-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IBDywvbed2JoNI5aGKLM8GnAWEqqc76kyo4cfU7hbUcN9Fr2piIlq/mG2lSOWh/p umBxxhTAvNXuhsnfQ89AZg== 0000865722-05-000016.txt : 20050513 0000865722-05-000016.hdr.sgml : 20050513 20050513133727 ACCESSION NUMBER: 0000865722-05-000016 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 EFFECTIVENESS DATE: 20050513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON INSTITUTIONAL FUNDS INC CENTRAL INDEX KEY: 0000865722 IRS NUMBER: 593020895 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-06135 FILM NUMBER: 05827987 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON INSTITUTIONAL TRUST INC DATE OF NAME CHANGE: 19930326 N-CSR/A 1 tifiannualrpt1204_amd.txt TIFI AMENDED 12/31/04 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDED FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06135 -------- TEMPLETON INSTITUTIONAL FUNDS, INC. ------------------------------------ (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091 -------------------------------------------------------------------- (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (954) 527-7500 -------------- Date of fiscal year end: 12/31 ------ Date of reporting period: 12/31/04 ------- ITEM 1. REPORTS TO STOCKHOLDERS. ANNUAL REPORT | - --------------------------------------------------------------------- 12 31 2004 THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. ----------------------------------- Foreign Equity Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY CONTENTS ANNUAL REPORT - -------------------------------------------------------------------------------- TIFI Foreign Equity Series ................................................ 2 Performance Summary ....................................................... 7 Your Fund's Expenses ...................................................... 9 Financial Highlights and Statement of Investments ......................... 11 Financial Statements ...................................................... 18 Notes to Financial Statements ............................................. 21 Report of Independent Registered Public Accounting Firm ................... 31 Tax Designation ........................................................... 32 Board Members and Officers ................................................ 35 Shareholder Information ................................................... 42 ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE ----------------------------------------------------- Annual Report | 1 ANNUAL REPORT TIFI FOREIGN EQUITY SERIES YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in foreign (non-U.S.) equity securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you the Templeton Institutional Funds, Inc. (TIFI) Foreign Equity Series (the "Fund") annual report for the fiscal year ended December 31, 2004. PERFORMANCE OVERVIEW The Fund posted a 21.25% cumulative total return for the 12-month period ended December 31, 2004. The Fund performed comparably to the MSCI All Country World ex-U.S. Index,(1,2) which returned 21.36% for the period, and outperformed the MSCI EAFE Index,(2,3) which returned 20.70%, during the same period. ECONOMIC AND MARKET OVERVIEW The global economic recovery continued in 2004, led by growth in China and the United States. As of September 30, 2004, U.S. gross domestic product (GDP) had increased for 12 consecutive quarters and more recent data suggested the fourth quarter would extend this run. In China, GDP grew 9.5% annualized in the first three quarters of 2004.(4) (1) Source: Standard & Poor's Micropal. The Morgan Stanley Capital International (MSCI) All Country World ex-U.S. Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the United States. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) All MSCI data is presented "as is." The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or distributing the MSCI data is strictly prohibited. (3) Source: Standard & Poor's Micropal. The MSCI Europe, Australasia, and Far East (EAFE) Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global developed markets, excluding the United States and Canada. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (4) Source: Bloomberg L.P. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12. 2 | Annual Report The 12-nation euro zone lagged other regions in the current recovery. However, the European Central Bank projected euro zone growth may be between 1.6% and 2.2% in 2004, compared with only 0.5% in 2003. In Japan, the economy struggled to emerge from a decade-long deflationary period. Although the country's consumer and business confidence reached their highest levels since 1991, economic growth slowed in response to higher oil prices and reduced external demand. In addition, the U.S. dollar declined 4% versus the yen and 7% versus the euro in 2004. This hurt Japanese and European exports into the U.S., as it made their goods more expensive in the world's biggest market.(5) Oil prices increased during most of 2004, reaching $56 per barrel in October, but declined to end the year at $43. Higher oil prices triggered investor worries about inflation, decreased spending--due to cautionary consumer and business sentiment--and slower economic and corporate profit growth. Global equity markets ended 2004 on a positive note. They registered a second consecutive year of strong gains, after three years of declines. The total return for the MSCI All Country ex-US Index(1,2) was 21.36% and total return for the MSCI Emerging Markets Index(2,6) was 25.95%, in U.S. dollar terms for the 12-month period ended December 31, 2004. These indices' total returns were significantly lower in local currencies (13.49% and 16.45%, respectively) over the same period. Throughout 2004, most of the world's currencies strengthened in relation to the U.S. dollar, which benefited U.S.-based investors who invested in non-U.S. equities from developed and emerging market countries. The Fund benefited from this macroeconomic trend as well as from the continuation of the global economic expansion. INVESTMENT STRATEGY We employ a bottom-up, value-oriented, long-term investment strategy. Our in-depth fundamental internal research evaluates a company's potential to grow earnings, asset value and/or cash flow over a five-year horizon. Stocks are selected for purchase or sale utilizing strict valuation parameters, reflecting our focus on individual companies rather than countries or sectors. GEOGRPAHIC DISTRIBUTION ON 12/31/04 EQITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Europe 64.1% Asia 20.4% North America 4.6% Australia & New Zealand 3.0% Latin America 0.9% Middle-East/Africa 0.8% Short-Term Investments & Other Net Assets 6.2% SECTOR DIVERSIFICATION ON 12/31/04 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS Financials 18.4% Industrials 13.9% Consumer Discretionary 11.1% Materials 11.0% Telecommunication Services 8.8% Energy 7.6% Health Care 7.5% Information Technology 6.2% Utilities 6.0% Consumer Staples 3.3% Short-Term Investments & Other Net Assets 6.2% (5) Source: Bloomberg.com, December 15, 2004. (6) Source: Standard & Poor's Micropal. The Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Annual Report | 3 10 LARGEST EQUITY POSITIONS ON 12/31/04 PERCENTAGE OF TOTAL NET ASSETS Samsung Electronics Co. Ltd. 2.1% Telefonica SA, ORD & ADR 1.7% Celesio AG 1.7% Sanofi-Aventis, ORD & ADR 1.6% E.ON AG 1.5% Nordea Bank AB, FDR 1.5% Michelin SA, B 1.5% Shell Transport & Trading Co. PLC, ADR 1.5% Iberdrola SA, Br. 1.5% BHP Billiton PLC 1.5% FUND ASSET ALLOCATION ON 12/31/04 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Equity 93.8% Short-Term Investment & Other Net Assets 6.2% MANAGER'S DISCUSSION In the fourth quarter of 2004, global equity markets abandoned the pattern of relatively flat returns that characterized the earlier part of the year. A few factors contributed to spark a year-end rally. First, there was a sense of relief in the markets after the gradual escalation in the price of oil concluded. The price per barrel spiked to $56 in mid-October, but dropped to $46 in about three weeks' time. The barrel's price was slightly over $43 at year-end 2004. Higher energy prices had affected the outlook for inflation and corporate profit growth during most of the year. Second, investor sentiment improved significantly as a previously feared hard landing in the Chinese economy appeared unlikely. Third, the U.S. presidential election concluded without incident. The Reuters CRB Index, a gauge for price changes in energy, industrial minerals, and other commodities, rose 11% in 2004, after a rise of 9% in 2003. In both years, the increases reflected not only dollar weakness, but also strong world demand for energy sources and commodities needed to support an expanding global economy. The Fund benefited from this secular trend. Most of our holdings in the energy, materials, and industrial sectors experienced share price increases during 2004, in part because the additional demand improved the prospects for margin expansion and earnings growth rates. Last year, these three sectors had a significant effect on the Fund's overall performance. In the case of materials and industrial holdings, the effect was compounded because the Fund maintained overweight positions relative to the MSCI All Country World ex-U.S. Index. Strong demand for commodities has traditionally been associated with good news for emerging market equities. Last year was no exception. The rise in commodity prices helped produce strong equity market returns in countries such as Chile, Brazil, Mexico, and Argentina. In 2004, however, the Fund did not derive the bulk of returns related to emerging market exposure from commodity-related holdings. Instead, the largest contributions came from holdings in telecommunications such as Telmex (Mexico), Chunghwa Telecom (Taiwan), and from technology-related holdings, such as Samsung Electronics (South Korea), Check Point Software Technologies (Israel), and Satyam Computer Services (India). At Templeton we are stock pickers and valuations are our main criteria for stock selection. The health care sector was out of favor with investors during most of 2004. Patent expirations, drug re-importation issues, and withdrawal