UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06135
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TEMPLETON INSTITUTIONAL FUNDS
-------------------------------------
(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
-------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
--------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
DECEMBER 31, 2008
Emerging Markets Series
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO)
Contents
ANNUAL REPORT
TIF 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 ................... 29
Tax Designation ........................................................... 30
Board Members and Officers ................................................ 32
Shareholder Information ................................................... 37
Annual Report
TIF Emerging Markets Series
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF 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 FTINSTITUTIONAL.COM OR CALL A FRANKLIN TEMPLETON
INSTITUTIONAL SERVICES REPRESENTATIVE AT (800) 321-8563 FOR MOST RECENT
MONTH-END PERFORMANCE.
This annual report for Templeton Institutional Funds (TIF) Emerging Markets
Series (Fund) covers the fiscal year ended December 31, 2008.
PERFORMANCE OVERVIEW
TIF Emerging Markets Series had a -54.10% cumulative total return for the 12
months ended December 31, 2008. The Fund performed comparably to 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 had total returns of -53.74% and -53.18% during the same period.(1)
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The S&P/IFCI Composite Index is a free float-adjusted,
market capitalization-weighted index designed to measure equity performance
of 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.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Annual Report | 1
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(PERFORMANCE GRAPH)
Asia 41.2%
Latin America & Caribbean 24.9%
Europe 19.9%
Middle East & Africa 13.4%
Short-Term Investments & Other Net Assets 0.6%
ECONOMIC AND MARKET OVERVIEW
The year 2008 marked the end of a long bull run in emerging markets that started
in 2003. After surging close to 400% in the previous five-year period, the MSCI
EM Index declined 53.18% in U.S. dollar terms in 2008.(1) Our experience has led
us to believe the recent fall is part of a natural bull and bear market cycle.
In emerging markets we have found, in the past, that bull markets have lasted
longer than bear markets and bull markets have tended to more than recover the
losses of the previous bear markets. Please remember, historical performance is
no guarantee of future results.
Global financial markets this past year experienced some of the worst volatility
since the 1930s. The current crisis began in the U.S. with the unraveling of the
highly leveraged derivative structure of subprime mortgages. Extreme risk
aversion and the resulting lack of liquidity were detrimental to companies that
relied on borrowing and eventually led to a series of major financial firm
collapses in the U.S. and Europe. Investor anxiety surged and market volatility
in developed and emerging markets reached historic levels.
Recognizing the severity of the credit crunch, governments around the world
implemented fiscal stimuli and loosened monetary policies to support their
domestic economies and ease liquidity conditions. Thus far, more than US$1
trillion in total has been pledged globally by countries including China, the
U.S., Germany, the U.K., Taiwan, Spain, Japan, South Korea, Russia, France,
Australia, Hong Kong, Singapore and Malaysia. Government measures, coupled with
stocks trading at distress-level valuations, brought bargain hunters back to the
market. As a result, the MSCI EM Index rebounded and ended the year 25% above
its 2008 low in October.(1)
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. 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 | Annual Report
TOP 10 COUNTRIES
12/31/08
% OF TOTAL
NET ASSETS
----------
China 22.1%
Brazil 13.3%
South Africa 10.9%
Mexico 8.9%
Russia 6.1%
Taiwan 5.7%
Turkey 5.5%
U.K. 4.2%
India 4.0%
Chile 2.1%
MANAGER'S DISCUSSION
During the year under review, the most significant detractors from the Fund's
absolute performance included Turkey's Akbank, one of the country's largest
commercial banks, Russia's Gazprom, the world's largest natural gas producer,
and Chalco (Aluminum Corp. of China), the country's leading alumina and aluminum
products manufacturer. All three stocks significantly declined in value and
underperformed many of their emerging markets peers in 2008. Investor risk
aversion rose toward emerging markets such as Turkey amid the global financial
crisis, and shares of Akbank suffered. Commodity price corrections drove
investors to reduce exposure to energy stocks. Although we trimmed the Fund's
holdings in these stocks to meet funding requirements, we believed that these
companies were well positioned to benefit from continued demand for their
products and services over the longer term.
On the other hand, the most significant contributors to Fund performance
included Zijin Mining Group, a Chinese mining conglomerate primarily engaged in
gold production, and China Coal Energy and China Shenhua Energy, the country's
largest coal producers. We added shares of Zijin Mining Group to the portfolio
in December after price corrections brought the shares down to attractive levels
in our view. As one of China's largest gold miners, Zijin Mining Group has
proven reserves and benefits from economies of scale and cost advantages. We
believe expectations for gold prices to remain relatively high could lead to
higher revenues.
We initiated a position in China Coal Energy and added to our existing position
in China Shenhua Energy as price corrections brought valuations down to what we
considered attractive levels. China Coal Energy is the country's largest thermal
coal exporter, and also engages in the coking business and mining equipment
manufacturing. As an integrated coal-based energy company, China Shenhua Energy
owns one of the two dedicated coal freight rail lines in the country. Based on
our analysis, we believe these companies could benefit from proven reserves,
resilient coal prices in the medium term and long-term demand from industries
such as power generation and steel.
It is also 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, 2008, the U.S. dollar increased in value relative to most
non-U.S. currencies. As a result, the Fund's performance was
Annual Report | 3
negatively affected by the portfolio's predominant investment in securities with
non-U.S. currency exposure.
(PERFORMANCE GRAPH)
TOP 10 EQUITY HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
China Mobile Ltd. 5.7%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
ICBC (Industrial and Commercial Bank of 2.4%
China Ltd.), H
COMMERCIAL BANKS, CHINA
America Movil SAB de CV, L, ADR 2.3%
WIRELESS TELECOMMUNICATION SERVICES,
MEXICO
China Construction Bank Corp., H 2.3%
COMMERCIAL BANKS, CHINA
PetroChina Co. Ltd., H 2.2%
OIL, GAS & CONSUMABLE FUELS, CHINA
President Chain Store Corp. 2.1%
FOOD & STAPLES RETAILING, TAIWAN
Vale (Companhia Vale do Rio Doce), ADR,
pfd., A 2.0%
METALS & MINING, BRAZIL
Petrobras (Petroleo Brasileiro SA), ADR,
pfd. 2.0%
OIL, GAS & CONSUMABLE FUELS, BRAZIL
TSMC (Taiwan Semiconductor
Manufacturing Co. Ltd.) 1.9%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT, TAIWAN
Tupras-Turkiye Petrol Rafinerileri AS 1.8%
OIL, GAS & CONSUMABLE FUELS, TURKEY
During the reporting period, we increased the Fund's holdings in South Africa,
Taiwan and Chile as we continued to search for attractive investment
opportunities. We also increased the Fund's exposure to select frontier markets,
which we believe have the potential to grow at a relatively fast pace and offer
investors the opportunity to invest in a younger generation of emerging markets.
We made select purchases in Qatar, United Arab Emirates, Kuwait and Oman.
In addition, we made significant purchases in banks. In our view, the continued
liberalization of the financial sector in emerging markets could unlock hidden
value and allow banks to benefit from the growing financial needs of consumers
in these markets. Major additions in this sector included ICBC (Industrial and
Commercial Bank of China) and China Construction Bank, two leading Chinese
commercial banks, HSBC Holdings, one of the world's premier banking and
financial services organizations, and Banco Itau Holding Financeira, a major
financial conglomerate in Brazil.
We also made key purchases in consumer-related sectors that included
broadcasting and cable television, life and health insurance, and brewing
companies. Some key investments were China Life Insurance, the country's leading
life insurance company, Brazil's Ambev (Companhia de Bebidas das Americas), one
of the world's largest beer and soft drink producers, and Grupo Televisa, a
premier Mexican media company. We believe the long-term outlook for consumerism
remained attractive due to relatively higher per-capita income growth and
continued demand for consumer goods and services in emerging markets.
To raise funds for redemptions during the reporting period, we sold a number of
holdings. We sold some other stocks as they reached sale price targets. As a
result, the Fund's exposure to diversified metals and mining, oil and gas,
telecommunication services and electric utilities companies fell. Major sales
included all or part of Vale (Companhia Vale do Rio Doce), one of the world's
4 | Annual Report
largest iron ore producers, Petrobras (Petroleo Brasileiro), Brazil's national
oil and gas company, and China Telecom, the country's leading integrated
telecommunication services provider. We also sold some spin-offs of UES (Unified
Energy System), a Russian electricity production group that was split into
individual companies due to restructuring in the country's power sector.
Geographically, the Fund's investments fell in countries such as Brazil, Russia
and South Korea.
We thank you for your continued participation in the Fund and look forward to
serving your future investment needs.
(Photo of Mark Mobius)
/s/ Mark Mobius
Mark Mobius
Executive Chairman
Templeton Asset Management Ltd.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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 12/31/08
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 12/31/08 12/31/07
- ------------- ------- -------- --------
Net Asset Value (NAV) -$12.83 $8.40 $21.23
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.5031
Short-Term Capital Gain $0.1591
Long-Term Capital Gain $1.0183
TOTAL $1.6805
PERFORMANCE(1)
1-YEAR 5-YEAR 10-YEAR
-------- ---------- ----------
Cumulative Total Return(2) -54.10% +24.80% +97.97%
Average Annual Total Return(3) -54.10% +4.53% +7.07%
Value of $1,000,000 Investment(4) $458,994 $1,247,978 $1,979,719
Total Annual Operating
Expenses(5) 1.41%
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, VISIT FTINSTITUTIONAL.COM
OR CALL (800) 321-8563.
6 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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.
(PERFORMANCE GRAPH)
USD USD USD
TIF EMERGING IFC INVESTABLE MSCI EMERGING
MARKETS SERIES COMPOSITE INDEX MARKETS INDEX
INCEPTION DATE 3-MAY-93 3-MAY-93 3-MAY-93
CALENDAR MONTH NET 540 GROSS BM0300 GROSS BM0119
- -------------- -------------- --------------- -------------
Dec-98 1,000,000.00 1,000,000.00 1,000,000.00
Jan-99 951,865.30 976,884.88 983,865.85
Feb-99 951,865.07 994,283.81 993,435.97
Mar-99 1,084,922.22 1,109,191.81 1,124,361.24
Apr-99 1,296,849.48 1,260,441.44 1,263,468.23
May-99 1,261,929.74 1,237,910.46 1,256,118.03
Jun-99 1,384,751.26 1,372,887.72 1,398,677.12
Jul-99 1,323,340.78 1,352,943.63 1,360,681.35
Aug-99 1,276,379.41 1,367,547.04 1,373,061.03
Sep-99 1,219,785.35 1,329,453.00 1,326,593.76
Oct-99 1,254,705.24 1,352,067.43 1,354,840.50
Nov-99 1,360,668.62 1,473,609.55 1,476,321.62
Dec-99 1,565,836.61 1,671,131.14 1,664,080.53
Jan-00 1,495,434.87 1,673,509.41 1,673,998.39
Feb-00 1,442,026.56 1,671,882.17 1,696,106.94
Mar-00 1,460,914.44 1,696,332.46 1,704,384.42
Apr-00 1,334,617.42 1,520,841.16 1,542,821.15
May-00 1,227,750.78 1,478,491.26 1,479,037.95
Jun-00 1,318,830.00 1,520,340.47 1,531,136.92
Jul-00 1,262,967.89 1,447,239.95 1,452,391.27
Aug-00 1,287,255.66 1,452,705.80 1,459,532.33
Sep-00 1,160,958.77 1,322,777.15 1,332,091.92
Oct-00 1,063,807.13 1,215,671.55 1,235,511.26
Nov-00 1,007,944.75 1,108,273.88 1,127,485.76
Dec-00 1,064,554.25 1,140,359.66 1,154,706.95
Jan-01 1,185,023.58 1,286,811.03 1,313,710.12
Feb-01 1,091,598.49 1,187,674.72 1,210,845.13
Mar-01 989,568.54 1,085,367.38 1,091,916.54
Apr-01 1,041,198.26 1,149,622.40 1,145,870.08
May-01 1,078,076.82 1,184,420.24 1,159,547.45
Jun-01 1,073,159.72 1,162,974.09 1,135,745.60
Jul-01 1,010,466.12 1,083,489.80 1,063,977.22
Aug-01 1,014,153.98 1,068,761.21 1,053,482.34
Sep-01 887,538.34 903,075.06 890,424.83
Oct-01 914,582.40 959,068.72 945,683.62
Nov-01 969,899.72 1,071,431.55 1,044,416.17
Dec-01 1,011,369.78 1,160,554.10 1,127,316.94
Jan-02 1,063,940.87 1,201,986.06 1,165,519.33
Feb-02 1,062,689.07 1,225,184.63 1,184,667.14
Mar-02 1,126,401.97 1,310,552.01 1,255,926.52
Apr-02 1,164,032.23 1,322,693.70 1,264,078.01
May-02 1,156,506.34 1,301,038.93 1,243,937.41
Jun-02 1,083,754.38 1,207,159.84 1,150,614.83
Jul-02 1,026,054.41 1,130,721.41 1,063,102.86
Aug-02 1,023,545.62 1,145,366.55 1,079,483.95
Sep-02 948,284.72 1,018,108.23 963,017.18
Oct-02 973,371.65 1,083,489.80 1,025,505.22
Nov-02 1,052,395.47 1,158,718.24 1,096,094.34
Dec-02 1,031,142.50 1,114,866.27 1,059,675.96
Jan-03 1,019,685.25 1,115,867.65 1,055,062.24
Feb-03 1,018,412.48 1,082,822.21 1,026,586.20
Mar-03 981,554.25 1,043,059.21 997,477.70
Apr-03 1,083,799.49 1,149,538.95 1,086,325.15
May-03 1,147,702.74 1,229,523.93 1,164,292.19
Jun-03 1,186,044.64 1,305,628.57 1,230,650.61
Jul-03 1,237,167.52 1,375,808.40 1,307,723.13
Aug-03 1,295,958.55 1,475,069.89 1,395,497.15
Sep-03 1,334,300.57 1,491,175.37 1,405,727.46
Oct-03 1,437,823.92 1,612,300.25 1,525,351.51
Nov-03 1,467,219.44 1,632,995.37 1,544,098.67
Dec-03 1,586,340.99 1,752,075.77 1,656,037.39
Jan-04 1,637,177.03 1,811,949.76 1,714,851.58
Feb-04 1,697,137.34 1,899,278.17 1,793,957.57
Mar-04 1,695,399.25 1,934,701.88 1,817,008.52
Apr-04 1,599,902.16 1,788,417.41 1,668,454.87
May-04 1,580,279.14 1,764,092.29 1,635,594.42
Jun-04 1,612,983.81 1,764,175.74 1,643,065.56
Jul-04 1,588,128.29 1,727,875.83 1,614,012.50
Aug-04 1,641,763.44 1,805,107.02 1,681,575.37
Sep-04 1,726,795.00 1,909,333.67 1,778,697.78
Oct-04 1,777,814.14 1,964,534.57 1,821,309.78
Nov-04 1,913,865.02 2,135,227.60 1,990,009.07
Dec-04 2,005,162.98 2,244,669.75 2,085,811.12
Jan-05 1,990,546.35 2,250,093.88 2,092,412.94
Feb-05 2,144,687.24 2,438,978.60 2,276,145.24
Mar-05 2,041,644.05 2,286,685.86 2,126,190.60
Apr-05 1,978,883.43 2,235,448.74 2,069,520.74
May-05 2,057,674.70 2,319,230.61 2,142,385.22
Jun-05 2,124,440.46 2,397,421.45 2,216,338.26
Jul-05 2,244,634.21 2,563,357.95 2,373,161.82
Aug-05 2,233,966.93 2,584,929.28 2,394,524.52
Sep-05 2,414,236.89 2,826,302.83 2,617,807.29
Oct-05 2,279,364.94 2,642,174.66 2,446,769.64
Nov-05 2,455,618.54 2,856,552.76 2,649,354.94
Dec-05 2,568,503.25 3,034,630.95 2,806,299.45
Jan-06 2,827,657.48 3,360,287.06 3,121,443.33
Feb-06 2,834,435.23 3,362,498.44 3,118,469.99
Mar-06 2,856,164.43 3,402,177.99 3,146,424.43
Apr-06 3,049,376.61 3,690,866.61 3,370,939.37
May-06 2,758,185.19 3,325,489.21 3,018,522.90
Jun-06 2,728,253.77 3,311,428.21 3,012,127.70
Jul-06 2,797,654.96 3,353,819.84 3,057,176.33
Aug-06 2,849,344.05 3,452,872.70 3,136,597.29
Sep-06 2,849,344.23 3,483,080.90 3,162,961.75
Oct-06 2,985,401.20 3,639,087.08 3,313,317.04
Nov-06 3,152,769.56 3,921,391.91 3,560,134.56
Dec-06 3,315,178.63 4,100,221.14 3,720,770.55
Jan-07 3,272,270.25 4,053,156.42 3,682,225.47
Feb-07 3,240,478.76 4,044,603.00 3,660,898.05
Mar-07 3,368,331.67 4,211,999.83 3,808,083.46
Apr-07 3,540,675.18 4,423,874.49 3,984,924.15
May-07 3,696,611.07 4,651,020.15 4,183,331.65
Jun-07 3,813,176.61 4,872,491.34 4,381,202.44
Jul-07 3,905,090.56 5,119,581.09 4,614,637.40
Aug-07 3,780,356.28 5,005,924.81 4,518,081.94
Sep-07 4,239,969.80 5,503,567.41 5,017,381.44
Oct-07 4,699,600.38 6,139,233.11 5,577,314.42
Nov-07 4,312,213.86 5,717,403.10 5,182,303.58
Dec-07 4,313,165.73 5,751,658.53 5,200,816.41
Jan-08 3,675,234.96 5,012,600.66 4,553,310.99
Feb-08 3,973,903.36 5,373,555.31 4,891,054.78
Mar-08 3,652,896.76 5,103,559.06 4,632,666.43
Apr-08 3,957,635.75 5,501,481.20 5,009,371.06
May-08 4,040,933.69 5,607,835.77 5,103,756.99
Jun-08 3,602,092.74 5,046,271.96 4,595,555.11
Jul-08 3,518,795.50 4,868,986.52 4,425,845.39
Aug-08 3,268,896.68 4,479,359.12 4,073,776.65
Sep-08 2,837,245.22 3,690,219.89 3,361,291.14
Oct-08 2,056,845.47 2,674,907.16 2,441,868.67
Nov-08 1,898,626.83 2,464,776.57 2,258,224.56
Dec-08 1,979,719.32 2,660,850.34 2,434,974.55
AVERAGE ANNUAL TOTAL RETURN
12/31/08
--------
1-Year -54.10%
5-Year +4.53%
10-Year +7.07%
ENDNOTES
THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY
FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. 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.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The S&P/IFCI Composite Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity performance of global emerging markets. The MSCI EM Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global and emerging markets.
Annual Report | 7
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 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 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
Actual $1,000 $ 549.60 $5.38
Hypothetical (5% return before expenses) $1,000 $1,018.20 $7.00
* Expenses are calculated using the most recent six-month annualized expense
ratio of 1.38%, multiplied by the average account value over the period,
multiplied by 184/366 to reflect the one-half year period.
