazipari Rt. .............. Oil, Gas & Consumable Fuels 139,904 13,080,962
OTP Bank ..................................... Commercial Banks 300,355 9,807,252
-------------
69,456,774
-------------
INDIA 3.1%
Bharat Petroleum Corp. Ltd. .................. Oil, Gas & Consumable Fuels 126,496 1,220,682
Gail India Ltd. .............................. Gas Utilities 1,927,980 11,389,201
(a),(b) Himatsingka Seide Ltd., GDR, 144A ............ Textiles Apparel & Luxury Goods 1,664,000 4,762,368
Hindalco Industries Inc. ..................... Metals & Mining 8,000 25,496
Hindustan Lever Ltd. ......................... Household Products 5,945,800 26,065,319
Hindustan Petroleum Corp. Ltd. ............... Oil, Gas & Consumable Fuels 3,308,489 24,173,036
Indian Oil Corp. Ltd. ........................ Oil, Gas & Consumable Fuels 153,591 1,900,815
National Aluminum Co. Ltd. ................... Metals & Mining 204,800 1,000,445
Oil & Natural Gas Corp. Ltd. ................. Oil, Gas & Consumable Fuels 214,000 5,588,161
Ranbaxy Laboratories Ltd. .................... Pharmaceuticals 80,000 644,249
Tata Tea Ltd. ................................ Food Products 517,712 10,911,705
-------------
87,681,477
-------------
INDONESIA 0.5%
PT Astra International Tbk ................... Automobiles 10,347,000 10,736,460
PT Bank Danamon Indonesia Tbk ................ Commercial Banks 7,368,500 3,560,567
-------------
14,297,027
-------------
MALAYSIA 1.9%
Kuala Lumpur Kepong Bhd. ..................... Food Products 1,494,486 3,321,519
Maxis Communications Bhd. .................... Wireless Telecommunication Services 8,084,000 17,966,821
Resorts World Bhd. ........................... Hotels, Restaurants & Leisure 3,836,000 11,367,430
Sime Darby Bhd. .............................. Industrial Conglomerates 7,259,300 11,812,328
Tanjong PLC .................................. Hotels, Restaurants & Leisure 1,197,200 4,593,041
YTL Corp. Bhd. ............................... Multi-Utilities 175,293 248,133
YTL Power International Bhd. ................. Water Utilities 8,677,656 5,142,995
-------------
54,452,267
-------------
MEXICO 4.2%
Fomento Economico Mexicano SA de CV
(FEMSA), ADR ............................... Beverages 330,606 23,972,241
Grupo Bimbo SA de CV, A ...................... Food Products 1,513,034 5,267,679
(a) Grupo Televisa SA ............................ Media 1,156,366 4,624,376
Kimberly Clark de Mexico SA de CV, A ......... Household Products 15,955,381 57,050,527
12 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MEXICO (CONTINUED)
Telefonos de Mexico SA de CV
(Telmex), L, ADR ........................... Diversified Telecommunication Services 1,120,658 $ 27,657,840
-------------
118,572,663
-------------
PANAMA 0.3%
Banco Latinoamericano de Exportaciones
SA, E ...................................... Commercial Banks 470,100 8,602,830
-------------
PHILIPPINES 1.2%
San Miguel Corp., B .......................... Beverages 20,989,098 35,028,006
-------------
POLAND 1.7%
Polski Koncern Naftowy Orlen SA .............. Oil, Gas & Consumable Fuels 1,118,171 21,582,060
Telekomunikacja Polska SA .................... Diversified Telecommunication Services 3,653,893 26,320,177
-------------
47,902,237
-------------
PORTUGAL 0.2%
(a) Jeronimo Martins SGPS SA ..................... Food & Staples Retailing 358,881 5,395,738
-------------
RUSSIA 4.0%
Lukoil Holdings, ADR ......................... Oil, Gas & Consumable Fuels 712,520 42,323,688
Mining and Metallurgical Co. Norilsk Nickel .. Metals & Mining 375,900 33,304,740
Mobile Telesystems, ADR ...................... Wireless Telecommunication Services 575,600 20,146,000
(b) Novolipetsk Steel, 144A ...................... Metals & Mining 3,402,000 4,864,860
Unified Energy Systems ....................... Electric Utilities 33,176,500 14,066,836
-------------
114,706,124
-------------
SINGAPORE 4.1%
ComfortDelGro Corp. Ltd. ..................... Road & Rail 16,213,000 15,599,266
DBS Group Holdings Ltd. ...................... Commercial Banks 840,000 8,334,586
Fraser and Neave Ltd. ........................ Industrial Conglomerates 3,946,318 43,902,031
Keppel Corp. Ltd. ............................ Industrial Conglomerates 1,623,053 10,736,091
Singapore Press Holdings Ltd. ................ Media 2,384,500 6,165,760
Singapore Technologies Engineering Ltd. ...... Aerospace & Defense 3,928,000 6,755,513
Singapore Telecommunications Ltd. ............ Diversified Telecommunication Services 15,977,428 25,076,573
-------------
116,569,820
-------------
SOUTH AFRICA 9.1%
Anglo American PLC ........................... Metals & Mining 1,699,616 57,401,492
Edgars Consolidated Stores Ltd. .............. Specialty Retail 1,314,350 7,303,445
(a) Imperial Holdings Ltd. ....................... Air Freight & Logistics 722,811 16,061,197
JD Group Ltd. ................................ Specialty Retail 96,519 1,169,211
Nampak Ltd. .................................. Containers & Packaging 1,385,910 3,688,459
Nedbank Group Ltd. ........................... Commercial Banks 2,166,957 34,246,654
(b) Nedbank Group Ltd., 144A ..................... Commercial Banks 254,187 4,017,179
Old Mutual PLC ............................... Insurance 14,449,770 40,957,024
Remgro Ltd. .................................. Diversified Financial Services 3,286,244 63,361,797
SABMiller PLC ................................ Beverages 531,896 9,898,183
Sappi Ltd. ................................... Paper & Forest Products 1,629,594 18,674,336
(a) Steinhoff International Holdings Ltd. ........ Household Durables 565,000 1,674,239
-------------
258,453,216
-------------
Annual Report | 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SOUTH KOREA 20.5%
CJ Corp. ..................................... Food Products 387,490 $ 40,191,271
(a) Daewoo Shipbuilding & Marine
Engineering Co. Ltd. ....................... Machinery 1,667,110 45,586,978
Hana Financial Group Inc. .................... Commercial Banks 920,716 42,220,426
(a) Hite Brewery Co. Ltd. ........................ Beverages 104,809 14,980,145
(a) Hyundai Development Co. ...................... Construction & Engineering 840,260 38,197,427
(a) Kangwon Land Inc. ............................ Hotels, Restaurants & Leisure 1,762,897 35,957,850
Korea Gas Corp. .............................. Gas Utilities 325,370 10,705,723
(a) LG Card Co. Ltd. ............................. Consumer Finance 448,090 22,460,094
LG Chem Ltd. ................................. Chemicals 461,590 26,114,769
(a) LG Corp. ..................................... Industrial Conglomerates 941,000 29,514,243
LG Electronics Inc. .......................... Household Durables 258,740 22,933,481
LG Household & Health Care Ltd. .............. Household Products 61,930 3,380,794
(a) LG Petrochemical Co. Ltd. .................... Chemicals 318,370 7,963,200
(a) LG Philips LCD Co. Ltd. ...................... Electronic Equipment & Instruments 156,760 6,682,722
POSCO ........................................ Metals & Mining 79,400 15,919,404
Samsung Electronics Co. Ltd. ................. Semiconductors & Semiconductor Equipment 187,210 122,452,993
Samsung Fine Chemicals Co. Ltd. .............. Chemicals 703,670 23,222,856
Samsung Heavy Industries Co. Ltd. ............ Machinery 747,750 13,173,759
(a) Shinhan Financial Group Co. Ltd. ............. Commercial Banks 401,000 16,338,511
SK Corp. ..................................... Oil, Gas & Consumable Fuels 417,910 21,611,028
SK Telecom Co. Ltd. .......................... Wireless Telecommunication Services 131,819 23,681,627
-------------
583,289,301
-------------
SWEDEN 0.8%
Oriflame Cosmetics SA, SDR ................... Personal Products 781,400 22,520,999
-------------
TAIWAN 13.6%
Acer Inc. .................................... Computers & Peripherals 4,211,268 10,583,815
(a) AU Optronics Corp. ........................... Electronic Equipment & Instruments 1,594,000 2,379,358
BenQ Corp. ................................... Computers & Peripherals 7,106,000 6,872,969
Chinatrust Financial Holding Co. Ltd. ........ Commercial Banks 13,734,059 10,877,965
Chunghwa Telecom Co. Ltd. .................... Diversified Telecommunication Services 12,123,000 20,976,540
D-Link Corp. ................................. Communications Equipment 17,660,036 20,228,089
Delta Electronics Inc. ....................... Electronic Equipment & Instruments 4,479,917 9,184,604
Lite-On Technology Corp. ..................... Computers & Peripherals 19,220,880 26,202,440
MediaTek Inc. ................................ Semiconductors & Semiconductor Equipment 3,291,200 38,800,798
Mega Financial Holding Co. Ltd. .............. Commercial Banks 54,408,032 35,386,395
Premier Image Technology Corp. ............... Leisure Equipment & Products 12,086,020 16,218,274
President Chain Store Corp. .................. Food & Staples Retailing 7,844,010 16,440,007
Realtek Semiconductor Corp. .................. Semiconductors & Semiconductor Equipment 16,815,450 19,670,488
Siliconware Precision Industries Co. Ltd. .... Semiconductors & Semiconductor Equipment 7,831,237 10,985,895
Sunplus Technology Co. Ltd. .................. Semiconductors & Semiconductor Equipment 12,015,260 15,226,564
Synnex Technology International Corp. ........ Electronic Equipment & Instruments 9,323,130 11,488,298
Taiwan Mobile Co. Ltd. ....................... Wireless Telecommunication Services 40,388,878 35,311,739
Taiwan Semiconductor
Manufacturing Co. Ltd. ..................... Semiconductors & Semiconductor Equipment 21,058,056 40,093,476
Uni-President Enterprises Corp. .............. Food Products 54,962,180 26,119,447
Yang Ming Marine Transport Corp. ............. Marine 2,764,000 1,797,676
Yuanta Core Pacific Securities Co. ........... Capital Markets 17,572,704 12,232,077
-------------
387,076,914
-------------
14 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
THAILAND 3.4%
Bangkok Bank Public Co. Ltd., fgn. ........... Commercial Banks 2,939,500 $ 8,239,915
BEC World Public Co. Ltd., fgn. .............. Media 8,464,300 2,826,591
Kasikornbank Public Co. Ltd., fgn. ........... Commercial Banks 13,333,200 24,375,137
Land and House Public Co. Ltd., fgn. ......... Household Durables 22,311,831 4,840,348
Shin Corp. Public Co. Ltd., fgn. ............. Wireless Telecommunication Services 10,526,900 10,841,231
Siam Cement Public Co. Ltd., fgn. ............ Construction Materials 2,509,436 16,148,473
Siam Commercial Bank
Public Co. Ltd., fgn. ...................... Commercial Banks 8,003,100 10,144,088
Siam Makro Public Co. Ltd., fgn. ............. Food & Staples Retailing 388,600 700,001
(a) Thai Airways International
Public Co. Ltd., fgn. ...................... Airlines 3,898,200 4,180,885
(a) TMB Bank Public Co. Ltd., fgn. ............... Commercial Banks 126,962,200 13,307,434
(a) True Corp. Public Co. Ltd., rts., 3/28/08 .... Diversified Telecommunication Services 2,088,420 --
--------------
95,604,103
--------------
TURKEY 3.1%
Arcelik AS, Br. .............................. Household Durables 4,183,860 29,121,277
KOC Holding AS ............................... Industrial Conglomerates 3,193,700 15,016,657
Migros Turk TAS .............................. Food & Staples Retailing 1,410,402 13,681,056
(a) Petkim Petrokimya Holding AS ................. Chemicals 452,300 2,629,067
Tupras-Turkiye Petrol Rafineleri AS .......... Oil, Gas & Consumable Fuels 946,600 17,382,954
Turkiye Is Bankasi, C ........................ Commercial Banks 1,107,874 9,598,020
--------------
87,429,031
--------------
UNITED KINGDOM 2.2%
HSBC Holdings PLC ............................ Commercial Banks 2,666,858 42,821,616
Provident Financial PLC ...................... Consumer Finance 2,168,230 20,423,563
--------------
63,245,179
--------------
UNITED STATES 0.4%
Avon Products Inc. ........................... Personal Products 376,000 10,734,800
--------------
TOTAL COMMON STOCKS
(COST $1,788,548,711) ...................... 2,617,440,948
--------------
PREFERRED STOCKS 7.7%
BRAZIL 7.7%
Banco Bradesco SA, ADR, pfd. ................. Commercial Banks 1,964,352 57,260,861
Companhia Vale do Rio Doce, ADR, pfd., A ..... Metals & Mining 1,364,350 49,457,687
Klabin SA, pfd. .............................. Containers & Packaging 42,035 74,603
Petroleo Brasileiro SA, ADR, pfd. ............ Oil, Gas & Consumable Fuels 1,202,535 77,407,178
Suzano Bahia Sul Papel e
Celulose SA, pfd., A ....................... Paper & Forest Products 960,237 4,833,422
Unibanco Uniao de Bancos
Brasileiros SA, GDR, pfd. .................. Commercial Banks 228,000 14,493,960
Usinas Siderurgicas de
Minas Gerais SA, pfd., A ................... Metals & Mining 507,202 12,060,228
Votorantim Celulose e Papel SA, ADR, pfd. .... Paper & Forest Products 59,500 731,255
--------------
TOTAL PREFERRED STOCKS (COST $129,383,221) ... 216,319,194
--------------
Annual Report | 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS SERIES INDUSTRY PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $20,915,713) 0.7%
UNITED STATES 0.7%
(c) U.S. Treasury Bills, 1/05/06 - 3/23/06 ....... United States $ 21,030,000 $ 20,920,733
---------------
TOTAL INVESTMENTS
(COST $1,938,847,645) 100.5% ............... 2,854,680,875
OTHER ASSETS, LESS LIABILITIES (0.5)% ........ (13,144,422)
---------------
NET ASSETS 100.0% ............................ $2,841,536,453
===============
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
GDR - Global Depository Receipt
SDR - Swedish Depository Receipt
(a) Non-income producing.