from the market of several leading prescription drugs created a challenging environment for pharmaceutical companies. Our focus on longer-term 4 | Annual Report fundamentals had led us to conclude that certain companies deserved better valuations than the market was willing to recognize. As a result, we had accumulated shares of Merck (Germany), Aventis (France), GlaxoSmithKline (U.K.), and Ono Pharmaceutical (Japan). Last year, rival company Sanofi-Synthelabo acquired Aventis. The combined entity, known as Sanofi-Aventis has been a holding in the portfolio. Another holding was Celesio, a German-based company that operates a chain of retail pharmacies and is Europe's largest drug wholesaler. Despite a lackluster performance of the health care sector versus the broader market during 2004, pharmaceutical holdings in the portfolio performed strongly. This was based primarily on company-specific fundamentals, and perhaps, on the realization that investor sentiment toward the pharmaceutical industry had become overly pessimistic. In 2004, the financial sector provided the strongest contribution to investment returns of any sector in both the Fund and the MSCI All Country World ex-U.S. Index. This resulted from the generally favorable business climate that existed last year for banks, insurance companies, and the like, plus the fact that combined, these holdings represented the biggest relative weight of any sector, in both the Fund and the MSCI All Country World ex-U.S. Index. Although financial holdings within the Fund performed well, their returns, in aggregate, lagged the combined returns of the MSCI All Country World ex-U.S. Index's constituents. There were two main reasons behind this. First, the Fund lacked exposure to banks in Japan and Europe that performed well last year. Second, the Fund was underweight in the financial sector relative to the MSCI All Country World ex-U.S. Index (19% versus 26%), as of year-end 2004. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2004, the U.S. dollar declined in value relative to most non-U.S. currencies. At the end of the period, the Fund's portfolio was invested predominantly in securities with non-U.S. currency exposure, which resulted in a positive effect on Fund performance. However, one cannot expect the same result in future periods. The Fund's moderate exposure to the Brazilian equity market as well as to Japan-based banks that performed strongly during the period hurt performance relative to the index. Annual Report | 5 We thank you for your continued participation in the Fund and look forward to serving your investment needs. Sincerely, [PHOTO OMMITED] /s/ Gary P. Motyl Gary P. Motyl, CFA President Templeton Investment Counsel, LLC Chief Investment Officer, Templeton Institutional Global Equities THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Annual Report PERFORMANCE SUMMARY AS OF 12/31/04 TOTAL RETURNS Your dividend income will vary depending on the dividends or interest paid by the securities in the Fund's portfolio. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. The unmanaged indices include reinvested dividends. They differ from the fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
- ---------------------------------------------------------------------------------------------------------------------- AVERAGE CUMULATIVE THREE YEAR FIVE YEAR TEN YEAR ANNUAL SINCE ONE YEAR AVERAGE AVERAGE AVERAGE SINCE INCEPTION(1,2) CUMULATIVE(1,2) ANNUAL(1,3) ANNUAL(1,3) ANNUAL(1,3) INCEPTION(1,3) (10/18/90) - ---------------------------------------------------------------------------------------------------------------------- TIFI Foreign Equity Series 21.25% 13.78% 4.04% 10.10% 10.43% 309.31% - ---------------------------------------------------------------------------------------------------------------------- MSCI All Country World ex-U.S. Index(4,5) 21.36% 13.56% 0.02% 6.02% 7.13% 165.93% - ---------------------------------------------------------------------------------------------------------------------- MSCI EAFE Index(5,6) 20.70% 12.31% -0.80% 5.94% 6.35% 139.71% - ----------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT (10/18/90-12/31/04) Millions [THE FOLLOWING TABLES WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
TIFI FOREIGN MSCI ALL COUNTRY MSCI EAFE Inception Date Equity Series World ex U.S. Index Index CPI Index - -------------- -------------- ------------------- -------------- ----------------- Oct-1990* $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00 Oct-90 4,970,000.00 5,277,872.02 4,934,898.82 5,010,765.71 Nov-90 4,875,000.00 4,984,504.08 4,645,204.64 5,021,531.42 Dec-90 4,860,000.00 5,075,508.20 4,722,265.21 5,021,531.42 Jan-91 5,005,000.00 5,234,135.03 4,876,331.94 5,051,809.99 Feb-91 5,614,717.29 5,796,297.48 5,400,502.19 5,059,211.41 Mar-91 5,452,705.61 5,477,301.69 5,077,601.57 5,066,612.84 Apr-91 5,503,334.26 5,536,809.68 5,128,939.01 5,074,014.26 May-91 5,579,277.23 5,615,435.40 5,183,969.76 5,088,817.12 Jun-91 5,295,756.79 5,224,874.15 4,804,403.31 5,104,292.83 Jul-91 5,604,591.56 5,475,926.32 5,041,756.63 5,111,694.25 Aug-91 5,614,717.29 5,381,896.37 4,940,601.98 5,126,497.11 Sep-91 5,756,477.51 5,655,733.95 5,220,530.99 5,149,374.24 Oct-91 5,736,226.05 5,754,623.56 5,295,844.65 5,156,775.67 Nov-91 5,685,597.40 5,498,299.12 5,050,016.68 5,171,578.52 Dec-91 5,899,356.90 5,783,735.71 5,312,370.80 5,175,615.66 Jan-92 6,060,450.45 5,703,138.61 5,200,544.26 5,183,017.09 Feb-92 6,154,884.60 5,528,007.26 5,015,879.37 5,201,857.09 Mar-92 6,108,305.50 5,193,698.94 4,686,142.21 5,228,098.51 Apr-92 6,304,443.75 5,210,753.61 4,709,498.85 5,235,499.93 May-92 6,657,492.60 5,527,136.19 5,026,179.50 5,242,901.36 Jun-92 6,584,641.25 5,260,404.73 4,789,506.20 5,261,741.35 Jul-92 6,360,483.25 5,148,494.88 4,668,310.42 5,273,179.92 Aug-92 6,181,156.85 5,423,065.99 4,962,686.21 5,287,982.77 Sep-92 6,024,246.25 5,311,797.98 4,866,379.38 5,302,785.63 Oct-92 5,811,296.15 5,078,534.03 4,612,699.38 5,321,625.62 Nov-92 5,822,504.05 5,106,637.57 4,657,430.00 5,329,027.05 Dec-92 5,820,814.28 5,149,274.26 4,682,817.64 5,325,662.76 Jan-93 5,843,981.70 5,148,678.26 4,683,724.34 5,351,904.19 Feb-93 5,971,402.51 5,306,250.63 4,826,680.96 5,370,744.18 Mar-93 6,119,129.28 5,743,162.08 5,248,599.45 5,389,584.17 Apr-93 6,316,146.70 6,250,447.00 5,748,192.04 5,404,387.03 May-93 6,484,190.97 6,389,589.31 5,871,201.22 5,411,788.45 Jun-93 6,362,503.74 6,313,118.35 5,780,833.30 5,419,189.88 Jul-93 6,466,807.08 6,522,955.04 5,984,538.92 5,419,189.88 Aug-93 6,924,582.85 6,873,034.36 6,308,835.87 5,434,665.59 Sep-93 6,872,431.18 6,731,737.28 6,168,297.12 5,445,431.30 Oct-93 7,278,055.28 6,975,224.87 6,359,913.39 5,468,308.44 Nov-93 7,110,011.01 6,444,008.40 5,805,314.24 5,472,345.58 Dec-93 7,801,444.08 6,946,617.03 6,225,721.55 5,471,672.72 Jan-94 8,357,853.38 7,517,902.83 6,753,421.89 5,487,148.43 Feb-94 8,129,432.72 7,461,053.91 6,736,194.56 5,505,988.43 Mar-94 7,768,922.25 7,119,318.55 6,447,258.98 5,524,828.42 Apr-94 7,881,601.28 7,360,834.76 6,722,291.80 5,532,229.85 May-94 7,911,253.65 7,363,310.44 6,685,117.04 5,535,594.13 Jun-94 7,656,243.23 7,415,528.92 6,781,227.41 5,554,434.13 Jul-94 7,988,349.83 7,536,103.65 6,848,021.09 5,569,236.98 Aug-94 8,261,151.68 7,789,677.34 7,011,529.62 5,592,114.12 Sep-94 8,065,446.00 7,596,849.47 6,792,107.83 5,606,916.97 Oct-94 8,237,429.78 7,801,047.12 7,019,992.17 5,610,954.11 Nov-94 7,881,601.28 7,424,743.95 6,684,210.34 5,618,355.54 Dec-94 7,819,889.51 7,407,368.35 6,727,429.78 5,618,355.54 Jan-95 7,594,900.47 7,071,409.58 6,470,833.22 5,640,559.82 Feb-95 7,713,478.58 7,032,715.64 6,453,908.13 5,663,436.95 Mar-95 7,749,977.69 7,430,062.08 6,858,151.97 5,682,276.95 Apr-95 8,090,636.05 7,719,899.87 7,117,915.94 5,700,444.09 May-95 8,297,464.34 7,685,790.52 7,034,892.30 5,711,882.65 Jun-95 8,346,129.82 7,579,473.87 6,913,391.26 5,723,321.22 Jul-95 8,759,786.40 8,009,875.21 7,345,800.28 5,723,321.22 Aug-95 8,534,708.56 7,731,957.34 7,067,140.65 5,738,796.93 Sep-95 8,692,871.37 7,864,085.24 7,207,074.93 5,749,562.64 Oct-95 8,504,292.63 7,653,973.46 7,015,156.42 5,768,402.64 Nov-95 8,638,122.70 7,833,735.25 7,212,212.91 5,764,365.50 Dec-95 8,834,438.34 8,143,470.17 7,504,775.30 5,760,328.35 Jan-96 9,117,593.42 8,255,334.17 7,537,416.55 5,793,971.20 Feb-96 9,262,239.31 8,255,655.09 7,564,617.60 5,812,811.20 Mar-96 9,331,737.70 8,409,330.56 7,727,192.22 5,843,089.76 Apr-96 9,672,911.59 8,664,463.01 7,953,749.76 5,865,294.04 May-96 9,786,636.22 8,534,352.33 7,809,427.04 5,876,732.61 Jun-96 9,755,046.04 8,577,630.87 7,855,148.98 5,880,769.75 Jul-96 9,502,324.64 8,292,469.35 7,627,482.25 5,891,535.46 Aug-96 9,780,318.18 8,341,111.85 7,646,220.75 5,902,974.03 Sep-96 9,862,545.80 8,548,243.64 7,851,032.55 5,921,814.02 Oct-96 9,957,438.80 8,462,603.50 7,772,856.74 5,940,654.02 Nov-96 10,469,861.00 8,789,072.17 8,084,157.63 5,951,419.73 Dec-96 10,741,164.36 8,687,294.27 7,982,002.58 5,951,419.73 Jan-97 10,938,370.56 8,527,704.68 7,704,551.88 5,970,259.72 Feb-97 11,089,456.80 8,684,085.05 7,832,396.81 5,988,426.86 Mar-97 11,201,338.56 8,665,884.23 7,862,620.20 6,003,229.71 Apr-97 11,148,688.32 8,738,962.60 7,906,444.11 6,010,631.14 May-97 11,609,377.92 9,278,752.26 8,422,659.56 6,006,594.00 Jun-97 12,122,717.76 9,790,713.45 8,889,311.68 6,013,995.42 Jul-97 12,563,663.52 9,988,951.14 9,034,686.17 6,021,396.85 Aug-97 11,852,885.28 9,203,152.36 8,361,910.55 6,032,835.42 Sep-97 12,807,170.88 9,700,717.95 8,832,186.46 6,047,638.27 Oct-97 11,859,466.56 8,874,804.01 8,155,276.28 6,063,113.98 Nov-97 11,780,491.20 8,763,902.77 8,073,881.67 6,059,076.84 Dec-97 11,968,834.64 8,864,763.76 8,146,417.80 6,051,675.41 Jan-98 12,113,618.93 9,129,936.46 8,520,885.57 6,063,113.98 Feb-98 12,885,801.81 9,739,136.81 9,069,440.05 6,075,225.41 Mar-98 13,833,179.95 10,075,645.74 9,350,792.58 6,087,336.83 Apr-98 14,013,101.25 10,147,807.19 9,426,985.74 6,098,102.54 May-98 13,860,860.15 9,963,781.74 9,383,430.81 6,108,868.25 Jun-98 13,729,379.20 9,926,325.63 9,456,269.18 6,116,269.68 Jul-98 13,971,580.95 10,020,768.19 9,554,528.43 6,123,671.11 Aug-98 11,722,564.70 8,607,568.24 8,372,790.97 6,131,072.53 Sep-98 11,549,563.45 8,425,743.39 8,118,343.30 6,138,473.96 Oct-98 12,442,249.90 9,308,277.02 8,967,019.03 6,153,276.81 Nov-98 13,113,494.75 