Annual Report | 9
Templeton Institutional Funds
FINANCIAL HIGHLIGHTS
EMERGING MARKETS SERIES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2008 2007 2006 2005 2004
---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 21.23 $ 20.86 $ 18.93 $ 15.09 $ 12.18
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ...................... 0.28 0.50 0.44 0.33 0.21
Net realized and unrealized gains (losses) .... (11.43) 5.31 4.96 3.89 2.97
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. (11.15) 5.81 5.40 4.22 3.18
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ......................... (0.50) (0.79) (0.54) (0.38) (0.27)
Net realized gains ............................ (1.18) (4.65) (2.93) -- --
---------- ---------- ---------- ---------- ----------
Total distributions .............................. (1.68) (5.44) (3.47) (0.38) (0.27)
---------- ---------- ---------- ---------- ----------
Redemption fees(c,d) ............................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 8.40 $ 21.23 $ 20.86 $ 18.93 $ 15.09
========== ========== ========== ========== ==========
Total return ..................................... (54.10)% 30.10% 29.07% 28.09% 26.40%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ...................................... 1.40% 1.41% 1.42% 1.42% 1.45%
Net investment income ............................ 1.79% 2.18% 2.09% 1.98% 1.62%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $1,120,378 $3,184,512 $3,209,602 $2,841,536 $2,063,532
Portfolio turnover rate .......................... 77.61% 87.26% 40.84% 36.42% 52.07%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
10 | Annual report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE
----------------------- -------------------------------------------- ------------- --------------
COMMON STOCKS 91.3%
ARGENTINA 0.3%
Tenaris SA, ADR .............................. Energy Equipment & Services 159,000 $ 3,335,820
--------------
AUSTRIA 0.6%
OMV AG ....................................... Oil, Gas & Consumable Fuels 269,829 7,063,092
--------------
BRAZIL 6.1%
AES Tiete SA ................................. Independent Power Producers & Energy Traders 1,335,408 7,379,507
American Banknote SA ......................... Commercial Services & Supplies 199,775 927,881
Banco Itau Holding Financeira SA, ADR ........ Commercial Banks 1,054,905 12,236,898
Companhia de Bebidas das Americas (AmBev) .... Beverages 413,138 15,135,006
Companhia Energetica de Minas Gerais ......... Electric Utilities 200,128 2,166,000
Natura Cosmeticos SA ......................... Personal Products 1,593,811 13,076,894
Souza Cruz SA ................................ Tobacco 905,191 17,247,320
--------------
68,169,506
--------------
CHILE 1.2%
Banco Santander Chile SA, ADR ................ Commercial Banks 96,600 3,383,898
Cia Cervecerias Unidas SA, ADR ............... Beverages 219,000 5,726,850
Empresa Nacional de Telecomunicaciones SA .... Diversified Telecommunication Services 168,253 1,829,817
Lan Airlines SA, ADR Airlines 349,868 2,816,438
--------------
13,757,003
--------------
CHINA 22.1%
Aluminum Corp. of China Ltd., H .............. Metals & Mining 14,171,000 7,460,153
Anta Sports Products Ltd. .................... Textiles, Apparel & Luxury Goods 1,534,000 698,694
Bank of China Ltd., H ........................ Commercial Banks 34,995,000 9,572,579
China Coal Energy Co., H ..................... Oil, Gas & Consumable Fuels 13,787,000 10,975,948
China Construction Bank Corp., H ............. Commercial Banks 46,490,000 25,493,859
China Life Insurance Co. Ltd., H ............. Insurance 4,108,000 12,482,697
China Mobile Ltd. ............................ Wireless Telecommunication Services 6,312,500 63,367,720
China Molybdenum Co. Ltd., H ................. Metals & Mining 8,113,000 3,684,777
China Petroleum and Chemical Corp., H ........ Oil, Gas & Consumable Fuels 6,114,000 3,699,861
China Shenhua Energy Co. Ltd., H ............. Oil, Gas & Consumable Fuels 5,888,500 12,460,504
China Shipping Development Co. Ltd., H ....... Marine 3,572,000 3,548,863
CNOOC Ltd. ................................... Oil, Gas & Consumable Fuels 13,952,000 13,033,532
Denway Motors Ltd. ........................... Automobiles 29,559,858 9,191,925
Hidili Industry International Development
Ltd. ...................................... Metals & Mining 12,467,000 3,924,993
Industrial and Commercial Bank of China
Ltd., H ................................... Commercial Banks 50,967,000 26,830,967
Lonking Holdings Ltd. ........................ Machinery 1,865,000 955,337
PetroChina Co. Ltd., H ....................... Oil, Gas & Consumable Fuels 27,588,000 24,170,024
(a) Shanda Interactive Entertainment Ltd., ADR ... Software 34,917 1,129,914
Shanghai Industrial Holdings Ltd. ............ Industrial Conglomerates 676,000 1,543,857
Tencent Holdings Ltd. ........................ Internet Software & Services 509,800 3,288,947
Annual Report | 11
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE
----------------------- -------------------------------------------- ------------- --------------
COMMON STOCKS (CONTINUED)
CHINA (CONTINUED)
Yantai Changyu Pioneer Wine Co. Ltd.,B ....... Beverages 350,700 $ 1,230,812
Zijin Mining Group Co. Ltd., H ............... Metals & Mining 13,884,000 8,419,757
--------------
247,165,720
--------------
EGYPT 0.2%
Egyptian Financial Group-Hermes Holding ...... Capital Markets 264,612 826,305
El Ezz Aldekhela Steel Alexa Co. ............. Metals & Mining 1,333 193,495
Telecom Egypt ................................ Diversified Telecommunication Services 425,087 1,234,092
--------------
2,253,892
--------------
HONG KONG 1.3%
Dairy Farm International Holdings Ltd. ....... Food & Staples Retailing 2,339,019 9,987,611
VTech Holdings Ltd. .......................... Communications Equipment 1,093,000 4,625,739
--------------
14,613,350
--------------
HUNGARY 1.9%
Magyar Telekom PLC ........................... Diversified Telecommunication Services 1,504,119 4,251,451
MOL Hungarian Oil and Gas Nyrt. .............. Oil, Gas & Consumable Fuels 207,389 10,774,163
(a) OTP Bank Ltd. ................................ Commercial Banks 386,200 5,844,277
--------------
20,869,891
--------------
INDIA 4.0%
(a) Bharti Airtel Ltd. ........................... Wireless Telecommunication Services 129,241 1,900,869
GAIL India Ltd. .............................. Gas Utilities 2,226,538 9,433,707
Grasim Industries Ltd. ....................... Construction Materials 20,709 518,768
Great Eastern Shipping Co. Ltd. .............. Oil, Gas & Consumable Fuels 122,200 509,963
Infosys Technologies Ltd. .................... IT Services 244,083 5,611,851
National Aluminium Co. Ltd. .................. Metals & Mining 755,329 2,949,387
Oil & Natural Gas Corp. Ltd. ................. Oil, Gas & Consumable Fuels 823,946 11,314,429
Shipping Corp. of India Ltd. ................. Marine 89,360 146,115
Steel Authority of India Ltd. ................ Metals & Mining 2,462,000 3,921,882
Tata Consultancy Services Ltd. ............... IT Services 883,072 8,683,602
Union Bank of India Ltd. ..................... Commercial Banks 20,000 67,051
--------------
45,057,624
--------------
INDONESIA 1.7%
PT Astra International Tbk ................... Automobiles 4,495,000 4,350,665
(b) PT Bank Central Asia Tbk ..................... Commercial Banks 18,231,000 5,435,849
PT Telekomunikasi Indonesia, B ............... Diversified Telecommunication Services 13,945,000 8,827,569
--------------
18,614,083
--------------
ISRAEL 0.5%
(a) Taro Pharmaceutical Industries Ltd. .......... Pharmaceuticals 759,075 5,844,877
--------------
KUWAIT 0.2%
Kuwait Projects Co. (Holding) KSC (KIPCO) .... Diversified Financial Services 560,000 993,339
National Mobile Telecommunications Co. ....... Wireless Telecommunication Services 195,000 1,327,107
--------------
2,320,446
--------------
12 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE
----------------------- -------------------------------------------- ------------- --------------
COMMON STOCKS (CONTINUED)
LUXEMBOURG 0.1%
(a) Reinet Investments SCA, GDR .................. Textiles, Apparel & Luxury Goods 826,287 $852,658
--------------
MALAYSIA 0.1%
British American Tobacco Malaysia Bhd. ....... Tobacco 95,100 1,225,764
--------------
MEXICO 8.9%
Alfa SAB de CV ............................... Industrial Conglomerates 262,221 564,019
America Movil SAB de CV, L, ADR .............. Wireless Telecommunication Services 848,578 26,297,432
Fomento Economico Mexicano SAB de CV, ADR .... Beverages 124,766 3,759,200
Grupo Televisa SA ............................ Media 6,704,904 19,994,938
Kimberly Clark de Mexico SAB de CV, A ........ Household Products 5,895,939 19,774,932
Telefonos de Mexico SAB de CV, L, ADR ........ Diversified Telecommunication Services 904,158 18,933,068
Wal-Mart de Mexico SAB de CV, V .............. Food & Staples Retailing 3,872,160 10,446,221
--------------
99,769,810
--------------
OMAN 0.1%
Oman International Bank ...................... Commercial Banks 1,313,240 750,403
--------------
PAKISTAN 1.3%
Fauji Fertilizer Co. Ltd. .................... Chemicals 1,254,911 942,075
MCB Bank Ltd. ................................ Commercial Banks 3,357,543 5,338,546
Oil & Gas Development Co. Ltd. ............... Oil, Gas & Consumable Fuels 5,679,400 3,588,161
(a) Pakistan Telecommunications Corp., A ......... Diversified Telecommunication Services 20,361,133 4,346,282
--------------
14,215,064
--------------
PERU 0.3%
Credicorp Ltd. ............................... Commercial Banks 63,000 3,147,480
--------------
PHILIPPINES 1.0%
Bank of the Philippine Islands ............... Commercial Banks 771,100 645,270
Globe Telecom Inc. ........................... Wireless Telecommunication Services 60,639 990,385
Philippine Long Distance Telephone Co., ADR .. Wireless Telecommunication Services 199,922 9,386,338
--------------
11,021,993
--------------
POLAND 0.4%
Polski Koncern Naftowy Orlen SA .............. Oil, Gas & Consumable Fuels 544,012 4,718,738
--------------
QATAR 1.1%
Industries Qatar ............................. Industrial Conglomerates 70,270 1,942,940
Qatar National Bank .......................... Commercial Banks 220,980 10,320,895
--------------
12,263,835
--------------
RUSSIA 6.1%
Bank of Moscow ............................... Commercial Banks 24,128 518,752
(a,c) Centenergoholding ............................ Electric Utilities 161,838 --
(a) Federal Grid Co. ............................. Electric Utilities 284,876,557 1,210,725
Gazprom, ADR ................................. Oil, Gas & Consumable Fuels 834,700 11,894,475
Gazprom, ADR (London Exchange) ............... Oil, Gas & Consumable Fuels 590,600 8,374,708
(a) Holiding MRSK OAO ............................ Electric Utilities 29,782,700 923,264
(a) Inter Rao Ues OAO ............................ Electric Utilities 1,221,833,345 274,913
Annual Report | 13
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE
----------------------- -------------------------------------------- ------------- --------------
COMMON STOCKS (CONTINUED)
RUSSIA (CONTINUED)
(a,c) Intergenerasiya Holding Co. .................. Electric Utilities 542,583 $ --
(a) Kuzbassenergo ................................ Electric Utilities 14,100,516 35,251
LUKOIL, ADR .................................. Oil, Gas & Consumable Fuels 202,570 6,705,067
LUKOIL, ADR (London Exchange) ................ Oil, Gas & Consumable Fuels 229,250 7,297,028
Mechel OAO, ADR .............................. Metals & Mining 177,483 709,932
Mining and Metallurgical Co. Norilsk
Nickel ....................................... Metals & Mining 148,386 9,719,283
Mobile TeleSystems ........................... Wireless Telecommunication Services 609,400 2,334,002
Mobile TeleSystems, ADR ...................... Wireless Telecommunication Services 172,700 4,607,636
(a) RAO Energy System of East OAO ................ Electric Utilities 25,782,700 55,433
(a) RusHydro ..................................... Electric Utilities 27,736,834 579,700
Sberbank RF .................................. Commercial Banks 4,715,680 3,489,603
(a,c) Sibenergyholding JSC ......................... Electric Utilities 149,072 --
(a) TGK-2 ........................................ Electric Utilities 385,310,076 105,960
(a) TGK-4 ........................................ Electric Utilities 470,860,819 211,887
(a) TGK-9 ........................................ Electric Utilities 800,469,615 36,021
TNK-BP ....................................... Oil, Gas & Consumable Fuels 12,656,073 8,226,447
(a) Wimm-Bill-Dann Foods ......................... Food Products 107,050 1,391,650
--------------
68,701,737
--------------
SINGAPORE 1.0%
ComfortDelGro Corp. Ltd. ..................... Road & Rail 1,861,306 1,884,044
Fraser and Neave Ltd. ........................ Industrial Conglomerates 3,586,139 7,385,068
Keppel Corp. Ltd. ............................ Industrial Conglomerates 794,388 2,401,187
--------------
11,670,299
--------------
SOUTH AFRICA 10.9%
ABSA Group Ltd. .............................. Commercial Banks 567,600 6,530,419
Foschini Ltd. ................................ Specialty Retail 2,997,139 15,304,540
Impala Platinum Holdings Ltd. ................ Metals & Mining 305,153 4,382,516
Kersaf Investments Ltd. ...................... Hotels, Restaurants & Leisure 24,800 246,285
Lewis Group Ltd. ............................. Specialty Retail 2,052,297 10,479,814
Massmart Holdings Ltd. ....................... Food & Staples Retailing 467,059 4,201,544
MTN Group Ltd. ............................... Wireless Telecommunication Services 1,406,771 16,237,729
Naspers Ltd., N .............................. Media 628,431 11,114,538
Pretoria Portland Cement Co. Ltd. ............ Construction Materials 519,662 1,733,128
Remgro Ltd. .................................. Diversified Financial Services 1,297,201 10,548,728
Sasol ........................................ Oil, Gas & Consumable Fuels 232,680 6,931,389
Standard Bank Group Ltd. ..................... Commercial Banks 1,746,237 15,418,901
Telkom South Africa Ltd. ..................... Diversified Telecommunication Services 628,570 7,656,518
The Spar Group Ltd. .......................... Food & Staples Retailing 419,612 2,544,456
Tiger Brands Ltd. ............................ Food Products 440,387 6,720,118
Truworths International Ltd. ................. Specialty Retail 664,719 2,411,374
--------------
122,461,997
--------------
14 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE
----------------------- -------------------------------------------- ------------- --------------
COMMON STOCKS (CONTINUED)
SOUTH KOREA 2.0%
Kangwon Land Inc. ............................ Hotels, Restaurants & Leisure 971,788 $ 10,502,697
(a) S1 Corp. ..................................... Commercial Services & Supplies 61,759 2,640,527
SK Telecom Co. Ltd. .......................... Wireless Telecommunication Services 53,315 8,822,514
--------------
21,965,738
--------------
SWEDEN 1.0%
Oriflame Cosmetics SA, SDR ................... Personal Products 384,603 11,091,952
--------------
TAIWAN 5.7%
MediaTek Inc. ................................ Semiconductors & Semiconductor Equipment 1,738,610 11,696,827
President Chain Store Corp. .................. Food & Staples Retailing 9,787,010 23,411,185
Taiwan Mobile Co. Ltd. ....................... Wireless Telecommunication Services 4,555,000 6,768,223
Taiwan Semiconductor Manufacturing Co. Ltd. .. Semiconductors & Semiconductor Equipment 15,874,355 21,504,847
--------------
63,381,082
--------------
THAILAND 1.1%
Siam Cement Public Co. Ltd., fgn. ............ Construction Materials 1,147,524 3,595,806
Thai Beverages Co. Ltd., fgn. ................ Beverages 68,147,000 9,276,555
--------------
12,872,361
--------------
TURKEY 5.5%
Akbank TAS ................................... Commercial Banks 4,877,907 15,135,602
Anadolu Efes Biracilik Ve Malt Sanayii AS .... Beverages 1,151,781 7,700,970
Tekfen Holding AS ............................ Diversified Financial Services 123,500 234,093
Tupras-Turkiye Petrol Rafinerileri AS ........ Oil, Gas & Consumable Fuels 1,937,395 20,373,774
Turkcell Iletisim Hizmetleri AS .............. Wireless Telecommunication Services 3,256,383 18,496,171
--------------
61,940,610
--------------
UNITED ARAB EMIRATES 0.4%
Abu Dhabi Commercial Bank .................... Commercial Banks 1,043,442 505,649
First Gulf Bank .............................. Commercial Banks 674,898 1,657,319
National Bank of Abu Dhabi ................... Commercial Banks 138,572 337,645
Union National Bank .......................... Commercial Banks 2,561,112 1,547,900
--------------
4,048,513
--------------
UNITED KINGDOM 4.2%
Anglo American PLC ........................... Metals & Mining 683,406 15,339,557
(a) British American Tobacco PLC ................. Tobacco 526,733 13,743,248
HSBC Holdings PLC ............................ Commercial Banks 1,921,658 18,273,876
--------------
47,356,681
--------------
TOTAL COMMON STOCKS
(COST 1,255,781,718) ...................... 1,022,522,019
--------------
PREFERRED STOCKS 8.1%
BRAZIL 7.2%
Banco Bradesco SA, ADR, pfd. ................. Commercial Banks 1,228,206 12,122,393
Companhia Energetica de Minas Gerais, ADR,
pfd. ...................................... Electric Utilities 472,050 6,485,967
Annual Report | 15
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE
----------------------- -------------------------------------------- ------------- --------------
PREFERRED STOCKS (CONTINUED)
BRAZIL (CONTINUED)
Companhia Vale do Rio Doce, ADR, pfd., A ..... Metals & Mining 2,117,580 $ 22,552,227
Itausa - Investimentos Itau SA, pfd. ......... Commercial Banks 2,350,890 8,135,938
Petroleo Brasileiro SA, ADR, pfd. ............ Oil, Gas & Consumable Fuels 1,099,440 22,439,571
Unibanco - Uniao de Bancos Brasileiros SA,
GDR, pfd. ................................. Commercial Banks 99,500 6,429,690
Usinas Siderurgicas de Minas Gerais SA, pfd.,
A ......................................... Metals & Mining 258,111 2,957,487
--------------
81,123,273
--------------
CHILE 0.9%
Embotelladora Andina SA, pfd., A ............. Beverages 3,648,322 6,719,088
Sociedad Quimica y Minera de Chile SA, B, ADR,
pfd. ...................................... Chemicals 117,409 2,863,606
--------------
9,582,694
--------------
TOTAL PREFERRED STOCKS
(COST $65,709,804) ........................ 90,705,967
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM
INVESTMENTS
(COST $1,321,491,522) .................. 1,113,227,986
--------------
SHORT TERM INVESTMENTS
(COST $4,929,741) 0.4%
MONEY MARKET FUNDS 0.4%
(d) Franklin Institutional Fiduciary Trust
Money Market Portfolio, 0.55% ............. 4,929,741 4,929,741
--------------
TOTAL INVESTMENTS
(COST $1,326,421,263) 99.8% ............... 1,118,157,727
OTHER ASSETS, LESS LIABILITIES 0.2% 2,220,037
--------------
NET ASSETS 100.0% ............................ $1,120,377,764
==============
See Abbreviations on page 28.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) A portion or all of the security purchased on a delayed delivery basis. See
Note 1(c).
(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the value of these securities was
$0.
(d) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
The accompanying notes are an integral part of these financial statements.
16 | Annual Report
Templeton Institutional Funds
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
EMERGING
MARKETS SERIES
--------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................. $1,321,491,522
Cost - Sweep Money Fund (Note 7) ........................ 4,929,741
--------------
Total cost of investments ............................... $1,326,421,263
--------------
Value - Unaffiliated issuers ............................ $1,113,227,986
Value - Sweep Money Fund (Note 7) ....................... 4,929,741
--------------
Total value of investments .............................. 1,118,157,727
Cash ....................................................... 104,212
Foreign currency, at value (cost $5,179) ................... 5,208
Receivables:
Investment securities sold .............................. 1,549,813
Capital shares sold ..................................... 803,322
Dividends ............................................... 4,876,151
Foreign tax ............................................. 117,945
--------------
Total assets ......................................... 1,125,614,378
--------------
Liabilities:
Payables:
Investment securities purchased ......................... 494,718
Capital shares redeemed ................................. 3,082,401
Affiliates .............................................. 1,237,605
Custodian fees .......................................... 310,795
Accrued expenses and other liabilities ..................... 111,095
--------------
Total liabilities .................................... 5,236,614
--------------
Net assets, at value .............................. $1,120,377,764
--------------
Net assets consist of:
Paid-in capital ............................................ $1,615,282,849
Distributions in excess of net investment income ........... (17,167,773)
Net unrealized appreciation (depreciation) ................. (208,285,077)
Accumulated net realized gain (loss) ....................... (269,452,235)
--------------
Net assets, at value .............................. $1,120,377,764
--------------
Shares outstanding ............................................ 133,379,697
--------------
Net asset value per share(a) .................................. $ 8.40
--------------
(a) Redemption price is equal to net asset value less redemption fees retained
by the Fund.
The accompanying notes are an integral part of these financial statements.
Annual Report | 17
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
EMERGING
MARKETS SERIES
---------------
Investment income:
Dividends: (net of foreign taxes of $6,928,402)
Unaffiliated issuers ......................................... $ 71,161,106
Sweep Money Fund (Note 7) .................................... 777,945
Interest (net of foreign taxes of $1,255) ....................... 1,121,507
---------------
Total investment income ................................... 73,060,558
---------------
Expenses:
Management fees (Note 3a) ....................................... 27,932,744
Administrative fees (Note 3b) ................................... 1,842,000
Transfer agent fees (Note 3c) ................................... 3,210
Custodian fees (Note 4) ......................................... 1,867,907
Reports to shareholders ......................................... 71,692
Registration and filing fees .................................... 55,643
Professional fees ............................................... 145,249
Trustees' fees and expenses ..................................... 69,308
Other ........................................................... 84,433
---------------
Total expenses ............................................ 32,072,186
Expense reductions (Note 4) ............................... (20,798)
---------------
Net expenses ........................................... 32,051,388
---------------
Net investment income ............................... 41,009,170
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................................. (173,359,159)
Foreign currency transactions ................................ (2,169,553)
---------------
Net realized gain (loss) ............................... (175,528,712)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................. (1,450,377,519)
Translation of other assets and liabilities
denominated in foreign currencies ......................... (403,943)
Change in deferred taxes on unrealized appreciation
(depreciation) ............................................... 1,661,836
---------------
Net change in unrealized appreciation (depreciation) ... (1,449,119,626)
---------------
Net realized and unrealized gain (loss) ............................ (1,624,648,338)
---------------
Net increase (decrease) in net assets resulting from operations .... $(1,583,639,168)
---------------
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
EMERGING MARKETS SERIES
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
--------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................... $ 41,009,170 $ 71,536,151
Net realized gain (loss) from investments and foreign currency
transactions and swap agreements ...................................... (175,528,712) 664,392,365
Net change in unrealized appreciation (depreciation) on investments,
translation of other assets and liabilities denominated in foreign
currencies and deferred taxes ......................................... (1,449,119,626) 105,503,414
--------------- --------------
Net increase (decrease) in net assets resulting from operations .... (1,583,639,168) 841,431,930
--------------- --------------
Distributions to shareholders from:
Net investment income .................................................... (63,309,942) (101,637,203)
Net realized gains ....................................................... (154,527,211) (587,388,696)
--------------- --------------
Total distributions to shareholders ............................................ (217,837,153) (689,025,899)
--------------- --------------
Capital share transactions (Note 2) ............................................ (262,665,982) (177,501,570)
--------------- --------------
Redemption fees ................................................................ 8,076 5,283
--------------- --------------
Net increase (decrease) in net assets .............................. (2,064,134,227) (25,090,256)
Net assets:
Beginning of year ........................................................... 3,184,511,991 3,209,602,247
--------------- --------------
End of year ................................................................. $ 1,120,377,764 $3,184,511,991
--------------- --------------
Distributions in excess of net investment income included in net assets:
End of year ................................................................. $ (17,167,773) $ (25,601,137)
--------------- --------------
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of four separate funds. The Emerging Market Series (Fund) is included
in this report. The financial statements of the remaining funds in the Trust 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.
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. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. At December 31, 2008, a portion
of the securities held by the Fund were fair valued. All security valuation
procedures are approved by the Trust's Board of Trustees.
20 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
D. 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 at a future 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
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
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 has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of December 31, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be 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.
F. 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 accounting principles generally accepted in the United States of
America. 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 the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
22 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
H. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
Fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
I. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2008 2007
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ---------------
Shares sold .................... 23,018,745 $ 396,764,787 11,076,340 $ 251,491,312
Shares issued in reinvestment
of distributions ............ 18,691,046 206,756,226 32,231,074 647,171,797
Shares redeemed ................ (58,338,281) (866,186,995) (47,192,244) (1,076,164,679)
----------- ------------- ----------- ---------------
Net increase (decrease) ........ (16,628,490) $(262,665,982) (3,884,830) $ (177,501,570)
=========== ============= =========== ===============
Annual Report | 23
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS 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
trustees of the Trust 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
A. MANAGEMENT FEES
Effective March 1, 2008, 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 $7.5 billion
1.125% Over $7.5 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
Prior to March 1, 2008, the Fund paid fees 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 net assets of certain funds within the Trust 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
24 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$3,210, of which $1,799 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, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses and 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, 2008, the Fund deferred
realized capital losses and realized currency losses of $255,281,400 and
$69,240, respectively.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
------------ ------------
Distributions paid from:
Ordinary income ........... $ 85,229,983 $171,493,747
Long term capital gain .... 132,607,170 517,532,152
------------ ------------
$217,837,153 $689,025,899
============ ============
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ........................... $1,361,848,914
==============
Unrealized appreciation ....................... $ 135,769,061
Unrealized depreciation ....................... (379,460,248)
--------------
Net unrealized appreciation (depreciation) .... $ (243,691,187)
==============
Undistributed ordinary income ................. $ 2,859,536
Undistributed long term capital gains ......... 1,372,355
--------------
Distributable earnings ........................ $ 4,231,891
==============
Annual Report | 25
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
5. INCOME TAXES (CONTINUED)
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 capital gains tax.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2008, aggregated $1,728,487,454 and $2,149,941,789,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin
Advisers, Inc. (an affiliate of the 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.
8. 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.
9. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Fund has determined that the implementation
of SFAS 157 did not have a material impact on the Fund's financial statements.
26 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
9. FAIR VALUE MEASUREMENTS (CONTINUED)
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Fund's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Fund's investments and are summarized in the following fair
value hierarchy:
- - Level 1 - quoted prices in active markets for identical securities
- - Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speed, credit risk, etc.)
- - Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2008, in
valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ---------- ------- --------------
ASSETS:
Investments in Securities ..... $1,116,522,072 $1,635,655 $-- $1,118,157,727
10. NEW ACCOUNTING PRONOUNCEMENT
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
11. SUBSEQUENT EVENT
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit (Global Credit Facility) to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Annual Report | 27
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMERGING MARKETS SERIES
11. SUBSEQUENT EVENT (CONTINUED)
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
GDR - Global Depository Receipt
SDR - Swedish Depository Receipt
28 | Annual Report
Templeton Institutional Funds
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS -
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 Templeton Institutional Funds, hereafter referred to as the
"Fund") at December 31, 2008, 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, 2008 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 20, 2009
Annual Report | 29
Templeton Institutional Funds
TAX DESIGNATION (UNAUDITED)
EMERGING MARKETS SERIES
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $132,607,170 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $21,928,772 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, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $80,703,535 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. 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 $1,284,877 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, 2008.
At December 31, 2008, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income 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, pursuant to Section 853 of the Code. This designation will allow
shareholders of record on December 16, 2008, 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 of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
shareholders of record.
Record Date: 12/16/2008
FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED DIVIDENDS
PER SHARE PER SHARE PER SHARE
---------------- --------------------- ---------------------------
Fund Shares .... $0.0566 $0.7950 $0.4966
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.
30 | Annual Report
Templeton Institutional Funds
TAX DESIGNATION (UNAUDITED) (continued)
EMERGING MARKETS SERIES
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 2009, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2008. 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 2008 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 bracket). 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
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. Generally, each
board member serves 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) Trustee Since 1992 138 Bar-S Foods (meat packing
500 East Broward Blvd. company).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) and
500 East Broward Blvd. Allied Capital Corporation
Suite 2100 (financial services).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding
500 East Broward Blvd. company), Victory Nickel Inc.
Suite 2100 (mineral exploration) and ABACO
Fort Lauderdale, FL 33394-3091 Markets Limited (retail
distributors).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Vice Chairman, Caribbean Utilities Company, Ltd.and director of various other private business and nonprofit
organizations.
EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration and
500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J.
Suite 2100 Trustee Independent Heinz Company (processed foods and
Fort Lauderdale, FL 33394-3091 Trustee since 2007 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
- ------------------- --------------- ------------------ ----------------------- ----------------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation (assisted
500 East Broward Blvd. living) and OSI Pharmaceuticals,
Suite 2100 Inc. (pharmaceutical products).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and 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) Trustee Since 2003 138 Hess Corporation (exploration and
500 East Broward Blvd. refining of oil and gas) and
Suite 2100 Sentient Jet (private jet
Fort Lauderdale, FL 33394-3091 service).
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).
LARRY D. THOMPSON (1945) Trustee Since 2005 145 None
500 East Broward Blvd.
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. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (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 Trustee Since 1990 23 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).
ROBERT E. WADE (1946) Trustee Since 2007 37 El Oro and Exploration Co., p.l.c.
500 East Broward Blvd. (investments).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
Annual Report | 33
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
- ------------------- --------------- ------------------ ----------------------- ----------------------------------
**CHARLES B. JOHNSON (1933) Trustee, Trustee and Vice 138 None
One Franklin Parkway Chairman of President since
San Mateo, CA 94403-1906 the Board and 1993 and
Vice President 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.; Director, Templeton Worldwide, 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 42
of the investment companies in Franklin Templeton Investments.
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director,Templeton Global Advisors Limited; officer
and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
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
- ------------------- --------------- ------------------ ----------------------- ----------------------------------
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 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 Templeton Investments; officer and/or director, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
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.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 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.; 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.
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; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or
director, as the case may be, of some of the other 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 2005 Not Applicable Not Applicable
500 East Broward Blvd. Chief Executive
Suite 2100 Officer -
Fort Lauderdale, FL 33394-3091 Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc. and of six 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
- ------------------- --------------- ------------------ ----------------------- ----------------------------------
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:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the
South; and officer of 14 of the investment companies in Franklin Templeton Investments.
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
* 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 manager or
affiliated investment managers.
** 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 investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Fund under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008.
SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL
CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC.
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 OSI PHARMACEUTICALS, INC. 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
BELIEVES THAT MS. BATES 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. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS 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 (800)
321-8563 TO REQUEST THE SAI.
36 | Annual Report
Templeton Institutional Funds
SHAREHOLDER INFORMATION
EMERGING MARKETS SERIES
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager 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 (954) 527-7678 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 (800)
SEC-0330.
Annual Report | 37
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(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) 600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
Emerging Markets Series
INVESTMENT MANAGER
Templeton Asset Management Ltd.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
(800) 321-8563
ftinstitutional.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 A2008 02/09
DECEMBER 31, 2008
Foreign Smaller Companies Series
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
(FRANKLIN TEMPLETON INSTITUTIONAL (R) LOGO)
Contents
ANNUAL REPORT
TIF Foreign Smaller Companies Series ..................................... 1
Performance Summary ...................................................... 6
Your Fund's Expenses ..................................................... 8
Financial Highlights and Statement of Investments ........................ 10
Financial Statements ..................................................... 15
Notes to Financial Statements ............................................ 18
Report of Independent Registered Public Accounting Firm .................. 26
Tax Designation .......................................................... 27
Board Members and Officers ............................................... 29
Shareholder Information .................................................. 34
Annual Report
TIF Foreign Smaller Companies Series
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF Foreign Smaller Companies Series
seeks long-term capital growth. Under normal market conditions, the Fund invests
at least 80% of its net assets in investments of smaller companies located
outside the U.S., including emerging markets.
PERFORMANCE DATA 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 CALL A FRANKLIN TEMPLETON INSTITUTIONAL SERVICES
REPRESENTATIVE AT (800) 321-8563 FOR MOST RECENT MONTH-END PERFORMANCE.
This annual report for Templeton Institutional Funds (TIF) Foreign Smaller
Companies Series (Fund) covers the year ended December 31, 2008.
PERFORMANCE OVERVIEW
The Fund had a -47.28% cumulative total return for the year ended December 31,
2008. The Fund performed comparably to its benchmark, the S&P/Citigroup Global
Equity ex-U.S. less than $2 Billion Index, which had a -49.15% total return
during the same period.(1) Please note that index performance information is
provided for reference and we do not attempt to track the 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.
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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. The index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND 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
Annual Report | 1
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(PERFORMANCE GRAPH)
Asia 40.5%
Europe 29.6%
North America 8.6%
Australia & New Zealand 4.2%
Latin America & Caribbean 4.3%
Middle East & Africa 1.8%
Short-Term Investments & Other Net Assets 11.0%
ECONOMIC AND MARKET OVERVIEW
The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as
housing prices declined, consumer demand softened, and a credit crisis
originally related to U.S. subprime loan losses intensified and spread globally.
Although GDP growth rebounded in the second quarter of 2008, largely due to
fiscal stimulus, the domestic economy contracted in the third and fourth
quarters. Fear of recession spanned the entire period, and in the summer most
economists agreed that a recession had already begun. By then, the faltering
U.S. economy -- which is the world's largest and accounts for roughly 25% of
global GDP -- had negatively impacted growth prospects around the world.
Although signs of a global slowdown surfaced in the latter half of the reporting
period, in the first half growth remained robust in developing economies,
particularly in Asia.
The China-led demand for oil, natural gas, and industrial and agricultural
commodities propelled commodity prices and those of related equities to higher
levels. The steep rise in the price of oil, which peaked at $145 per barrel in
early July, was one of the most extreme market trends during the year. As a
result, oil was a major focus of attention due to its impact on everything from
inflation to corporate earnings to consumer spending. The price boom for
commodities in general was broadly based and included natural gas, precious
metals and most agricultural and industrial commodities, all of which added to
global inflationary pressures. In this environment, the world's monetary
authorities faced the choice of lowering short-term interest rates to stimulate
growth or raising them to fight rising inflation. Stimulus provided through
fiscal and monetary policies implemented around the globe sought to restore
financial market stability and reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The eurozone had made
controlling inflation its main goal and kept rates steady at 4.00% until July,
when the European Central Bank (ECB) joined many of the world's central banks
whose concerns about inflation had led them to raise rates. The potential for
global recession, however, exacerbated by the virtual freeze in the global
financial system in September and October, trumped inflationary concerns, and
the world's monetary authorities, including the ECB and the Bank of England, cut
interest rates aggressively. The U.S. dollar, which had declined earlier in the
period versus many of the world's
2 | Annual Report
currencies, regained ground quickly toward period-end as a flight to the
relative safety of U.S. Treasuries prevailed. The greenback appreciated 8.6%
relative to most currencies during the year under review.(2)
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
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. We also consider a company's
price/earnings ratio, profit margins, liquidation value and other factors.
MANAGER'S DISCUSSION
During the year, the Fund held some poor performers. U.K.-based chemicals
manufacturer Yule Catto was a significant detractor from Fund results. The
company historically has earned relatively high profit margins as an industry
leader serving various niche markets. However, as Yule Catto was focused on
controlling costs and asset utilization, the company's share price declined, we
believe, largely due to several non-recurring charges related to restructuring.
At period-end, we believed the company remained attractively valued due to plant
closures and other restructuring efforts, and its solid dividend.
Finnish sporting goods company Amer Sports produces and markets golf, racquet
and team sports equipment under the Wilson brand name, and skis and snowboards
under the Atomic and Oxygen brands. The company's stock price declined during
the period, largely due to weak demand. However, the company has strong cash
flow and a solid balance sheet. In addition, we think recent acquisitions in the
fitness, team sports and winter sports areas complement the company's product
lineup and should strengthen its long-term competitive position.
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/08
(PERFORMANCE GRAPH)
Textiles, Apparel & Luxury Goods 9.3%
Commercial Services & Supplies 4.9%
Food Products 4.3%
Electronic Equipment, Instruments & Components 4.1%
Machinery 4.0%
Food & Staples Retailing 3.8%
Communications Equipment 3.8%
Commercial Banks 3.7%
Household Durables 3.5%
Real Estate Management & Development 3.1%
Specialty Retail 3.1%
Capital Markets 3.0%
Leisure Equipment & Products 2.8%
Health Care Providers & Services 2.7%
Computers & Peripherals 2.1%
Other 30.8%
Short-Term Investments & Other Net Assets 11.0%
(2.) Source: Federal Reserve H10 report.
Annual Report | 3
TOP 10 EQUITY HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Dorel Industries Inc., B
HOUSEHOLD DURABLES, CANADA 2.0%
Iluka Resources Ltd.
METALS & MINING, AUSTRALIA 1.9%
Descente Ltd.
TEXTILES, APPAREL & LUXURY GOODS, JAPAN 1.8%
Massmart Holdings Ltd.
FOOD & STAPLES RETAILING,SOUTH AFRICA 1.8%
Binggrae Co. Ltd.
FOOD PRODUCTS, SOUTH KOREA 1.7%
Giant Manufacturing Co. Ltd.
LEISURE EQUIPMENT & PRODUCTS, TAIWAN 1.7%
North West Company Fund
FOOD & STAPLES RETAILING, CANADA 1.7%
Steiner Leisure Ltd.
DIVERSIFIED CONSUMER SERVICES, BAHAMAS 1.7%
Sinotrans Ltd., H
AIR FREIGHT & LOGISTICS, CHINA 1.6%
Imtech NV
CONSTRUCTION & ENGINEERING, NETHERLANDS 1.6%
Sweden-based Niscayah Group, formerly known as Securitas Systems, was another
key detractor. The company, which designs and installs corporate security
systems, struggled from reduced banking-sector investment due to the credit
crisis. Over the longer term, however, we continue to believe Niscayah could
show strong potential for profit margin expansion if it expands its installed
security base and associated service contracts.
On a more positive note, several holdings performed well for the Fund.
U.K.-based FKI (sold during the period), a leading international engineering
conglomerate, was among the Fund's top contributors during the reporting period.
Its largest division, FKI Logistex, manufactures automated sorting and material
handling equipment for top delivery companies and airport baggage handling
systems. During the period, FKI was acquired by another U.K.-based engineering
company, Melrose, an industry leader that designs, develops and manufactures
specialist components for various markets worldwide.
Canadian drilling and well-servicing contractor Saxon Energy (sold by
period-end) also performed well during the year. The company provides
technology, equipment and personnel to oil and gas producers and has a strong
Latin American presence. Saxon's stock price rose after U.S. energy company
Schlumberger, which sought to expand operations in the region, made a takeover
offer for the company.
Binggrae, based in South Korea, a leading producer of dairy beverage and ice
cream products, also contributed to performance for the time we held it.
Binggrae's profitability and balance sheet improved significantly over the past
five years as the company has strong brand power and efficient cost management.
4 | Annual Report
Thank you for your continued participation in TIF Foreign Smaller Companies
Series. We look forward to serving your future investment needs.
(PHOTO OF HARLAN B. HODES)
/s/ Harlan B. Hodes
Harlan B. Hodes, CPA
(PHOTO OF CYNTHIA L. SWEETING)
/s/ Cynthia L. Sweeting
Cynthia L. Sweeting, CFA
Portfolio Management Team
TIF Foreign Smaller Companies Series
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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 12/31/08
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 12/31/08 12/31/07
- ------------- ------- -------- --------
Net Asset Value (NAV) -$11.39 $8.81 $20.20
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.4803
Short-term Capital Gain $0.0512
Long-term Capital Gain $1.4497
TOTAL $1.9812
PERFORMANCE(1)
INCEPTION
1-YEAR 5-YEAR (10/21/02)
-------- ---------- -----------
Cumulative Total Return(2) -47.28% +6.41% +62.52%
Average Annual Total Return(3) -47.28% +1.25% +8.15%
Value of $1,000,000 Investment(4) $527,242 $1,064,098 $1,625,091
Total Annual Operating
Expenses(5)
Without Waiver 1.07%
With Waiver 0.95%
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 (800)
321-8563.
THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES SO THAT
TOTAL FUND ANNUAL OPERATING EXPENSES, EXCLUDING ACQUIRED FUND FEES AND EXPENSES,
DO NOT EXCEED 0.95% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING
THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS)
UNTIL 4/30/09.
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 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.
10/21/02-12/31/08
$ Millions
(PLOT POINTS TO COME)
AVERAGE ANNUAL TOTAL RETURN
12/31/08
--------
1-Year -47.28%
5-Year +1.25%
Since Inception (10/21/02) +8.15%
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.) If the administrator had not waived fees, 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.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. 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.
Annual Report | 7
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases, if
applicable, and redemption fees; and
- - 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 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 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
Actual $1,000 $ 590.70 $3.80
Hypothetical (5% return before expenses) $1,000 $1,020.36 $4.82
* Expenses are calculated using the most recent six-month annualized expense
ratio, net of expense waiver, of 0.95% multiplied by the average account
value over the period, multiplied by 184/366 to reflect the one-half year
period.
Annual Report | 9
Templeton Institutional Funds
FINANCIAL HIGHLIGHTS
FOREIGN SMALLER COMPANIES SERIES
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2008 2007 2006 2005 2004
------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 20.20 $ 22.42 $ 18.18 $ 17.45 $ 14.97
------- -------- -------- -------- -------
Income from investment operations(a):
Net investment income(b) .................... 0.42 0.33 0.30 0.38 0.21
Net realized and unrealized gains (losses) .. (9.83) 2.81 4.89 1.74 2.93
------- -------- -------- -------- -------
Total from investment operations ............... (9.41) 3.14 5.19 2.12 3.14
------- -------- -------- -------- -------
Less distributions from:
Net investment income ....................... (0.48) (0.39) (0.33) (0.36) (0.16)
Net realized gains .......................... (1.50) (4.97) (0.62) (1.03) (0.50)
------- -------- -------- -------- -------
Total distributions ............................ (1.98) (5.36) (0.95) (1.39) (0.66)
------- -------- -------- -------- -------
Redemption fees(c) ............................. --(d) --(d) --(d) --(d) --
------- -------- -------- -------- -------
Net asset value, end of year ................... $ 8.81 $ 20.20 $ 22.42 $ 18.18 $ 17.45
======= ======== ======== ======== =======
Total return ................................... (47.28)% 15.09% 28.78% 12.28% 21.28%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by
affiliates .................................. 1.09% 1.07% 1.07% 1.07% 1.16%
Expenses net of waiver and payments by
affiliates(e) ............................... 0.95% 0.95% 0.95% 0.95% 0.95%
Net investment income .......................... 2.60% 1.34% 1.45% 2.12% 1.34%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $63,617 $135,730 $170,757 $131,567 $97,495
Portfolio turnover rate ........................ 23.01% 20.95% 17.30% 24.59% 27.51%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
10 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE
------------------------------------------------ ---------------------------------------------- ------------ -----------
COMMON STOCKS AND OTHER EQUITY INTERESTS 88.4%
AUSTRALIA 4.2%
Billabong International Ltd. ................... Textiles, Apparel & Luxury Goods 130,665 $ 726,518
Downer EDI Ltd. ................................ Commercial Services & Supplies 169,732 460,447
(a) Iluka Resources Ltd. ........................... Metals & Mining 365,061 1,199,778
PaperlinX Ltd. ................................. Paper & Forest Products 608,161 301,532
-----------
2,688,275
-----------
BAHAMAS 1.7%
(a) Steiner Leisure Ltd. ........................... Diversified Consumer Services 37,040 1,093,421
-----------
BELGIUM 0.9%
Barco NV ....................................... Electronic Equipment, Instruments & Components 21,690 542,891
-----------
BRAZIL 2.1%
Companhia de Saneamento de Minas Gerais ........ Water Utilities 86,500 702,988
Lojas Renner SA ................................ Multiline Retail 90,500 612,717
-----------
1,315,705
-----------
CANADA 6.9%
Canaccord Capital Inc. ......................... Capital Markets 108,300 359,576
Dorel Industries Inc., B ....................... Household Durables 54,900 1,263,313
Linamar Corp. .................................. Auto Components 57,890 176,030
(a) MDS Inc. ....................................... Life Sciences Tools & Services 84,390 523,623
(a) Mega Brands Inc. ............................... Leisure Equipment & Products 67,800 20,059
North West Company Fund (Trust Units) .......... Food & Staples Retailing 78,750 1,093,750
(a) Open Text Corp. ................................ Internet Software & Services 32,100 975,821
-----------
4,412,172
-----------
CAYMAN ISLANDS 2.2%
(a) Ju Teng International Holdings Ltd. ............ Electronic Equipment, Instruments & Components 2,910,000 608,268
Stella International Holdings Ltd. ............. Textiles, Apparel & Luxury Goods 952,500 774,270
-----------
1,382,538
-----------
CHINA 4.5%
(a) AAC Acoustic Technologies Holdings Inc. ........ Communications Equipment 1,238,000 555,887
People's Food Holdings Ltd. .................... Food Products 1,424,000 690,876
Sinotrans Ltd., H .............................. Air Freight & Logistics 5,228,000 1,011,845
Travelsky Technology Ltd., H ................... IT Services 1,423,000 624,268
-----------
2,882,876
-----------
DENMARK 1.0%
(a) Vestas Wind Systems AS ......................... Electrical Equipment 11,230 640,310
-----------
FINLAND 3.2%
Amer Sports OYJ ................................ Leisure Equipment & Products 90,200 676,039
Huhtamaki OYJ .................................. Containers & Packaging 141,800 872,427
Konecranes OYJ ................................. Machinery 30,370 512,994
-----------
2,061,460
-----------
FRANCE 1.1%
Sperian Protection ............................. Commercial Services & Supplies 11,330 708,567
-----------
Annual Report | 11
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE
------------------------------------------------ ---------------------------------------------- ------------ -----------
COMMON STOCKS AND OTHER EQUITY INTERESTS
(CONTINUED)
GERMANY 4.1%
Celesio AG ..................................... Health Care Providers & Services 30,750 $ 829,856
(a) Jenoptik AG .................................... Electronic Equipment, Instruments & Components 124,770 868,840
Rational AG .................................... Household Durables 7,770 931,765
-----------
2,630,461
-----------
HONG KONG 6.3%
Dah Sing Financial Group ....................... Commercial Banks 100,400 257,535
Hang Lung Group Ltd. ........................... Real Estate Management & Development 259,000 783,664
Hopewell Holdings Ltd. ......................... Real Estate Management & Development 280,000 921,266
Texwinca Holdings Ltd. ......................... Textiles, Apparel & Luxury Goods 1,063,000 452,621
VTech Holdings Ltd. ............................ Communications Equipment 212,000 897,216
Yue Yuen Industrial Holdings Ltd. .............. Textiles, Apparel & Luxury Goods 366,000 723,481
-----------
4,035,783
-----------
INDIA 0.9%
HCL Infosystems Ltd. ........................... IT Services 292,426 544,916
-----------
INDONESIA 0.7%
PT Indosat Tbk ................................. Diversified Telecommunication Services 887,900 468,388
-----------
JAPAN 7.0%
Asics Corp. .................................... Textiles, Apparel & Luxury Goods 49,000 396,719
Descente Ltd. .................................. Textiles, Apparel & Luxury Goods 246,900 1,167,409
Japan Airport Terminal Co. Ltd. ................ Transportation Infrastructure 48,400 654,251
MEITEC Corp. ................................... Professional Services 15,100 260,720
Sohgo Security Services Co. Ltd. ............... Commercial Services & Supplies 73,400 764,005
Takuma Co. Ltd. ................................ Machinery 318,000 552,766
USS Co. Ltd. ................................... Specialty Retail 12,750 676,009
-----------
4,471,879
-----------
NETHERLANDS 6.8%
Aalberts Industries NV ......................... Machinery 88,078 623,187
Draka Holding NV ............................... Electrical Equipment 33,535 306,673
Imtech NV ...................................... Construction & Engineering 59,220 993,688
OPG Groep NV ................................... Health Care Providers & Services 70,470 915,420
Randstad Holding NV ............................ Professional Services 28,793 585,801
SBM Offshore NV ................................ Energy Equipment & Services 37,860 494,933
USG People NV .................................. Professional Services 30,390 391,798
-----------
4,311,500
-----------
NORWAY 1.8%
Schibsted ASA .................................. Media 48,580 579,759
Tomra Systems ASA .............................. Commercial Services & Supplies 175,930 596,986
-----------
1,176,745
-----------
RUSSIA 0.4%
(a, b) X 5 Retail Group NV, GDR, Reg S ................ Food & Staples Retailing 26,698 226,399
-----------
SINGAPORE 1.5%
Cerebos Pacific Ltd. ........................... Food Products 433,358 922,682
-----------
SOUTH AFRICA 1.8%
Massmart Holdings Ltd. ......................... Food & Staples Retailing 124,297 1,118,144
-----------
12 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE
------------------------------------------------ ---------------------------------------------- ------------ -----------
COMMON STOCKS AND OTHER EQUITY INTERESTS
(CONTINUED)
SOUTH KOREA 7.8%
Bank of Pusan .................................. Commercial Banks 135,980 $ 626,606
(a) Binggrae Co. Ltd. .............................. Food Products 32,120 1,107,543
Daegu Bank Co. Ltd. ............................ Commercial Banks 91,770 486,824
Halla Climate Control Corp. .................... Auto Components 86,930 499,005
INTOPS Co. Ltd. ................................ Electronic Equipment, Instruments & Components 25,195 281,274
People & Telecommunication Inc. ................ Communications Equipment 114,426 366,471
Sindo Ricoh Co. ................................ Office Electronics 15,588 672,641
Youngone Corp. ................................. Textiles, Apparel & Luxury Goods 184,030 910,679
-----------
4,951,043
-----------
SPAIN 0.7%
Sol Melia SA ................................... Hotels, Restaurants & Leisure 74,738 445,196
-----------
SWEDEN 1.0%
(c) D. Carnegie & Co. AB ........................... Capital Markets 148,750 --
Niscayah Group AB .............................. Commercial Services & Supplies 710,580 604,343
-----------
604,343
-----------
SWITZERLAND 2.4%
Verwaltungs- und Privat-Bank AG ................ Capital Markets 6,890 903,913
Vontobel Holding AG ............................ Capital Markets 29,730 612,473
-----------
1,516,386
-----------
TAIWAN 8.3%
D-Link Corp. ................................... Communications Equipment 836,245 585,563
Giant Manufacturing Co. Ltd. ................... Leisure Equipment & Products 497,400 1,106,345
KYE Systems Corp. .............................. Computers & Peripherals 970,633 487,167
Pihsiang Machinery Manufacturing Co. Ltd. ...... Health Care Equipment & Supplies 702,000 957,419
Simplo Technology Co. Ltd. ..................... Computers & Peripherals 340,350 824,525
(a) Ta Chong Bank Ltd. ............................. Commercial Banks 2,947,000 399,227
Test-Rite International Co. Ltd. ............... Distributors 1,939,972 893,778
-----------
5,254,024
-----------
THAILAND 3.5%
Bank of Ayudhya Public Co. Ltd., NVDR .......... Commercial Banks 2,081,900 556,610
Glow Energy Public Co. Ltd., fgn. .............. Independent Power Producers & Energy Traders 1,071,600 693,143
Preuksa Real Estate Co. Ltd., fgn. ............. Real Estate Management & Development 2,312,600 291,194
Total Access Communication Public Co. Ltd.,
fgn. ........................................ Wireless Telecommunication Services 812,800 715,264
-----------
2,256,211
-----------
UNITED KINGDOM 5.6%
Bodycote PLC ................................... Machinery 241,897 434,562
Burberry Group PLC ............................. Textiles, Apparel & Luxury Goods 114,380 370,451
Electrocomponents PLC .......................... Electronic Equipment, Instruments & Components 153,410 316,489
Future PLC ..................................... Media 952,620 253,921
GAME Group PLC ................................. Specialty Retail 391,400 726,007
John Wood Group PLC ............................ Energy Equipment & Services 78,920 216,990
Kingfisher PLC ................................. Specialty Retail 299,740 591,010
Melrose PLC .................................... Machinery 313,092 394,410
Annual Report | 13
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE
------------------------------------------------ ---------------------------------------------- ------------ -----------
COMMON STOCKS AND OTHER EQUITY INTERESTS
(CONTINUED)
UNITED KINGDOM (CONTINUED)
New Star Asset Management Group Ltd. ........... Capital Markets 295,952 $ 8,126
Yule Catto & Co. PLC ........................... Chemicals 315,020 257,657
-----------
3,569,623
-----------
TOTAL COMMON STOCKS AND OTHER EQUITY
INTERESTS (COST $79,638,412) ................ 56,231,938
-----------
PREFERRED STOCKS (COST $296,797) 0.6%
GERMANY 0.6%
Hugo Boss AG, pfd. ............................. Textiles, Apparel & Luxury Goods 21,430 416,222
-----------
TOTAL INVESTMENTS
(COST $79,935,209) 89.0% .................... 56,648,160
OTHER ASSETS, LESS LIABILITIES 11.0% ........... 6,969,100
-----------
NET ASSETS 100.0% .............................. $63,617,260
===========
See Abbreviations on page 25.