(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2005, the aggregate value of these securities was $47,208,096,
representing 1.66% of net assets.
(c) The security is traded on a discount basis with no stated coupon rate.
16 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
---------------
EMERGING
MARKETS SERIES
---------------
Assets:
Investments in securities:
Cost .................................................................... $ 1,938,847,645
---------------
Value ................................................................... $ 2,854,680,875
Foreign currency, at value (cost $1,338,137) ............................... 1,309,122
Receivables:
Investment securities sold .............................................. 3,904,002
Capital shares sold ..................................................... 2,000,753
Dividends ............................................................... 4,543,817
Foreign income tax ...................................................... 1,196,587
---------------
Total assets ......................................................... 2,867,635,156
===============
Liabilities:
Payables:
Investment securities purchased ......................................... 16,217
Capital shares redeemed ................................................. 22,111,039
Affiliates .............................................................. 3,102,348
Deferred taxes ............................................................. 172,369
Funds advanced by custodian ................................................ 41,310
Accrued expenses and other liabilities ..................................... 655,420
---------------
Total liabilities .................................................... 26,098,703
---------------
Net assets, at value .............................................. $ 2,841,536,453
===============
Net assets consist of:
Paid-in capital ............................................................ $ 1,990,285,401
Distributions in excess of net investment income ........................... (35,986,193)
Net unrealized appreciation (depreciation) ................................. 915,630,626
Accumulated net realized gain (loss) ....................................... (28,393,381)
---------------
Net assets, at value .............................................. $ 2,841,536,453
===============
Shares outstanding ............................................................ 150,136,201
===============
Net asset value per share(a) .................................................. $ 18.93
===============
(a) Redemption 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. | 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2005
--------------
EMERGING
MARKETS SERIES
--------------
Investment income:
Dividends (net of foreign taxes of $6,069,643) ........................... $ 77,719,597
Interest (net of foreign taxes of $191) .................................. 2,558,319
Other income (Note 8) .................................................... 305,837
--------------
Total investment income ............................................... 80,583,753
--------------
Expenses:
Management fees (Note 3a) ................................................... 28,989,228
Administrative fees (Note 3b) ............................................... 1,954,710
Transfer agent fees (Note 3c) ............................................... 21,500
Custodian fees (Note 4) ..................................................... 2,342,842
Reports to shareholders ..................................................... 26,500
Registration and filing fees ................................................ 105,600
Professional fees ........................................................... 96,393
Directors' fees and expenses ................................................ 43,600
Other ....................................................................... 60,300
--------------
Total expenses ........................................................... 33,640,673
Expense reductions (Note 4) .............................................. (5,971)
--------------
Net expenses .......................................................... 33,634,702
--------------
Net investment income .............................................. 46,949,051
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (net of foreign taxes of $183,885) ........................... 329,182,608
Foreign currency transactions ............................................ (2,597,244)
--------------
Net realized gain (loss) .............................................. 326,585,364
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. 246,054,052
Translation of assets and liabilities denominated in foreign currencies .. (136,934)
Change in deferred taxes on unrealized appreciation ......................... 651,321
--------------
Net change in unrealized appreciation (depreciation) .................. 246,568,439
--------------
Net realized and unrealized gain (loss) ........................................ 573,153,803
--------------
Net increase (decrease) in net assets resulting from operations ................ $ 620,102,854
==============
18 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
EMERGING MARKETS SERIES
YEAR ENDED DECEMBER 31,
-----------------------------------
2005 2004
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................... $ 46,949,051 $ 31,730,390
Net realized gain (loss) from investments and foreign currency transactions ......... 326,585,364 272,225,999
Net change in unrealized appreciation (depreciation) on investments, translation
of assets and liabilities denominated in foreign currencies, and deferred taxes .. 246,568,439 151,684,428
-----------------------------------
Net increase (decrease) in net assets resulting from operations .................. 620,102,854 455,640,817
-----------------------------------
Distributions to shareholders from net investment income .................................. (55,791,328) (39,319,998)
-----------------------------------
Capital share transactions (Note 2) ....................................................... 213,692,478 (445,018,905)
-----------------------------------
Redemption fees ........................................................................... 712 913
-----------------------------------
Net increase (decrease) in net assets ............................................ 778,004,716 (28,697,173)
Net assets:
Beginning of year ................................................................... 2,063,531,737 2,092,228,910
-----------------------------------
End of year ......................................................................... $ 2,841,536,453 $ 2,063,531,737
===================================
Distributions in excess of net investment income included in net assets:
End of year ......................................................................... $ (35,986,193) $ (24,856,992)
===================================
Annual Report | See notes to financial statements. | 19
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment
Company Act of 1940 as an open-end investment company, consisting of four
separate series. The Emerging Markets Series (the Fund) included in this report
is diversified. The financial statements of the remaining funds in the series
are presented separately.
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.
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. 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 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.
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. 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. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into
20 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
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, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
Annual Report | 21
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
The Fund is subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
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 is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with generally accepted accounting principles. These differences may
be permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
Common expenses incurred by TIFI are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets of TIFI. Fund
specific expenses are charged directly to the fund that incurred the expense.
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.
22 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such
fees are retained by the Fund and accounted for as an addition to paid-in
capital.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities 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, 2005, there were 1.14 billion shares authorized ($0.01 par
value) for TIFI, of which 325 million have been classified as Fund shares.
Transactions in the Fund's shares were as follows:
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
Shares sold ...................................... 33,273,305 $ 537,595,503 38,933,946 $ 502,321,321
Shares issued in reinvestment of distributions ... 2,750,866 49,329,161 2,567,946 35,813,965
Shares redeemed .................................. (22,672,825) (373,232,186) (76,560,769) (983,154,191)
----------------------------------------------------------
Net increase (decrease) .......................... 13,351,346 $ 213,692,478 (35,058,877) $(445,018,905)
==========================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------------
SUBSIDIARY 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
Annual Report | 23
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to TAML based on the average daily
net assets of the Fund 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% In excess of $20 billion
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 TIFI 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% In excess of $1.2 billion
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $21,500, of which $4,728 was retained by
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, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At December 31, 2005, the Fund had tax basis capital losses of $25,624,201
expiring on December 31, 2010 which may be carried over to offset future capital
gains, if any. During the year ended December 31, 2005, the Fund utilized
$327,970,519 of capital loss carryforwards.
24 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
5. INCOME TAXES (CONTINUED)
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2005, the Fund deferred realized currency losses of
$602,812.
The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:
-------------------------
2005 2004
-------------------------
Distributions paid from - ordinary income ... $55,791,328 $39,319,998
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares and foreign taxes paid on net realized gains.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and foreign taxes paid on net realized gains.
At December 31, 2005, the cost of investments, net unrealized appreciation
(depreciation) and undistributed ordinary income for income tax purposes were as
follows:
Cost of investments .......................... $1,985,953,537
==============
Unrealized appreciation ...................... $ 889,427,359
Unrealized depreciation ...................... (20,700,021)
--------------
Net unrealized appreciation (depreciation) ... $ 868,727,338
==============
Distributable earnings - ordinary income ..... $ 8,953,331
==============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2005, aggregated $1,030,525,159 and $833,406,915,
respectively.
Annual Report | 25
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
7. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
8. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds and are recorded as
other income in the current period. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
26 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
8. REGULATORY MATTERS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intends to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company 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.
Annual Report | 27
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 Emerging Markets Series (one of the
funds constituting the Templeton Institutional Funds, Inc., hereafter referred
to as the "Fund") at December 31, 2005, 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, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 10, 2006
28 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED)
EMERGING MARKET SERIES
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
the maximum amount allowable but no less than $32,940,041 as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended December 31, 2005. In January 2006, shareholders will receive
Form 1099-DIV which will include their share of qualified dividends distributed
during the calendar year 2005. Shareholders are advised to check with their tax
advisors for information on the treatment of these amounts on their individual
income tax returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,556,795 as interest-related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended December 31, 2005.
At December 31, 2005, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the table
below, the Fund designates to shareholders the foreign source income and foreign
taxes paid as allowed, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on December 15, 2005, 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 and foreign qualified dividends as designated by the
Fund to shareholders of record.
Annual Report | 29
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
EMERGING MARKETS SERIES
Record Date: 12/15/2005
- -----------------------------------------------------------------------
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -----------------------------------------------------------------------
Austria .......... 0.0010 0.0039 0.0039
Belgium .......... 0.0003 0.0012 0.0012
Bermuda .......... 0.0000 0.0001 0.0000
Brazil ........... 0.0031 0.0422 0.0009
China ............ 0.0000 0.0205 0.0083
Croatia .......... 0.0000 0.0022 0.0000
Greece ........... 0.0000 0.0009 0.0009
Hong Kong ........ 0.0000 0.0191 0.0000
Hungary .......... 0.0011 0.0074 0.0073
India ............ 0.0012 0.0087 0.0087
Indonesia ........ 0.0001 0.0004 0.0004
Malaysia ......... 0.0000 0.0050 0.0000
Mexico ........... 0.0000 0.0164 0.0164
Panama ........... 0.0000 0.0017 0.0017
Philippines ...... 0.0009 0.0022 0.0022
Poland ........... 0.0013 0.0053 0.0053
Russia ........... 0.0015 0.0080 0.0080
Singapore ........ 0.0000 0.0257 0.0000
South Africa ..... 0.0010 0.0398 0.0075
South Korea ...... 0.0115 0.0427 0.0425
Sweden ........... 0.0000 0.0021 0.0000
Taiwan ........... 0.0178 0.0649 0.0000
Thailand ......... 0.0009 0.0052 0.0052
Turkey ........... 0.0000 0.0144 0.0144
United Kingdom ... 0.0000 0.0035 0.0000
=================================================
TOTAL ............ $ 0.0417 $ 0.3435 $ 0.1348
=================================================
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or as a tax
deduction.
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 that have not been adjusted for the
rate differential applicable to such dividend income.(1)
30 | Annual Report
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.(1)
In January 2006, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2005 individual income
tax returns.
(1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
Annual Report | 31
TEMPLETON INSTITUTIONAL FUNDS, INC.
BOARD MEMBERS AND OFFICERS
The name, year of birth 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods
500 East Broward Blvd. (meat 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 (1944) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Director Since 1992 141 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 (1952) Director Since 1996 136 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).
- ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Director Since 1993 140 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).
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation
500 East Broward Blvd. 2005 (assisted living).
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga
Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co.
Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since 2003 101 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 Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), 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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Director Since October 16 None
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow of the Brookings Institute
(2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice
(2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None
(1954)
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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas) and Weatherford International,
Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing)
(2004-present); and FORMERLY,
Director, H.J. Heinz Company
(processed foods and allied products)
(1987-1988; 1993-2003) and Total
Logistics, Inc. (operating and
investment business) (until 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 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 42 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) 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.; and officer and/or director or trustee, as the case
may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) 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 14 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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. (1940) 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.; 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 45 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) 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 32 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) 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, Franklin Templeton Institutional
Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (1936) 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable
500 East Broward Blvd. Chief 2005
Suite 2100 Executive
Fort Lauderdale, FL 33394-3091 Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
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 14 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 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:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the Fund
under the federal securities laws due to his position as officer and
director and major shareholder of Franklin Resources, Inc. (Resources),
which is the parent company of the Fund's adviser and distributor.
Nicholas F. Brady is considered to be an interested person of the Fund
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 TRUSTEES
HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT
COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO 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. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF
SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO
1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS
A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT
MR. OLSON AND MR. NIEMIEC 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. OLSON AND NIEMIEC ARE INDEPENDENT TRUSTEES AS THAT TERM IS
DEFINED UNDER THE APPLICABLE 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 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
38 | Annual Report
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 U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. 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.
Annual Report | 39
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[LOGO](R)
FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL
INSTITUTIONAL 600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
franklintempletoninstitutional.com
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges,
and expenses before investing. 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. The prospectus
contains this and other information; please read it carefully before investing.
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 A2005 02/06
FOREIGN SMALLER COMPANIES SERIES
ANNUAL REPORT 12/31/2005
- --------------------------------------------------------------------------------
THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
- --------------------------------------------------------------------------------
--------------------------------------
TEMPLETON INSTITUTIONAL FUNDS, INC.