9,808,501.66 9,428,493.88 6,153,276.81 Dec-98 13,184,952.96 10,146,431.81 9,802,659.42 6,149,239.67 Jan-99 13,043,897.72 10,135,566.33 9,776,062.84 6,164,715.38 Feb-99 12,746,939.32 9,908,629.12 9,545,156.16 6,170,771.09 Mar-99 13,435,670.93 10,387,031.11 9,945,957.56 6,189,611.09 Apr-99 14,537,321.51 10,906,602.73 10,351,289.45 6,234,019.65 May-99 14,001,383.39 10,394,320.61 9,820,491.21 6,234,019.65 Jun-99 14,663,862.45 10,871,943.22 10,205,540.19 6,234,019.65 Jul-99 14,745,741.89 11,126,938.14 10,511,391.80 6,250,841.07 Aug-99 14,671,306.04 11,165,540.39 10,551,891.14 6,269,681.07 Sep-99 14,373,562.64 11,241,048.59 10,660,695.33 6,296,595.34 Oct-99 14,604,313.77 11,659,621.68 11,062,364.15 6,309,379.63 Nov-99 15,333,785.10 12,125,828.66 11,448,921.27 6,312,071.05 Dec-99 16,789,277.01 13,282,291.56 12,478,632.07 6,312,071.05 Jan-00 15,752,131.70 12,561,548.12 11,687,988.26 6,329,565.33 Feb-00 16,188,824.46 12,900,853.65 12,004,729.36 6,365,899.61 Mar-00 16,515,106.04 13,386,361.76 12,472,587.39 6,417,036.74 Apr-00 15,808,661.39 12,639,256.93 11,818,275.24 6,422,419.59 May-00 15,753,715.70 12,315,951.62 11,532,035.58 6,427,129.59 Jun-00 16,562,202.35 12,840,245.37 11,985,706.76 6,462,118.15 Jul-00 16,334,570.19 12,333,327.22 11,485,491.57 6,476,248.15 Aug-00 16,577,901.12 12,485,902.38 11,587,598.26 6,476,248.15 Sep-00 15,800,812.01 11,793,308.33 11,025,793.85 6,509,891.00 Oct-00 15,149,313.05 11,418,472.23 10,767,504.78 6,520,656.71 Nov-00 15,047,271.05 10,906,190.11 10,366,017.31 6,524,693.85 Dec-00 15,806,214.00 11,278,550.54 10,736,888.49 6,519,310.99 Jan-01 16,057,994.40 11,447,813.61 10,731,829.10 6,562,373.84 Feb-01 15,526,458.00 10,541,485.96 9,928,068.34 6,589,960.97 Mar-01 14,351,908.40 9,796,352.50 9,270,721.76 6,606,109.54 Apr-01 15,163,924.27 10,462,631.00 9,920,944.69 6,629,659.53 May-01 15,069,503.82 10,173,710.13 9,578,670.87 6,658,592.38 Jun-01 14,729,590.20 9,783,515.65 9,190,508.89 6,672,049.52 Jul-01 14,370,792.49 9,565,839.30 9,024,029.41 6,651,190.96 Aug-01 14,210,277.73 9,328,265.83 8,797,305.65 6,653,882.38 Sep-01 12,463,499.40 8,338,636.18 7,908,239.38 6,681,469.52 Oct-01 12,869,507.34 8,572,266.90 8,110,458.02 6,658,592.38 Nov-01 13,634,312.98 8,964,341.06 8,409,956.67 6,647,153.82 Dec-01 13,891,851.15 9,079,826.89 8,460,091.23 6,620,912.39 Jan-02 13,498,232.70 8,690,961.94 8,011,210.46 6,638,406.67 Feb-02 13,719,043.05 8,753,541.60 8,067,791.66 6,665,320.95 Mar-02 14,385,895.04 9,229,055.30 8,508,246.15 6,700,309.51 Apr-02 14,405,127.52 9,289,021.74 8,569,862.57 6,738,662.36 May-02 14,664,766.00 9,390,203.65 8,686,119.85 6,737,316.65 Jun-02 14,058,942.88 8,984,742.48 8,343,592.16 6,742,699.50 Jul-02 12,549,193.20 8,109,223.28 7,520,545.86 6,750,100.93 Aug-02 12,578,041.92 8,109,681.74 7,505,258.87 6,771,632.35 Sep-02 11,029,827.28 7,250,254.44 6,701,105.21 6,782,398.06 Oct-02 11,635,650.40 7,639,211.08 7,061,779.02 6,796,528.06 Nov-02 12,424,182.08 8,006,574.30 7,383,183.59 6,795,182.34 Dec-02 11,835,829.31 7,747,911.72 7,135,478.75 6,780,379.49 Jan-03 11,513,832.30 7,475,907.98 6,838,132.00 6,810,658.05 Feb-03 11,172,320.33 7,324,433.12 6,681,816.64 6,863,140.90 Mar-03 10,810,118.59 7,182,356.66 6,555,540.31 6,904,185.17 Apr-03 12,046,121.26 7,874,446.41 7,205,572.83 6,890,055.17 May-03 12,722,979.87 8,376,046.43 7,648,862.27 6,876,598.04 Jun-03 13,036,885.31 8,609,172.85 7,838,169.48 6,883,999.46 Jul-03 13,694,124.82 8,838,173.13 8,029,078.53 6,890,728.03 Aug-03 14,223,840.25 9,100,640.93 8,224,369.96 6,918,315.17 Sep-03 14,321,935.70 9,355,452.45 8,479,533.93 6,939,173.73 Oct-03 15,410,795.20 9,961,902.05 9,008,594.32 6,932,445.16 Nov-03 15,685,462.46 10,179,119.94 9,210,163.16 6,911,586.60 Dec-03 16,879,250.70 10,956,299.69 9,930,120.51 6,904,858.03 Jan-04 17,138,165.46 11,132,210.41 10,071,275.81 6,939,173.73 Feb-04 17,616,161.94 11,415,263.02 10,305,479.86 6,974,162.29 Mar-04 17,464,823.78 11,485,498.94 10,367,507.32 7,015,879.42 Apr-04 17,064,483.98 11,128,542.74 10,141,777.91 7,036,737.99 May-04 17,104,517.96 11,163,752.40 10,185,695.51 7,079,127.98 Jun-04 17,464,823.78 11,405,727.07 10,413,008.63 7,100,659.40 Jul-04 16,984,416.02 11,073,344.28 10,076,507.48 7,086,529.40 Aug-04 17,094,509.46 11,162,010.25 10,123,290.26 7,093,930.83 Sep-04 17,715,036.15 11,520,891.98 10,389,355.81 7,108,060.83 Oct-04 18,415,630.80 11,921,585.17 10,744,259.97 7,145,740.82 Nov-04 19,766,777.63 12,749,057.87 11,481,208.91 7,149,777.96 Dec-04 20,465,666.31 13,296,503.79 11,985,425.68 7,123,536.54
Annual Report | 7 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1) Past fee waivers by the Fund's manager and administrator increased the Fund's total returns. Without these waivers, the Fund's total returns would have been lower. (2) Cumulative total return shows the change in value of an investment over the indicated periods. It assumes income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period, and the deduction of all applicable charges and fees. (3) Average annual total return represents the change in value of an investment over the indicated periods. (4) Source: Standard & Poor's Micropal. The Morgan Stanley Capital International (MSCI) All Country World ex-U.S. Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the United States. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (5) All MSCI data is presented "as is." The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or distributing the MSCI data is strictly prohibited. (6) Source: Standard & Poor's Micropal. The MSCI Europe, Australasia, and Far East (EAFE) Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global developed markets, excluding the United States and Canada. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 8 | Annual Report YOUR FUND'S EXPENSES As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000 IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = $8.6 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50 In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table below can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for the Fund and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in the shareholder reports of other funds. Annual Report | 9 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------- BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* ON 6/30/04 ON 12/31/04 6/30/04-12/31/04 - ------------------------------------------------------------------------------------------------- Actual $1,000.00 $1,171.80 $4.42 - ------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,021.06 $4.12 - -------------------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.81% multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. 10 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL HIGHLIGHTS FOREIGN EQUITY SERIES
-------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, PRIMARY SHARES 2004 2003 2002 2001 2000 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 16.95 $ 12.13 $ 14.47 $ 16.95 $ 21.53 --------------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ................... 33 .25 .23 .25 .35 Net realized and unrealized gains (losses) . 3.25 4.87 (2.37) (2.28) (1.66) --------------------------------------------------------------------------------- Total from investment operations ............ 3.58 5.12 (2.14) (2.03) (1.31) --------------------------------------------------------------------------------- Less distributions from: Net investment income ...................... (.26) (.30) (.20) (.28) (.33) Net realized gains ......................... -- -- -- (.17) (2.94) --------------------------------------------------------------------------------- Total distributions ......................... (.26) (.30) (.20) (.45) (3.27) --------------------------------------------------------------------------------- Redemption fees ............................. --(c) -- -- -- -- --------------------------------------------------------------------------------- Net asset value, end of year ................ $ 20.27 $ 16.95 $ 12.13 $ 14.47 $ 16.95 ================================================================================= Total return(b) ............................. 21.25% 42.61% (14.80)% (12.11)% (5.86)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $ 5,658,170 $ 4,642,764 $ 3,164,910 $ 3,551,516 $ 4,344,727 Ratios to average net assets: Expenses ................................... .82% .83% .83% .84% .83% Net investment income ...................... 1.89% 1.85% 1.68% 1.62% 1.71% Portfolio turnover rate ..................... 18.25% 8.93% 16.26% 15.38% 27.41%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.001 per share. Annual Report | See notes to financial statements. | 11 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.8% AUSTRALIA 2.9% Alumina Ltd. .............................. Metals & Mining 9,790,288 $ 45,520,184 AMP Ltd. .................................. Insurance 5,184,670 29,463,194 National Australia Bank Ltd. .............. Commercial Banks 2,903,680 65,503,548 Qantas Airways Ltd. ....................... Airlines 9,186,030 26,676,194 --------------- 167,163,120 --------------- BERMUDA 1.5% ACE Ltd. .................................. Insurance 1,108,930 47,406,758 XL Capital Ltd., A ........................ Insurance 450,020 34,944,053 --------------- 82,350,811 --------------- CANADA 2.7% Alcan Inc. ................................ Metals & Mining 1,066,343 52,279,125 BCE Inc. .................................. Diversified Telecommunication Services 2,469,060 59,536,595 BCE Inc. (USD Traded)...................... Diversified Telecommunication Services 5,920 142,849 (a) Celestica Inc. ............................ Electronic Equipment & Instruments 9,815 138,490 Husky Energy Inc. ......................... Oil & Gas 1,453,010 41,493,803 --------------- 153,590,862 --------------- CHINA .5% China Mobile (Hong Kong) Ltd., fgn. ....... Wireless Telecommunication Services 8,492,000 28,788,107 --------------- DENMARK .7% TDC AS .................................... Diversified Telecommunication Services 531,490 22,467,975 (a) Vestas Wind Systems AS .................... Electrical Equipment 1,111,445 13,786,244 (a) Vestas Wind Systems AS, 144A .............. Electrical Equipment 340,168 4,219,407 --------------- 40,473,626 --------------- FINLAND 3.0% M-real OYJ, B ............................. Paper & Forest Products 2,306,820 14,650,054 M-real OYJ, B, 144A ....................... Paper & Forest Products 1,922,350 12,208,378 Stora Enso OYJ, R (EUR/FIM Traded) ........ Paper & Forest Products 1,673,625 25,572,678 Stora Enso OYJ, R (SEK Traded) ............ Paper & Forest Products 2,814,636 43,000,971 UPM-Kymmene Corp. ......................... Paper & Forest Products 3,278,200 72,733,227 --------------- 168,165,308 --------------- FRANCE 6.2% Accor SA .................................. Hotels Restaurants & Leisure 494,470 21,612,765 AXA SA .................................... Insurance 2,311,148 57,016,597 Michelin SA, B ............................ Auto Components 1,341,820 85,925,861 Sanofi-Aventis ............................ Pharmaceuticals 1,106,500 88,289,366 Sanofi-Aventis, ADR ....................... Pharmaceuticals 6,813 272,861 Suez SA ................................... Multi-Utilities & Unregulated Power 2,075,810 55,267,047 Suez SA, ADR .............................. Multi-Utilities & Unregulated Power 7,250 193,937 Total SA, B ............................... Oil & Gas 201,687 43,981,845 --------------- 352,560,279 ---------------