(a) Non-income producing for the twelve months ended December 31, 2008.
(b) Security was purchased pursuant to Regulation S under the Securities Act of
1933, which exempts from registration securities offered and sold outside
of the United States. Such a security cannot be sold in the United States
without either an effective registration statement filed pursuant to the
Securities Act of 1933, or pursuant to an exemption from registration. This
security has been deemed liquid under guidelines approved by the Trust's
Board of Trustees. At December 31, 2008, the value of this security was
$226,399, representing 0.36% of net assets.
(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2008, the value of this security was $0.
The accompanying notes are an integral part of these financial statements.
14 | Annual Report
Templeton Institutional Funds
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
FOREIGN SMALLER
COMPANIES SERIES
----------------
Assets:
Investments in securities:
Cost ...................................... $ 79,935,209
============
Value ..................................... $ 56,648,160
Cash ......................................... 7,490,125
Foreign currency, at value (cost $1,256) ..... 1,642
Receivables:
Investment securities sold ................ 262,125
Capital shares sold ....................... 40,440
Dividends ................................. 149,838
------------
Total assets ........................... 64,592,330
------------
Liabilities:
Payables:
Capital shares redeemed ................... 885,270
Affiliates ................................ 38,446
Accrued expenses and other liabilities ....... 51,354
------------
Total liabilities ...................... 975,070
------------
Net assets, at value ................ $ 63,617,260
============
Net assets consist of:
Paid-in capital .............................. $ 92,660,534
Undistributed net investment income .......... 91,688
Net unrealized appreciation (depreciation) ... (23,296,027)
Accumulated net realized gain (loss) ......... (5,838,935)
------------
Net assets, at value ................ $ 63,617,260
============
Shares outstanding ........................... 7,219,803
============
Net asset value per share(a) ................. $ 8.81
============
(a) Redemption price is equal to net asset value less redemption fees retained
by the Fund.
The accompanying notes are an integral part of these financial statements.
Annual Report | 15
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
FOREIGN SMALLER
COMPANIES SERIES
----------------
Investment income:
Dividends (net of foreign taxes of $369,933)........... $ 3,676,092
Interest............................................... 135,764
------------
Total investment income....................... 3,811,856
------------
Expenses:
Management fees (Note 3a).............................. 806,616
Administrative fees (Note 3b).......................... 215,097
Transfer agent fees (Note 3c).......................... 16,594
Custodian fees (Note 4)................................ 39,697
Reports to shareholders................................ 14,990
Registration and filing fees........................... 28,302
Professional fees...................................... 30,212
Trustees' fees and expenses............................ 10,011
Other.................................................. 16,897
------------
Total expenses...................................... 1,178,416
Expense reductions (Note 4)......................... (5,096)
Expenses waived/paid by affiliates (Note 3d)........ (151,428)
------------
Net expenses..................................... 1,021,892
------------
Net investment income......................... 2,789,964
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments......................................... 1,748,060
Foreign currency transactions....................... (167,582)
------------
Net realized gain (loss)......................... 1,580,478
------------
Net change in unrealized appreciation
(depreciation) on:
Investments............................................ (67,517,868)
Translation of other assets and liabilities
denominated in foreign currencies................ (13,138)
------------
Net change in unrealized appreciation
(depreciation)................................... (67,531,006)
------------
Net realized and unrealized gain (loss)................... (65,950,528)
------------
Net increase (decrease) in net assets resulting from
operations............................................. $(63,160,564)
============
The accompanying notes are an integral part of these financial statements.
16 | Annual Report
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOREIGN SMALLER COMPANIES SERIES
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
-------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income...................................... $ 2,789,964 $ 2,005,398
Net realized gain (loss) from investments and foreign
currency transactions................................... 1,580,478 30,293,153
Net change in unrealized appreciation (depreciation)
on investments and translation of assets and liabilities
denominated in foreign currencies....................... (67,531,006) (12,858,499)
------------ ------------
Net increase (decrease) in net assets resulting
from operations................................... (63,160,564) 19,440,052
------------ ------------
Distributions to shareholders from:
Net investment income...................................... (3,045,712) (2,190,031)
Net realized gains......................................... (9,591,312) (27,624,200)
------------ ------------
Total distributions to shareholders........................... (12,637,024) (29,814,231)
------------ ------------
Capital share transactions: (Note 2).......................... 3,684,900 (24,652,937)
------------ ------------
Redemption fees............................................... 99 10
------------ ------------
Net increase (decrease) in net assets................... (72,112,589) (35,027,106)
Net assets:
Beginning of year............................................. 135,729,849 170,756,955
------------ ------------
End of year................................................... $ 63,617,260 $135,729,849
============ ============
Undistributed net investment income included in net assets:
End of year................................................... $ 91,688 $ 309,079
============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 17
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of four separate funds. The Foreign Smaller Companies Series (Fund)
is included in this report. The financial statements of the remaining funds in
the Trust 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.
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. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. At December 31, 2008, a portion
of the securities held by the Fund were fair valued. All security valuation
procedures are approved by the Trust's Board of Trustees.
18 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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 at a future 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 AND DEFERRED TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
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.
Annual Report | 19
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME AND DEFERRED TAXES (CONTINUED)
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of December 31, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be 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.
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 accounting principles generally accepted in the United States of
America. 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 the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
20 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
G. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
Fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2008 2007
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
Shares sold ................. 2,570,880 $ 28,792,534 417,004 $ 10,235,055
Shares issued in reinvestment
of distributions ......... 982,160 9,601,409 1,265,199 24,546,890
Shares redeemed ............. (3,051,880) (34,709,043) (2,581,541) (59,434,882)
---------- ------------ ---------- ------------
Net increase (decrease) ..... 501,160 $ 3,684,900 (899,338) $(24,652,937)
========== ============ ========== ============
Annual Report | 21
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES 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
trustees of the Trust 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
- ---------- -------------------------------------------------
0.750% 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
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
average daily net assets of the Fund.
C. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$16,594, of which $9,547 was retained by Investor Services.
D. WAIVERS AND EXPENSE REIMBURSEMENTS
FT Services and TIC have agreed in advance to waive a portion of their
respective fees and to assume payment of other expenses through April 30, 2009.
Total expenses waived are not subject to reimbursement by the Fund. After April
30, 2009, FT Services and TIC may discontinue this waiver at any time upon
notice to the Trust's Board of Trustees.
22 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the year ended December 31, 2008, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses and 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, 2008, the Fund
deferred realized capital losses and realized currency losses of $5,531,195 and
$206,945 respectively.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
----------- -----------
Distributions paid from:
Ordinary income ......... $ 3,368,790 $ 3,862,682
Long term capital gain .. 9,268,234 25,951,549
----------- -----------
$12,637,024 $29,814,231
=========== ===========
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation) and undistributed ordinary income for income tax purposes were as
follows:
Cost of investments ..................................... $ 80,036,004
============
Unrealized appreciation ................................. $ 6,418,607
Unrealized depreciation ................................. (29,806,451)
------------
Net unrealized appreciation (depreciation) .............. $(23,387,844)
============
Distributable earnings - undistributed ordinary income .. $ 91,876
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
Annual Report | 23
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2008, aggregated $23,236,154 and $33,416,695,
respectively.
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. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Fund has determined that the implementation
of SFAS 157 did not have a material impact on the Fund's financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Fund's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Fund's investments and are summarized in the following fair
value hierarchy:
- - Level 1 - quoted prices in active markets for identical securities
- - Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speed, credit risk, etc.)
- - Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2008, in
valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ---------- ------- -----------
ASSETS:
Investments in Securities $52,176,281 $4,471,879 $-- $56,648,160
24 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
9. NEW ACCOUNTING PRONOUNCEMENT
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
10. SUBSEQUENT EVENT
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit (Global Credit Facility) to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
SELECTED PORTFOLIO
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
Annual Report | 25
Templeton Institutional Funds
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS -
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 Templeton Institutional Funds, hereafter referred
to as the "Fund") at December 31, 2008, 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, 2008 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 20, 2009
26 | Annual Report
Templeton Institutional Funds
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 $9,268,234 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $323,078 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, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $2,124,940 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. 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 $92,248 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, 2008.
At December 31, 2008, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income 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, pursuant to Section 853 of the Code. This designation will allow
shareholders of record on December 16, 2008, to treat their proportionate share
of foreign taxes paid by the Fund as having been paid directly by them. The
shareholder shall consider these amounts as foreign taxes paid in the tax year
in which they receive the Fund distribution.
The following tables provide a detailed analysis of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
shareholders of record.
Record Date: 12/16/08
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
PER SHARE PER SHARE PER SHARE
----------- ------------- -------------------
Fund Shares ... $0.0586 $0.4862 $0.2546
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.
Annual Report | 27
Templeton Institutional Funds
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES
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 2009, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2008. 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 2008 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 bracket). 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 | Annual Report
Templeton Institutional Funds
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 Trust, 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. Generally, each
board member serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ ------------------ -----------------------------
HARRIS J. ASHTON (1932) Trustee Since 1992 138 Bar-S Foods (meat packing
500 East Broward Blvd. company).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until
1998).
ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae)
500 East Broward Blvd. and Allied Capital
Suite 2100 Corporation (financial
Fort Lauderdale, FL 33394-3091 services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until
1995).
FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding
500 East Broward Blvd. company), Victory Nickel Inc.
Suite 2100 (mineral exploration) and
Fort Lauderdale, FL 33394-3091 ABACO Markets Limited (retail
distributors).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Vice Chairman, Caribbean Utilities Company, Ltd. and director of various other private business and nonprofit
organizations.
EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration
500 East Broward Blvd. Independent 1996 and Lead and refining of oil and gas),
Suite 2100 Trustee Independent H.J. Heinz Company (processed
Fort Lauderdale, FL 33394-3091 Trustee since 2007 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 FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ ------------------ -----------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation
500 East Broward Blvd. (assisted living) and OSI
Suite 2100 Pharmaceuticals, Inc.
Fort Lauderdale, FL 33394-3091 (pharmaceutical products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and 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) Trustee Since 2003 138 Hess Corporation (exploration
500 East Broward Blvd. and refining of oil and gas)
Suite 2100 and Sentient Jet (private jet
Fort Lauderdale, FL 33394-3091 service).
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).
LARRY D. THOMPSON (1945) Trustee Since 2005 145 None
500 East Broward Blvd.
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. (credit card provider)
(1997-2001); Senior Fellow of The Brookings Institution (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 Trustee Since 1990 23 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).
El Oro and Exploration Co.,
ROBERT E. WADE (1946) Trustee Since 2007 37 p.l.c. (investments).
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
30 | Annual Report
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ ------------------ -----------------------------
**CHARLES B. JOHNSON Trustee, Trustee and Vice 138 None
(1933) Chairman of President since
One Franklin Parkway the Board and 1993 and
San Mateo, CA 94403-1906 Vice President 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.; Director, Templeton
Worldwide, 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 42 of the investment companies in Franklin Templeton Investments.
**GREGORY E. JOHNSON Trustee Since 2007 92 None
(1961)
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors
Limited; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources,
Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance,
Franklin Resources, Inc. (1994-2001).
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004);
Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President,
Franklin Templeton Services, LLC (1997-2003).
Annual Report | 31
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ ------------------ -----------------------------
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 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 Templeton Investments; officer and/or director, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
RUPERT H. JOHNSON, JR. Vice President Since 1996 Not Applicable Not Applicable
(1940)
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.; Director, Franklin Advisers, Inc.
and Templeton Worldwide, 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 44 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.; 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.
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; Executive Chairman, Templeton Asset Management Ltd.; and
officer and/or director, as the case may be, of some of the other 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 2005 Not Applicable Not Applicable
500 East Broward Blvd. Chief Executive
Suite 2100 Officer -
Fort Lauderdale, FL 33394-3091 Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in
Franklin Templeton Investments.
32 | Annual Report
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ------------------ ------------------ -----------------------------
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:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice
President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust
International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments.
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 18 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of
Franklin Resources, Inc. and of 46 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).
* 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 manager or
affiliated investment managers.
** 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 investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Fund under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008.
SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL
CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC.
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 OSI PHARMACEUTICALS, INC. 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
BELIEVES THAT MS. BATES 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. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS 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 (800) 321-8563 TO REQUEST THE SAI.
Annual Report | 33
Templeton Institutional Funds
SHAREHOLDER INFORMATION
FOREIGN SMALLER COMPANIES SERIES
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager 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 (954) 527-7678 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 (800)
SEC-0330.
34 | Annual Report
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(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO)
600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
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
(800) 321-8563
ftinstitutional.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 A2008 02/09
DECEMBER 31, 2008
(GRAPHIC)
Global Equity Series
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO)
Contents
ANNUAL REPORT
TIF Global 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 ............................................... 30
Shareholder Information .................................................. 35
Annual Report
TIF Global Equity Series
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF Global Equity Series seeks long-term
capital growth. Under normal market conditions, the Fund invests at least 80% of
its net assets in equity securities of companies located anywhere in the world,
including emerging markets.
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 FTINSTITUTIONAL.COM OR CALL (800) 321-8563 FOR MOST
RECENT MONTH-END PERFORMANCE.
This inaugural annual report for Templeton Institutional Funds (TIF) Global
Equity Series (Fund) covers the period since inception on March 31, 2008,
through December 31, 2008.
PERFORMANCE OVERVIEW
For the period under review, the Fund had a -31.75% cumulative total return. The
Fund performed better than its benchmark, the Morgan Stanley Capital
International (MSCI) All Country (AC) World Index, which had a - 35.97% total
return 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
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The MSCI AC World Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market performance
in global developed and emerging markets. The index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
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
Annual Report | 1
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BAR CHART)
Europe 43.0%
North America 33.2%
Asia 11.8%
Latin America & Caribbean 2.0%
Middle East & Africa 0.6%
Australia & New Zealand 0.2%
Short-Term Investments & Other Net Assets 9.2%
rather undertake investments on the basis of fundamental research. You can find
the Fund's performance data in the Performance Summary beginning on page 6.
ECONOMIC AND MARKET OVERVIEW
The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as
housing prices declined, consumer demand softened, and a credit crisis
originally related to U.S. subprime loan losses intensified and spread globally.
Although GDP growth rebounded in the second quarter of 2008, largely due to
fiscal stimulus, the domestic economy contracted in the third and fourth
quarters. Fear of recession spanned the entire period, and in the summer most
economists agreed that a recession had already begun. By then, the faltering
U.S. economy -- which is the world's largest and accounts for roughly 25% of
global GDP -- had negatively impacted growth prospects around the world.
Although signs of a global slowdown surfaced in the latter half of the reporting
period, in the first half growth remained robust in developing economies,
particularly in Asia.
The China-led demand for oil, natural gas, and industrial and agricultural
commodities propelled commodity prices and those of related equities to higher
levels. The steep rise in the price of oil, which peaked at $145 per barrel in
early July, was one of the most extreme market trends during the period. As a
result, oil was a major focus of attention due to its impact on everything from
inflation to corporate earnings to consumer spending. The price boom for
commodities in general was broadly based and included natural gas, precious
metals and most agricultural and industrial commodities, all of which added to
global inflationary pressures. In this environment, the world's monetary
authorities faced the choice of lowering short-term interest rates to stimulate
growth or raising them to fight rising inflation. Stimulus provided through
fiscal and monetary policies implemented around the globe sought to restore
financial market stability and reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to a target range of 0% to 0.25% from 4.25%.
The eurozone had made controlling inflation its main goal and kept rates steady
at 4.00% until July, when the European Central Bank (ECB) joined many of the
world's central banks whose concerns about inflation had led them to raise
rates. The potential for global recession, however, exacerbated by the virtual
freeze in the global financial system in September and October, trumped
inflationary concerns, and the world's monetary authorities, including the ECB
and the Bank of England, cut interest rates aggressively. The U.S. dollar, which
had declined earlier in the period versus many of the world's
2 | Annual Report
currencies, regained ground quickly toward period-end as a flight to the
relative safety of U.S. Treasuries prevailed. The greenback appreciated 12.95%
relative to most currencies during the period under review.(2)
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the period under review with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
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. We also consider a company's
price/earnings ratio, profit margins and liquidation value.
MANAGER'S DISCUSSION
The global financial sector, the epicenter of the market and credit crises,
declined by almost 50% during the reporting period. Yet, the materials sector
performed worse. Materials and energy-related stocks provided positive returns
during the earlier part of the period. However, materials and energy stocks,
along with the underlying commodities, experienced a sharp downturn in the
period's second half. Most sectors were negatively impacted by the global market
downturn; however, the health care, consumer staples and utilities sectors
declined less and lived up to their "defensive" reputations.
Because consumer staples held up better than the benchmark index, the Fund's
underweighted allocation in the sector negatively impacted relative
performance.(3) The Fund was underweighted in this sector as we did not find
valuations attractive and, in our analysis, we believed fundamentals were
beginning to deteriorate.
Another area that detracted from relative Fund performance was the
telecommunication services sector.(4) We continued to hold an overweighted
position in telecommunications because we found opportunities to purchase
businesses with what we believed were solid balance sheets, desirable products
and growing global presence at largely discounted prices to future value
potential.
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BAR CHART)
Pharmaceuticals 14.1%
Diversified Telecommunication Services 8.2%
Oil, Gas & Consumable Fuels 7.3%
Software 6.0%
Insurance 5.6%
Multi-Utilities 5.1%
Food Products 4.1%
Wireless Telecommunication Services 3.5%
Electric Utilities 3.0%
Commercial Banks 2.8%
Food & Staples Retailing 2.7%
Health Care Providers & Services 2.6%
Capital Markets 2.3%
Semiconductors & Semiconductor Equipment 2.3%
Health Care Equipment & Supplies 2.2%
Other 19.0%
Short-Term Investments & Other Net Assets 9.2%
(2.) Source: Federal Reserve H10 report.
(3.) The consumer staples sector comprises beverages, food and staples
retailing, and food products in the SOI.
(4.) The telecommunication services sector comprises diversified
telecommunication services and wireless telecommunication services in the
SOI.
Annual Report | 3
TOP 10 EQUITY HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Quest Diagnostics Inc. 2.2%
HEALTH CARE PROVIDERS & SERVICES, U.S.
Telefonica SA, ADR 2.2%
DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN
France Telecom SA 2.2%
DIVERSIFIED TELECOMMUNICATION SERVICES, FRANCE
Microsoft Corp. 2.1%
SOFTWARE, U.S.
PG&E Corp. 2.1%
MULTI-UTILITIES, U.S.
Sanofi-Aventis 2.0%
PHARMACEUTICALS, FRANCE
Novartis AG 2.0%
PHARMACEUTICALS, SWITZERLAND
GlaxoSmithKline PLC 1.8%
PHARMACEUTICALS, U.K.
Nestle SA 1.8%
FOOD PRODUCTS, SWITZERLAND
Taiwan Semiconductor Manufacturing Co. Ltd. 1.7%
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, TAIWAN
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 period
ended December 31, 2008, the U.S. dollar appreciated in value relative to most
non-U.S. currencies. As a result, the Fund's performance was negatively affected
by the portfolio's substantial investment in securities with non-U.S. currency
exposure.
We continued to favor the health care sector, which performed better than most
sectors during the period under review.(5) Thus, the Fund's overweighted
position and stock selection in health care benefited relative performance. The
Fund's overweighting reflects our contrarian view relative to a market that has
largely focused on the negatives facing pharmaceutical companies: challenging
pricing, political headwinds and insurmountable competition from cheaper
generics. In our analysis, health care stocks were attractive based on bargain
valuations, high free cash-flow yields and revenue growth potential from an
aging global population.
The Fund's valuation philosophy led us away from investment banks and
brokerages, the financials sector's most leveraged industries, which we believed
had high multiples, balance sheet opacity and uncertain earnings.(6) Thus, our
stock selection and underweighted exposure in financials boosted relative Fund
performance. We remained cautious of the sector overall despite buying some of
what we considered well-capitalized financial firms we believed could profit
from industry consolidation.