--------------------------------------
Foreign Smaller Companies Series
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INSTITUTIONAL
FRANKLIN o TEMPLETON o FIDUCIARY
CONTENTS
ANNUAL REPORT
TIFI Foreign Smaller Companies Series ...................................... 1
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 .................... 28
Tax Designation ............................................................ 29
Board Members and Officers ................................................. 32
Shareholder Information .................................................... 39
- --------------------------------------------------------------------------------
ANNUAL REPORT
TIFI FOREIGN SMALLER COMPANIES SERIES
YOUR FUND'S GOAL AND MAIN 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.
- --------------------------------------------------------------------------------
ASSET ALLOCATION
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Equity ............................................................... 92.4%
Short-Term Investments & Other Net Assets ............................ 7.6%
- --------------------------------------------------------------------------------
This annual report for Templeton Institutional Funds, Inc. (TIFI) Foreign
Smaller Companies Series' (the Fund) covers the fiscal year ended December 31,
2005.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 12.
Annual Report | 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURNS 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.
- --------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The Fund posted a +12.28% cumulative total return for the 12-month period ended
December 31, 2005. The Fund underperformed its benchmark, the S&P/Citigroup
Global ex-U.S. less than $2 Billion Index, which returned +25.24% during the
same period.(1) Please note that index performance information is provided for
reference and that we do not attempt to track the index, but rather undertake
investments on the basis of fundamental research. You can find more of the
Fund's performance data in the Performance Summary beginning on page 7.
ECONOMIC AND MARKET OVERVIEW
The global economy overcame fears of derailment generated by higher energy costs
and advanced at a solid clip during 2005, with Europe surpassing expectations.
Excluding the volatile energy and food sectors, inflation remained relatively
subdued worldwide, and monetary policy remained fairly accommodative. The U.S.
Federal Reserve Board raised the short-term federal funds target rate with eight
quarter-point increases, bringing it to 4.25%. The European Central Bank (ECB)
made one quarter-point rise in short-term rates, its first increase after
keeping rates at historically low levels for more than two and a half years.
Even after the increases, both rates remained at levels considered accommodative
for economic growth.
Strong demand for oil sustained high prices during most of the year, while
prices for other commodities such as industrial metals were also high, led by
copper, whose contract price rose 45.4% during 2005.(2) This contributed to
economic growth in countries such as Australia and Canada, and emerging markets
in Asia and Latin America that are tied to mining and industrial commodities.
In this environment, global equity markets performed strongly, particularly
outside the U.S. One-year total return for the Morgan Stanley Capital
International (MSCI) All Country (AC) World ex US Index was +17.11% in U.S.
dollar terms.(3) By comparison the total return for the MSCI USA Index
(1) Source: Standard & Poor's Micropal. The S&P/Citigroup Global ex-U.S. less
than $2 Billion Index is a free float-adjusted, market
capitalization-weighted index designed to measure performance of global
developed and emerging market equity securities, excluding the U.S., 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.
(2) Source: New York Mercantile Exchange.
(3) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a
free float-adjusted market capitalization-weighted index designed to
measure equity market performance in global developed and emerging markets
excluding the U.S.
2 | Annual Report
was +5.72%.(4) In terms of sectors, energy and materials led equity market
performance, and telecommunication services and consumer-related sectors lagged.
Among developed countries, the Japanese equity market performed well, returning
+44.70% in local currency terms for the year under review.(4) However, this
market benefited primarily from investors outside Japan, and the return was
significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast,
the conversion into dollars enhanced equity market returns in Brazil (+57.04%),
Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the
consensus of many analysts appeared to be that the U.S. dollar would decline in
value relative to major currencies. In fact, for the year the dollar appreciated
versus the yen, the euro, the pound and most other currencies.
INVESTMENT STRATEGY
When choosing equity investments, we apply a bottom-up, value-oriented,
long-term approach, focusing on the market price of a company's securities
relative to our evaluation of the company's potential long-term (typically five
years) earnings, asset value and cash flow potential. We also consider a
company's price/earnings ratio, profit margins and liquidation value.
MANAGER'S DISCUSSION
During the year under review, the Fund benefited from the strong performance of
several stocks. For example, we owned Precision Drilling Trust. Based in Canada,
Precision Drilling provides integrated oilfield drilling and energy services to
the oil and gas industry, including oilfield rentals, well services, catering
services and drilling services. At year-end, Precision was Canada's largest
driller and the world's third-largest land driller. The company performed well
during the period due to increased demand for oil services given historically
high oil prices. As a result, operating margins reached 35% at the company's
fiscal year-end. This was a record high, as drilling activity in Canadian
oilfields and pricing continued to move higher. Precision's international
drilling business has expanded, especially in the Middle East, a market we
believe has solid long-term growth prospects.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Asia ................................................. 36.3%
Europe ............................................... 36.2%
North America ........................................ 11.2%
Australia & New Zealand .............................. 5.7%
Latin America ........................................ 2.0%
Middle East & Africa ................................. 1.0%
Short-Term Investments & Other Net Assets ............ 7.6%
(4) Source: Standard & Poor's Micropal. Individual country market returns are
measured by MSCI country-specific indexes. The MSCI USA Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the U.S.
Annual Report | 3
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Industrials ......................................... 25.6%
Consumer Discretionary .............................. 19.1%
Financials .......................................... 11.9%
Information Technology .............................. 11.3%
Materials ........................................... 8.7%
Health Care ......................................... 5.5%
Energy .............................................. 4.9%
Telecommunication Services .......................... 2.0%
Utilities ........................................... 1.9%
Consumer Staples .................................... 1.5%
Short-Term Investments & Other Net Assets ........... 7.6%
Also performing well during the period were holdings in Bank of Pusan and Daegu
Bank. Both companies have been highly profitable small-cap South Korean regional
banks. Pusan and Daegu also experienced solid financial improvement due to a
strong export environment, and a slow but steady recovery in domestic demand.
They also maintained a 24%-33% dividend payout ratio over the past three years.
These banks performed well during the period, and traded at a significant
discount to larger South Korean banks.
The Fund also benefited from its holding in CAE. Based in Canada, the company
operates through two segments, Civil Simulation and Training and Military
Simulation and Training. The civil segment supplies civil flight simulators and
visual systems, and provides business and civil aviation training with nearly
500 full-flight simulators installed in more than 100 centers worldwide. The
military segment supplies military flight and land-based simulators, visual and
training systems to more than 30 countries. It also provides naval training
systems and designs and manufactures power plant training simulators and
systems. CAE performed well as the company is the leading manufacturer of
commercial and military flight simulators and the second-largest training
provider. CAE undertook a major initiative to divest non-core operations, reduce
costs through consolidation, improve productivity, increase integration, expand
military operations and services with greater emphasis on the U.S. defense
market, and aggressively enter the commercial flight training market.
Some holdings detracted from performance during the year under review. For
example, one hindrance to the Fund's overall results was our investment in AcBel
Polytech, a manufacturer of standard and custom switching power supplies and
power system products. The company's products include personal computer power
supplies, web server power supplies, telecom power supplies, low voltage
switching regulators and direct current converters. AcBel's growth was expected
to exceed its peer group's, as the company is a low-cost manufacturer with its
manufacturing base centered in China. Moreover, increasing processor speeds in
the personal computer market are apt to place greater demands on power supplies.
We believe the company's shares represented value as AcBel had solid growth
prospects that were not reflected in its low price-to-earnings (P/E) valuation
of 5.5 times 2004 earnings as of December 31, 2005, and an attractive dividend
yield that exceeded 9%. Furthermore, AcBel is well capitalized with more than
half its market value accounted for by the net cash it carries on its balance
sheet.
4 | Annual Report
Also hindering performance during the period was China Pharmaceutical Group. The
company is a leading global supplier of bulk vitamin C, penicillin and
cephalosporin. During the period, the company suffered from margin pressure as a
result of weaker product prices and higher raw materials and energy costs. We
continued to hold the shares because the company is the most efficient producer
of vitamin C and penicillin in China, and we expect it to gain market share from
higher cost European competitors. We believe China Pharmaceutical's
competitiveness should be sustainable going forward, given high barriers to
entry in terms of capacity, technological expertise and the integrated nature of
production. Because of the company's leading market position, we believe it
should continue to benefit from China's focus on being a global manufacturing
base for bulk pharmaceuticals. A number of Chinese drug producers recently
gained market share in the global pharmaceutical market because of lower labor
and utility costs. At 7.5 times the estimate of 2005 earnings as of December 31,
2005, China Pharmaceutical's share price did not reflect any of the growth
potential we see for the company.
Ngai Lik, a consumer electronics company, manufactures mini hi-fi systems, CD
players, DVDs and digital cameras in Hong Kong. Its low-priced, value-for-money
products are designed and developed in-house and sold directly under customers'
private labels or through trading agents. Shares were under pressure during the
period due in part to pricing pressure from the company's top customer,
Wal-Mart, a weaker consumer spending outlook, profit margin pressure from higher
energy prices and uncertainty over the intended change in its product mix to
concentrate on low plastic content MP3 and portable DVD players. We believed the
company's shares represented value as Ngai Lik had solid growth prospects that
were not reflected in the shares' low valuation of 0.8 times price-to-book and 5
times the average fiscal year earnings-per-share from 2001-2005 as of year-end
2005.
It is important to recognize the effect of currency movements on the Fund's
performance. In general, if the value of the U.S. dollar increases compared with
a foreign currency, an investment traded in that foreign currency will decrease
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 year ended
December 31, 2005, the U.S. dollar rose in value relative to most non-U.S.
currencies. As a result, the Fund's performance was
TOP 10 EQUITY HOLDINGS
12/31/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Hansol Paper Co. Ltd. 2.1%
PAPER & FOREST PRODUCTS, SOUTH KOREA
- --------------------------------------------------------------------------------
Daegu Bank Co. Ltd. 1.9%
COMMERCIAL BANKS, SOUTH KOREA
- --------------------------------------------------------------------------------
Bank of Pusan 1.9%
COMMERCIAL BANKS, SOUTH KOREA
- --------------------------------------------------------------------------------
D-Link Corp. 1.7%
COMMUNICATIONS EQUIPMENT, TAIWAN
- --------------------------------------------------------------------------------
Amer Sports Corp. Ltd. 1.5%
LEISURE EQUIPMENT & PRODUCTS, FINLAND
- --------------------------------------------------------------------------------
MDS Inc. 1.5%
HEALTH CARE PROVIDERS & SERVICES, CANADA
- --------------------------------------------------------------------------------
Sohgo Security Services Co. Ltd. 1.5%
COMMERCIAL SERVICES & SUPPLIES, JAPAN
- --------------------------------------------------------------------------------
Vedior NV 1.5%
COMMERCIAL SERVICES & SUPPLIES, NETHERLANDS
- --------------------------------------------------------------------------------
CAE Inc. 1.5%
AEROSPACE & DEFENSE, CANADA
- --------------------------------------------------------------------------------
Aalberts Industries NV 1.4%
INDUSTRIAL CONGLOMERATES, NETHERLANDS
- --------------------------------------------------------------------------------
Annual Report | 5
negatively affected by the portfolio's investment predominantly in securities
with non-U.S. currency exposure.
We thank you for your continued participation in the Fund and look forward to
serving your investment needs.
/s/ Tucker Scott
[PHOTO]
Tucker Scott, CFA
/s/ Cindy L. Sweeting
[PHOTO]
Cindy L. Sweeting, CFA
Portfolio Management Team
TIFI Foreign Smaller Companies Series
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2005, 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 12/31/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes that a
shareholder would pay 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 on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
SYMBOL: TFSCX CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.73 $18.18 $17.45
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
Dividend Income $0.3613
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.4434
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.5853
- --------------------------------------------------------------------------------
TOTAL $1.3900
- --------------------------------------------------------------------------------
TIFI FOREIGN SMALLER COMPANIES SERIES PAID DISTRIBUTIONS DERIVED FROM LONG-TERM
CAPITAL GAINS OF 58.53 CENTS ($0.5853) PER SHARE IN DECEMBER 2005. THE FUND
DESIGNATES SUCH DISTRIBUTIONS AS CAPITAL GAIN DIVIDENDS PER INTERNAL REVENUE
CODE SECTION 852(B)(3)(C).
PERFORMANCE(1)
- --------------------------------------------------------------------------------------------
1-YEAR 3-YEAR INCEPTION (10/21/02)
- --------------------------------------------------------------------------------------------
Cumulative Total Return(2) +12.28% +105.91% +107.97%
Average Annual Total Return(3) +12.28% +27.22% +25.76%
Value of $1,000,000 Investment(4) $1,122,775 $2,059,057 $2,079,647
PERFORMANCE DATA 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.
Annual Report | 7
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any Fund expenses, account fees and reinvested distributions.