12 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) GERMANY 9.1% BASF AG ................................... Chemicals 879,580 $ 63,164,758 BASF AG, ADR .............................. Chemicals 6,430 463,089 Bayer AG, Br. ............................. Chemicals 1,469,460 49,652,003 Celesio AG ................................ Health Care Providers & Services 1,178,552 95,477,873 Deutsche Post AG .......................... Air Freight & Logistics 3,524,380 80,634,325 E.ON AG ................................... Electric Utilities 956,750 87,220,411 Merck KGaA ................................ Pharmaceuticals 1,131,887 77,259,290 Muenchener Rueckversicherungs-Gesellschaft Insurance 144,848 17,747,280 Muenchener Rueckversicherungs-Gesellschaft, 144A .................................... Insurance 37,999 4,655,770 Volkswagen AG ............................. Automobiles 885,310 40,065,527 --------------- 516,340,326 --------------- HONG KONG 1.7% Cheung Kong Holdings Ltd. ................. Real Estate 54,000 538,416 Cheung Kong Holdings Ltd., ADR ............ Real Estate 31,535 314,425 Hutchison Whampoa Ltd. .................... Industrial Conglomerates 5,342,550 50,003,926 Hutchison Whampoa Ltd., ADR ............... Industrial Conglomerates 4,795 224,396 Swire Pacific Ltd., A ..................... Industrial Conglomerates 5,440,500 45,496,153 Swire Pacific Ltd., B ..................... Industrial Conglomerates 154,500 229,579 --------------- 96,806,895 --------------- INDIA 2.5% Housing Development Finance Corp. Ltd. .... Thrifts & Mortgage Finance 3,668,470 64,980,691 ICICI Bank Ltd. ........................... Commercial Banks 4,935,848 42,311,344 Satyam Computers Services Ltd. ............ IT Services 3,347,536 31,726,127 Satyam Computers Services Ltd., ADR ....... IT Services 47,700 1,151,001 --------------- 140,169,163 --------------- ISRAEL .8% (a) Check Point Software Technologies Ltd. .... Software 1,811,250 44,611,088 --------------- ITALY 1.8% Eni SpA ................................... Oil & Gas 2,745,390 68,623,574 Riunione Adriatica di Sicurta SpA ......... Insurance 1,359,294 30,693,497 --------------- 99,317,071 --------------- JAPAN 8.3% East Japan Railway Co. .................... Road & Rail 6,228 34,660,808 Hitachi Ltd. .............................. Electronic Equipment & Instruments 4,622,000 32,040,812 Hitachi Ltd., ADR ......................... Electronic Equipment & Instruments 2,275 157,953 Komatsu Ltd. .............................. Machinery 5,609,365 39,268,841 NEC Corp. ................................. Computers & Peripherals 3,873,000 24,088,079 NEC Corp., ADR ............................ Computers & Peripherals 14,625 89,651 Nintendo Co. Ltd. ......................... Software 318,900 40,072,671
Annual Report | 13 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) JAPAN (CONT.) Nippon Telegraph & Telephone Corp. ........ Diversified Telecommunication Services 10,115 $ 45,429,604 Nippon Telegraph & Telephone Corp., ADR ... Diversified Telecommunication Services 6,815 153,678 Nomura Holdings Inc. ...................... Capital Markets 1,882,000 27,452,724 Ono Pharmaceutical Co. Ltd. ............... Pharmaceuticals 977,000 54,850,127 Seiko Epson Corp. ......................... Computers & Peripherals 764,200 34,024,136 Sompo Japan Insurance Inc. ................ Insurance 6,208,000 63,280,141 Sony Corp. ................................ Household Durables 1,130,000 43,690,685 Sony Corp., ADR ........................... Household Durables 4,405 171,619 Takeda Pharmaceutical Co. Ltd. ............ Pharmaceuticals 650,400 32,767,663 --------------- 472,199,192 --------------- MEXICO .9% Telefonos de Mexico SA de CV (Telmex), L, ADR ..................................... Diversified Telecommunication Services 1,383,057 52,998,744 --------------- NETHERLANDS 5.3% Akzo Nobel NV, ADR ........................ Chemicals 5,290 224,772 CNH Global NV ............................. Machinery 335,040 6,489,725 IHC Caland NV ............................. Energy Equipment & Services 603,625 38,285,611 ING Groep NV .............................. Diversified Financial Services 2,548,410 76,979,328 ING Groep NV, ADR ......................... Diversified Financial Services 12,965 392,191 Koninklijke Philips Electronics NV ........ Household Durables 2,735,551 72,423,872 Koninklijke Philips Electronics NV (N.Y. shares) ................................. Household Durables 11,935 316,278 Unilever NV ............................... Food Products 1,093,340 73,189,033 Unilever NV (N.Y. shares), ADR ............ Food Products 2,540 169,444 Wolters Kluwer NV ......................... Media 1,499,375 30,051,795 --------------- 298,522,049 --------------- NEW ZEALAND .1% Carter Holt Harvey Ltd. ................... Paper & Forest Products 2,361,750 3,510,421 --------------- NORWAY 1.2% Norsk Hydro ASA ........................... Oil & Gas 476,090 37,446,913 Telenor ASA ............................... Diversified Telecommunication Services 3,671,250 33,295,476 --------------- 70,742,389 --------------- PORTUGAL 1.0% Portugal Telecom SA, SGPS ................. Diversified Telecommunication Services 4,496,290 55,523,312 --------------- SINGAPORE 1.0% DBS Group Holdings Ltd. ................... Commercial Banks 5,624,185 55,473,491 DBS Group Holdings Ltd., ADR .............. Commercial Banks 7,605 300,044 --------------- 55,773,535 ---------------
14 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SOUTH KOREA 5.5% (a) Kookmin Bank .............................. Commercial Banks 900,573 $ 35,233,005 (a) Kookmin Bank, ADR ......................... Commercial Banks 216,498 8,460,742 (a) Korea Electric Power Corp. ................ Electric Utilities 1,146,540 29,737,827 Korea Electric Po wer Corp., ADR .......... Electric Utilities 12,195 161,462 KT Corp., ADR ............................. Diversified Telecommunication Services 903,955 19,715,259 LG Electronics Inc. ....................... Household Durables 938,340 58,102,390 POSCO ..................................... Metals & Mining 224,020 40,467,291 POSCO, ADR ................................ Metals & Mining 4,080 181,682 Samsung Electronics Co. Ltd. .............. Semiconductors & Semiconductor Equipment 270,520 117,725,328 --------------- 309,784,986 --------------- SPAIN 6.2% Banco Santander Central Hispano SA ........ Commercial Banks 5,231,710 64,817,772 Endesa SA ................................. Electric Utilities 1,635,640 38,376,236 Iberdrola SA, Br. ......................... Electric Utilities 3,310,874 84,016,370 Repsol YPF SA ............................. Oil & Gas 2,520,610 65,536,134 Telefonica SA ............................. Diversified Telecommunication Services 5,224,173 98,256,307 Telefonica SA, ADR ........................ Diversified Telecommunication Services 8,550 483,075 --------------- 351,485,894 --------------- SWEDEN 7.7% Atlas Copco AB, A ......................... Machinery 1,540,640 69,568,463 Autoliv Inc. .............................. Auto Components 830,940 40,134,402 Autoliv Inc., SDR ......................... Auto Components 9,100 435,570 Electrolux AB, B .......................... Household Durables 2,311,080 52,874,778 Foreningssparbanken AB, A ................. Commercial Banks 1,405,980 35,024,112 Nordea Bank AB, FDR ....................... Commercial Banks 8,593,898 86,939,572 Securitas AB, B ........................... Commercial Services & Supplies 1,761,160 30,219,944 Svenska Cellulosa AB, B ................... Paper & Forest Products 1,294,903 55,256,107 Volvo AB, B ............................... Machinery 1,625,555 64,472,168 --------------- 434,925,116 --------------- SWITZERLAND 3.6% Adecco SA ................................. Commercial Services & Supplies 1,031,040 52,233,204 Lonza Group AG ............................ Chemicals 420,110 23,606,866 Nestle SA ................................. Food Products 246,320 64,340,138 Nestle SA, ADR ............................ Food Products 2,310 150,846 Swiss Reinsurance Co. ..................... Insurance 871,120 61,799,461 Swiss Reinsurance Co., ADR ................ Insurance 3,295 233,756 UBS AG .................................... Capital Markets 4,755 398,659 --------------- 202,762,930 --------------- TAIWAN .9% Chunghwa Telecom Co. Ltd., ADR ............ Diversified Telecommunication Services 1,223,460 25,753,833 Compal Electronics Inc., 144A ............. Computers & Peripherals 4,003,190 19,935,886 Compal Electronics Inc., GDR, Reg S ....... Computers & Peripherals 1,061,000 5,283,780 --------------- 50,973,499 ---------------