Our bottom-up research did not uncover many opportunities in the materials
sector, contributing to the Fund's underweighting in the sector.(7) Although our
underweighted position hurt the Fund when materials stock prices rose earlier in
the period, the materials sector allocation helped relative performance for the
period as these stocks declined sharply. We monitored the situation closely and
sought proper re-entry points, but we did not find compelling valuations in the
materials sector by period-end.
(5.) The health care sector comprises biotechnology, health care equipment and
supplies, health care providers and services, and pharmaceuticals in the
SOI.
(6.) The financials sector comprises capital markets, commercial banks, consumer
finance, diversified financial services, insurance, real estate management
and development, and thrifts and mortgage finance in the SOI.
(7.) The materials sector comprises chemicals, containers and packaging, and
metals and mining in the SOI.
4 | Annual Report
Thank you for your participation in TIF Global Equity Series. We look forward to
serving your future investment needs.
(PHOTO OF NEIL DEVLIN)
/s/ Neil Devlin
- -------------------------------------
Neil Devlin, CFA
Portfolio Manager
TIF Global Equity Series
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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 12/31/08
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 graphs 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 INFORMATION
SYMBOL: TGESX CHANGE 12/31/08 3/31/08
- ------------- ------ -------- -------
Net Asset Value (NAV) -$3.27 $6.73 $10.00
DISTRIBUTIONS (3/31/08-12/31/08)
Dividend Income $0.0955
PERFORMANCE(1)
INCEPTION
(3/31/08)
---------
Cumulative Total Return(2) -31.75%
Aggregate Total Return(3) -31.75%
Value of $1,000,000 Investment(4) $682,539
Total Annual Operating Expenses(5)
Without waiver 1.18%
With waiver 0.81%
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, VISIT FTINSTITUTIONAL.COM
OR CALL (800) 321-8563.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES,
EXCLUDING ACQUIRED FUND FEES AND EXPENSES, DO NOT EXCEED 0.81% (OTHER THAN
CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION,
INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/09.
6 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A 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.
3/31/08-12/31/08
$ Millions
(PERFORMANCE GRAPH)
USD USD
TIF GLOBAL EQUITY SERIES MSCI ALL COUNTRY WORLD INDEX
31-MAR-08 31-MAR-08
INCEPTION DATE NET GROSS
CALENDAR MONTH 12332 BM0045
- -------------- ------------------------ ----------------------------
Mar-08 1,000,000.00 1,000,000.00
Apr-08 1,009,998.71 1,056,517.21
May-08 1,020,000.73 1,074,229.62
Jun-08 941,000.13 986,384.88
Jul-08 920,000.19 961,078.35
Aug-08 909,001.68 940,786.02
Sep-08 820,003.26 823,578.80
Oct-08 684,002.97 660,589.34
Nov-08 650,001.43 617,608.14
Dec-08 682,538.77 640,297.00
AGGREGATE TOTAL RETURN
12/31/08
--------
Since Inception (3/31/08) -31.75%
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 THESE MARKETS' SMALLER SIZE AND LESSER LIQUIDITY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
(1.) If the manager had not waived fees, the Fund's total return would have been
lower.
(2.) Cumulative total return represents the change in value of an investment
over the period indicated.
(3.) Aggregate total return represents the change in value of an investment over
the period indicated. Because the Fund has existed for less than one year,
average annual total returns are not available.
(4.) This figure represents the value of a hypothetical $1,000,000 investment
in the Fund over the period indicated.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The MSCI AC World Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global developed and emerging markets.
Annual Report | 7
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 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 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
Actual $1,000 $ 725.30 $3.51
Hypothetical (5% return before expenses) $1,000 $1,021.06 $4.12
* Expenses are calculated using the most recent six-month annualized expense
ratio, net of expense waiver, of 0.81%, multiplied by the average account
value over the period, multiplied by 184/366 to reflect the one-half year
period.
Annual Report | 9
Templeton Institutional Funds
FINANCIAL HIGHLIGHTS
GLOBAL EQUITY SERIES
PERIOD ENDED
DECEMBER 31, 2008(a)
--------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................... $ 10.00
-------
Income from investment operations(b):
Net investment income(c) ............................. 0.14
Net realized and unrealized gains (losses) ........... (3.31)
-------
Total from investment operations ........................ (3.17)
-------
Less distributions from net investment income ........... (0.10)
-------
Net asset value, end of period .......................... $ 6.73
=======
Total return(d) ......................................... (31.75)%
RATIOS TO AVERAGE NET ASSETS(e)
Expenses before waiver and payments by affiliates ....... 1.05%
Expenses net of waiver and payments by affiliates(f) .... 0.81%
Net investment income ................................... 2.26%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ....................... $95,152
Portfolio turnover rate ................................. 21.68%
(a) For the period March 31, 2008 (commencement of operations) to December 31,
2008.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Total return is not annualized for periods less than one year.
(e) Ratios are annualized for periods less than one year.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
10 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
- -------------------- ---------------------------------------------- ------------- ------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 89.6%
AUSTRALIA 0.2%
Alumina Ltd. ................................... Metals & Mining 207,960 $ 204,744
------------
AUSTRIA 1.3%
Telekom Austria AG ............................. Diversified Telecommunication Services 86,420 1,244,663
------------
BRAZIL 0.9%
Companhia Vale do Rio Doce, ADR ................ Metals & Mining 68,470 829,172
------------
CANADA 1.5%
George Weston Ltd. ............................. Food & Staples Retailing 6,000 295,611
Loblaw Cos. Ltd. ............................... Food & Staples Retailing 38,200 1,097,842
------------
1,393,453
------------
CHINA 1.3%
China Telecom Corp. Ltd., H .................... Diversified Telecommunication Services 2,012,000 750,262
(a) Shanghai Electric Group Co. Ltd. ............... Electrical Equipment 1,164,000 471,596
------------
1,221,858
------------
FRANCE 9.4%
AXA SA ......................................... Insurance 56,060 1,242,069
Compagnie Generale des Etablissements
Michelin, B ................................. Auto Components 9,140 480,162
Electricite de France .......................... Electric Utilities 18,580 1,078,187
France Telecom SA .............................. Diversified Telecommunication Services 74,100 2,068,136
GDF Suez ....................................... Multi-Utilities 9,219 455,372
Sanofi-Aventis ................................. Pharmaceuticals 30,260 1,920,990
(a) Suez Environnement SA .......................... Multi-Utilities 2,417 40,726
Total SA, B .................................... Oil, Gas & Consumable Fuels 12,200 663,776
Vivendi SA ..................................... Media 30,050 977,570
------------
8,926,988
------------
GERMANY 6.4%
Bayerische Motoren Werke AG .................... Automobiles 5,770 177,258
Celesio AG ..................................... Health Care Providers & Services 12,790 345,166
Deutsche Post AG ............................... Air Freight & Logistics 62,520 1,032,014
E.ON AG ........................................ Electric Utilities 21,020 823,571
(a) Infineon Technologies AG ....................... Semiconductors & Semiconductor Equipment 154,470 205,412
Merck KGaA ..................................... Pharmaceuticals 12,890 1,162,914
Muenchener Rueckversicherungs-
Gesellschaft AG ............................. Insurance 4,630 709,241
SAP AG ......................................... Software 31,930 1,118,202
Siemens AG ..................................... Industrial Conglomerates 7,240 534,430
------------
6,108,208
------------
HONG KONG 0.6%
Cheung Kong (Holdings) Ltd. ........................ Real Estate Management & Development 62,000 586,385
------------
Annual Report | 11
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
- -------------------- ---------------------------------------------- ------------- ------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
INDIA 1.2%
Housing Development Finance Corp. Ltd. ......... Thrifts & Mortgage Finance 6,117 $ 187,152
ICICI Bank Ltd., ADR ........................... Commercial Banks 35,910 691,268
Satyam Computer Services Ltd. .................. IT Services 80,273 280,922
------------
1,159,342
------------
ISRAEL 0.6%
(a) Check Point Software Technologies Ltd. ......... Software 28,080 533,239
------------
ITALY 0.8%
Eni SpA ........................................ Oil, Gas & Consumable Fuels 28,053 656,652
UniCredit SpA .................................. Commercial Banks 38,900 94,917
------------
751,569
------------
JAPAN 4.2%
EBARA Corp. .................................... Machinery 301,000 699,798
FUJIFILM Holdings Corp. ........................ Electronic Equipment, Instruments & Components 17,600 392,579
Mitsubishi UFJ Financial Group Inc. ............ Commercial Banks 6,400 40,192
Nintendo Co. Ltd. .............................. Software 1,400 534,570
Nomura Holdings Inc. ........................... Capital Markets 23,800 198,003
Olympus Corp. .................................. Health Care Equipment & Supplies 40,000 800,081
Takeda Pharmaceutical Co. Ltd. ................. Pharmaceuticals 19,000 989,504
Toyota Motor Corp. ............................. Automobiles 11,400 376,553
------------
4,031,280
------------
NETHERLANDS 1.6%
ING Groep NV ................................... Diversified Financial Services 3,070 31,466
Koninklijke Philips Electronics NV ............. Industrial Conglomerates 21,240 410,750
SBM Offshore NV ................................ Energy Equipment & Services 20,100 262,761
Unilever NV .................................... Food Products 34,430 834,808
------------
1,539,785
------------
NORWAY 1.3%
Aker Solutions ASA ............................. Energy Equipment & Services 18,730 121,189
Telenor ASA .................................... Diversified Telecommunication Services 166,160 1,106,164
------------
1,227,353
------------
PORTUGAL 0.7%
Banco Espirito Santo SA ........................ Commercial Banks 75,660 707,771
------------
RUSSIA 0.9%
Gazprom, ADR ................................... Oil, Gas & Consumable Fuels 64,040 908,087
------------
SINGAPORE 1.2%
DBS Group Holdings Ltd. ........................ Commercial Banks 65,000 382,060
(a) DBS Group Holdings Ltd., rts., 1/20/09 ......... Commercial Banks 32,500 68,063
(a) Flextronics International Ltd. ................. Electronic Equipment, Instruments & Components 34,420 88,115
Singapore Telecommunications Ltd. .............. Diversified Telecommunication Services 336,004 598,122
------------
1,136,360
------------
12 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
- -------------------- ---------------------------------------------- ------------- ------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
SOUTH KOREA 1.4%
(b) Hyundai Motor Co., GDR, 144A ................... Automobiles 5,800 $ 90,697
Samsung Electronics Co. Ltd. ................... Semiconductors & Semiconductor Equipment 1,060 378,511
SK Telecom Co. Ltd., ADR ....................... Wireless Telecommunication Services 48,240 877,003
------------
1,346,211
------------
SPAIN 3.0%
Iberdrola SA, Br. .............................. Electric Utilities 21,208 193,945
Repsol YPF SA .................................. Oil, Gas & Consumable Fuels 26,847 566,856
Telefonica SA, ADR ............................. Diversified Telecommunication Services 31,030 2,091,112
------------
2,851,913
------------
SWITZERLAND 6.5%
Adecco SA ...................................... Professional Services 2,770 92,809
Lonza Group AG ................................. Life Sciences Tools & Services 7,370 673,231
Nestle SA ...................................... Food Products 44,150 1,719,862
Novartis AG .................................... Pharmaceuticals 38,590 1,904,385
Roche Holding AG ............................... Pharmaceuticals 4,370 664,973
Swiss Reinsurance Co. .......................... Insurance 23,380 1,101,240
------------
6,156,500
------------
TAIWAN 1.8%
Compal Electronics Inc. ........................ Computers & Peripherals 309,540 162,916
Taiwan Semiconductor Manufacturing Co. Ltd. .... Semiconductors & Semiconductor Equipment 1,159,818 1,571,195
------------
1,734,111
------------
TURKEY 1.1%
Turkcell Iletisim Hizmetleri AS, ADR ........... Wireless Telecommunication Services 69,190 1,008,790
------------
UNITED KINGDOM 9.9%
BAE Systems PLC ................................ Aerospace & Defense 106,720 587,240
BG Group PLC ................................... Oil, Gas & Consumable Fuels 16,220 226,714
BP PLC ......................................... Oil, Gas & Consumable Fuels 82,670 635,111
Cadbury PLC .................................... Food Products 95,019 840,313
GlaxoSmithKline PLC ............................ Pharmaceuticals 93,440 1,753,006
Premier Foods PLC .............................. Food Products 75,280 33,810
Rexam PLC ...................................... Containers & Packaging 77,070 395,101
Royal Bank of Scotland Group PLC ............... Commercial Banks 742,570 535,773
Royal Dutch Shell PLC, B, ADR .................. Oil, Gas & Consumable Fuels 27,970 1,438,497
Tesco PLC ...................................... Food & Staples Retailing 221,230 1,163,223
Unilever PLC ................................... Food Products 19,050 439,333
Vodafone Group PLC ............................. Wireless Telecommunication Services 696,840 1,414,700
------------
9,462,821
------------
UNITED STATES 31.8%
Accenture Ltd., A .............................. IT Services 26,800 878,772
ACE Ltd. ....................................... Insurance 16,300 862,596
American Express Co. ........................... Consumer Finance 27,370 507,714
(a) Amgen Inc. ..................................... Biotechnology 22,690 1,310,348
Bank of America Corp. .......................... Diversified Financial Services 9,670 136,154
The Bank of New York Mellon Corp. .............. Capital Markets 42,570 1,206,008
Annual Report | 13
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
- -------------------- ---------------------------------------------- ------------- ------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
UNITED STATES (CONTINUED)
Bristol-Myers Squibb Co. ....................... Pharmaceuticals 34,540 $ 803,055
(a) Cisco Systems Inc. ............................. Communications Equipment 49,150 801,145
CMS Energy Corp. ............................... Multi-Utilities 109,200 1,104,012
Comcast Corp., A ............................... Media 30,050 485,308
The Cooper Cos. Inc. ........................... Health Care Equipment & Supplies 21,470 352,108
Covidien Ltd. .................................. Health Care Equipment & Supplies 25,000 906,000
Cytec Industries Inc. .......................... Chemicals 6,700 142,174
(a) Dr. Pepper Snapple Group Inc. .................. Beverages 59,433 965,786
E. I. du Pont de Nemours and Co. ............... Chemicals 7,800 197,340
El Paso Corp. .................................. Oil, Gas & Consumable Fuels 115,230 902,251
General Electric Co. ........................... Industrial Conglomerates 23,880 386,856
Great Plains Energy Inc. ....................... Electric Utilities 39,534 764,192
Invesco Ltd. ................................... Capital Markets 16,920 244,325
JPMorgan Chase & Co. ........................... Diversified Financial Services 2,910 91,752
Legg Mason Inc. ................................ Capital Markets 24,100 528,031
Merck & Co. Inc. ............................... Pharmaceuticals 38,930 1,183,472
Microsoft Corp. ................................ Software 104,740 2,036,146
News Corp., A .................................. Media 11,770 106,989
NiSource Inc. .................................. Multi-Utilities 113,650 1,246,741
(a) Oracle Corp. ................................... Software 86,080 1,526,198
Pfizer Inc. .................................... Pharmaceuticals 88,470 1,566,804
PG&E Corp. ..................................... Multi-Utilities 52,150 2,018,726
Progressive Corp. .............................. Insurance 58,810 870,976
Quest Diagnostics Inc. ......................... Health Care Providers & Services 40,750 2,115,332
Seagate Technology ............................. Computers & Peripherals 43,810 194,078
Target Corp. ................................... Multiline Retail 29,740 1,026,922
Torchmark Corp. ................................ Insurance 12,310 550,257
Tyco Electronics Ltd. .......................... Electronic Equipment, Instruments & Components 10,480 169,881
United Parcel Service Inc., B .................. Air Freight & Logistics 9,950 548,842
(a) Watson Pharmaceuticals Inc. .................... Pharmaceuticals 56,470 1,500,408
------------
30,237,699
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $115,451,172) ......................... 85,308,302
------------
PREFERRED STOCKS 1.2%
BRAZIL 1.2%
Banco Bradesco SA, ADR, pfd. ................... Commercial Banks 17,420 171,935
Petroleo Brasileiro SA, ADR, pfd. .............. Oil, Gas & Consumable Fuels 46,990 959,066
------------
TOTAL PREFERRED STOCKS
(COST $1,307,322) ........................... 1,131,001
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $116,758,494) ......................... 86,439,303
------------
14 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES PRINCIPAL AMOUNT VALUE
- -------------------- ---------------- ------------
SHORT TERM INVESTMENTS 7.9%
TIME DEPOSITS 7.9%
UNITED STATES 7.9%
Dresdner Bank AG, 0.01%, 1/02/09 ............... $ 4,000,000 $ 4,000,000
Paribas Corp., 0.01%, 1/02/09 .................. 3,470,000 3,470,000
------------
TOTAL TIME DEPOSITS
(COST $7,470,000) ........................... 7,470,000
------------
TOTAL INVESTMENTS
(COST $124,228,494) 98.7% ................... 93,909,303
OTHER ASSETS, LESS LIABILITIES 1.3% ............ 1,243,086
------------
NET ASSETS 100.0% .............................. $ 95,152,389
------------
See Abbreviations on page 26.
(a) Non-income producing for the twelve months ended December 31, 2008.
(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. This security has been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At December 31, 2008,
the value of this security was $90,697, representing 0.10% of net assets.
The accompanying notes are an integral part of these financial statements.
Annual Report | 15
Templeton Institutional Funds
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
GLOBAL
EQUITY SERIES
-------------
Assets:
Investments in securities:
Cost ..................................................... $124,228,494
============
Value .................................................... $ 93,909,303
Cash ........................................................ 4,079
Receivables:
Capital shares sold ...................................... 1,200,000
Dividends ................................................ 175,793
Offering costs .............................................. 8,670
------------
Total assets .......................................... 95,297,845
------------
Liabilities:
Payables:
Investment securities purchased .......................... 9,559
Affiliates ............................................... 85,888
Custodian fees ........................................... 8,650
Reports to shareholders .................................. 7,914
Professional fees ........................................ 30,475
Accrued expenses and other liabilities ...................... 2,970
------------
Total liabilities ..................................... 145,456
------------
Net assets, at value ............................... $ 95,152,389
============
Net assets consist of:
Paid-in capital ............................................. $133,934,667
Undistributed net investment income ......................... 141,706
Net unrealized appreciation (depreciation) .................. (30,321,484)
Accumulated net realized gain (loss) ........................ (8,602,500)
------------
Net assets, at value ............................... $ 95,152,389
============
Shares outstanding .......................................... 14,130,028
============
Net asset value per share(a) ................................ $ 6.73
============
(a) Redemption price is equal to net asset value less redemption fees retained
by the Fund.
The accompanying notes are an integral part of these financial statements.
16 | Annual Report
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the period March 31, 2008 (commencement of operations) to December 31, 2008
GLOBAL
EQUITY SERIES
-------------
Investment income:
Dividends (net of foreign taxes of $190,992) ................ $ 2,015,552
Interest .................................................... 101,542
------------
Total investment income ............................... 2,117,094
------------
Expenses:
Management fees (Note 3a) ................................... 480,968
Administrative fees (Note 3b) ............................... 137,419
Transfer agent fees (Note 3c) ............................... 790
Custodian fees (Note 4) ..................................... 8,800
Reports to shareholders ..................................... 13,534
Registration and filing fees ................................ 4,621
Professional fees ........................................... 37,867
Trustees' fees and expenses ................................. 3,662
Amortization of offering costs .............................. 26,491
Other ....................................................... 6,618
------------
Total expenses ........................................ 720,770
Expense reductions (Note 4) ........................... (150)
Expenses waived/paid by affiliates (Note 3d) .......... (163,020)
------------
Net expenses ....................................... 557,600
------------
Net investment income ........................... 1,559,494
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................. (8,480,014)
Foreign currency transactions ............................ (252,239)
------------
Net realized gain (loss) ........................... (8,732,253)
------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................. (30,319,191)
Translation of other assets and liabilities denominated
in foreign currencies ................................. (2,293)
------------
Net change in unrealized appreciation
(depreciation) .................................. (30,321,484)
------------
Net realized and unrealized gain (loss) ........................ (39,053,737)
------------
Net increase (decrease) in net assets resulting from
operations .................................................. $(37,494,243)
============
The accompanying notes are an integral part of these financial statements.
Annual Report | 17
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
GLOBAL EQUITY
SERIES
-------------
PERIOD ENDED
DECEMBER 31,
2008(a)
-------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 1,559,494
Net realized gain (loss) from investments and foreign
currency transactions ................................. (8,732,253)
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies ......... (30,321,484)
------------
Net increase (decrease) in net assets resulting from
operations ......................................... (37,494,243)
------------
Distributions to shareholders from net investment income .... (1,314,526)
Capital share transactions (Note 2) ......................... 133,961,158
------------
Net increase (decrease) in net assets ................. 95,152,389
Net assets:
Beginning of period ......................................... --
------------
End of period ............................................... $ 95,152,389
============
Undistributed net investment income included in net assets:
End of period ............................................... $ 141,706
============
(a) For the period March 31, 2008 (commencement of operations) to December 31,
2008.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS
GLOBAL EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of four separate funds. The Global Equity Series (Fund) is included
in this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund commenced operations effective March 31, 2008.
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. Time deposits are valued at cost.
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. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. At December 31, 2008, a portion
of the securities held by the Fund were fair valued. All security valuation
procedures are approved by the Trust's Board of Trustees.
Annual Report | 19
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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 at a future 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 it is the Fund's policy
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 has reviewed the tax positions as of December 31, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.
20 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. 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 accounting principles generally accepted in the United States of
America. 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 the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
F. OFFERING COSTS
Offering costs are amortized on a straight line basis over twelve months.
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
H. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
Fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
Annual Report | 21
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
PERIOD ENDED
DECEMBER 31, 2008(a)
-------------------------
SHARES AMOUNT
---------- ------------
Shares sold ........................................... 14,141,844 $134,378,229
Shares issued in reinvestment of distributions ........ 187,949 1,266,776
Shares redeemed ....................................... (199,765) (1,683,847)
---------- ------------
Net increase (decrease) ............................... 14,130,028 $133,961,158
========== ============
(a) For the period March 31, 2008 (commencement of operations) to December 31,
2008.
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
trustees of the Trust 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
22 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 an administrative fee to FT Services of 0.20% per year of the
average daily net assets of the Fund.
C. TRANSFER AGENT FEES
For the period ended December 31, 2008, the Fund paid transfer agent fees of
$790, of which $128 was retained by Investor Services.
D. WAIVERS AND EXPENSE REIMBURSEMENTS
FT Services and TIC have agreed in advance to waive a portion of their
respective fees and to assume payment of other expenses through April 30, 2009.
Total expenses waived are not subject to reimbursement by the Fund. After April
30, 2009, FT Services and TIC may discontinue this waiver at any time upon
notice to the Trust's Board of Trustees.
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 period ended December 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At December 31, 2008, the Fund had tax basis capital losses of
$5,295,647 expiring in 2016.
Annual Report | 23
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
5. INCOME TAXES (CONTINUED)
For tax purposes, realized capital losses and 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, 2008, the Fund
deferred realized capital losses and realized currency losses of $2,776,941 and
$57,167, respectively.
The tax character of distributions paid during the period ended December 31,
2008 was as follows:
2008
----------
Distributions paid from - ordinary income ........ $1,314,526
At December 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ........................................ $124,701,239
============
Unrealized appreciation .................................... 1,928,166
Unrealized depreciation .................................... (32,720,102)
------------
Net unrealized appreciation (depreciation) ................. $(30,791,936)
============
Distributable earnings - undistributed ordinary income ..... $ 141,706
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and offering costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended December 31, 2008, aggregated $143,077,824 and $19,561,029,
respectively.