The unmanaged index includes reinvestment of any income or distributions. It
differs from the Fund in composition and does not pay management fees or
expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
12/31/05
- --------------------------------------------------
1-Year +12.28%
- --------------------------------------------------
3-Year +27.22%
- --------------------------------------------------
Since Inception (10/21/02) +25.76%
- --------------------------------------------------
10/21/02-12/31/05
$ Millions
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Tifi Foreign S&P/Citigroup
Smaller Companies Global ex-U.S. less than
Date Series $2 Billion Index(5)
----- ----------------- ------------------------
10/02 1000000 1000000
1012070 1002689
1032000 1039233
1010000 1034511
979000 1035387
946000 1024301
950000 1011659
1022000 1085277
1107000 1178455
1153000 1238669
1218000 1285780
1287000 1366070
1317000 1435073
1412000 1540403
1431000 1547557
12/03 1527200 1646986
1580250 1711255
1624117 1773390
1603945 1842141
1566860 1766101
1569950 1740644
1619397 1805172
1575101 1744466
1572011 1768307
1622488 1835434
1662664 1890958
1779071 2039434
1852238 2140641
1852238 2165408
1931847 2266644
1892013 2211030
1812423 2149636
1833936 2158960
1882336 2218225
1973756 2315093
1981284 2370042
2043667 2485123
1951160 2398178
2008168 2500888
12/2005 2079647 2680778
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
INVESTMENTS IN SMALLER-COMPANY STOCKS CARRY SPECIAL RISKS AS SUCH STOCKS HAVE
HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGE-COMPANY STOCKS,
PARTICULARLY OVER THE SHORT TERM. ADDITIONALLY, SMALLER COMPANIES OFTEN HAVE
RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND SMALL MARKET SHARE. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(1) The Fund's manager and administrator agreed in advance to assume as their
own certain expenses otherwise payable by the Fund. If the manager and
administrator had not taken this action, the Fund's total returns would
have been lower. This agreement may be ended after 5/1/06 upon notice to
the Board of Directors.
(2) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4) These figures represent the value of a hypothetical $1,000,000 investment
in the Fund over the periods indicated.
(5) Source: Standard & Poor's Micropal. The S&P/Citigroup Global Equity
ex-U.S. less than $2 Billion Index is a free float-adjusted, market
capitalization-weighted index designed to measure performance of global
developed and emerging market equity securities, excluding the U.S., with
market capitalizations less than $2 billion.
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 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 Fund's actual expense ratio 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 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 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05
- ------------------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,104.80 $5.04
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000.00 $1,020.42 $4.84
- ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, of 0.95%, multiplied by the average account value over the
period, multiplied by 184/365 to reflect the one-half year period.
10 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOREIGN SMALLER COMPANIES SERIES
-------------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004 2003 2002(d)
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 17.45 $ 14.97 $ 10.10 $ 10.00
Income from investment operations:
Net investment income (loss)(a) ........................ 0.38 0.21 0.17 (0.01)
Net realized and unrealized gains (losses) ............. 1.74 2.93 4.99 0.11
-------------------------------------------------------
Total from investment operations ........................ 2.12 3.14 5.16 0.10
-------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.36) (0.16) (0.13) --
Net realized gains ..................................... (1.03) (0.50) (0.16) --
-------------------------------------------------------
Total distributions ..................................... (1.39) (0.66) (0.29) --
-------------------------------------------------------
Redemption fees ......................................... --(c) -- -- --
-------------------------------------------------------
Net asset value, end of year ............................ $ 18.18 $ 17.45 $ 14.97 $ 10.10
=======================================================
Total return(b) ......................................... 12.28% 21.28% 51.21 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $131,567 $ 97,495 $ 33,583 $ 6,195
Ratios to average net assets:
Expenses ............................................... 1.07% 1.16% 1.58% 7.71%(e)
Expenses net of waiver and payments by affiliate ....... 0.95% 0.95% 0.95% 0.95%(e)
Net investment income (loss) ........................... 2.12% 1.34% 1.40% (0.55)%(e)
Portfolio turnover rate ................................. 24.59% 27.51% 12.58% --
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) For the period October 21, 2002 (commencement of operations) to December
31, 2002.
(e) Annualized.
Annual Report | See notes to financial statements. | 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.2%
AUSTRALIA 5.7%
Billabong International Ltd. .................. Textiles Apparel & Luxury Goods 87,656 $ 933,637
Downer EDI Ltd. ............................... Commercial Services & Supplies 347,038 1,827,810
Iluka Resources Ltd. .......................... Metals & Mining 266,395 1,532,046
(a) Mayne Pharma Ltd. ............................. Pharmaceuticals 239,900 446,986
PaperlinX Ltd. ................................ Paper & Forest Products 513,273 1,445,804
Promina Group Ltd. ............................ Insurance 187,159 664,486
Symbion Health Ltd. ........................... Health Care Providers & Services 239,900 621,205
-------------
7,471,974
-------------
BAHAMAS 0.6%
(a) Steiner Leisure Ltd. .......................... Diversified Consumer Services 21,090 749,960
-------------
BELGIUM 1.1%
Barco NV ...................................... Electronic Equipment & Instruments 18,480 1,389,224
-------------
BERMUDA 0.3%
(a) Weatherford International Ltd. ................ Energy Equipment & Services 11,732 424,698
-------------
BRAZIL 0.8%
(b) Lojas Renner SA, 144A ......................... Multiline Retail 32,400 1,039,078
-------------
CANADA 10.3%
CAE Inc. ...................................... Aerospace & Defense 261,920 1,919,951
Domtar Inc. ................................... Paper & Forest Products 103,950 600,107
(a) GSI Group Inc. ................................ Electronic Equipment & Instruments 151,050 1,640,403
Legacy Hotels ................................. Real Estate 204,730 1,409,137
Linamar Corp. ................................. Auto Components 106,490 1,073,787
MDS Inc. ...................................... Health Care Providers & Services 115,390 1,996,466
North West Company Fund ....................... Diversified Financial Services 54,150 1,677,192
(a) Open Text Corp. ............................... Internet Software & Services 61,600 871,823
Precision Drilling Trust ...................... Energy Equipment & Services 28,080 927,222
Quebecor World Inc. ........................... Commercial Services & Supplies 70,980 959,998
Transcontinental Inc., B ...................... Commercial Services & Supplies 25,630 429,997
-------------
13,506,083
-------------
CHINA 4.7%
BYD Co. Ltd., H ............................... Electrical Equipment 8,000 12,330
China Oilfield Services Ltd. .................. Energy Equipment & Services 3,454,000 1,392,086
(a) China Pharmaceutical Group Ltd. ............... Pharmaceuticals 3,168,000 490,298
China Power International Development Ltd. .... Independent Power Producers & Energy Traders 338,000 111,161
China Resources Power Co. Ltd. ................ Independent Power Producers & Energy Traders 2,036,000 1,148,814
People's Food Holdings Ltd. ................... Food Products 1,948,000 1,253,411
TCL Multimedia Technology Holdings Ltd. ....... Household Durables 4,116,000 594,548
Travelsky Technology Ltd., H .................. IT Services 599,000 552,366
Weiqiao Textile Co. Ltd. ...................... Textiles Apparel & Luxury Goods 488,500 667,827
-------------
6,222,841
-------------
DENMARK 1.0%
(a) Vestas Wind Systems AS ........................ Electrical Equipment 68,440 1,123,961
(a),(b) Vestas Wind Systems AS, 144A .................. Electrical Equipment 14,740 242,069
-------------
1,366,030
-------------
12 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
FINLAND 3.6%
Amer Sports Corp. Ltd. ........................ Leisure Equipment & Products 109,180 $ 2,033,146
Huhtamaki OYJ ................................. Containers & Packaging 67,870 1,117,639
KCI Konecranes OYJ ............................ Machinery 10,390 511,934
Metso OYJ ..................................... Machinery 38,740 1,060,338
-------------
4,723,057
-------------
GERMANY 2.2%
Celesio AG .................................... Health Care Providers & Services 5,490 471,072
(a) Jenoptik AG ................................... Semiconductors & Semiconductor Equipment 118,490 1,071,696
Vossloh AG .................................... Machinery 28,030 1,370,803
-------------
2,913,571
-------------
HONG KONG 6.8%
Asia Satellite Telecommunications Holdings Ltd. Diversified Telecommunication Services 318,000 563,928
Dah Sing Financial Holdings Ltd. .............. Commercial Banks 137,600 956,535
Fountain Set Holdings Ltd. .................... Textiles Apparel & Luxury Goods 1,400,000 645,503
Giordano International Ltd. ................... Specialty Retail 1,694,000 950,378
Hang Lung Group Ltd. .......................... Real Estate 355,000 753,161
Hopewell Holdings Ltd. ........................ Transportation Infrastructure 384,000 963,263
Lerado Group Holdings Co. Ltd. ................ Leisure Equipment & Products 3,815,186 228,804
Ngai Lik Industrial Holding Ltd. .............. Household Durables 2,832,000 372,552
Techtronic Industries Co. Ltd. ................ Household Durables 680,000 1,618,077
Texwinca Holdings Ltd. ........................ Textiles Apparel & Luxury Goods 667,000 481,734
Yue Yuen Industrial Holdings Ltd. ............. Textiles Apparel & Luxury Goods 501,000 1,398,909
-------------
8,932,844
-------------
INDIA 1.7%
Satyam Computer Services Ltd. ................. IT Services 48,680 798,224
Tata Motors Ltd., ADR ......................... Machinery 96,770 1,390,585
-------------
2,188,809
-------------
INDONESIA 0.5%
PT Indosat Tbk ................................ Diversified Telecommunication Services 1,215,400 686,213
-------------
ISRAEL 1.0%
(a) Orbotech Ltd. ................................. Electronic Equipment & Instruments 54,930 1,316,672
-------------
JAPAN 5.8%
Japan Airport Terminal Co. Ltd. ............... Transportation Infrastructure 80,000 753,029
MEITEC Corp. .................................. Commercial Services & Supplies 51,500 1,666,780
Nichii Gakkan Co. ............................. Health Care Providers & Services 26,900 683,724
Sangetsu Co. Ltd. ............................. Household Durables 29,300 781,962
Sohgo Security Services Co. Ltd. .............. Commercial Services & Supplies 130,100 1,989,583
Tokyo Individualized Educational Institute Inc. Diversified Consumer Services 168,840 1,808,132
-------------
7,683,210
-------------
LUXEMBOURG 0.4%
(a) Thiel Logistik AG ............................. IT Services 149,260 515,968
-------------
MEXICO 0.8%
Grupo Aeroportuario del Sureste SA de CV, ADR . Transportation Infrastructure 31,810 1,028,735
-------------
Annual Report | 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
NETHERLANDS 8.1%
Aalberts Industries NV ........................ Industrial Conglomerates 34,657 $ 1,840,137
Arcadis NV .................................... Construction & Engineering 17,400 552,053
(a) Draka Holding NV .............................. Electrical Equipment 88,180 1,381,105
(a),(b) Draka Holding NV, 144A ........................ Electrical Equipment 15,715 246,133
Imtech NV ..................................... Construction & Engineering 38,000 1,237,123
Oce NV ........................................ Office Electronics 49,460 713,764
OPG Groep NV .................................. Health Care Providers & Services 24,110 1,721,120
SBM Offshore NV ............................... Energy Equipment & Services 12,950 1,046,331
Vedior NV ..................................... Commercial Services & Supplies 132,640 1,965,964
-------------
10,703,730
-------------
NORWAY 1.1%
Prosafe ASA ................................... Energy Equipment & Services 33,920 1,439,801
-------------
RUSSIA 0.4%
(a),(b) Pyaterochka Holding NV, GDR, 144A ............. Food & Staples Retailing 36,528 529,656
-------------
SINGAPORE 2.2%
Huan Hsin Holdings Ltd. ....................... Electronic Equipment & Instruments 1,516,000 606,236
OSIM International Ltd. ....................... Specialty Retail 977,800 934,906
Venture Corp. Ltd. ............................ Electronic Equipment & Instruments 131,000 1,087,104
Want Want Holdings Ltd. ....................... Food Products 226,000 224,870
-------------
2,853,116
-------------
SOUTH KOREA 7.0%
Bank of Pusan ................................. Commercial Banks 186,080 2,447,206
(a) Dae Duck Electronics Co. Ltd. ................. Electronic Equipment & Instruments 7,700 69,548
Daegu Bank Co. Ltd. ........................... Commercial Banks 163,580 2,484,143
Halla Climate Control Co. Ltd. ................ Auto Components 118,420 1,445,723
Hansol Paper Co. Ltd. ......................... Paper & Forest Products 158,770 2,765,671
-------------
9,212,291
-------------
SPAIN 1.8%
Sol Melia SA .................................. Hotels, Restaurants & Leisure 91,738 1,166,408
Transportes Azkar SA .......................... Air Freight & Logistics 137,090 1,267,516
-------------
2,433,924
-------------
SWEDEN 2.3%
D. Carnegie & Co. AB .......................... Capital Markets 115,310 1,697,976
Kungsleden AB ................................. Real Estate 45,840 1,326,940
-------------
3,024,916
-------------
SWITZERLAND 4.2%
Gurit Heberlein AG, Br. ....................... Chemicals 1,340 1,325,975
(a) Kuoni Reisen Holding AG, B .................... Hotels, Restaurants & Leisure 2,590 1,072,472
SIG Holding AG ................................ Machinery 4,010 876,019
Verwaltungs-und Privat-Bank AG ................ Capital Markets 6,130 1,026,061
Vontobel Holding AG ........................... Capital Markets 40,680 1,254,074
-------------
5,554,601
-------------
14 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
TAIWAN 5.3%
AcBel Polytech Inc. ........................... Electrical Equipment 1,779,988 $ 970,612
D-Link Corp. .................................. Communications Equipment 1,932,200 2,213,173
Fu Sheng Industrial Co. Ltd. .................. Industrial Conglomerates 880,200 1,120,813
Giant Manufacturing Co. ....................... Leisure Equipment & Products 515,000 996,222
KYE Systems Corp. ............................. Computers & Peripherals 1,234,840 1,040,115
Taiwan Fu Hsing ............................... Building Products 617,110 695,568
-------------
7,036,503
-------------
THAILAND 2.3%
BEC World Public Co. Ltd., fgn. ............... Media 1,658,200 553,744
Glow Energy Public Co. Ltd., fgn. ............. Independent Power Producers & Energy Traders 708,000 402,106
(b) Glow Energy Public Co. Ltd., fgn., 144A ....... Independent Power Producers & Energy Traders 1,271,300 722,030
(a) Total Access Communication Public Co. Ltd. .... Wireless Telecommunication Services 410,000 1,328,400
-------------
3,006,280
-------------
UNITED KINGDOM 9.2%
Bodycote International PLC .................... Machinery 441,480 1,686,188
(b) Bodycote International PLC, 144A .............. Machinery 35,200 134,443
Burberry Group PLC ............................ Textiles Apparel & Luxury Goods 156,510 1,157,178
(a) Cambridge Antibody Technology Group PLC ....... Biotechnology 66,350 797,351
DS Smith PLC .................................. Containers & Packaging 360,250 1,028,855
DX Services PLC ............................... Air Freight & Logistics 174,330 1,022,748
Electrocomponents PLC ......................... Electronic Equipment & Instruments 209,920 1,014,851
Game Group PLC ................................ Specialty Retail 1,122,180 1,380,418
Homeserve PLC ................................. Commercial Services & Supplies 69,716 1,452,508
John Wood Group PLC ........................... Energy Equipment & Services 353,390 1,240,299
Yule Catto & Company PLC ...................... Chemicals 251,110 1,136,218
-------------
12,051,057
-------------
TOTAL COMMON STOCKS (COST $95,169,291) ........ 120,004,842
-------------
PREFERRED STOCKS 1.2%
BRAZIL 0.4%
Aracruz Celulose SA, ADR, pfd. ................ Paper & Forest Products 13,370 534,934
-------------
GERMANY 0.8%
Hugo Boss AG, pfd. ............................ Textiles Apparel & Luxury Goods 29,430 1,036,162
-------------
TOTAL PREFERRED STOCKS (COST $847,627) ........ 1,571,096
-------------
Annual Report | 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN SMALLER COMPANIES SERIES PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $9,499,757) 7.2%
UNITED STATES 7.2%
(c) U.S. Treasury Bills, 1/12/06 - 3/30/06 ........ United States $ 9,572,000 $ 9,502,623
-------------
TOTAL INVESTMENTS
(COST $105,516,675) 99.6% ................... 131,078,561
OTHER ASSETS, LESS LIABILITIES 0.4% ........... 488,487
-------------
NET ASSETS 100.0% ............................. $ 131,567,048
=============
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
GDR - Global Depository Receipt
(a) Non-income producing.