Annual Report | 15 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) UNITED KINGDOM 18.3% Amvescap PLC .............................. Capital Markets 3,236,560 $ 19,926,420 BAE Systems PLC ........................... Aerospace & Defense 5,617,238 24,852,650 BHP Billiton PLC .......................... Metals & Mining 7,121,991 83,457,628 BP PLC .................................... Oil & Gas 4,940,110 48,170,292 Brambles Industries PLC ................... Commercial Services & Supplies 7,121,727 35,575,827 (a) British Airways PLC ....................... Airlines 9,058,170 40,858,957 (a) British Airways PLC, ADR .................. Airlines 8,225 371,194 British Sky Broadcasting Group PLC ........ Media 3,090,910 33,342,766 Cadbury Schweppes PLC ..................... Food Products 5,278,910 49,143,371 Compass Group PLC ......................... Hotels Restaurants & Leisure 10,312,500 48,743,774 GKN PLC ................................... Auto Components 3,732,700 16,944,673 GlaxoSmithKline PLC ....................... Pharmaceuticals 2,274,620 53,353,020 Hanson PLC ................................ Construction Materials 4,059,615 34,850,912 HSBC Holdings PLC ......................... Commercial Banks 3,254,421 55,686,238 HSBC Holdings PLC, ADR .................... Commercial Banks 3,790 322,681 Kidde PLC ................................. Electrical Equipment 13,384,200 42,774,565 National Grid Transco PLC ................. Multi-Utilities & Unregulated Power 4,569,990 43,552,536 Pearson PLC ............................... Media 3,511,000 42,356,012 Rentokil Initial PLC ...................... Commercial Services & Supplies 6,043,130 17,138,325 (a) Rolls-Royce Group PLC ..................... Aerospace & Defense 13,555,704 64,268,473 (a) Rolls-Royce Group PLC, B .................. Aerospace & Defense 431,071,387 843,973 Shell Transport & Trading Co. PLC, ADR .... Oil & Gas 1,641,890 84,393,146 Shire Pharmaceuticals Group PLC ........... Pharmaceuticals 2,293,320 24,078,583 Shire Pharmaceuticals Group PLC, ADR ...... Pharmaceuticals 8,590 274,451 Smiths Group PLC .......................... Industrial Conglomerates 2,637,720 41,617,833 Standard Chartered PLC .................... Commercial Banks 2,715,610 50,483,095 Vodafone Group PLC ........................ Wireless Telecommunication Services 21,421,260 58,078,102 Yell Group PLC ............................ Media 2,599,590 21,955,154 --------------- 1,037,414,651 --------------- UNITED STATES .4% (a) News Corp. Ltd., A ........................ Media 1,089,919 20,337,889 --------------- TOTAL COMMON STOCKS (COST $3,440,666,938)..................... 5,307,291,263 --------------- PREFERRED STOCKS (COST $99,850) BRAZIL Cia Vale do Rio Doce, A, ADR, pfd. ........ Metals & Mining 11,115 270,984 ---------------
16 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- SHARES/PRINCIPAL FOREIGN EQUITY SERIES AMOUNT(d) VALUE - --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS 7.6% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio ............................ 160,093,425 $ 160,093,425 (c) U.S. Treasury Bills, 2/03/05 - 3/31/05 ....... 270,000,000 269,082,129 ---------------- TOTAL SHORT TERM INVESTMENTS (COST $429,106,877) ......................... 429,175,554 ---------------- TOTAL INVESTMENTS (COST $3,869,873,665) 101.4% ...................................... 5,736,737,801 OTHER ASSETS, LESS LIABILITIES (1.4)% ........ (78,568,113) ---------------- NET ASSETS 100.0% ............................ $ 5,658,169,688 ================
CURRENCY ABBREVIATIONS: | EUR - Euro | FIM - Finnish Markka | SEK - Swedish Krona (a) Non-income producing. (b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. (c) Security is traded on a discount basis with no stated coupon rate. (d) The principal amount is stated in U.S. dollars unless otherwise indicated. Annual Report | See notes to financial statements. | 17 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2004 --------------- FOREIGN EQUITY SERIES --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............. $ 3,709,780,240 Cost - Sweep Money Fund (Note 7) ........ 160,093,425 ---------------- Total cost of investments ............... 3,869,873,665 ================ Value - Unaffiliated issuers ............ 5,576,644,376 Value - Sweep Money Fund (Note 7) ....... 160,093,425 ---------------- Total value of investments .............. 5,736,737,801 Cash ..................................... 220,510 Foreign currency, at value (cost $54,478) 61,175 Receivables: Capital shares sold ..................... 4,589,895 Dividends ............................... 6,123,626 ---------------- Total assets ........................ 5,747,733,007 ---------------- Liabilities: Payables: Capital shares redeemed ................. 85,323,352 Affiliates .............................. 3,585,339 Deferred tax ............................. 332,213 Other liabilities ........................ 322,415 ---------------- Total liabilities ................... 89,563,319 ---------------- Net assets, at value ...................... $ 5,658,169,688 ================ Net assets consist of: Undistributed net investment income ...... $ 6,273,524 Net unrealized appreciation (depreciation) 1,866,756,932 Accumulated net realized gain (loss) ..... (259,955,008) Capital shares ........................... 4,045,094,240 ---------------- Net assets, at value ...................... $ 5,658,169,688 ================ Shares outstanding ........................ 279,178,456 ================ Net asset value per share(a) .............. $ 20.27 ================ (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 18 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2004
------------- FOREIGN EQUITY SERIES ------------- Investment income: Dividends (net of foreign taxes of $15,674,569): Unaffiliated issuers .................................................. $ 130,128,918 Sweep Money Fund (Note 7) ............................................. 1,212,011 Interest ............................................................... 1,871,341 -------------- Total investment income ........................................... 133,212,270 -------------- Expenses: Management fees (Note 3) ............................................... 33,538,027 Administrative fees (Note 3) ........................................... 4,116,372 Transfer agent fees (Note 3) ........................................... 57,900 Custodian fees (Note 4) ................................................ 2,022,300 Reports to shareholders ................................................ 60,000 Registration and filing fees ........................................... 81,800 Professional fees ...................................................... 182,335 Directors' fees and expenses ........................................... 117,600 Other .................................................................. 160,700 -------------- Total expenses .................................................... 40,337,034 Expense reductions (Note 4) ....................................... (23,554) -------------- Net expenses .................................................... 40,313,480 -------------- Net investment income ......................................... 92,898,790 -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................... 99,026,684 Foreign currency transactions ......................................... (495,492) -------------- Net realized gain (loss) .......................................... 98,531,192 Net change in unrealized appreciation (depreciation) on: Investments ........................................................... 797,144,359 Translation of assets and liabilities denominated in foreign currencies (63,024) Deferred taxes ........................................................ 8,659,231 -------------- Net change in unrealized appreciation (depreciation) .............. 805,740,566 -------------- Net realized and unrealized gain (loss) ................................. 904,271,758 -------------- Net increase (decrease) in net assets resulting from operations ......... $ 997,170,548 ==============
Annual Report | See notes to financial statements. | 19 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 2004 and 2003
----------------------------------- FOREIGN EQUITY SERIES ----------------------------------- 2004 2003 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................. $ 92,898,790 $ 66,241,621 Net realized gain (loss) from investments and foreign currency transactions ....... 98,531,192 (151,574,685) Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes ..... 805,740,566 1,439,364,827 ------------------------------------ Net increase (decrease) in net assets resulting from operations ................ 997,170,548 1,354,031,763 Distributions to shareholders from: Net investment income: Primary Shares ..................................................................... (72,392,703) (80,683,825) Service Shares ..................................................................... -- (313) ------------------------------------ Total distributions to shareholders .................................................. (72,392,703) (80,684,138) Capital share transactions (Note 2): Primary Shares ..................................................................... 90,602,987 204,511,702 Service Shares ..................................................................... -- (17,258) ------------------------------------ Total capital share transactions ..................................................... 90,602,987 204,494,444 Redemption fees ...................................................................... 24,434 -- ------------------------------------ Net increase (decrease) in net assets ........................................... 1,015,405,266 1,477,842,069 Net assets: Beginning of year ................................................................... 4,642,764,422 3,164,922,353 ------------------------------------ End of year ......................................................................... $ 5,658,169,688 $ 4,642,764,422 ==================================== Undistributed net investment income/distributions in excess of net investment income included in net assets: End of year ......................................................................... $ 6,273,524 $ (13,659,162) ====================================