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.
24 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
8. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value
Measurement", establishes a fair value hierarchy that distinguishes between
market data obtained from independent sources (observable inputs) and the Fund's
own market assumptions (unobservable inputs). These inputs are used in
determining the value of the Fund's investments and are summarized in the
following fair value hierarchy:
- - Level 1 - quoted prices in active markets for identical securities
- - Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speed, credit risk, etc.)
- - Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2008, in
valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ---------- ------- -----------
ASSETS:
Investments in Securities ........... $89,878,023 $4,031,280 $-- $93,909,303
9. NEW ACCOUNTING PRONOUNCEMENT
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Fund is currently
evaluating the impact, if any, of applying the various provisions of SFAS 161.
Annual Report | 25
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
GLOBAL EQUITY SERIES
10. SUBSEQUENT EVENT
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit (Global Credit Facility) to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
GDR - Global Depository Receipt
26 | Annual Report
Templeton Institutional Funds
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS -
GLOBAL 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 Global Equity Series (one of the
Funds constituting Templeton Institutional Funds, hereafter referred to as the
"Fund") at December 31, 2008, and the results of its operations, the changes in
its net assets and the financial highlights for the period March 31, 2008
(commencement of operations) through December 31, 2008, 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 audit. We conducted our audit 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
audit, which included confirmation of securities at December 31, 2008 by
correspondence with the custodian and brokers, provides a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 20, 2009
Annual Report | 27
Templeton Institutional Funds
TAX DESIGNATION (UNAUDITED)
GLOBAL EQUITY SERIES
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
37.98% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $1,912,690 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. 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 $63,479 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, 2008.
At December 31, 2008, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income 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, pursuant to Section 853 of the Code. This designation will allow
shareholders of record on December 16, 2008, 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, of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
shareholders of record.
Record Date: 12/16/2008
FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED
PER SHARE PER SHARE DIVIDENDS PER SHARE
---------------- --------------------- -------------------
Fund Shares ........ $0.0137 $0.0948 $0.0777
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)
28 | Annual Report
Templeton Institutional Funds
TAX DESIGNATION (UNAUDITED) (CONTINUED)
GLOBAL EQUITY SERIES
Foreign Qualified Dividends Per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund.(1)
In January 2009, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2008. 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 2008 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 bracket). 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 | 29
Templeton Institutional Funds
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. Generally, each
board member serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ------------------ ---------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1992 138 Bar-S Foods (meat packing
500 East Broward Blvd. company).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) and
500 East Broward Blvd. Allied Capital Corporation (financial
Suite 2100 services).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding company),
500 East Broward Blvd. Victory Nickel Inc. (mineral
Suite 2100 exploration) and ABACO Markets
Fort Lauderdale, FL 33394-3091 Limited (retail distributors).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Vice Chairman, Caribbean Utilities Company, Ltd. and director of various other private business and nonprofit
organizations.
EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration and
500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Heinz
Suite 2100 Trustee Independent Company (processed foods and allied
Fort Lauderdale, FL 33394-3091 Trustee since products), RTI International Metals,
2007 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).
30 | Annual Report
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ------------------ ---------------------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation (assisted living)
500 East Broward Blvd. and OSI Pharmaceuticals, Inc.
Suite 2100 (pharmaceutical products).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and 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) Trustee Since 2003 138 Hess Corporation (exploration and
500 East Broward Blvd. refining of oil and gas) and Sentient
Suite 2100 Jet (private jet service).
Fort Lauderdale, FL 33394-3091
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).
LARRY D. THOMPSON (1945) Trustee Since 2005 145 None
500 East Broward Blvd.
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. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (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 Trustee Since 1990 23 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).
ROBERT E. WADE (1946) Trustee Since 2007 37 El Oro and Exploration Co., p.l.c.
500 East Broward Blvd. (investments).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
Annual Report | 31
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ------------------ ---------------------------------------
**CHARLES B. JOHNSON (1933) Trustee, Trustee and Vice 138 None
One Franklin Parkway Chairman of President since
San Mateo, CA 94403-1906 the Board and 1993 and
Vice President 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.; Director, Templeton Worldwide,
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 42 of the investment companies in Franklin Templeton Investments.
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited;
officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the
investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of
the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
32 | Annual Report
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ------------------ ---------------------------------------
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 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 Templeton Investments; officer and/or director, as the case may be, of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
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.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 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.; 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.
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; Executive Chairman, Templeton Asset Management Ltd.; and officer
and/or director, as the case may be, of some of the other 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 2005 Not Applicable Not Applicable
500 East Broward Blvd. Chief Executive
Suite 2100 Officer -
Fort Lauderdale, FL 33394-3091 Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin
Templeton Investments.
Annual Report | 33
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- ---------------- ------------------ ---------------------------------------
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:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President
and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of
the South; and officer of 14 of the investment companies in Franklin Templeton Investments.
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
* 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 manager or
affiliated investment managers.
** 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 investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Fund under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008.
SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL
CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC.
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 OSI PHARMACEUTICALS, INC. 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
BELIEVES THAT MS. BATES 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. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS 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 (800) 321-8563 TO REQUEST THE SAI.
34 | Annual Report
Templeton Institutional Funds
SHAREHOLDER INFORMATION
GLOBAL EQUITY SERIES
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager 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 (954) 527-7678 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 (800)
SEC-0330.
Annual Report | 35
This page intentionally left blank.
(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) 600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
Global 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
(800) 321-8563
ftinstitutional.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.
ZT442 A2008 02/09
DECEMBER 31, 2008
Foreign Equity Series
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO)
Contents
ANNUAL REPORT
TIF Foreign Equity Series ................................................. 1
Performance Summary ....................................................... 6
Your Fund's Expenses ...................................................... 9
Financial Highlights and Statement of Investments ......................... 11
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 21
Report of Independent Registered Public Accounting Firm ................... 30
Tax Designation ........................................................... 31
Board Members and Officers ................................................ 33
Shareholder Information ................................................... 38
Annual Report
TIF Foreign Equity Series
YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF 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.
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 ftinstitutional.com OR CALL A FRANKLIN TEMPLETON
INSTITUTIONAL SERVICES REPRESENTATIVE AT (800) 321-8563 FOR MOST RECENT
MONTH-END PERFORMANCE.
This annual report for Templeton Institutional Funds (TIF) Foreign Equity Series
(Fund) covers the fiscal year ended December 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, the Fund's Primary Shares had a -42.15%
cumulative total return. The Fund performed better than the Morgan Stanley
Capital International (MSCI) All Country (AC) World ex USA Index's -45.24%
return, and performed comparably to the MSCI Europe, Australasia, Far East
(EAFE) Index's -43.06% return for the same period.(1) Please note that index
(1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The MSCI AC World ex USA 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.
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 13.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Annual Report | 1
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.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BARCHART)
Europe 66.6%
Asia 19.8%
North America 2.6%
Latin America 2.5%
Middle East & Africa 1.0%
Australia & New Zealand 1.0%
Short-Term Investments & Other Net Assets 6.5%
ECONOMIC AND MARKET OVERVIEW
The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as
housing prices declined, consumer demand softened, and a credit crisis
originally related to U.S. subprime loan losses intensified and spread globally.
Although GDP growth rebounded in the second quarter of 2008, largely due to
fiscal stimulus, the domestic economy contracted in the third and fourth
quarters. Fear of recession spanned the entire period, and in the summer most
economists agreed that a recession had already begun. By then, the faltering
U.S. economy -- which is the world's largest and accounts for roughly 25% of
global GDP -- had negatively impacted growth prospects around the world.
Although signs of a global slowdown surfaced in the latter half of the reporting
period, in the first half growth remained robust in developing economies,
particularly in Asia.
The China-led demand for oil, natural gas, and industrial and agricultural
commodities propelled commodity prices and those of related equities to higher
levels. The steep rise in the price of oil, which peaked at $145 per barrel in
early July, was one of the most extreme market trends during the year. As a
result, oil was a major focus of attention due to its impact on everything from
inflation to corporate earnings to consumer spending. The price boom for
commodities in general was broadly based and included natural gas, precious
metals and most agricultural and industrial commodities, all of which added to
global inflationary pressures. In this environment, the world's monetary
authorities faced the choice of lowering short-term interest rates to stimulate
growth or raising them to fight rising inflation. Stimulus provided through
fiscal and monetary policies implemented around the globe sought to restore
financial market stability and reignite economic growth.
The U.S. Treasury and the Federal Reserve Board took unprecedented steps,
including lowering short-term rates to near 0% from 4.25%. The eurozone had made
controlling inflation its main goal and kept rates steady at 4.00% until July,
when the European Central Bank (ECB) joined many of the world's central banks
whose concerns about inflation had led them to raise rates. The potential for
global recession, however, exacerbated by the virtual freeze in
2 | Annual Report
the global financial system in September and October, trumped inflationary
concerns, and the world's monetary authorities, including the ECB and the Bank
of England, cut interest rates aggressively. The U.S. dollar, which had declined
earlier in the period versus many of the world's currencies, regained ground
quickly toward period-end as a flight to the relative safety of U.S. Treasuries
prevailed. The greenback appreciated 8.6% relative to most currencies during the
year under review.(2)
In this challenging economic time, volatility came to define global equity
markets. Virtually all local indexes ended the 12-month period with marked
losses. Despite negative economic data and an outlook for decelerating corporate
earnings and profit margins globally, many companies outside the financials
sector retained relatively strong balance sheets.
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. We also consider a company's
price/earnings ratio, profit margins and liquidation value.
MANAGER'S DISCUSSION
The year 2008 was unusually difficult for most investors. At period-end, all
major gauges of stock market performance had registered double-digit negative
returns. No main region, country or sector was spared in the dramatic stock
market sell-off triggered by the global financial crisis and slowing economic
growth or recessionary environments.
The financials sector suffered most, erasing more than half of its entire market
capitalization during the year. But financials were not alone; they were
followed closely by materials-related stocks. The materials and energy sectors,
which were among the only sectors to have positive returns during the first half
of the year, experienced an abrupt reversal. With virtually no safe haven in the
global market downturn, the health care, utilities and consumer staples sectors
lived up to their "defensive" reputations and declined less in value than other
sectors.
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/08
(BAR CHART)
Diversified Telecommunication Services 11.0%
Commercial Banks 9.7%
Oil, Gas & Consumable Fuels 9.1%
Pharmaceuticals 8.9%
Insurance 5.6%
Food Products 5.2%
Industrial Conglomerates 4.0%
Software 3.6%
Aerospace & Defense 3.5%
Wireless Telecommunication Services 3.0%
Media 3.0%
Electric Utilities 2.5%
Semiconductors & Semiconductor Equipment 2.3%
Other 22.1%
Short-Term Investments & Other Net Assets 6.5%
(2.) Source: Federal Reserve H10 report.
Annual Report | 3
TOP 10 EQUITY HOLDINGS
12/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------ ----------
Telefonica SA, ord. & ADR 2.7%
DIVERSIFIED TELECOMMUNICATION SERVICES,
SPAIN
France Telecom SA 2.5%
DIVERSIFIED TELECOMMUNICATION SERVICES,
FRANCE
Novartis AG 2.5%
PHARMACEUTICALS, SWITZERLAND
Nestle SA, ord. & ADR 2.3%
FOOD PRODUCTS, SWITZERLAND
Sanofi-Aventis, ord. & ADR 2.2%
PHARMACEUTICALS, FRANCE
GlaxoSmithKline PLC 2.1%
PHARMACEUTICALS, U.K.
Unilever NV 2.0%
FOOD PRODUCTS, NETHERLANDS
E.ON AG, ord. & ADR 1.9%
ELECTRIC UTILITIES, GERMANY
Siemens AG 1.7%
INDUSTRIAL CONGLOMERATES, GERMANY
Royal Dutch Shell PLC 1.6%
OIL, GAS & CONSUMABLE FUELS, U.K.
For the Fund, our underweighting in consumer staples compared to the benchmark
MSCI AC World ex USA Index hurt relative performance.(3) Also, underweighting
and stock selection in utilities and stock selection in health care were
detrimental to relative results.(4)
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, 2008, the U.S. dollar appreciated 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.
During the review period, our research indicated most chemicals companies were
overvalued as were many in the metals and mining industry. As a result, the Fund
maintained little or no exposure to these areas and was significantly
underweighted in the materials sector relative to the benchmark. Although the
Fund's underweighted exposure to materials stocks hurt relative Fund performance
during the first half of the year, the sector was a key contributor in 2008 due
to a sharp correction in the second half of the year.
We believe that the Fund's relatively better performance in the financials
sector was an affirmation of our investment philosophy.(5) We steered away from
the most leveraged segments of the investment bank and brokerage industry
because, in our view, many of these companies were trading at high multiples and
had opaque balance sheets and unsustainable earnings. Despite absolute losses
from our sector holdings, our underweighted exposure helped relative Fund
performance.
One area of continued conviction for us where our investment strategy had yet to
be realized is the health care sector, which hurt relative results. The Fund's
overweighted allocation to health care evolved over a time when the consensus
view was that pharmaceutical companies faced a difficult pricing environment,
political headwinds and insurmountable competition from
(3.) The consumer staples sector comprises food and staples retailing and food
products in the SOI.
(4.) The utilities sector comprises electric utilities and multi-utilities in
the SOI; the health care sector comprises health care equipment and
supplies, health care providers and services, life sciences tools and
services, and pharmaceuticals.
(5.) The financials sector comprises capital markets, commercial banks, consumer
finance, diversified financial services, insurance, and thrifts and
mortgage finance in the SOI.
4 | Annual Report
cheaper generics. However, we saw bargain valuations, high free cash-flow
yields, and the implications of aging global demographics for revenue growth.
Our overweighted telecommunication services sector position was another
contrarian call.(6) By buying telecommunication stocks when they were out of
favor in the wake of the technology, media and telecommunications bubble, we
were able to invest in companies that we believed had solid balance sheets,
desirable products, and a growing global presence at largely discounted prices.
Although the Fund's telecommunication services holdings, like most everything
else, were down in absolute terms in 2008, our bottom-up-based decision to
overweight the sector contributed to the Fund's relative performance during the
year.
While we invested in some financial company stocks we saw as well-capitalized,
we remained cautious of the sector. In addition, we continued to monitor the
materials sector closely, seeking proper re-entry points, but as of period-end
we had yet to find compelling valuations in the materials sector, in general.
Looking beyond the turbulence of 2008, we continue to manage the Fund as always
- -- with a focus on the longer term. Thank you for your continued participation
in TIF Foreign Equity Series. We look forward to serving your future investment
needs.
(PHOTO OF GARY P. MOTYL)
/s/ Gary P. Motyl
Gary P. Motyl, CFA
Chief Investment Officer -
Templeton Global Equity Group
President - Templeton Investment Counsel, LLC
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2008, 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.) The telecommunication services sector comprises diversified
telecommunication services and wireless telecommunication services in the
SOI.
Annual Report | 5
Performance Summary as of 12/31/08
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs 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
PRIMARY SHARES (SYMBOL: TFEQX) CHANGE 12/31/08 12/31/07
- ------------------------------ ------- -------- --------
Net Asset Value (NAV) -$13.78 $14.82 $28.60
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.3893
Short-term Capital Gain $0.0328
Long-term Capital Gain $1.5038
Return of Capital $0.0202
TOTAL $1.9461
SERVICE SHARES (SYMBOL: TFESX) CHANGE 12/31/08 12/31/07
- ------------------------------ ------- -------- --------
Net Asset Value (NAV) -$13.77 $14.81 $28.58
DISTRIBUTIONS (1/1/08-12/31/08)
Dividend Income $0.3144
Short-term Capital Gain $0.0328
Long-Term Capital Gain $1.5038
Return of Capital $0.0202
TOTAL $1.8712
PERFORMANCE
PRIMARY SHARES(1) 1-YEAR 5-YEAR 10-YEAR
- ----------------- -------- ---------- ----------
Cumulative Total Return(2) -42.15% +21.81% +55.94%
Average Annual Total Return(3) -42.15% +4.03% +4.54%
Value of $1,000,000 Investment(4) $578,526 $1,218,132 $1,559,442
Total Annual Operating Expenses(5) 0.80%
SERVICE SHARES 1-YEAR INCEPTION (9/18/06)
- -------------- --------- -------------------
Cumulative Total Return(2) -42.41% -22.62%
Average Annual Total Return(3) -42.41% -10.62%
Value of $1,000,000 Investment(4) $575,848 $773,752
Total Annual Operating Expenses(5) 0.95%
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, VISIT ftinstitutional.com
OR CALL (800) 321-8563.