(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2005, the aggregate value of these securities was $2,913,409, representing
2.21% of net assets.
(c) The security is traded on a discount basis with no stated coupon rate.
16 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
----------------
FOREIGN SMALLER
COMPANIES SERIES
----------------
Assets:
Investments in securities:
Cost .................................................................. $ 105,516,675
================
Value ................................................................. $ 131,078,561
Cash ................................................................... 7,828
Foreign currency, at value (cost $473,709) ............................. 456,913
Receivables:
Investment securities sold ............................................ 4,993
Capital shares sold ................................................... 7,000
Dividends ............................................................. 160,443
----------------
Total assets ...................................................... 131,715,738
----------------
Liabilities:
Payables:
Investment securities purchased ....................................... 5,679
Capital shares redeemed ............................................... 140
Affiliates ............................................................ 115,298
Accrued expenses and other liabilities ................................. 27,573
----------------
Total liabilities ................................................. 148,690
----------------
Net assets, at value ............................................ $ 131,567,048
================
Net assets consist of:
Paid-in capital ........................................................ $ 105,475,709
Distributions in excess of net investment income ....................... (15,899)
Net unrealized appreciation (depreciation) ............................. 25,543,064
Accumulated net realized gain (loss) ................................... 564,174
----------------
Net assets, at value ............................................ $ 131,567,048
================
Shares Outstanding ...................................................... 7,238,369
================
Net asset value per share(a) ............................................ $ 18.18
================
(a) Redemption 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. | 17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2005
----------------
FOREIGN SMALLER
COMPANIES SERIES
----------------
Investment income:
Dividends (net of foreign taxes of $316,372) ........................... $ 3,303,381
Interest (net of foreign taxes of $66) ................................. 272,112
Other income (Note 8) .................................................. 31
----------------
Total investment income ........................................... 3,575,524
----------------
Expenses:
Management fees (Note 3a) .............................................. 873,615
Administrative fees (Note 3b) .......................................... 232,965
Transfer agent fees (Note 3c) .......................................... 13,800
Custodian fees (Note 4) ................................................ 49,842
Reports to shareholders ................................................ 20,200
Registration and filing fees ........................................... 19,250
Professional fees ...................................................... 26,715
Directors' fees and expenses ........................................... 6,100
Other .................................................................. 7,500
----------------
Total expenses .................................................... 1,249,987
Expense reductions (Note 4) ....................................... (2,165)
Expenses waived/paid by affiliates (Note 3d) ...................... (142,054)
----------------
Net expenses .................................................... 1,105,768
----------------
Net investment income ......................................... 2,469,756
----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 6,108,227
Foreign currency transactions ......................................... 23,509
----------------
Net realized gain (loss) ........................................ 6,131,736
----------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 5,924,625
Translation of assets and liabilities denominated in foreign currencies (39,817)
Change in deferred taxes on unrealized appreciation .................... 3,698
----------------
Net change in unrealized appreciation (depreciation) ............ 5,888,506
----------------
Net realized and unrealized gain (loss) ................................. 12,020,242
----------------
Net increase (decrease) in net assets resulting from operations ......... $ 14,489,998
================
18 | See notes to financial statements. | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------
FOREIGN SMALLER COMPANIES SERIES
YEAR ENDED DECEMBER 31,
--------------------------------
2005 2004
--------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................ $ 2,469,756 $ 711,332
Net realized gain (loss) from investments and foreign currency transactions ....... 6,131,736 3,073,095
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes .... 5,888,506 10,403,294
--------------------------------
Net increase (decrease) in net assets resulting from operations ................ 14,489,998 14,187,721
--------------------------------
Distributions to shareholders from:
Net investment income ............................................................. (2,471,905) (752,060)
Net realized gains ................................................................ (6,793,091) (2,184,958)
--------------------------------
Total distributions to shareholders ................................................ (9,264,996) (2,937,018)
--------------------------------
Capital share transactions (Note 2) ................................................ 28,847,120 52,661,504
--------------------------------
Redemption fees .................................................................... 3 --
--------------------------------
Net increase (decrease) in net assets .......................................... 34,072,125 63,912,207
Net assets:
Beginning of year .................................................................. 97,494,923 33,582,716
--------------------------------
End of year ........................................................................ $ 131,567,048 $ 97,494,923
================================
Distributions in excess of net investment income included in net assets:
End of year ........................................................................ $ (15,899) $ (36,766)
================================
Annual Report | See notes to financial statements. | 19
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment
Company Act of 1940 as an open-end investment company, consisting of four
separate series. The Foreign Smaller Companies Series (the Fund) included in
this report is diversified. The financial statements of the remaining funds in
the series are presented separately.
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.
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. 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 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.
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. 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. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into
20 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
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, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
Annual Report | 21
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME TAXES AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
The Fund is subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
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 is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with generally accepted accounting principles. These differences may
be permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
Common expenses incurred by TIFI are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets of TIFI. Fund
specific expenses are charged directly to the fund that incurred the expense.
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.
22 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such
fees are retained by the Fund and accounted for as an addition to paid-in
capital.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities 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, 2005, there were 1.14 billion shares authorized ($0.01 par
value) for TIFI, of which 60 million have been classified as Fund shares.
Transactions in the Fund's shares were as follows:
----------------------------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
----------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
Shares sold ................... 1,496,864 $ 25,920,894 3,247,849 $ 51,064,194
Shares issued in reinvestment
of distributions ............. 447,719 8,097,280 149,768 2,467,773
Shares redeemed ............... (292,789) (5,171,054) (54,830) (870,463)
----------------------------------------------------
Net increase (decrease) ....... 1,651,794 $ 28,847,120 3,342,787 $ 52,661,504
====================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
Annual Report | 23
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------
Templeton Investment Counsel, LLC (TIC) Investment manager
Franklin Templeton Investment Management Limited (FTIML) 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 average daily net
assets of the Fund 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% In excess of $20 billion
Under a subadvisory agreement effective October 18, 2005, FTIML, an affiliate of
TIC, provides subadvisory services to the Fund and receives from TIC fees based
on the average daily net assets of the Fund. Prior to July 20, 2005, Franklin
Templeton Investments (Asia) Limited, an affiliate of TIC, provided subadvisory
services to the Fund and received from TIC fees based on the average daily net
assets of the Fund
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
Fund's average daily net assets.
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $13,800, of which $8,651 was retained by
Investor Services.
D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT
FT Services agreed in advance to voluntarily waive a portion of administrative
fees through April 30, 2006, as noted in the Statement of Operations.
Additionally, TIC agreed in advance to voluntarily waive a portion of management
fees through April 30, 2006, as noted in the Statement of Operations. Total
expenses waived by FT Services and TIC are not subject to reimbursement by the
Fund subsequent to the Fund's fiscal year end.
24 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES 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, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:
-----------------------------
2005 2004
-----------------------------
Distributions paid from:
Ordinary income.................. $ 5,361,453 $ 1,758,770
Long term capital gain........... 3,903,543 1,178,248
-----------------------------
$ 9,264,996 $ 2,937,018
=============================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares and organizational costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At December 31, 2005, 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................................ $ 105,850,734
=============
Unrealized appreciation ........................... $ 30,172,924
Unrealized depreciation ........................... (4,945,097)
-------------
Net unrealized appreciation (depreciation) ........ $ 25,227,827
=============
Undistributed ordinary income ..................... $ 293,293
Undistributed long term capital gains ............. 589,325
-------------
Distributable earnings ............................ $ 882,618
=============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2005, aggregated $53,231,100 and $26,133,638,
respectively.
Annual Report | 25
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
7. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
8. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds and are recorded as
other income in the current period. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
26 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
8. REGULATORY MATTERS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intends to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company 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.
Annual Report | 27
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 Foreign Smaller Companies Series
(one of the funds constituting the Templeton Institutional Funds, Inc.,
hereafter referred to as the "Fund") at December 31, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with 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, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 10, 2006
28 | Annual Report
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
designates the maximum amount allowable but no less than $3,933,360 as a capital
gain dividend for the fiscal year ended December 31, 2005.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $2,473,428 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $271,847 as interest-related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended December 31, 2005.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,175,434 as a short-term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2005.
At December 31, 2005, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the table
below, the Fund designates to shareholders the foreign source income and foreign
taxes paid as allowed, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on December 15, 2005, 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, and foreign qualified dividends as designated by
the Fund to shareholders of record.
Annual Report | 29
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
Record Date: 12/15/2005
- --------------------------------------------------------------------------------
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------------
Australia.................. $ 0.0024 $ 0.0360 $ 0.0360
Belgium.................... 0.0009 0.0048 0.0048
Brazil..................... 0.0003 0.0051 0.0000
Canada..................... 0.0059 0.0947 0.0788
China...................... 0.0000 0.0201 0.0000
Denmark.................... 0.0002 0.0012 0.0012
Finland.................... 0.0038 0.0207 0.0207
Germany.................... 0.0017 0.0094 0.0037
Hong Kong.................. 0.0000 0.0357 0.0000
India...................... 0.0000 0.0041 0.0041
Indonesia.................. 0.0004 0.0023 0.0023
Japan...................... 0.0012 0.0139 0.0139
Mexico..................... 0.0000 0.0027 0.0027
Netherlands................ 0.0042 0.0230 0.0230
Norway..................... 0.0017 0.0091 0.0091
Singapore.................. 0.0000 0.0080 0.0000
South Korea................ 0.0038 0.0188 0.0188
Spain...................... 0.0008 0.0044 0.0044
Sweden..................... 0.0031 0.0171 0.0171
Switzerland................ 0.0017 0.0175 0.0175
Taiwan..................... 0.0130 0.0458 0.0000
Thailand................... 0.0005 0.0044 0.0044
United Kingdom............. 0.0000 0.0311 0.0311
-------------------------------------------------
TOTAL...................... $ 0.0456 $ 0.4299 $ 0.2936
=================================================
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or as a tax
deduction.
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 that have not been adjusted for the
rate differential applicable to such dividend income.(1)
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.(1)
30 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
In January 2006, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2005 individual income
tax returns.
(1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
Annual Report | 31
TEMPLETON INSTITUTIONAL FUNDS, INC.
BOARD MEMBERS AND OFFICERS
The name, year of birth 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 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods
500 East Broward Blvd. (meat 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 (1944) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Director Since 1992 141 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 (1952) Director Since 1996 136 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).
- ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Director Since 1993 140 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).