20 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Foreign Equity Series (the Fund) is a separate, diversified series of Templeton Institutional Funds, Inc. (the Company). The Company is an open-end investment company registered under the Investment Company Act of 1940. The Fund seeks long-term capital growth. Under normal conditions, the Fund invests at least 80% of its net assets in the equity securities of companies located outside the United States, including emerging markets. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System, are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. U.S. Government securities, generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. Annual Report | 21 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund's policy is to qualify as a regulated investment company under Sub Chapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. 22 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME AND DEFERRED TAXES (CONTINUED) The Fund is subject to a tax imposed on net realized gains of securities of certain foreign countries. When the Fund invests in these securities, the Fund records an estimated deferred tax liability for net unrealized gains. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Common expenses incurred by the Company are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. Other expenses are charged to each Fund on a specific identification basis. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses, during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEE Effective June 1, 2004, redemptions and exchanges of Fund shares held five trading days or less may be subject to the Fund's redemption fee, which is 1% of the amount redeemed. Effective March 1, 2005, the fee will increase to 2%. Such fees are retained by the Fund and accounted for as additional paid-in capital as noted in the Statements of Changes in Net Assets. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. Annual Report | 23 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 2. CAPITAL STOCK At December 31, 2004, there were 1.14 billion shares authorized ($0.01 par value), for the Company, of which 555 million have been classified as Primary shares. Transactions in the Fund's shares were as follows:
--------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 --------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------- PRIMARY SHARES: Shares sold ................. 47,051,626 $ 832,987,696 68,564,860 $ 964,509,589 Shares issued in reinvestment of distributions ........... 3,305,980 62,226,817 4,625,802 68,892,941 Shares redeemed ............. (45,065,673) (804,611,526) (60,226,673) (828,890,828) ---------------------------------------------------------------- Net increase (decrease) ..... 5,291,933 $ 90,602,987 12,963,989 $ 204,511,702 ================================================================ SERVICE SHARES(a): Shares liquidated ........... -- $ -- (1,024) $ (17,258) ================================================================
(a) On December 30, 2003, the Service Shares were terminated. 3. TRANSACTIONS WITH AFFILIATES Certain officers and directors of the Fund are also officers or directors of the following entities:
- ----------------------------------------------------------------------------------------- ENTITY AFFILIATION - ----------------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the Fund's average daily net assets as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.700% Up to and including $1 billion 0.680% Over $1 billion, up to and including $5 billion 0.660% Over $5 billion, up to and including $10 billion 0.640% Over $10 billion, up to and including $15 billion 0.620% Over $15 billion, up to and including $20 billion 0.600% Over $20 billion Prior to May 1, 2004, the Fund paid an investment management fee to TIC of .70% per year of the average daily net assets of the Fund. 24 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate average daily net assets of certain funds within the Company as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% Over $1.2 billion C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $57,900, of which $16,152 was paid to Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2004, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At December 31, 2004, the Fund had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows: Capital loss carryovers expiring in: 2010 ....................................... $ 82,638,416 2011 ....................................... 177,000,923 --------------- $ 259,639,339 =============== Annual Report | 25 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 5. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares. Net realized losses differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At December 31, 2004, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows: Cost of investments ......................... $ 3,920,497,029 ================ Unrealized appreciation ..................... $ 1,969,424,640 Unrealized depreciation ..................... (153,183,868) ---------------- Net unrealized appreciation (depreciation) .. $ 1,816,240,772 ================ Distributable earnings -- undistributed ordinary income ............. $ 56,581,219 ================ The tax character of distributions paid during the years ended December 31, 2004 and 2003, was as follows: ------------------------------ 2004 2003 ------------------------------ Distributions paid from - ordinary income ... $ 72,392,703 $ 80,684,138 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the year ended December 31, 2004 aggregated $1,006,350,038 and $849,238,782, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Franklin Advisers Inc. (an affiliate of the Fund's investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 26 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 8. REGULATORY MATTERS INVESTIGATIONS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, received subpoenas and/or requests for documents, information and/or testimony. The Company and its current employees provided documents and information in response to those requests and subpoenas. SETTLEMENTS Beginning in August 2004, the Company entered into settlements with certain regulators investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters described in this section is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary, Franklin Advisers, Inc., reached an agreement with the SEC that resolved the issues resulting from the SEC investigation into market timing activity. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the activities of a limited number of third parties that ended in 2000 and those that were the subject of the first Massachusetts administrative complaint described below. Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc. neither admitted nor denied any of the findings contained therein, Franklin Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. At this time, it is unclear which funds or which shareholders of any particular fund will receive distributions. The Order also required Franklin Advisers, Inc. to, among other things, enhance and periodically review compliance policies and procedures. On September 20, 2004, Franklin Resources, Inc. announced that two of its subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of the Office of the Secretary of the Commonwealth Annual Report | 27 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) of Massachusetts (the "State of Massachusetts") related to its administrative complaint filed on February 4, 2004, concerning one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as described above. Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a cease-and-desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts Consent Order included two different sections: "Statements of Fact" and "Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS admitted the facts in the Statements of Fact. On October 25, 2004, the State of Massachusetts filed a second administrative complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it described the Massachusetts Consent Order and stated that "Franklin did not admit or deny engaging in any wrongdoing") failed to state that Franklin Advisers, Inc. and FTAS admitted the Statements of Fact portion of the Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a second agreement with the State of Massachusetts on November 19, 2004, resolving the Second Complaint. As a result of the November 19, 2004 settlement, Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts Consent Order did not change and there was no monetary fine associated with this second settlement. On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the issues resulting from the CAGO's investigation concerning sales and marketing support payments. Under the terms of the settlement, FTDI neither admitted nor denied the allegations in the CAGO's complaint and agreed to pay $2 million to the State of California as a civil penalty, $14 million to the funds, to be allocated by an independent distribution consultant to be paid for by FTDI, and $2 million to the CAGO for its investigative costs. On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b) of the Securities Exchange Act of 1934" (the "Second Order"). 28 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc. neither admitted nor denied the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and Franklin Advisers, Inc. also agreed to implement certain measures and undertakings relating to marketing support payments to broker-dealers for the promotion or sale of fund shares, including making additional disclosures in the funds' Prospectuses and Statements of Additional Information. The Second Order further requires the appointment of an independent distribution consultant, at the Company's expense, who shall develop a plan for the distribution of the penalty and disgorgement to the funds. OTHER LEGAL PROCEEDINGS The Company, and other funds, and certain current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York and Florida, alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts administrative complaint and the findings in the SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc. In addition, the Company, as well as certain current and former officers, employees, and directors, have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and/or payment of allegedly excessive advisory, commission, and distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds. Annual Report | 29 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 8. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) The Company and fund management strongly believes that the claims made in each of the lawsuits identified above are without merit and intends to vigorously defend against them. The Company cannot predict with certainty, however, the eventual outcome of the remaining governmental investigations or private lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on the Company's future financial results. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. 30 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FOREIGN EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Foreign Equity Series of Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 9, 2005 Annual Report | 31 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) FOREIGN EQUITY SERIES Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby designates up to a maximum of $136,823,686 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In January 2005, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2004. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. At December 31, 2004, more than 50% of the Foreign Equity Series' total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund hereby designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 9, 2004, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, foreign qualified dividends, and adjusted foreign source income as designated by the Fund, to Primary Class shareholders of record. As a service to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below reports foreign source income with the required adjustments to foreign source qualified dividends. This information is provided to simplify your reporting of foreign source income for line 1 of Form 1116. 32 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES - ------------------------------------------------------------------------------- ADJUSTED FOREIGN FOREIGN FOREIGN FOREIGN TAX SOURCE QUALIFIED SOURCE PAID INCOME DIVIDENDS INCOME COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------------- Australia ................. 0.0010 0.0209 0.0209 0.0090 Bermuda ................... 0.0000 0.0045 0.0045 0.0019 Canada .................... 0.0029 0.0140 0.0137 0.0062 Chile ..................... 0.0015 0.0061 0.0061 0.0026 Denmark ................... 0.0005 0.0025 0.0025 0.0011 Finland ................... 0.0031 0.0152 0.0111 0.0089 France .................... 0.0049 0.0262 0.0258 0.0115 Germany ................... 0.0048 0.0276 0.0274 0.0119 Hong Kong ................. 0.0000 0.0120 0.0000 0.0120 India ..................... 0.0000 0.0058 0.0030 0.0041 Italy ..................... 0.0028 0.0135 0.0126 0.0063 Japan ..................... 0.0011 0.0114 0.0114 0.0049 Mexico .................... 0.0000 0.0042 0.0042 0.0018 Netherlands ............... 0.0044 0.0212 0.0212 0.0091 New Zealand ............... 0.0004 0.0034 0.0034 0.0015 Norway .................... 0.0006 0.0030 0.0030 0.0013 Portugal .................. 0.0005 0.0028 0.0028 0.0012 Singapore ................. 0.0008 0.0028 0.0000 0.0028 South Korea ............... 0.0039 0.0174 0.0174 0.0075 Spain ..................... 0.0035 0.0225 0.0224 0.0097 Sweden .................... 0.0074 0.0377 0.0377 0.0162 Switzerland ............... 0.0012 0.0059 0.0059 0.0025 Taiwan .................... 0.0012 0.0042 0.0042 0.0018 United Kingdom ............ 0.0094 0.0946 0.0946 0.0405 ------------------------------------------------- TOTAL ..................... $ 0.0559 $ 0.3794 $ 0.3558 $ 0.1763 ------------------------------------------------- Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit or deduction (assuming you held your shares in the Fund for a minimum of 16 days during the 30-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate). Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends without adjustment for the lower U.S. tax rates. Generally, this is the foreign source income to be reported by certain trusts and corporate shareholders. Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. If you are an individual shareholder who does not meet the qualified dividend holding period requirements, you may find this information helpful to calculate the foreign source income adjustment needed to complete line 1 of Form 1116. Annual Report | 33 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per share of foreign source income the Fund paid to you. These amounts reflect the Foreign Source Income reported in column 2 adjusted for the tax rate differential on foreign source qualified dividends that may be required for certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B). If you are an individual shareholder who meets the qualified dividend holding period requirements, generally, these Adjusted Foreign Source Income amounts may be reported directly on line 1 of Form 1116 without additional adjustment. In January 2005, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2004. The Foreign Source Income reported on Form 1099-DIV has been reduced to take into account the tax rate differential on foreign source qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B). Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2004 individual income tax returns. 34 | Annual Report BOARD MEMBERS AND OFFICERS The name, age, and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ----------------------------------------------------------------------------------------------------------------------------------- FRANK J. CROTHERS (60) Director Since 1990 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ----------------------------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO (72) Director Since 1992 143 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ----------------------------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil Suite 2100 and gas); H.J. Heinz Company Fort Lauderdale, FL 33394-3091 (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Canadian National Railway (railroad); and White Mountains Insurance Group, Ltd. (holding company). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences 500 East Broward Blvd. Corporation; MedImmune, Inc. Suite 2100 (biotechnology); and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988- 2002), White Mountains Insurance Group, Ltd. (holding company) (1987- 2004), and Spacehab, Inc. (aerospace services) (1994-2003). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ----------------------------------------------------------------------------------------------------------------------------------- FRED R. MILLSAPS (75) Director Since 1992 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ----------------------------------------------------------------------------------------------------------------------------------- FRANK A. OLSON (72) Director Since 2003 21 Director, White Mountains Insurance 500 East Broward Blvd. Group Ltd. (holding company); Amerada Suite 2100 Hess Corporation (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas); and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Co. (medical technology), Cooper Industries (electrical products and tools and hardware), Health Net (formerly Foundation Health), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison) and UAL Corporation (airlines). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977- 1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - -----------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- CONSTANTINE D. TSERETOPOULOS (50) Director Since 1990 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- **NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas); Total Logistics, Inc. (formerly Fort Lauderdale, FL 33394-3091 C2, Inc. (operating and investment business)); and Weatherford International, Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ----------------------------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (71) Director, Director and Vice 142 None One Franklin Parkway Vice President President since San Mateo, CA 94403-1906 and Chairman 1993 and of the Board Chairman of the Board since 1995 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (59) Vice Since 1996 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ----------------------------------------------------------------------------------------------------------------------------------- JEFFREY A. EVERETT (40) Vice Since 2001 Not Applicable Not Applicable PO Box N-7759 President Lyford Cay, Nassau, Bahamas - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ----------------------------------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN (44) Vice Since 1990 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 and Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (57) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ----------------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (57) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ----------------------------------------------------------------------------------------------------------------------------------- RUPERT H. JOHNSON, JR. (64) Vice Since 1996 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- JOHN R. KAY (64) Vice Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- MICHAEL O. MAGDOL (67) Vice Since 2002 Not Applicable Not Applicable 600 Fifth Avenue President Rockefeller Center - AML New York, NY 10020-2302 Compliance - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 39
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- MARK MOBIUS (68) Vice Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House President 8 Connaught Road Central Hong Kong - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ----------------------------------------------------------------------------------------------------------------------------------- DONALD F. REED (60) President and President since Not Applicable Not Applicable 1 Adelaide Street East, Chief 1993 and Chief Suite 2101 Executive Executive Officer - Toronto, Ontario Canada Officer - Investment M5C 3B8 Investment Management Management since 2002 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel, LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of FTTrust Company. - ----------------------------------------------------------------------------------------------------------------------------------- ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ----------------------------------------------------------------------------------------------------------------------------------- GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ----------------------------------------------------------------------------------------------------------------------------------- MURRAY L. SIMPSON (67) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - -----------------------------------------------------------------------------------------------------------------------------------