6 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $1,000,000 INVESTMENT
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
PRIMARY SHARES(1) 12/31/08
- ----------------- --------
1-Year -42.15%
5-Year +4.03%
10-Year +4.54%
PRIMARY SHARES (1/1/99-12/31/08)(1)
$ Millions
(PERFORMANCE GRAPH)
USD USD USD USD
TIF FOREIGN EQUITY SERIES (P) MSCI ALL COUNTRY WORLD EX U.S. INDEX MSCI EAFE INDEX CPI UNADJUSTED INDEX
INCEPTION DATE 18-OCT-90 18-OCT-90 18-OCT-90 18-OCT-90
CALENDAR MONTH NET 243 GROSS BM0047 GROSS BM0002 GROSS BM0152
- -------------- ----------------------------- ------------------------------------ --------------- --------------------
Dec-98 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00
Jan-99 989,301.85 998,929.13 997,273.24 1,002,440.51
Feb-99 966,779.29 976,562.92 973,736.32 1,003,660.77
Mar-99 1,019,015.59 1,023,712.70 1,014,617.93 1,006,711.41
Apr-99 1,102,569.18 1,074,920.02 1,055,962.31 1,014,032.95
May-99 1,061,921.39 1,024,431.13 1,001,812.90 1,014,032.95
Jun-99 1,112,166.72 1,071,504.09 1,041,101.74 1,014,032.95
Jul-99 1,118,376.84 1,096,635.58 1,072,286.46 1,017,083.59
Aug-99 1,112,731.34 1,100,440.09 1,076,441.96 1,019,524.10
Sep-99 1,090,149.36 1,107,881.94 1,087,517.02 1,024,405.13
Oct-99 1,107,650.75 1,149,135.17 1,128,488.65 1,026,235.51
Nov-99 1,162,977.10 1,195,083.05 1,167,930.10 1,026,845.64
Dec-99 1,273,367.86 1,309,060.35 1,272,982.64 1,026,845.64
Jan-00 1,194,706.30 1,238,026.17 1,192,320.75 1,029,896.28
Feb-00 1,227,826.76 1,271,467.04 1,224,643.16 1,035,997.56
Mar-00 1,252,573.25 1,319,317.18 1,272,351.52 1,044,539.35
Apr-00 1,198,993.55 1,245,684.90 1,205,625.55 1,045,149.48
May-00 1,194,826.01 1,213,820.96 1,176,416.52 1,046,369.74
Jun-00 1,256,145.11 1,265,493.68 1,222,699.22 1,051,860.89
Jul-00 1,238,880.43 1,215,533.45 1,171,676.77 1,054,301.40
Aug-00 1,257,335.25 1,230,570.77 1,182,086.78 1,054,301.40
Sep-00 1,198,397.49 1,162,310.90 1,124,762.94 1,059,792.56
Oct-00 1,148,985.26 1,125,368.25 1,098,422.50 1,061,622.94
Nov-00 1,141,245.99 1,074,879.36 1,057,466.28 1,062,233.07
Dec-00 1,198,807.54 1,111,578.02 1,095,299.55 1,061,622.94
Jan-01 1,217,903.93 1,128,260.04 1,094,783.12 1,068,334.35
Feb-01 1,177,589.84 1,038,935.28 1,012,789.30 1,072,605.25
Mar-01 1,088,507.12 965,497.30 945,731.89 1,075,045.76
Apr-01 1,150,093.94 1,031,163.59 1,012,062.59 1,079,316.66
May-01 1,142,932.69 1,002,688.46 977,146.31 1,084,197.68
Jun-01 1,117,152.26 964,232.14 937,549.77 1,086,028.07
Jul-01 1,089,939.46 942,778.65 920,565.82 1,082,977.43
Aug-01 1,077,765.26 919,364.17 897,437.11 1,082,977.43
Sep-01 945,282.45 821,829.42 806,741.04 1,087,858.45
Oct-01 976,075.59 844,855.32 827,369.92 1,084,197.68
Nov-01 1,034,081.61 883,496.90 857,922.59 1,082,367.30
Dec-01 1,053,614.32 894,878.82 863,036.95 1,078,096.40
Jan-02 1,023,760.60 856,553.53 817,245.40 1,080,536.91
Feb-02 1,040,507.91 862,721.18 823,017.41 1,084,807.81
Mar-02 1,091,084.75 909,586.29 867,949.37 1,090,909.09
Apr-02 1,092,543.31 915,496.39 874,235.03 1,097,010.37
May-02 1,112,235.07 925,468.56 886,094.75 1,097,010.37
Jun-02 1,066,286.81 885,507.60 851,152.57 1,097,620.50
Jul-02 951,781.34 799,219.22 767,191.68 1,098,840.76
Aug-02 953,969.30 799,264.40 765,631.90 1,102,501.53
Sep-02 836,546.64 714,561.98 683,598.00 1,104,331.91
Oct-02 882,494.77 752,896.31 720,391.32 1,106,162.29
Nov-02 942,300.08 789,102.46 753,178.67 1,106,162.29
Dec-02 897,676.97 763,609.50 727,909.63 1,103,721.78
Jan-03 873,255.56 736,801.68 697,576.47 1,108,602.81
Feb-03 847,353.81 721,872.80 681,630.32 1,117,144.60
Mar-03 819,882.94 707,870.19 668,748.53 1,123,856.01
Apr-03 913,626.27 776,080.36 735,060.11 1,121,415.50
May-03 964,961.98 825,516.46 780,281.28 1,119,585.11
Jun-03 988,769.81 848,492.65 799,593.02 1,120,805.37
Jul-03 1,038,617.41 871,062.19 819,068.17 1,122,025.63
Aug-03 1,078,793.24 896,930.18 838,990.39 1,126,296.52
Sep-03 1,086,233.25 922,043.59 865,020.36 1,129,957.29
Oct-03 1,168,816.91 981,813.33 918,991.25 1,128,737.03
Nov-03 1,189,649.07 1,003,221.64 939,553.83 1,125,686.39
Dec-03 1,280,190.90 1,079,818.00 1,012,998.64 1,124,466.14
Jan-04 1,299,828.13 1,097,155.20 1,027,398.28 1,129,957.29
Feb-04 1,336,081.56 1,125,051.96 1,051,290.08 1,136,058.57
Mar-04 1,324,603.48 1,131,974.19 1,057,617.67 1,143,380.11
Apr-04 1,294,239.97 1,096,793.72 1,034,590.39 1,147,040.88
May-04 1,297,276.26 1,100,263.88 1,039,070.55 1,153,752.29
Jun-04 1,324,603.55 1,124,112.13 1,062,259.38 1,157,413.06
Jul-04 1,288,167.44 1,091,353.54 1,027,931.98 1,155,582.67
Aug-04 1,296,517.02 1,100,092.18 1,032,704.42 1,156,192.80
Sep-04 1,343,580.39 1,135,462.42 1,059,846.49 1,158,633.31
Oct-04 1,396,716.14 1,174,953.46 1,096,051.23 1,164,734.59
Nov-04 1,499,192.56 1,256,506.53 1,171,229.40 1,165,344.72
Dec-04 1,552,199.38 1,310,461.06 1,222,665.92 1,161,073.83
Jan-05 1,532,289.54 1,287,887.00 1,200,324.35 1,163,514.34
Feb-05 1,604,270.88 1,351,411.56 1,252,463.22 1,170,225.75
Mar-05 1,567,137.82 1,314,753.57 1,221,483.22 1,179,377.67
Apr-05 1,518,430.42 1,282,329.34 1,194,142.29 1,187,309.33
May-05 1,537,758.87 1,290,372.14 1,195,969.06 1,186,089.08
Jun-05 1,551,675.28 1,314,649.64 1,212,317.26 1,186,699.21
Jul-05 1,622,030.20 1,363,154.95 1,249,558.57 1,192,190.36
Aug-05 1,649,089.33 1,398,041.71 1,281,493.73 1,198,291.64
Sep-05 1,699,342.98 1,470,155.80 1,338,828.06 1,212,934.72
Oct-05 1,637,492.48 1,416,635.04 1,299,819.48 1,215,375.23
Nov-05 1,680,014.86 1,464,263.77 1,331,960.29 1,205,613.18
Dec-05 1,763,481.40 1,534,715.07 1,394,026.67 1,200,732.15
Jan-06 1,866,239.70 1,641,720.44 1,479,715.98 1,209,884.08
Feb-06 1,855,173.75 1,636,980.61 1,476,685.22 1,212,324.59
Mar-06 1,900,969.80 1,684,528.01 1,526,078.53 1,219,036.00
Apr-06 1,981,539.61 1,771,385.71 1,600,091.88 1,229,408.18
May-06 1,904,958.08 1,689,719.68 1,539,877.88 1,235,509.46
Jun-06 1,905,755.64 1,688,034.30 1,540,442.40 1,237,949.97
Jul-06 1,942,450.79 1,705,303.73 1,555,867.81 1,241,610.74
Aug-06 1,997,493.80 1,753,637.33 1,599,071.97 1,244,051.25
Sep-06 2,034,986.76 1,754,775.98 1,601,854.53 1,237,949.97
Oct-06 2,118,747.39 1,826,230.37 1,664,299.82 1,231,238.56
Nov-06 2,194,531.35 1,892,533.75 1,714,499.38 1,229,408.18
Dec-06 2,275,627.21 1,951,512.77 1,768,427.11 1,231,238.56
Jan-07 2,300,372.00 1,958,800.99 1,780,529.16 1,234,996.95
Feb-07 2,284,160.50 1,970,770.30 1,795,155.41 1,241,604.64
Mar-07 2,359,505.82 2,026,297.24 1,841,764.00 1,252,910.31
Apr-07 2,486,721.14 2,120,262.43 1,925,236.52 1,261,049.42
May-07 2,556,345.92 2,178,378.43 1,961,578.46 1,268,755.34
Jun-07 2,570,942.94 2,196,931.08 1,964,604.90 1,271,214.15
Jul-07 2,535,687.04 2,190,668.55 1,935,881.78 1,270,890.79
Aug-07 2,510,773.87 2,157,033.38 1,906,092.19 1,268,560.10
Sep-07 2,654,327.54 2,299,874.39 2,008,431.85 1,272,056.13
Oct-07 2,786,687.14 2,428,251.91 2,087,569.74 1,274,777.30
Nov-07 2,696,448.66 2,319,140.96 2,019,463.13 1,282,348.99
Dec-07 2,695,544.91 2,285,618.75 1,974,126.04 1,281,488.71
Jan-08 2,466,516.68 2,064,464.39 1,791,952.93 1,287,858.45
Feb-08 2,452,387.74 2,124,292.87 1,818,181.45 1,291,598.54
Mar-08 2,406,196.36 2,078,485.06 1,799,924.77 1,302,794.39
Apr-08 2,554,146.68 2,206,397.19 1,899,933.56 1,310,695.55
May-08 2,554,170.61 2,244,632.11 1,922,046.05 1,321,732.76
Jun-08 2,303,467.85 2,060,650.83 1,765,237.87 1,335,051.86
Jul-08 2,245,967.49 1,986,955.30 1,708,727.68 1,342,062.23
Aug-08 2,191,307.38 1,894,544.45 1,639,932.29 1,336,705.31
Sep-08 1,953,233.21 1,610,543.30 1,403,382.24 1,334,856.62
Oct-08 1,543,156.89 1,256,086.32 1,120,270.15 1,321,372.79
Nov-08 1,455,698.22 1,183,940.61 1,060,243.60 1,296,064.67
Dec-08 1,559,441.98 1,251,626.63 1,124,104.07 1,282,660.16
AVERAGE ANNUAL TOTAL RETURN
SERVICE SHARES 12/31/08
- -------------- --------
1-Year -42.41%
Since Inception (9/18/06) -10.62%
SERVICE SHARES (9/18/06-12/31/08)
$ Millions
(PERFORMANCE GRAPH)
USD USD USD USD
TIF FOREIGN EQUITY SERIES (S) MSCI ALL COUNTRY WORLD EX U.S. INDEX MSCI EAFE INDEX CPI UNADJUSTED INDEX
INCEPTION DATE 18-SEP-06 18-SEP-06 18-SEP-06 18-SEP-06
CALENDAR MONTH NET 243 GROSS BM0047 GROSS BM0002 GROSS BM0152
- -------------- ----------------------------- ------------------------------------ --------------- --------------------
Sep-06 1,013,121.36 1,010,904.00 1,014,140.64 998,032.46
Oct-06 1,054,870.84 1,052,067.96 1,053,675.01 992,621.74
Nov-06 1,092,644.18 1,090,264.49 1,085,456.55 991,146.09
Dec-06 1,133,066.30 1,124,241.55 1,119,598.42 992,621.74
Jan-07 1,145,400.75 1,128,440.20 1,127,260.28 995,651.75
Feb-07 1,138,595.76 1,135,335.57 1,136,520.22 1,000,978.85
Mar-07 1,176,157.36 1,167,323.93 1,166,028.31 1,010,093.46
Apr-07 1,239,571.12 1,221,456.07 1,218,875.10 1,016,655.19
May-07 1,274,277.19 1,254,935.95 1,241,883.33 1,022,867.68
Jun-07 1,281,126.49 1,265,623.90 1,243,799.38 1,024,849.98
Jul-07 1,263,982.22 1,262,016.13 1,225,614.66 1,024,589.28
Aug-07 1,251,563.57 1,242,639.35 1,206,754.74 1,022,710.28
Sep-07 1,323,121.53 1,324,928.22 1,271,546.40 1,025,528.78
Oct-07 1,389,101.96 1,398,884.87 1,321,648.92 1,027,722.58
Nov-07 1,344,124.43 1,336,027.45 1,278,530.35 1,033,826.86
Dec-07 1,343,673.92 1,316,715.73 1,249,827.25 1,033,133.30
Jan-08 1,229,505.44 1,189,311.53 1,134,492.71 1,038,268.57
Feb-08 1,221,051.92 1,223,777.95 1,151,098.10 1,041,283.82
Mar-08 1,198,034.17 1,197,388.66 1,139,539.72 1,050,309.89
Apr-08 1,271,800.40 1,271,077.20 1,202,855.69 1,056,679.78
May-08 1,268,510.68 1,293,103.85 1,216,855.20 1,065,577.96
Jun-08 1,144,004.19 1,187,114.59 1,117,579.30 1,076,315.79
Jul-08 1,115,343.84 1,144,659.54 1,081,802.47 1,081,967.54
Aug-08 1,088,087.44 1,091,422.83 1,038,247.83 1,077,648.79
Sep-08 969,670.90 927,813.40 888,487.02 1,076,158.39
Oct-08 765,962.21 723,615.27 709,247.60 1,065,287.75
Nov-08 722,414.63 682,053.04 671,244.55 1,044,884.41
Dec-08 773,752.12 721,046.10 711,674.87 1,034,077.72
Annual Report | 7
Performance Summary (CONTINUED)
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. 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.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Source: (C) 2009 Morningstar. The MSCI AC World ex USA 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 Consumer
Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a
commonly used measure of the inflation rate.
8 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 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 actual expense ratio for each class and an assumed 5% annual rate
of return before expenses, which does not represent the Fund's actual return.
The figure under the heading "Expenses Paid During Period" shows the
hypothetical expenses your account would have incurred under this scenario. You
can compare this figure with the 5% hypothetical examples that appear in
shareholder reports of other funds.
Annual Report | 9
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08
----------------- -------------- -----------------------
PRIMARY SHARES
Actual $1,000 $ 677.00 $3.37
Hypothetical (5% return before expenses) $1,000 $1,021.11 $4.06
SERVICE SHARES
Actual $1,000 $ 676.40 $4.00
Hypothetical (5% return before expenses) $1,000 $1,020.36 $4.82
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Primary Shares: 0.80% and Service Shares:
0.95%), multiplied by the average account value over the period, multiplied
by 184/366 for to reflect the one-half year period.
10 | Annual Report
Templeton Institutional Funds
FINANCIAL HIGHLIGHTS
FOREIGN EQUITY SERIES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
PRIMARY SHARES 2008 2007 2006 2005 2004
- -------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 28.60 $ 26.67 $ 22.31 $ 20.27 $ 16.95
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ..................... 0.66 0.72 0.55 0.42 0.33
Net realized and unrealized gains (losses) ... (12.49) 4.08 5.86 2.32 3.25
---------- ---------- ---------- ---------- ----------
Total from investment operations ................ (11.83) 4.80 6.41 2.74 3.58
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ........................ (0.39) (1.16) (0.74) (0.66) (0.26)
Net realized gains ........................... (1.54) (1.71) (1.31) (0.04) --
Tax return of capital ........................ (0.02) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions ............................. (1.95) (2.87) (2.05) (0.70) (0.26)
---------- ---------- ---------- ---------- ----------
Redemption fees(c,d) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .................... $ 14.82 $ 28.60 $ 26.67 $ 22.31 $ 20.27
========== ========== ========== ========== ==========
Total return .................................... (42.15)% 18.45% 29.04% 13.61% 21.25%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ..................................... 0.80% 0.78% 0.80% 0.81% 0.82%
Net investment income ........................... 2.88% 2.46% 2.25% 2.01% 1.89%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $4,687,747 $9,081,511 $7,311,236 $6,245,721 $5,658,170
Portfolio turnover rate ......................... 6.66%(f) 16.74% 7.59% 12.97% 18.25%
(a) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Based on average daily shares outstanding.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Amount rounds to less than $0.01 per share.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind. See Note 9.
The accompanying notes are an integral part of these financial statements.
Annual Report | 11
Templeton Institutional Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FOREIGN EQUITY SERIES
YEAR ENDED DECEMBER 31,
-------------------------------
SERVICE SHARES 2008 2007 2006(a)
- -------------- ------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 28.58 $ 26.67 $25.15
------- -------- ------
Income from investment operations(b):
Net investment income(c) ..................... 0.65 0.36 0.05
Net realized and unrealized gains (losses) ... (12.55) 4.42 3.31
------- -------- ------
Total from investment operations ................ (11.90) 4.78 3.36
------- -------- ------
Less distributions from:
Net investment income ........................ (0.31) (1.16) (0.66)
Net realized gains ........................... (1.54) (1.71) (1.18)
Tax return of capital ........................ (0.02) -- --
------- -------- ------
Total distributions ............................. (1.87) (2.87) (1.84)
------- -------- ------
Redemption fees(d,e) ............................ -- -- --
------- -------- ------
Net asset value, end of year .................... $ 14.81 $ 28.58 $26.67
======= ======== ======
Total return(f) ................................. (42.41)% 18.37% 13.31%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) ..................................... 0.95% 0.92% 0.80%
Net investment income ........................... 2.73% 2.32% 2.25%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $30,349 $173,247 $ 11
Portfolio turnover rate ......................... 6.66%(i) 16.74% 7.59%
(a) For the period September 18, 2006 (effective date) to December 31, 2006.
(b) The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the timing
of sales and repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
(i) Excludes the value of portfolio securities delivered as a result of
redemptions in-kind. See Note 9.
The accompanying notes are an integral part of these financial statements.
12 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
--------------------- ---------------------------------------------- ------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS 92.6%
AUSTRALIA 1.0%
Alumina Ltd. ....................... Metals & Mining 17,863 $ 17,587
National Australia Bank Ltd. ....... Commercial Banks 3,010,754 44,505,632
--------------
44,523,219
--------------
AUSTRIA 0.9%
Telekom Austria AG ................. Diversified Telecommunication Services 2,953,740 42,541,212
--------------
BRAZIL 0.7%
Embraer-Empresa Brasileira de
Aeronautica SA, ADR ............. Aerospace & Defense 2,007,570 32,542,710
--------------
CANADA 0.6%
Husky Energy Inc. .................. Oil, Gas & Consumable Fuels 1,147,780 29,118,975
Loblaw Cos. Ltd. ................... Food & Staples Retailing 8,300 238,536
--------------
29,357,511
--------------
CHINA 2.8%
China Mobile Ltd. .................. Wireless Telecommunication Services 6,954,000 69,807,385
China Telecom Corp. Ltd., H ........ Diversified Telecommunication Services 121,768,000 45,406,508
(a) Shanghai Electric Group Co. Ltd. ... Electrical Equipment 39,708,000 16,087,729
--------------
131,301,622
--------------
DENMARK 0.7%
(a) Vestas Wind Systems AS ............. Electrical Equipment 584,043 33,300,842
--------------
FRANCE 10.5%
Accor SA ........................... Hotels, Restaurants & Leisure 513,030 25,186,856
AXA SA ............................. Insurance 2,603,448 57,682,161
(b) AXA SA, 144A ....................... Insurance 11,854 262,638
Compagnie Generale des
Etablissements
Michelin, B ..................... Auto Components 972,567 51,092,963
France Telecom SA .................. Diversified Telecommunication Services 4,259,495 118,882,798
GDF Suez ........................... Multi-Utilities 737,087 36,408,375
Sanofi-Aventis ..................... Pharmaceuticals 1,599,988 101,571,752
Sanofi-Aventis, ADR ................ Pharmaceuticals 7,073 227,468
Total SA, B ........................ Oil, Gas & Consumable Fuels 1,185,713 64,512,100
Valeo SA ........................... Auto Components 2,862 42,270
Vivendi SA ......................... Media 1,257,159 40,897,206
--------------
496,766,587
--------------
GERMANY 11.5%
Bayerische Motoren Werke AG ........ Automobiles 2,143,322 65,844,248
Celesio AG ......................... Health Care Providers & Services 2,431,865 65,629,204
Deutsche Post AG ................... Air Freight & Logistics 3,960,630 65,377,849
E.ON AG ............................ Electric Utilities 2,284,780 89,518,519
E.ON AG, ADR ....................... Electric Utilities 4,820 196,415
(a) Infineon Technologies AG ........... Semiconductors & Semiconductor Equipment 6,982,654 9,285,417
Merck KGaA ......................... Pharmaceuticals 689,639 62,218,071
Muenchener Rueckversicherungs-
Gesellschaft AG ................. Insurance 331,473 50,776,283
SAP AG ............................. Software 1,569,901 54,978,599
Annual Report | 13
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
--------------------- ---------------------------------------------- ------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
GERMANY (CONTINUED)
Siemens AG ......................... Industrial Conglomerates 1,081,990 $ 79,868,454
--------------
543,693,059
--------------
HONG KONG 1.8%
Cheung Kong (Holdings) Ltd. ........ Real Estate Management & Development 2,642,500 24,992,290
Cheung Kong (Holdings) Ltd., ADR ... Real Estate Management & Development 32,635 308,727
Hutchison Whampoa Ltd. ............. Industrial Conglomerates 4,099,350 20,549,114
Hutchison Whampoa Ltd., ADR ........ Industrial Conglomerates 4,895 123,403
Swire Pacific Ltd., A .............. Real Estate Management & Development 5,640,400 38,826,784
Swire Pacific Ltd., B .............. Real Estate Management & Development 159,500 211,564
--------------
85,011,882
--------------
INDIA 3.7%
Bharat Petroleum Corp. Ltd. ........ Oil, Gas & Consumable Fuels 3,599,933 27,836,174
Housing Development Finance Corp.
Ltd. ............................ Thrifts & Mortgage Finance 2,473,824 75,687,719
ICICI Bank Ltd. .................... Commercial Banks 5,134,600 47,348,785
Satyam Computer Services Ltd. ...... IT Services 6,695,072 23,429,998
Satyam Computer Services Ltd.,
ADR ............................. IT Services 94,800 856,992
--------------
175,159,668
--------------
ISRAEL 1.0%
(a) Check Point Software Technologies
Ltd. ............................ Software 2,539,220 48,219,788
--------------
ITALY 2.5%
Eni SpA ............................ Oil, Gas & Consumable Fuels 2,523,780 59,075,488
Intesa Sanpaolo SpA ................ Commercial Banks 9,383,357 33,293,899
UniCredit SpA ...................... Commercial Banks 9,634,630 23,508,820
--------------
115,878,207
--------------
JAPAN 4.0%
Aiful Corp. ........................ Consumer Finance 12,850 36,956
FUJIFILM Holdings Corp. ............ Electronic Equipment, Instruments & Components 1,098,200 24,496,049
NGK Spark Plug Co. Ltd. ............ Auto Components 2,538,000 20,373,593
Nintendo Co. Ltd. .................. Software 178,000 67,966,759
Olympus Corp. ...................... Health Care Equipment & Supplies 4,000 80,008
Promise Co. Ltd. ................... Consumer Finance 7,150 181,210
Sony Corp. ......................... Household Durables 1,597,800 34,918,022
Sony Corp., ADR .................... Household Durables 7,525 164,572
Takeda Pharmaceutical Co. Ltd. ..... Pharmaceuticals 792,400 41,267,547
--------------
189,484,716
--------------
MEXICO 0.9%
Telefonos de Mexico SAB de CV, L,
ADR ............................. Diversified Telecommunication Services 1,346,714 28,200,191
Telmex Internacional SAB de CV,
ADR ............................. Diversified Telecommunication Services 1,346,714 15,298,671
--------------
43,498,862
--------------
NETHERLANDS 4.8%
ING Groep NV ....................... Diversified Financial Services 2,646,110 27,121,408
ING Groep NV, ADR .................. Diversified Financial Services 13,475 149,573
Koninklijke Philips Electronics
NV .............................. Industrial Conglomerates 3,063,680 59,246,943
Koninklijke Philips Electronics NV,
N.Y. shs. ....................... Industrial Conglomerates 12,405 246,487
Randstad Holding NV ................ Professional Services 555,605 11,303,931
14 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
--------------------- ---------------------------------------------- ------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
NETHERLANDS (CONTINUED)
Royal Dutch Shell PLC, A, ADR ...... Oil, Gas & Consumable Fuels 6,990 $ 370,051
SBM Offshore NV .................... Energy Equipment & Services 2,381,320 31,130,299
Unilever NV ........................ Food Products 3,917,963 94,996,978
Unilever NV, N.Y. shs. ............. Food Products 19,310 474,060
--------------
225,039,730
--------------
NORWAY 0.9%
Telenor ASA ........................ Diversified Telecommunication Services 6,431,788 42,817,859
--------------
PORTUGAL 1.2%
Portugal Telecom SGPS SA ........... Diversified Telecommunication Services 6,650,947 56,451,118
--------------
RUSSIA 0.0%(c)
Gazprom, ADR ....................... Oil, Gas & Consumable Fuels 7,100 101,175
--------------
SINGAPORE 2.3%
DBS Group Holdings Ltd. ............ Commercial Banks 7,148,185 42,015,859
DBS Group Holdings Ltd., ADR ....... Commercial Banks 7,805 209,564
(a) DBS Group Holdings Ltd., rts.,
1/20/09 ......................... Commercial Banks 3,574,092 7,485,009
(a) Flextronics International Ltd. ..... Electronic Equipment, Instruments & Components 5,093,850 13,040,256
Singapore Telecommunications Ltd. .. Diversified Telecommunication Services 25,046,000 44,584,503
--------------
107,335,191
--------------
SOUTH KOREA 3.2%
(a) KB Financial Group Inc. ............ Commercial Banks 936,835 24,997,102
(a) KB Financial Group Inc., ADR ....... Commercial Banks 229,338 6,008,656
Korea Electric Power Corp. ......... Electric Utilities 1,192,700 27,952,431
Korea Electric Power Corp., ADR .... Electric Utilities 12,395 143,906
LG Electronics Inc. ................ Household Durables 562,263 33,299,503
Samsung Electronics Co. Ltd. ....... Semiconductors & Semiconductor Equipment 161,786 57,771,564
SK Telecom Co. Ltd., ADR ........... Wireless Telecommunication Services 12,830 233,249
--------------
150,406,411
--------------
SPAIN 4.8%
Banco Santander SA ................. Commercial Banks 4,778,907 45,105,834
Repsol YPF SA ...................... Oil, Gas & Consumable Fuels 2,600,571 54,909,316
Telefonica SA ...................... Diversified Telecommunication Services 5,632,394 124,831,061
Telefonica SA, ADR ................. Diversified Telecommunication Services 9,232 622,144
--------------
225,468,355
--------------
SWEDEN 2.3%
Atlas Copco AB, A .................. Machinery 6,476,400 55,288,362
Niscayah Group AB .................. Commercial Services & Supplies 1,351,050 1,149,058
Nordea Bank AB, FDR ................ Commercial Banks 7,508,228 53,228,690
--------------
109,666,110
--------------
SWITZERLAND 8.5%
Adecco SA .......................... Professional Services 1,063,741 35,640,653
Lonza Group AG ..................... Life Sciences Tools & Services 708,078 64,681,158
Nestle SA .......................... Food Products 2,768,116 107,831,843
Nestle SA, ADR ..................... Food Products 5,775 229,268
Novartis AG ........................ Pharmaceuticals 2,368,754 116,896,091
Swiss Reinsurance Co. .............. Insurance 1,087,340 51,215,659
Annual Report | 15
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
--------------------- ---------------------------------------------- ------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
SWITZERLAND (CONTINUED)
Swiss Reinsurance Co., ADR ......... Insurance 3,295 $ 157,501
(a) UBS AG ............................. Capital Markets 11,121 154,542
(a) UBS AG ............................. Capital Markets 1,631,663 23,332,781
--------------
400,139,496
--------------
TAIWAN 2.0%
Chinatrust Financial Holding Co.
Ltd. ............................ Commercial Banks 87,652,268 37,173,655
Chunghwa Telecom Co. Ltd., ADR ..... Diversified Telecommunication Services 6,281 97,984
(b) Compal Electronics Inc., GDR,
144A ............................ Computers & Peripherals 4,456,055 11,726,460
(d) Compal Electronics Inc., GDR,
Reg S ........................... Computers & Peripherals 1,137,622 2,980,570
Taiwan Semiconductor Manufacturing
Co. Ltd. ......................... Semiconductors & Semiconductor Equipment 31,172,333 42,228,881
--------------
94,207,550
--------------
THAILAND 0.0%(c)
Advanced Info Service Public Co.