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation
500 East Broward Blvd. 2005 (assisted living).
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga
Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); and Vice Chairman, Dillon, Read
& Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since 2003 103 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 Company (medical
technology), Cooper Industries,
Inc. (electrical products and tools
and hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), 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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Director Since October 16 None
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow of the Brookings Institute
(2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of
Justice (2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None
(1954)
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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas), and Weatherford International,
Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing)
(2004-present); and FORMERLY,
Director, H.J. Heinz Company
(processed foods and allied products)
(1987-1988; 1993-2003); and Total
Logistics, Inc. (operating and
investment business) (until 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 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 42 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) 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.; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) 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; and officer of 14 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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. (1940) 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.; 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 45 of
the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) 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 32 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) 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, Franklin Templeton
Institutional Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (1936) 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable
500 East Broward Blvd. Chief 2005
Suite 2100 Executive
Fort Lauderdale, FL 33394-3091 Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
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 14 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 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:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 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 FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO 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. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF
SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO
1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS
A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT
MR. OLSON AND MR. NIEMIEC 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. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS
DEFINED UNDER THE APPLICABLE 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.
38 | Annual Report
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 U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. 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.
Annual Report | 39
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[LOGO](R)
FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL
INSTITUTIONAL 600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN SMALLER COMPANIES SERIES
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
franklintempletoninstitutional.com
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges,
and expenses before investing. 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. The prospectus
contains this and other information; please read it carefully before investing.
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 A2005 02/06
FRANKLINT TEMPLETON NON-U.S. CORE EQUITY SERIES
ANNUAL REPORT | 12 2005
- --------------------------------------------------------------------------------
THE EXPERTISE OF MANY. THE STRENGTH OF ONE.
- --------------------------------------------------------------------------------
--------------------------------------
TEMPLETON INSTITUTIONAL FUNDS, INC.
--------------------------------------
Franklin Templeton Non-U.S. Core Equity Series
[LOGO](R)
FRANKLIN(R) TEMPLETON(R)
INSTITUTIONAL
CONTENTS
TIFI Franklin Templeton Non-U.S. Core Equity Series ................ 1
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 ............ 25
Tax Designation .................................................... 26
Board Members and Officers ......................................... 29
Shareholder Information ............................................ 36
- --------------------------------------------------------------------------------
ANNUAL REPORT
TIFI FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Franklin Templeton Non-U.S. Core
Equity Series seeks 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 REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURNS 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GEOGRAPHIC BREAKDOWN*
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Europe ............................................... 64.3%
Asia ................................................. 22%
Australia & New Zealand .............................. 5.2%
North America ........................................ 4.5%
Latin America ........................................ 3.2%
Middle East & Africa ................................. 2.3%
* Short-term investments and other net assets equal -1.5%.
- --------------------------------------------------------------------------------
This annual report for Templeton Institutional Funds, Inc. (TIFI) Franklin
Templeton Non-U.S. Core Equity Series (the "Fund") covers the fiscal year ended
December 31, 2005.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 11.
-------------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-------------------------------------------------------
Not part of the annual report | 1
PORTFOLIO BREAKDOWN*
Based on Total Net Assets as of 12/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Financials .......................................... 26.3%
Consumer Discretionary .............................. 13.8%
Telecomunication Services ........................... 11.5%
Health Care ......................................... 11.0%
Industrials ......................................... 9.9%
Energy .............................................. 8.8%
Information Technology .............................. 7.0%
Materials ........................................... 6.1%
Consumer Staples .................................... 3.9%
Utilities ........................................... 3.2%
* Short-term investments and other net assets equal -1.5%.
PERFORMANCE OVERVIEW
The Fund posted a +13.90% cumulative total return for the 12-month period ended
December 31, 2005. The Fund underperformed its benchmark, the Morgan Stanley
Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index, which
returned +14.02%. In addition, the MSCI All Country (AC) World ex US Index
returned +17.11% during the same period.(1)
ECONOMIC AND MARKET OVERVIEW
The global economy overcame fears of derailment generated by higher energy costs
and advanced at a solid clip during 2005, with signs of firming recoveries in
Europe and Japan. Excluding the volatile energy and food sectors, inflation
remained relatively subdued worldwide, and monetary policy remained fairly
accommodative. The U.S. Federal Reserve Board raised the short-term federal
funds target rate with eight quarter-point increases, bringing it to 4.25%. The
European Central Bank (ECB) made one quarter-point rise in short-term rates, its
first increase after keeping rates at historically low levels for more than two
and a half years. Even after the increases, both rates remained at levels
considered accommodative for economic growth.
Strong demand for oil sustained high prices during most of the year, while
prices for other commodities such as industrial metals were also high, led by
copper, whose contract price rose 45.4% during 2005.(2) This contributed to
economic growth in countries such as Australia and Canada, and emerging markets
in Asia and Latin America that are tied to mining and industrial commodities.
In this environment, global equity markets performed strongly, particularly
outside the U.S. One-year total return for the Morgan Stanley Capital
International (MSCI) All Country (AC) World ex US Index was +17.11% in
(1) Source: Standard & Poor's Micropal. The MSCI EAFE Index is a free
float-adjusted, capitalization-weighted index designed to measure equity
market performance in global developed markets excluding the U.S. and
Canada. The MSCI AC World ex US Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market
performance in global developed and emerging markets excluding the U.S.
The indexes are unmanaged and include reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
(2) Source: New York Mercantile Exchange.
2 | Annual Report
U.S. dollar terms.(3) By comparison the total return for the MSCI USA Index was
+5.72%.4 In terms of sectors, energy and materials led equity market
performance, and telecommunication services and consumer-related sectors lagged.
Among developed countries, the Japanese equity market performed well, returning
+44.70% in local currency terms for the year under review.(4) However, this
market benefited primarily from investors outside Japan, and the return was
significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast,
the conversion into dollars enhanced equity market returns in Brazil (+57.04%),
Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the
consensus of many analysts appeared to be that the U.S. dollar would decline in
value relative to major currencies. In fact, for the year the dollar appreciated
versus the yen, the euro, the pound and most other currencies.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets will be invested in issuers located in
at least three countries. 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 a top-down evaluation of equity market
sectors and an in-depth qualitative and quantitative analysis of individual
equity securities.
MANAGER'S DISCUSSION
During the year under review, value and growth stock outperformance frequently
alternated and no clear leader emerged. The MSCI EAFE Growth Index returned
+13.64% for the 12 months ended December 31, 2005, while the MSCI EAFE Value
Index returned +14.39% for the same period, a difference of less than 80 basis
points.5 As a result, we did not change the Fund's allocation between growth and
value positions.
TOP 10 EQUITY HOLDINGS
12/31/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
SBM Offshore NV 2.5%
ENERGY EQUIPMENT & SERVICES, NETHERLANDS
- --------------------------------------------------------------------------------
Mitsui Fudosan Co., Ltd. 2.1%
REAL ESTATE, JAPAN
- --------------------------------------------------------------------------------
Atlas Copco AB, A 2.1%
MACHINERY, SWEDEN
- --------------------------------------------------------------------------------
Next PLC 1.6%
MULTI-LINE RETAIL, UK
- --------------------------------------------------------------------------------
Tesco PLC 1.6%
FOOD & STAPLES RETAILING, UK
- --------------------------------------------------------------------------------
BAE Systems PLC 1.5%
AEROSPACE & DEFENSE, UK
- --------------------------------------------------------------------------------
Roche Holding AG 1.5%
PHARMACEUTICALS, SWITZERLAND
- --------------------------------------------------------------------------------
ING Groep NV 1.5%
CAPITAL MARKETS, NETHERLANDS
- --------------------------------------------------------------------------------
Samsung Electronics Co. Ltd., GDR, 144A 1.5%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, SOUTH KOREA
- --------------------------------------------------------------------------------
Esprit Holdings Ltd. 1.5%
SPECIALTY RETAIL, HONG KONG
- --------------------------------------------------------------------------------
(3) Source: Standard & Poor's Micropal. See footnote 1 for a description of
the MSCI AC World ex US Index.
(4) Source: Standard & Poor's Micropal. Individual country market returns are
measured by MSCI country-specific indexes. The MSCI USA Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the U.S.
(5) Source: Standard & Poor's Micropal. The MSCI EAFE Growth Index 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 MSCI EAFE Value Index 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.
Annual Report | 3
Our energy sector holdings were among the strongest contributors to Fund
performance during the year. Energy prices rose significantly with crude oil
spot prices reaching a record of almost $70 per barrel in August. Natural gas
prices rose from $6.01 at the end of 2004 to $9.52 by period-end, after hitting
a high of more than $15 in December. As a result of Hurricanes Katrina and Rita,
energy prices spiked higher due to concerns that the U.S. would face shortages
in energy supplies. Higher energy prices were considered positive for energy
companies, which resulted in higher stock prices. Although the overall portfolio
had a similar energy sector weighting to that of the MSCI EAFE Index, strong
stock selection in the value portion of the portfolio drove the Fund's relative
performance. In this sector, Encana, Lukoil, and Saipem contributed the most to
Fund performance.
The Fund also benefited from its overweighted allocation and stock selection in
the telecomunication services sector. The sector was one of the worst performing
areas in the MSCI EAFE Index, but telecommunication services holdings
outperformed those in the index. Top performing holdings included China Mobile,
TDC, America Movil and Telenor.
The Fund had several detractors from performance such as our investments in the
materials sector. Stock selection was the primary detractor of relative
performance in the sector, as several of our paper and forest products industry
investments, such as Norske Skogindustrier and Stora Enso, underperformed.
Because of stock selection, two other areas that hindered relative performance
were the information technology and consumer discretionary sectors.
It is important to recognize the effect of currency movements on the Fund's
performance. 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, 2005, the U.S. dollar rose in value relative to most non-U.S.
currencies. As a result, the Fund's performance was negatively affected by the
portfolio's investment primarily in securities with non-U.S. currency exposure.
4 | Annual Report
We thank you for your continued participation in the Fund and look forward to
serving your investment needs.
Canyon A. Chan, CFA
Gary P. Motyl, CFA
John P. Remmert
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, 2005, 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 12/31/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table and graph do not reflect any taxes that a
shareholder would pay 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 on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
SYMBOL: N/A CHANGE 12/31/05 12/31/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.45 $14.68 $14.23
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/05-12/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2344
- --------------------------------------------------------------------------------
Short-term Capital Gain $0.0985
- --------------------------------------------------------------------------------
Long-term Capital Gain $1.1725
- --------------------------------------------------------------------------------
TOTAL $1.5054
- --------------------------------------------------------------------------------
Franklin Templeton Non-U.S. Core Equity Series paid distributions derived from
long-term capital gains totaling $1.1725 per share in March and December 2005.
The Fund designates such distributions as capital gain dividends per Internal
Revenue Code Section 852(b)(3)(C).
PERFORMANCE(1)
- ------------------------------------------------------------------------------------------
1-YEAR 3-YEAR INCEPTION (9/3/02)
- ------------------------------------------------------------------------------------------
Cumulative Total Return(2) +13.90% +82.47% +73.25%
- ------------------------------------------------------------------------------------------
Average Annual Total Return(3) +13.90% +22.20% +17.97%
- ------------------------------------------------------------------------------------------
Value of $1,000,000 Investment(4) $1,139,003 $1,824,719 $1,732,551
- ------------------------------------------------------------------------------------------
PERFORMANCE DATA 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.
6 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any Fund expenses, account fees and reinvested distributions.
The unmanaged indexes include reinvestment of any income or distributions. They
differ from the Fund in composition and do not pay management fees or expenses.
One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
12/31/05
- --------------------------------------------------
1-Year +13.90%
- --------------------------------------------------
3-Year +22.20%
- --------------------------------------------------
Since Inception (9/3/02) +17.97%
- --------------------------------------------------
[PLOT POINTS TO COME]
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. INVESTING IN A
FUND THAT FOCUSES IN ONE OR MORE SECTORS INVOLVES SPECIAL RISKS, INCLUDING
GREATER SENSITIVITY TO ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS IN THAT
SECTOR. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
(1) The Fund's manager and administrator agreed in advance to assume as their
own certain expenses otherwise payable by the Fund. If the manager and
administrator had not taken this action, the Fund's total returns would
have been lower. This agreement may be ended after 5/1/06 upon notice to
the Board of Directors.
(2) Cumulative total return represents the change in value of an investment
over the periods indicated.
(3) Average annual total return represents the average annual change in value
of an investment over the periods indicated.
(4) These figures represent the value of a hypothetical $1,000,000 investment
in the Fund over the periods indicated.
(5) Source: Standard & Poor's Micropal. The MSCI EAFE Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global developed markets, excluding the U.S.
and Canada. The MSCI AC World Index ex US is a free float-adjusted, market
capitalization-weighted index designed to measure equity market
performance in global developed and emerging markets excluding the U.S.
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 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 Fund's actual expense ratio 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 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 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05
- ------------------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,153,50 $4.56
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000.00 $1,020.97 $4.28
- ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, of 0.84% multiplied by the average account value over the period,
multiplied by 184/365 to reflect the one-half year period.
Annual Report | 9
Templeton Institutional Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
YEAR ENDED DECEMBER 31,
2005 2004 2003 2002/C
------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 14.23 $ 12.46 $ 9.45 $10.00
--------------------------------------------
Income from investment operations:
Net investment income/a .............................. 0.25 0.19 0.19 0.01
Net realized and unrealized gains (losses) ........... 1.70 2.12 3.09 (0.51)
--------------------------------------------
Total from investment operations ...................... 1.95 2.31 3.28 (.50)
--------------------------------------------
Less distributions from:
Net investment income ................................ (0.23) (0.17) (0.27) (0.05)
Net realized gains ................................... (1.27) (0.37) -- --
--------------------------------------------
Total distributions ................................... (1.50) (0.54) (0.27) (0.05)
--------------------------------------------
Net asset value, end of year .......................... $ 14.68 $ 14.23 $12.46 $ 9.45
============================================
Total return/b ........................................ 13.90% 18.77% 34.89% (5.05)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $ 2,936 $ 2,846 $2,493 $2,942
Ratios to average net assets:
Expenses .............................................. 2.68% 2.53% 5.31% 5.47%/d
Expenses, net of waiver and payments by affiliate ..... 0.84% 0.84% 0.84% 0.84%/d
Net investment income ................................ 1.72% 1.45% 1.87% 0.28%/d
Portfolio turnover rate ................................ 31.36% 24.45% 39.97% 6.36%
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
c For the period September 3, 2002 (commencement date) to December 31, 2002.
d Annualized.
See notes to financial statements.
10
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 101.5%
AUSTRALIA 5.2%
Aristocrat Leisure Ltd. ........................ Hotels, Restaurants & Leisure 2,000 $ 18,075
CSL Ltd. ....................................... Biotechnology 600 18,705
Macquarie Bank Ltd. ............................ Capital Markets 600 29,995
Qantas Airways Ltd. ............................ Airlines 4,970 14,729
QBE Insurance Group Ltd. ....................... Insurance 1,000 14,377
Sonic Healthcare Ltd. .......................... Health Care Providers & Services 2,200 23,884
St. George Bank Ltd. ........................... Commercial Banks 1,500 32,636
------------
152,401
------------
AUSTRIA 1.1%
Erste Bank der Oester Sparkassen AG ............ Commercial Banks 600 33,420
------------
BERMUDA 0.6%
ACE Ltd. ....................................... Insurance 350 18,704
------------
BRAZIL 0.5%
Companhia Siderurgica Nacional SA, ADR ......... Metals & Mining 700 14,980
------------
CANADA 3.9%
Alcan Inc. ..................................... Metals & Mining 300 12,327
BCE Inc. ....................................... Diversified Telecommunication Services 1,060 25,417
Cameco Corp. ................................... Oil, Gas & Consumable Fuels 500 31,743
(a) Cognos Inc. .................................... Software 600 20,933
Encana Corp. ................................... Oil, Gas & Consumable Fuels 200 9,044
Talisman Energy Inc. ........................... Oil, Gas & Consumable Fuels 300 15,900
------------
115,364
------------
CHINA 1.0%
China Mobile (Hong Kong) Ltd. .................. Wireless Telecommunication Services 4,450 21,063
Huaneng Power International, Inc., H ........... Independent Power Producers & Energy Traders 15,000 9,866
------------
30,929
------------
DENMARK 0.6%
TDC AS ......................................... Diversified Telecommunication Services 140 8,386
(a) Vestas Wind Systems AS ......................... Electrical Equipment 370 6,076
(a),(b) Vestas Wind Systems AS, 144A ................... Electrical Equipment 123 2,020
------------
16,482
------------
FINLAND 0.8%
Stora Enso OYJ, R (EUR/FIM Traded) ............. Paper & Forest Products 1,820 24,649
------------
FRANCE 5.5%
Accor SA ....................................... Hotels, Restaurants & Leisure 140 7,700
AXA SA ......................................... Insurance 610 19,686
Essilor International SA ....................... Health Care Equipment & Supplies 200 16,148
France Telecom SA .............................. Diversified Telecommunication Services 870 21,619
Michelin SA, B ................................. Auto Components 530 29,791
Sanofi-Aventis ................................. Pharmaceuticals 330 28,909
Suez SA ........................................ Multi-Utilities 1,190 37,051
------------
160,904
------------
Annual Report | 11
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
GERMANY 7.8%
BASF AG ........................................ Chemicals 140 $ 10,728
Bayer AG, Br. .................................. Chemicals 280 11,678
Bayerische Motoren Werke AG .................... Automobiles 460 20,149
Celesio AG ..................................... Health Care Providers & Services 460 39,470
Deutsche Post AG ............................... Air Freight & Logistics 1,520 36,925
E.ON AG ........................................ Electric Utilities 260 26,920
Puma AG Rudolf Dassler Sport ................... Textiles Apparel & Luxury Goods 100 29,206
SAP AG ......................................... Software 200 36,268
Siemens AG ..................................... Industrial Conglomerates 220 18,849
------------
230,193
------------
GREECE 1.2%
National Bank of Greece SA ..................... Commercial Banks 800 34,095
------------
HONG KONG 4.2%
Esprit Holdings Ltd. ........................... Specialty Retail 6,000 42,638
Noble Group Ltd. ............................... Trading Companies & Distributors 10,000 7,697
Sun Hung Kai Properties Ltd. ................... Real Estate 3,000 29,212
Swire Pacific Ltd., A .......................... Real Estate 3,000 26,929
Television Broadcasts Ltd. ..................... Media 3,000 15,941
------------
122,417
------------
IRISH REPUBLIC 1.0%
Anglo Irish Bancorp PLC ........................ Commercial Banks 2,000 30,378
------------
ISRAEL 2.0%
(a) Check Point Software Technologies Ltd. ......... Software 1,160 23,316
Teva Pharmaceutical Industries Ltd., ADR ....... Pharmaceuticals 800 34,408
------------
57,724
------------
ITALY 2.7%
Eni SpA ........................................ Oil, Gas & Consumable Fuels 652 18,085
Luxottica Group SpA, ADR ....................... Textiles Apparel & Luxury Goods 700 17,717
Saipem SpA ..................................... Energy Equipment & Services 2,000 32,816
UniCredito Italiano SpA ........................ Commercial Banks 1,432 9,867
------------
78,485
------------
JAPAN 10.9%
Aiful Corp. .................................... Consumer Finance 500 41,727
Asahi Glass Co. Ltd. ........................... Building Products 3,000 38,711
Fast Retailing Co. Ltd. ........................ Specialty Retail 400 39,075
Fuji Photo Film Co. Ltd. ....................... Leisure Equipment & Products 300 9,913
Mabuchi Motor Co. Ltd. ......................... Electronic Equipment & Instruments 100 5,550
Mitsui Fudosan Co. Ltd. ........................ Real Estate 3,000 60,874
Nintendo Co. Ltd. .............................. Software 100 12,073
Nippon Telegraph & Telephone Corp. ............. Diversified Telecommunication Services 6 27,247
Seiko Epson Corp. .............................. Computers & Peripherals 400 10,048
Sompo Japan Insurance Inc. ..................... Insurance 2,000 27,027
SONY Corp. ..................................... Household Durables 900 36,753
Takeda Pharmaceutical Co. Ltd. ................. Pharmaceuticals 200 10,811
------------
319,809
------------
12 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MEXICO 2.7%
America Movil SA de CV, L, ADR ................. Wireless Telecommunication Services 1,000 $ 29,260
Grupo Financiero Banorte SA de CV, O ........... Commercial Banks 8,000 16,576
Telefonos de Mexico SA de CV (Telmex), L, ADR .. Diversified Telecommunication Services 1,300 32,084
------------
77,920
------------
NETHERLANDS 6.6% ...............................
Akzo Nobel NV .................................. Chemicals 630 29,199
ING Groep NV ................................... Capital Markets 1,290 44,746
Koninklijke Philips Electronics NV ............. Household Durables 1,130 35,116
SBM Offshore NV ................................ Energy Equipment & Services 910 73,526
VNU NV ......................................... Media 320 10,611
------------
193,198
------------
NORWAY 2.1%
Norske Skogindustrier ASA ...................... Paper & Forest Products 1,340 21,292
Telenor ASA .................................... Diversified Telecommunication Services 4,080 40,047
------------
61,339
------------
PORTUGAL 0.8%
Portugal Telecom SGPS SA ....................... Diversified Telecommunication Services 2,310 23,382
------------
RUSSIA 0.6%
Lukoil Holdings, ADR ........................... Oil, Gas & Consumable Fuels 300 17,820
------------
SINGAPORE 1.0%
DBS Group Holdings Ltd. ........................ Commercial Banks 2,000 19,844
SembCorp Marine Ltd. ........................... Machinery 5,000 8,299
------------
28,143
------------
SOUTH AFRICA 0.3%
Sappi Ltd. ..................................... Paper & Forest Products 872 9,993
------------
SOUTH KOREA 3.2%
Kookmin Bank, ADR .............................. Commercial Banks 370 27,643
KT Corp., ADR .................................. Diversified Telecommunication Services 1,100 23,705
Samsung Electronics Co. Ltd., GDR, 144A ........ Semiconductors & Semiconductor Equipment 130 42,802
------------
94,150
------------
SPAIN 2.6%
Banco Bilbao Vizcaya Argentaria SA ............. Commercial Banks 900 16,067
Banco Santander Central Hispano SA ............. Commercial Banks 650 8,580
Telefonica Moviles SA .......................... Wireless Telecommunication Services 2,000 21,001
Telefonica SA .................................. Diversified Telecommunication Services 2,048 30,816
------------
76,464
------------
SWEDEN 4.3%
Atlas Copco AB, A .............................. Machinery 2,730 60,816
Getinge AB, B .................................. Health Care Equipment & Supplies 1,200 16,538
Nordea Bank AB, FDR ............................ Commercial Banks 2,260 23,625
Securitas AB, B ................................ Commercial Services & Supplies 480 7,974
Volvo AB, B .................................... Machinery 340 16,025
------------
124,978
------------
Annual Report | 13
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SWITZERLAND 5.8%
Credit Suisse Group ............................ Capital Markets 400 $ 20,399
Lonza Group AG ................................. Chemicals 110 6,732
Roche Holding AG ............................... Pharmaceuticals 300 45,054
Swiss Reinsurance Co. .......................... Insurance 340 24,897
(a) Syngenta AG .................................... Chemicals 300 37,336
Synthes Inc. ................................... Health Care Equipment & Supplies 100 11,235
UBS AG ......................................... Capital Markets 250 23,806
------------
169,459
------------
TAIWAN 1.7%
Chunghwa Telecom Co. Ltd., ADR ................. Diversified Telecommunication Services 700 12,845
(b) Compal Electronics Inc., GDR, 144A ............. Computers & Peripherals 415 2,108
Compal Electronics Inc., GDR, Reg S ............ Computers & Peripherals 1,039 5,278
Taiwan Semiconductor Manufacturing Co. Ltd.,
ADR ......................................... Semiconductors & Semiconductor Equipment 2,999 29,720
------------
49,951
------------
UNITED KINGDOM 20.8%
BAE Systems PLC ................................ Aerospace & Defense 6,900 45,318
BG Group PLC ................................... Oil, Gas & Consumable Fuels 1,800 17,791
BP PLC ......................................... Oil, Gas & Consumable Fuels 1,560 16,613
British Sky Broadcasting Group PLC ............. Media 1,660 14,180
Cadbury Schweppes PLC .......................... Food Products 3,700 34,979
Compass Group PLC .............................. Hotels, Restaurants & Leisure 3,970 15,061
GlaxoSmithKline PLC ............................ Pharmaceuticals 500 12,637
HBOS PLC ....................................... Commercial Banks 1,500 25,613
HSBC Holdings PLC .............................. Commercial Banks 1,200 19,268
Man Group PLC .................................. Capital Markets 900 29,575
National Grid PLC .............................. Electric Utilities 2,062 20,186
Next PLC ....................................... Multiline Retail 1,800 47,536
Pearson PLC .................................... Media 920 10,882
Reckitt Benckiser PLC .......................... Household Products 1,000 33,033
Rentokil Initial PLC ........................... Commercial Services & Supplies 1,570 4,416
Royal Bank of Scotland Group PLC ............... Commercial Banks 780 23,551
Royal Dutch Shell PLC, B ....................... Oil, Gas & Consumable Fuels 801 25,605
Sage Group PLC ................................. Software 4,000 17,755
Shire PLC ...................................... Pharmaceuticals 2,870 36,736
Smith & Nephew PLC ............................. Health Care Equipment & Supplies 3,000 27,639
Smiths Group PLC ............................... Industrial Conglomerates 1,290 23,215
Standard Chartered PLC ......................... Commercial Banks 1,630 36,316
Tesco PLC ...................................... Food & Staples Retailing 8,000 45,626
Vodafone Group PLC ............................. Wireless Telecommunication Services 9,940 21,462
Yell Group PLC ................................. Media 670 6,184
------------
611,177
------------
14 | Annual Report
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES/ WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $2,002,395) 101.5% .................... $ 2,978,908
OTHER ASSETS, LESS LIABILITIES (1.5)% .......... (42,765)
------------
NET ASSETS 100.0% .............................. $ 2,936,143
============
CURRENCY ABBREVIATIONS
EUR - Euro
FIM - Finnish Markka
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FDR - Foreign Depository Receipt
GDR - Global Depository Receipt
(a) Non-income producing.
(b) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2005, the aggregate value of these securities was $46,930, representing
1.60% of net assets.