Ltd., fgn. ...................... Wireless Telecommunication Services 46,300 104,486
--------------
UNITED KINGDOM 18.0%
Aviva PLC .......................... Insurance 7,540,909 42,954,110
BAE Systems PLC .................... Aerospace & Defense 11,721,971 64,501,575
BP PLC ............................. Oil, Gas & Consumable Fuels 9,532,367 73,232,341
BP PLC, ADR ........................ Oil, Gas & Consumable Fuels 11,290 527,695
British Energy Group PLC ........... Electric Utilities 29,041 327,874
British Sky Broadcasting Group
PLC ............................. Media 6,375,534 44,696,573
Cadbury PLC ........................ Food Products 4,977,616 44,020,194
Cadbury PLC, ADR ................... Food Products 1,120 39,950
Compass Group PLC .................. Hotels, Restaurants & Leisure 8,212,658 41,262,791
GKN PLC ............................ Auto Components 32,056 45,415
GlaxoSmithKline PLC ................ Pharmaceuticals 5,285,319 99,156,624
HSBC Holdings PLC .................. Commercial Banks 5,074,103 48,255,995
HSBC Holdings PLC, ADR ............. Commercial Banks 3,930 191,273
Kingfisher PLC ..................... Specialty Retail 6,182,965 12,191,215
National Grid PLC .................. Multi-Utilities 4,137,614 41,365,649
Pearson PLC ........................ Media 4,890,579 45,786,213
Premier Foods PLC .................. Food Products 72,600 32,606
Rentokil Initial PLC ............... Commercial Services & Supplies 129,400 83,158
Rexam PLC .......................... Containers & Packaging 11,357 58,222
(a) Rolls-Royce Group PLC .............. Aerospace & Defense 14,036,722 68,781,975
Royal Bank of Scotland Group PLC ... Commercial Banks 14,623,041 10,550,695
Royal Dutch Shell PLC, B ........... Oil, Gas & Consumable Fuels 13,237 333,499
Royal Dutch Shell PLC, B, ADR ...... Oil, Gas & Consumable Fuels 1,477,427 75,984,071
Smiths Group PLC ................... Industrial Conglomerates 2,062,397 26,658,270
Standard Chartered PLC ............. Commercial Banks 2,801,748 35,805,813
Unilever PLC, ADR .................. Food Products 3,165 72,858
Vodafone Group PLC ................. Wireless Telecommunication Services 35,894,999 72,872,751
Wolseley PLC ....................... Trading Companies & Distributors 6,518 36,556
--------------
849,825,961
--------------
UNITED STATES 2.0%
ACE Ltd. ........................... Insurance 1,151,300 60,926,796
Invesco Ltd. ....................... Capital Markets 1,670,880 24,127,507
16 | Annual Report
Templeton Institutional Funds
STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE
--------------------- ---------------------------------------------- ------------- --------------
COMMON STOCKS AND OTHER EQUITY
INTERESTS (CONTINUED)
UNITED STATES 2.0%
News Corp., A ...................... Media 1,124,699 $ 10,223,514
--------------
95,277,817
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY
INTERESTS
(COST $4,456,244,182) ........... 4,368,121,144
--------------
PREFERRED STOCKS
(COST $33,662,007) 0.9%
BRAZIL 0.9%
Petroleo Brasileiro SA, ADR, pfd. .. Oil, Gas & Consumable Fuels 2,133,760 43,550,041
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM
INVESTMENTS
(COST $4,489,906,189) ........... 4,411,671,185
--------------
PRINCIPAL
AMOUNT
-------------
SHORT TERM INVESTMENTS 8.3%
U.S. GOVERNMENT AND AGENCY
SECURITIES 3.6% FHLB,
2.56%, 2/13/09 .................. $ 24,810,000 24,874,184
(e) 3/12/09 ......................... 25,000,000 24,998,520
(e) 6/22/09 ......................... 100,000,000 99,869,400
(e) FHLMC, 2/02/09 ..................... 20,000,000 20,000,260
--------------
TOTAL U.S. GOVERNMENT AND AGENCY
SECURITIES (COST $169,576,543) .. 169,742,364
--------------
TOTAL INVESTMENTS BEFORE MONEY
MARKET FUND (COST
$4,659,482,732) ................. 4,581,413,549
--------------
SHARES
-------------
MONEY MARKET FUNDS (COST
$221,909,924) 4.7%
(f) Franklin Institutional Fiduciary
Trust Money Market Portfolio,
0.55% ........................... 221,909,924 221,909,924
--------------
TOTAL INVESTMENTS
(COST $4,881,392,656) 101.8% .... 4,803,323,473
OTHER ASSETS, LESS LIABILITIES
(1.8)% .......................... (85,227,621)
--------------
NET ASSETS 100.0% .................. $4,718,095,852
==============
See Abbreviations on page 29.
(a) Non-income producing for the twelve months ended December 31, 2008.
(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 Trustees. At December 31, 2008,
the aggregate value of these securities was $11,989,098, representing 0.25%
of net assets.
(c) Rounds to less than 0.1% of net assets.
(d) Security was purchased pursuant to Regulation S under the Securities Act of
1933, which exempts from registration securities offered and sold outside
of the United States. Such a security cannot be sold in the United States
without either an effective registration statement filed pursuant to the
Securities Act of 1933, or pursuant to an exemption from registration. This
security has been deemed liquid under guidelines approved by the Fund's
Board of Trustees. At December 31, 2008, the value of this security was
$2,980,570, representing 0.06% of net assets.
(e) The security is traded on a discount basis with no stated coupon rate.
(f) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
The accompanying notes are an integral part of these financial statements.
Annual Report | 17
Templeton Institutional Funds
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2008
FOREIGN
EQUITY SERIES
---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ...................................... $ 4,659,482,732
Cost - Sweep Money Fund (Note 7) ................................. 221,909,924
---------------
Total cost of investments ........................................ $ 4,881,392,656
===============
Value - Unaffiliated issuers ..................................... $ 4,581,413,549
Value - Sweep Money Fund (Note 7) ................................ 221,909,924
---------------
Total value of investments ....................................... 4,803,323,473
Foreign currency, at value (cost $262) .............................. 264
Receivables:
Investment securities sold ....................................... 1,382,999
Capital shares sold .............................................. 6,605,023
Dividends and interest ........................................... 12,263,277
---------------
Total assets .................................................. 4,823,575,036
---------------
Liabilities:
Payables:
Capital shares redeemed .......................................... 101,857,406
Affiliates ....................................................... 2,925,033
Accrued expenses and other liabilities .............................. 696,745
---------------
Total liabilities ............................................. 105,479,184
---------------
Net assets, at value ....................................... $ 4,718,095,852
===============
Net assets consist of:
Paid-in capital ..................................................... $ 5,097,165,290
Distribution in excess of net investment income ..................... (80,322,173)
Net unrealized appreciation (depreciation) .......................... (78,453,744)
Accumulated net realized gain (loss) ................................ (220,293,521)
---------------
Net assets, at value ....................................... $ 4,718,095,852
===============
PRIMARY SHARES:
Net assets, at value ................................................ $ 4,687,747,300
===============
Shares outstanding .................................................. 316,283,737
===============
Net asset value per share(a) ........................................ $ 14.82
===============
SERVICE SHARES:
Net assets, at value ................................................ $ 30,348,552
===============
Shares outstanding .................................................. 2,048,587
===============
Net asset value and maximum offering price per share(a) ............. $ 14.81
===============
(a) Redemption price is equal to net asset value less redemption fees retained
by the Fund.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2008
FOREIGN
EQUITY SERIES
---------------
Investment income:
Dividends: (net of foreign taxes of $27,458,378)
Unaffiliated issuers ............................................. $ 252,893,868
Sweep Money Fund (Note 7) ........................................ 2,770,618
Interest ............................................................ 4,577,109
---------------
Total investment income ....................................... 260,241,595
---------------
Expenses:
Management fees (Note 3a) ........................................... 47,452,545
Administrative fees (Note 3b) ....................................... 5,685,679
Transfer agent fees (Note 3c) ....................................... 106,283
Sub-transfer agent fees - Service Shares (Note 3c) ............... 89,736
Custodian fees (Note 4) ............................................. 2,166,867
Reports to shareholders ............................................. 118,254
Registration and filing fees ........................................ 226,008
Professional fees ................................................... 115,973
Trustees' fees and expenses ......................................... 150,885
Other ............................................................... 233,707
---------------
Total expenses ................................................... 56,345,937
Expense reductions (Note 4) ...................................... (53,409)
---------------
Net expenses .................................................. 56,292,528
---------------
Net investment income ...................................... 203,949,067
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (includes gains of $11,436,968 from a redemption
in-kind - Note 9) ............................................. 48,070,550
Foreign currency transactions .................................... (5,185,677)
---------------
Net realized gain (loss) ...................................... 42,884,873
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................... (3,937,200,090)
Translation of other assets and liabilities denominated in
foreign currencies ............................................ 216,208
Change in deferred taxes on unrealized appreciation (depreciation) .. 2,104,690
---------------
Net change in unrealized appreciation (depreciation) .......... (3,934,879,192)
---------------
Net realized and unrealized gain (loss) ................................ (3,891,994,319)
---------------
Net increase (decrease) in net assets resulting from operations ........ $(3,688,045,252)
===============
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Templeton Institutional Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOREIGN EQUITY SERIES
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
--------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income .............................................. $ 203,949,067 $ 206,626,441
Net realized gain (loss) from investments and foreign currency
transactions .................................................... 42,884,873 752,853,744
Net change in unrealized appreciation (depreciation) on investments,
translation of other assets and liabilities denominated in
foreign currencies and deferred taxes ........................... (3,934,879,192) 447,476,103
--------------- --------------
Net increase (decrease) in net assets resulting from
operations ................................................ (3,688,045,252) 1,406,956,288
--------------- --------------
Distributions to shareholders from:
Net investment income:
Primary Shares ..................................................... (116,638,592) (337,298,627)
Service Shares ..................................................... (595,462) (6,047,617)
Net realized gains:
Primary Shares ..................................................... (461,846,071) (495,682,366)
Service Shares ..................................................... (1,944,902) (8,697,904)
Tax return of capital:
Primary Shares ..................................................... (6,041,906) --
Service Shares ..................................................... (38,216) --
--------------- --------------
Total distributions to shareholders ...................................... (587,105,149) (847,726,514)
--------------- --------------
Capital share transactions: (Note 2)
Primary Shares ..................................................... (132,971,686) 1,208,441,383
Service Shares ..................................................... (128,567,654) 175,811,194
--------------- --------------
Total capital share transactions ......................................... (261,539,340) 1,384,252,577
--------------- --------------
Redemption fees .......................................................... 27,932 28,313
--------------- --------------
Net increase (decrease) in net assets ........................... (4,536,661,809) 1,943,510,664
Net assets:
Beginning of year ..................................................... 9,254,757,661 7,311,246,997
--------------- --------------
End of year ........................................................... $ 4,718,095,852 $9,254,757,661
=============== ==============
Distributions in excess of net investment income included in net assets:
End of year ........................................................... $ (80,322,173) $ (158,223,078)
=============== ==============
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Institutional Funds (Trust) is registered under the Investment Company
Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of four separate funds. The Foreign Equity Series (Fund) is included
in this report. The financial statements of the remaining funds in the Trust are
presented separately. The Fund offers two classes of shares: Primary Shares and
Service Shares. Each class of shares differs by its transfer agency fees and
voting rights on matters affecting a single class.
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.
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. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. At December 31, 2008, a portion
of the securities held by the Fund were fair valued. All security valuation
procedures are approved by the Trust's Board of Trustees.
Annual Report | 21
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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 at a future 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 AND DEFERRED TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
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.
22 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME AND DEFERRED TAXES (CONTINUED)
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of December 31, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be 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.
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 accounting principles generally accepted in the United States of
America. 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.
Realized and unrealized gains and losses and net investment income, not
including class specific expenses, are allocated daily to each class of shares
based upon the relative proportion of net assets of each class. Differences in
per share distributions, by class, are generally due to differences in class
specific expenses.
Common expenses incurred by the Trust are allocated among the funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Annual Report | 23
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
G. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
Fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Fund and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2008 2007
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------------- ----------- ---------------
PRIMARY SHARES:
Shares sold .................... 47,189,948 $ 1,048,350,855 62,169,907 $ 1,790,944,002
Shares issued in reinvestment
of distributions ............ 30,987,557 530,703,931 26,528,242 733,703,547
Shares redeemed in-kind
(Note 9) .................... (2,162,529) (50,278,808) -- --
Shares redeemed ................ (77,270,787) (1,661,747,664) (45,282,230) (1,316,206,166)
----------- --------------- ----------- ---------------
Net increase (decrease) ........ (1,255,811) $ (132,971,686) 43,415,919 $ 1,208,441,383
=========== =============== =========== ===============
24 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2008 2007
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- --------- ------------
SERVICE SHARES:
Shares sold .................... 2,291,131 $ 41,458,231 5,842,118 $170,491,561
Shares issued in reinvestment
of distributions ............ 163,000 2,540,363 531,207 14,745,444
Shares redeemed ................ (6,466,648) (172,566,248) (312,618) (9,425,811)
---------- ------------- --------- ------------
Net increase (decrease) ........ (4,012,517) $(128,567,654) 6,060,707 $175,811,194
========== ============= ========= ============
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
trustees of the Trust 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 the Trust 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
Annual Report | 25
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. TRANSFER AGENT FEES
For the year ended December 31, 2008, the Fund paid transfer agent fees of
$196,019, of which $92,543 was retained by Investor Services.
Service Shares may pay up to 0.15% of average daily net assets for sub-transfer
agency fees. For the period ended December 31, 2008, the Fund paid $89,736 for
sub-transfer agency fees.
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, 2008, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses, realized currency losses and ordinary
income 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, 2008,
the Fund deferred realized capital losses, realized currency losses and ordinary
income losses of $218,432,510, $1,565,387 and $14,732,156 respectively.
The tax character of distributions paid during the years ended December 31, 2008
and 2007, was as follows:
2008 2007
------------ ------------
Distributions paid from:
Ordinary income .......... $132,532,407 $362,163,529
Long term capital gain ... 448,492,620 485,562,985
Return of capital ........ 6,080,122 --
------------ ------------
$587,105,149 $847,726,514
============ ============
26 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
5. INCOME TAXES (CONTINUED)
At December 31, 2008, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ......................................... $ 4,947,276,753
===============
Unrealized appreciation ..................................... $ 863,466,236
Unrealized depreciation ..................................... (1,007,419,516)
---------------
Net unrealized appreciation (depreciation) .................. $ (143,953,280)
===============
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, foreign currency
transactions and gains and losses realized on in-kind shareholder redemptions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2008, aggregated $458,471,435 and $863,199,622,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin
Advisers, Inc. (an affiliate of the investment manager). Pursuant to a SEC
exemptive order specific to the Funds' investment in the Sweep Money Fund, asset
allocation fees 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.
8. 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.
Annual Report | 27
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
9. REDEMPTIONS IN-KIND
During the year ended December 31, 2008, the Fund realized $11,436,968 of net
gains resulting from a redemption in-kind in which a shareholder redeemed Fund
shares for securities held by the Fund rather than for cash. Because such gains
are not taxable to the Fund, and are not distributed to shareholders, they have
been reclassified from accumulated net realized gains to paid-in capital.
10. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Fund has determined that the implementation
of SFAS 157 did not have a material impact on the Fund's financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Fund's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Fund's investments and are summarized in the following fair
value hierarchy:
- - Level 1 - quoted prices in active markets for identical securities
- - Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speed, credit risk, etc.)
- - Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2008, in
valuing the Fund's assets and liabilities carried at fair value.
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------- ------------ ------- --------------
ASSETS:
Investments in Securities ...... $4,443,998,327 $359,325,146 $-- $4,803,323,473
28 | Annual Report
Templeton Institutional Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EQUITY SERIES
11. NEW ACCOUNTING PRONOUNCEMENT
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
12. SUBSEQUENT EVENT
On January 23, 2009, the Fund entered into, along with certain other funds
managed by Franklin Templeton Investments (individually, "Borrower";
collectively "Borrowers"), a $725 million senior unsecured syndicated global
line of credit (Global Credit Facility) to provide a source of funds to the
Borrowers for temporary and emergency purposes and to meet future unanticipated
or unusually large redemption requests.
Under the terms of the Global Credit Facility, each Borrower has agreed to pay
its proportionate share of fees and expenses incurred in connection with the
implementation and maintenance of the Global Credit Facility.
ABBREVIATIONS
SELECTED PORTFOLIO
ADR - American Depository Receipt
FDR - Foreign Depository Receipt
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corp.
GDR - Global Depository Receipt
Annual Report | 29
Templeton Institutional Funds
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS -
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 Templeton Institutional Funds, hereafter referred to as the
"Fund") at December 31, 2008, 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 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, 2008 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 20, 2009
30 | Annual Report
Templeton Institutional Funds
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 $453,901,413 as a long
term capital gain dividend for the fiscal year ended December 31, 2008.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $5,515,535 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, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $246,223,866 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2008. Distributions, including qualified dividend income, paid
during calendar year 2008 will be reported to shareholders on Form 1099-DIV in
January 2009. 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 $5,372,128 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, 2008.
At December 31, 2008, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income 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, pursuant to Section 853 of the Code. This designation will allow
shareholders of record on December 16, 2008, to treat their proportionate share
of foreign taxes paid by the Fund as having been paid directly by them. The
shareholder shall consider these amounts as foreign taxes paid in the tax year
in which they receive the Fund distribution.
The following tables provide a detailed analysis of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
Primary Shares, and Service Shares shareholders of record.
Record Date: 12/16/2008
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
PAID INCOME DIVIDENDS
CLASS PER SHARE PER SHARE PER SHARE
- ----- ----------- -------------- -----------------
Primary Shares ... $0.0908 $0.7478 $0.6565
Service Shares ... $0.0908 $0.7478 $0.6565
Annual Report | 31
Templeton Institutional Funds
TAX DESIGNATION (UNAUDITED) (CONTINUED)
FOREIGN 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 2009, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2008. 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 2008 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 bracket). 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.
32 | Annual Report
Templeton Institutional Funds
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 Trust, 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. Generally, each
board member serves 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) Trustee Since 1992 138 Bar-S Foods (meat packing
500 East Broward Blvd. company).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) and
500 East Broward Blvd. Allied Capital Corporation (financial
Suite 2100 services).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding
500 East Broward Blvd. company), Victory Nickel Inc.
Suite 2100 (mineral exploration) and ABACO
Fort Lauderdale, FL 33394-3091 Markets Limited (retail
distributors).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director and Vice Chairman, Caribbean Utilities Company, Ltd. and director of various other private business and nonprofit
organizations.
EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration and
500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Heinz
Suite 2100 Trustee Independent Company (processed foods and allied
Fort Lauderdale, FL 33394-3091 Trustee since products), RTI International Metals,
2007 Inc. (manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 33
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- --------------- --------------- ----------------------- -------------------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation (assisted l
500 East Broward Blvd. iving) and OSI Pharmaceuticals, Inc.
Suite 2100 (pharmaceutical products).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and 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) Trustee Since 2003 138 Hess Corporation (exploration and
500 East Broward Blvd. refining of oil and gas) and Sentient
Suite 2100 Jet (private jet service).
Fort Lauderdale, FL 33394-3091
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).
LARRY D. THOMPSON (1945) Trustee Since 2005 145 None
500 East Broward Blvd.
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. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (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 Trustee Since 1990 23 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).
ROBERT E. WADE (1946) Trustee Since 2007 37 El Oro and Exploration Co., p.l.c.
500 East Broward Blvd. (investments).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former practicing attorney.
34 | Annual Report
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
- ------------------- --------------- --------------- ----------------------- -------------------------------------
**CHARLES B. JOHNSON (1933) Trustee, Trustee and 138 None
One Franklin Parkway Chairman of Vice President
San Mateo, CA 94403-1906 the Board and since 1993 and
Vice President 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.; Director, Templeton Worldwide, 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 42
of the investment companies in Franklin Templeton Investments.
**GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable
One Franklin Parkway Executive December 2008
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer
and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer since
Vice President 2004 and Vice
- AML President - AML
Compliance Compliance
since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable
One Franklin Parkway Officer and February 2008
San Mateo, CA 94403-1906 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
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
- ------------------- --------------- --------------- ----------------------- -------------------------------------
JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable
500 East Broward Blvd. February 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 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 Templeton Investments; officer and/or director, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
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.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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 44 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.; 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.
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; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or
director, as the case may be, of some of the other 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 2005 Not Applicable Not Applicable
500 East Broward Blvd. Chief Executive
Suite 2100 Officer -
Fort Lauderdale, FL 33394-3091 Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc. and of six 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
- ------------------- --------------- --------------- ----------------------- -------------------------------------
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:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the
South; and officer of 14 of the investment companies in Franklin Templeton Investments.
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 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).
* 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 manager or
affiliated investment managers.
** 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 investment manager and
distributor. Gregory E. Johnson is considered to be an interested person of
the Fund under the federal securities laws due to his position as an
officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008.
SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL
CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC.
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 OSI PHARMACEUTICALS, INC. 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
BELIEVES THAT MS. BATES 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. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS 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 (800) 321-8563 TO REQUEST THE SAI.
Annual Report | 37
Templeton Institutional Funds
SHAREHOLDER INFORMATION
FOREIGN EQUITY SERIES
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager 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 (954) 527-7678 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 (800)
SEC-0330.
38 | Annual Report
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(FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO)
600 Fifth Avenue
New York, NY 10020
ANNUAL REPORT
TEMPLETON INSTITUTIONAL FUNDS
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
(800) 321-8563
ftinstitutional.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 A2008 02/09
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 expert is David W. Niemiec he is "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 $243,851 for the fiscal year ended December 31, 2008 and $215,491 for the
fiscal year ended December 31, 2007.
(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.
There were no 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.
(c) Tax Fees
The aggregate 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 were $1,290 for the fiscal year ended December 31, 2008
and $0 for the fiscal year ended December 31, 2007. The services for which these
fees were paid included tax compliance and advice.
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 $4,000 for the fiscal year ended
December 31, 2008 and $46,000 for the fiscal year ended December 31, 2007. 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 $8,739 for the fiscal year ended December 31,
2008 and $0 for the fiscal year ended December 31, 2007. 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 other than
services reported in paragraphs (a)-(c) of Item 4 were $275,338 for the fiscal
year ended December 31, 2008 and $0 for the fiscal year ended December 31, 2007.
The services for which these fees were paid included review of materials
provided to the fund Board in connect with the investment management contract
renewal process.
(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 $289,367 for the fiscal year ended December 31, 2008 and $46,000
for the fiscal year ended December 31, 2007.
(h) The registrant's audit committee of the board 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 Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting 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
By /s/JENNIFER J. BOLT
---------------------------------
Jennifer J. Bolt
Chief Executive Officer -
Finance and Administration
Date February 25, 2009
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/JENNIFER J. BOLT
---------------------------------
Jennifer J. Bolt
Chief Executive Officer -
Finance and Administration
Date February 25, 2009
By /s/LAURA F. FERGERSON
----------------------------------
Laura F. Fergerson
Chief Financial Officer and
Chief Accounting Officer
Date February 25, 2009