Annual Report | See notes to financial statements. | 15
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
FRANKLIN TEMPLETON
NON-U.S. CORE EQUITY
SERIES
------------------
Assets:
Investments in securities:
Cost ................................................ $2,002,395
------------------
Value ............................................... $2,978,908
Foreign currency, at value (cost $13,229) ............ 12,837
Receivables:
Investment securities sold .......................... 70,721
Dividends ........................................... 5,143
Affiliates .......................................... 29,071
------------------
Total assets .................................... 3,096,680
------------------
Liabilities:
Payables:
Fund advance by custodian .......................... 155,527
Investment securities purchased..................... -
Accrued expenses and other liabilities ............... 5,010
------------------
Total liabilities................................ 160,537
------------------
Net assets, at value ........................... $2,936,143
------------------
Net assets consist of:
Paid-in Capital ...................................... $1,912,477
Undistributed net investment income .................. 5,202
Net unrealized appreciation (depreciation) ........... 976,035
Accumulated net realized gain (loss) ................. 42,429
------------------
Net assets, at value ........................... $2,936,143
==================
Shares outstanding .................................... 200,000
==================
Net asset value per share/a ........................... $14.68
==================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
See notes to financial statements.
16
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
FRANKLIN TEMPLETON
NON-U.S. CORE EQUITY
SERIES
------------------
Investment income:
Dividends (net of foreign taxes of $5,634) ................... $ 72,341
Interest ..................................................... 1,555
--------------
Total investment income ................................. 73,896
--------------
Expenses:
Management fees (Note 3a)..................................... 20,227
Administrative fees (Note 3b)................................. 5,779
Transfer agent fees (Note 3c)................................. 205
Custodian fees (Note 4) ...................................... 900
Registration and filing fees ................................. 11,100
Professional fees ............................................ 20,100
Directors' fees and expenses ................................. 5,220
Reports to Shareholders ...................................... 7,150
Other ........................................................ 6,700
--------------
Total expenses .......................................... 77,381
Expenses waived/paid by affiliate (Note 3d).............. (52,652)
Expense reductions (Note 4) ............................. (488)
--------------
Net expenses ........................................ 24,241
--------------
Net investment income ............................. 49,655
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. 287,893
Foreign currency transactions ............................... 489
--------------
Net realized gain (loss) ................................ 288,382
Net change in unrealized appreciation (depreciation) on:
Investments ................................................. 55,200
Translation of assets and liabilities denominated in
foreign currencies ........................................ (1,978)
--------------
Net change in unrealized appreciation (depreciation) .... 53,222
--------------
Net realized and unrealized gain (loss) ....................... 341,604
--------------
Net increase (decrease) in net assets resulting from operations. $391,259
--------------
See notes to financial statements.
17
TEMPLETON INSTITUTIONAL FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN TEMPLETON
NON-U.S. CORE EQUITY SERIES
-------------------------------
YEAR ENDED DECEMBER 31,
2005 2004
-------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 49,655 $ 37,466
Net realized gain (loss) from investments and foreign
currency transactions ..................................... 288,382 123,700
Net unrealized appreciation (depreciation) on investments
and translation of asset and liabilities denominated in
foreign currencies ........................................ 53,222 300,082
-------------------------------
Net increase (decrease) in net assets resulting from
operations ............................................ 391,259 461,248
Distributions to shareholders from:
Net investment income ...................................... (46,880) (34,900)
Net realized gains ......................................... (254,200) (73,360)
-------------------------------
Total distributions to shareholders ......................... (301,080) (108,260)
-------------------------------
Net increase (decrease) in net assets ................... 90,179 352,988
Net assets:
Beginning of year ........................................... 2,845,964 2,492,976
-------------------------------
End of year ................................................ $2,936,143 $2,845,964
===============================
Undistributed net investment income included in net assets:
End of year ................................................. $ 5,202 $ 1,938
===============================
See notes to financial statements.
18
TEMPLETON INSTITUTIONAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment
Company Act of 1940 as an open-end investment company, consisting of four
separate series. The Non-U.S. Core Equity Series (the Fund) included in this
report is diversified. The financial statements of the remaining funds in the
series are presented separately.
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. 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 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.
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. 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. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. 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.
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.
19
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)
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, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
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 is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with generally accepted accounting principles. These differences may
be permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
20
TEMPLETON INSTITUTIONAL FUNDS, INC.
Notes to Financial Statements (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Common expenses incurred by TIFI are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets of TIFI. Fund
specific expenses are charged directly to the fund that incurred the expense.
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
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such
fees are retained by the Fund and accounted for as an addition to 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 liabilities 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, 2005, there were 1.14 billion shares authorized ($0.01 par
value) for TIFI, of which 60 million have been classified as Fund shares. During
the years ended December 31, 2005 and 2004, there were no share transactions.
21
TEMPLETON INSTITUTIONAL FUNDS, INC.
Notes to Financial Statements (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
- -------------------------------------------------------------------------------------------------
Franklin Templeton Alternative Strategies Inc. (Alternative Strategies) Investment manager
Fiduciary International Inc. (Fiduciary) Investment manager
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 Alternative Strategies based on
the average daily net assets of the Fund 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% In excess of $20 billion
Under a subadvisory agreement, Fiduciary, an affiliate of Alternative
Strategies, provides subadvisory services to the Fund and receives from
Alternative Strategies fees based on the average daily net assets of the Fund.
Under a subadvisory agreement, TIC, and affiliate of Alternative Strategies,
provides subadvisory services to the Fund and receives from Alternative
Strategies fees based on the average daily net assets of the Fund.
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
Fund's average daily net assets.
C. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $205, of which $24 was retained by Investor
Services.
D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
FT Services agreed in advance to voluntarily waive administrative fees through
April 30, 2006, as noted in the Statement of Operations. Additionally,
Alternative Strategies agreed in advance to voluntarily waive management fees
through April 30, 2006, as noted in the Statement of Operations. Total expenses
waived by FT Services and Alternative Strategies are not subject to
reimbursement by the Fund subsequent to the Fund's fiscal year end.
22
TEMPLETON INSTITUTIONAL FUNDS, INC.
Notes to Financial Statements (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
E. OTHER AFFILIATED TRANSACTIONS
At December 31, 2005, Franklin Advisers (an affiliate of the Fund's investment
manager) owned 100% of the Fund.
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, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The tax character of distributions paid during the years ended December 31, 2005
and 2004, was as follows:
2005 2004
----------- -----------
Distributions paid from:
Ordinary income..................... $ 66,580 $ 34,900
Long term capital gain.............. 234,500 73,360
----------- -----------
$ 301,080 $108,260
========================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and organizational
costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At December 31, 2005, 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 $ 2,011,894
-----------------
Unrealized appreciation $ 980,346
Unrealized depreciation (13,332)
-----------------
Net unrealized appreciation $ 967,014
=================
Undistributed ordinary income $ 9,760
Undistributed long term capital gains 47,617
-----------------
Distributable earnings $ 57,377
=================
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2005, aggregated $871,147 and $1,039,125, respectively.
23
TEMPLETON INSTITUTIONAL FUNDS, INC.
Notes to Financial Statements (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
7. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
8. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds. The Fund did not
participate in the CAGO settlement. The SEC has not yet approved the
distribution plan pertaining to the December 13, 2004 SEC Order. When approved,
disbursements of settlement monies will be made promptly to the relevant funds,
in accordance with the terms and conditions of that order. The IDC continues to
develop the plan of distribution under the August 2, 2004 SEC Order that
resolved the SEC's market timing investigation.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intends to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company 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.
24
TEMPLETON INSTITUTIONAL FUNDS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE TEMPLETON INSTITUTIONAL
FUNDS, INC. - FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Templeton Non-U.S. Core
Equity Series (one of the funds constituting the Templeton Institutional Funds,
Inc., hereafter referred to as the "Fund") at December 31, 2005, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with 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, 2005 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 10, 2006
25
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
designates the maximum amount allowable but no less than $264,503 as a capital
gain dividend for the fiscal year ended December 31, 2005 .
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $68,858 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2005. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $1,556 as interest-related dividends for purposes of
the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended
December 31,2005.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $24,011 as a short-term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31,2005.
At December 31, 2005, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the table
below, the Fund designates to shareholders the foreign source income and foreign
taxes paid as allowed, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on December 15, 2005, 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, and foreign qualified dividends as designated by
the Fund to shareholders of record.
26
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
RECORD DATE: 12/15/2005
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------
Australia 0.0003 0.0177 0.0177
Austria 0.0003 0.0015 0.0015
Bermuda 0.0000 0.0022 0.0022
Brazil 0.0000 0.0069 0.0069
Canada 0.0012 0.0063 0.0063
China 0.0000 0.0043 0.0023
Denmark 0.0002 0.0012 0.0012
Finland 0.0008 0.0041 0.0041
France 0.0026 0.0151 0.0151
Germany 0.0032 0.0199 0.0199
Hong Kong 0.0000 0.0173 0.0000
Ireland 0.0000 0.0014 0.0014
Israel 0.0003 0.0009 0.0009
Italy 0.0036 0.0188 0.0188
Japan 0.0012 0.0137 0.0131
Mexico 0.0000 0.0070 0.0070
Netherlands 0.0031 0.0158 0.0158
Norway 0.0011 0.0058 0.0058
Portugal 0.0000 0.0034 0.0034
Russia 0.0007 0.0034 0.0034
Singapore 0.0000 0.0017 0.0000
South Africa 0.0000 0.0010 0.0010
South Korea 0.0021 0.0097 0.0097
Spain 0.0014 0.0106 0.0106
Sweden 0.0022 0.0207 0.0207
Switzerland 0.0014 0.0100 0.0081
Taiwan 0.0023 0.0086 0.0077
United Kingdom 0.0000 0.0702 0.0597
----------------------------------------------------------
TOTAL $0.0280 $0.2992 $0.2643
----------------------------------------------------------
27
TEMPLETON INSTITUTIONAL FUNDS, INC.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or as a tax
deduction.
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 that have not been adjusted for the
rate differential applicable to such dividend income./1
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./1
In January 2006, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2005 individual income
tax returns.
- ---------------------
1. Qualified dividends are taxed at a maximum rate of 15% (5% for those in the
10% and 15% income tax brackets). In determining the amount of foreign tax
credit that may be applied against the U.S. tax liability of individuals
receiving foreign source qualified dividends, adjustments may be required to the
foreign tax credit limitation calculation to reflect the rate differential
applicable to such dividend income. The rules however permit certain individuals
to elect not to apply the rate differential adjustments for capital gains and/or
dividends for any taxable year. Please consult your tax advisor and the
instructions to Form 1116 for more information.
28
TEMPLETON INSTITUTIONAL FUNDS, INC.
BOARD MEMBERS AND OFFICERS
The name, year of birth 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods
500 East Broward Blvd. (meat 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 (1944) Director Since 1990 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Director Since 1992 141 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 (1952) Director Since 1996 136 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 | 29
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Director Since 1993 140 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).
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation
500 East Broward Blvd. 2005 (assisted living).
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga
Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co.
Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since 2003 101 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 Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), 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).
- ------------------------------------------------------------------------------------------------------------------------------------
30 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Director Since October 16 None
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow, Brookings Institute
(2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice
(2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None
(1954)
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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas), and Weatherford International,
Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing)
(2004-present); and FORMERLY,
Director, H.J. Heinz Company
(processed foods and allied products)
(1987-1988; 1993-2003) and Total
Logistics, Inc. (operating and
investment business) (until 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 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 42 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) 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.; and officer and/or director or trustee, as the case
may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) 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; and officer of 14 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) 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 47 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 47 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).
- ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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, LLC,
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 47 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. (1940) 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.; 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 45 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) 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 32 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) 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, Franklin Templeton Institutional
Suisse S.A., 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 45 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
- ------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (1936) 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).
- ------------------------------------------------------------------------------------------------------------------------------------
GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable
500 East Broward Blvd. Chief Executive 2005
Suite 2100 Officer -
Fort Lauderdale, FL 33394-3091 Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
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 14 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 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:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 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 FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO 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. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF
SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO
1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS
A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT
MR. OLSON AND MR. NIEMIEC 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.
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 | 35
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 U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. 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.
36 | Annual Report
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[LOGO](R)
FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL
INSTITUTIONAL 600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS, INC.
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
1-800/321-8563
franklintempletoninstitutional.com
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges,
and expenses before investing. 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. The prospectus
contains this and other information; please read it carefully before investing.
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 A2005 02/06
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 12(a)(1), 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 David W. Niemiec 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 $215,505 for the fiscal year ended December 31, 2005 and $208,478 for the
fiscal year ended December 31, 2004.
(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 $0 for the fiscal year ended December 31, 2005 and $48,579 for the fiscal
year ended December 31, 2004. 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.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $22,571 for the fiscal year ended
December 31, 2005 and $0 for the fiscal year ended December 31, 2004. The
services for which these fees were paid included tax compliance and advice.
(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 $0 for the fiscal year ended December 31, 2005
and $4,683 for the fiscal year ended December 31, 2004. 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 $4,789 for the fiscal year ended December
31, 2005 and $155,317 for the fiscal year ended December 31, 2004. 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
the review of the 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 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 $27,360 for the fiscal year ended December 31, 2005 and $208,579
for the fiscal year ended December 31, 2004.
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. 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 disclosure
herein.
ITEM 11. 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 12. EXHIBITS.
(A)(1) Code of Ethics
(A)(2) 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) 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: May 17, 2006
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: May 17, 2006
By/s/GALEN G. VETTER
-----------------------------
Galen G. Vetter
Chief Financial Officer
Date: May 17, 2006