40 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- GALEN G. VETTER (53) Chief Since May 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, FL 33394-3091 Chief Accounting Officer - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP. - -----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of Templeton Institutional Funds, Inc. (TIFI) under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR. OLSON, WHO HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY CHAIRMAN FROM 1980-2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD. AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 41 TEMPLETON INSTITUTIONAL FUNDS, INC. SHAREHOLDER INFORMATION FOREIGN EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the Securities and Exchange Commission's website at sec.gov and reflect the 12-month period beginning July 1, 2003, and ending June 30, 2004. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 42 | Annual Report This page intentionally left blank. This page intentionally left blank. [LOGO] FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN(R) TEMPLETON(R) 600 Fifth Avenue INSTITUTIONAL New York, NY 10020 FRANKLINTEMPLETONINSTITUTIONAL.COM ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 This report must be preceded or accompanied by the current Templeton Institutional Funds, Inc., Foreign Equity Series prospectus, which contains more complete information including charges, expenses, and risk factors. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT454 A2004 02/05 ANNUAL REPORT | - --------------------------------------------------------------------- 12 31 2004 THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. --------------------------------------- Emerging Markets Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY CONTENTS ANNUAL REPORT - -------------------------------------------------------------------------------- TIFI Emerging Markets Series .............................................. 2 Performance Summary ....................................................... 6 Your Fund's Expenses ...................................................... 8 Financial Highlights and Statement of Investments ......................... 10 Financial Statements ...................................................... 16 Notes to Financial Statements ............................................. 19 Report of Independent Registered Public Accounting Firm ................... 29 Tax Designation ........................................................... 30 Board Members and Officers ................................................ 33 Shareholder Information ................................................... 40 ------------------------------------------------------ NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE ------------------------------------------------------ Annual Report | 1 ANNUAL REPORT TIFI EMERGING MARKETS SERIES YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in securities issued by emerging market companies. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This is the Templeton Institutional Funds, Inc. (TIFI) Emerging Markets Series (the "Fund") annual report for the fiscal year ended December 31, 2004. PERFORMANCE OVERVIEW The Fund posted a 26.40% cumulative total return for the 12-month period ended December 31, 2004. The Fund underperformed the S&P/IFCI Composite Index(1), which returned 28.11% for the period, but outperformed the MSCI Emerging Markets Index,(2),(3) which returned 25.95% during the same period. ECONOMIC AND MARKET OVERVIEW In terms of stock market performance and economic developments, 2004 was another positive year for emerging markets. The MSCI Emerging Markets Index(2) recorded a 25.95% gain for the period (in U.S. dollar terms) as strong stock prices and a sliding U.S. dollar boosted performance in the fourth quarter. Despite recording double-digit gains, Asian stock markets did not perform as well as those in other emerging markets regions as rising interest rates in the United States, high commodity prices, and concerns over China's overheating economy continued to affect sentiment. In Africa, U.S. investors (1) Source: Standard & Poor's Micropal. The S&P/International Finance Corporation Investable (IFCI) Composite Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity performance of global emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: Standard & Poor's Micropal. The Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (3) All MSCI data is presented "as is." The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or distributing the MSCI data is strictly prohibited. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. 2 | Annual Report in the South African market benefited from a strengthening rand, which greatly enlarged the performance of that market (in U.S. dollar terms). Latin American and Eastern European markets outperformed their emerging market counterparts as both regions continued to attract greater investor interest. Most Latin American economies recorded strong economic growth, which in turn was reflected in the strong stock market performance of those countries. In Eastern Europe, new member countries began to see positive developments as a result of accession into the European Union (EU) in the form of higher investment inflows, which boosted local stock markets. The Turkish market also recorded strong gains as investors reacted favorably to approval from the EU to begin formal accession talks for October 2005 as well as the government's new US$10 billion stand-by agreement with the International Monetary Fund. Bucking the regional trend, the Russian market underperformed as foreign investors remained cautious due to the decimation of Yukos by the Russian government and new tax claims on Vimpelcom. On December 26, the largest earthquake in 40 years struck in the Indian Ocean, just north of Sumatra. Measuring 8.9 on the Richter Scale, the earthquake created monster tidal waves, also known as tsunamis, that devastated the coastal areas of Indonesia, Sri Lanka, Thailand, India, and the Maldives. The remoteness of some of these areas has complicated aid relief to the victims. While the tsunamis have had a devastating impact on the people in the region, it is estimated that their impact on the economies is quite minimal. INVESTMENT STRATEGY Our investment strategy employs a bottom-up, value-oriented, long-term approach. We focus on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value, and cash flow potential. As we look for investments, we focus on specific companies and undertake in-depth research to construct an "action list" from which we make our buy decisions. Before we make a purchase, we generally look at the company's potential for earnings and growth over a five-year horizon. During our analysis, we also consider the company's position in its sector, the economic framework, and political environment. MANAGER'S DISCUSSION In Asia, the Fund's largest purchases were undertaken in South Korea and Taiwan as we increased exposure to the electronics and semiconductor sectors. Key purchases included Samsung Electronics, one of the world's GEOGRAPHIC DISTRIBUTION ON 12/31/04 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Asia .............................. 56.0% Europe ............................ 20.1% Middle-East/Africa ................ 12.1% Latin America ..................... 11.6% Short-Term Investments & Other Net Assets .................. 0.2% SECTOR DIVERSIFICATION ON 12/31/04 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS Consumer Staples 22.6% Financials 15.1% Information Technology 11.7% Telecommunication Services 10.9% Energy 10.5% Industrials 9.4% Materials 9.0% Consumer Discretionary 6.9% Utilities 2.3% Health Care 1.4% Short-Term Investments & Other Net Assets 0.2% Annual Report | 3 10 LARGEST EQUITY POSITIONS ON 12/31/04 PERCENTAGE OF TOTAL NET ASSETS Samsung Electronics Co. Ltd. 4.1% Anglo American PLC 3.1% SABMiller PLC 3.0% Kimberly Clark de Mexico SA de CV, A 2.7% Remgro Ltd. 2.5% Fraser & Neave Ltd. 2.3% Cia de Bebidas das Americas (Ambev),ADR, pfd. 2.3% MOL Magyar Olaj-Es Gazipari RT 2.2% Inbev 2.2% China Mobile (Hong Kong) Ltd., fgn. 2.2% FUND ASSET ALLOCATION ON 12/31/04 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Equity ............................ 99.8% Short-Term Investments & Other Net Assets .................. 0.2% largest electronics manufacturers, and Taiwan Semiconductor Manufacturing Company, a leading global integrated circuit producer. Additional purchases included South Korea's Daewoo Shipbuilding & Marine Engineering, a major player in the global shipbuilding industry, and MediaTek, Taiwan's biggest integrated circuit design company. Net sales were seen in Indonesia as the market enjoyed a strong run in 2004, triggering our sell targets. The Fund invested in several western European-listed companies with significant business exposure and growth opportunities in emerging markets. They include Oriflame Cosmetics, a cosmetic company with sales operations in over 50 countries and market leadership in more than 30 of them; Inbev, the product of a merger between Interbrew and Ambev; and HSBC Holdings, one of the largest banking and financial services organizations in the world. Exposure to Latin America was reduced during the reporting period as the Fund undertook selective sales in Brazil, Mexico, and Argentina in addition to selling its only holding in Peru. Allowing the Fund to realize gains, significant sales included Grupo Carso and Tenaris. Benefiting from a strengthening rand and high commodity prices in 2004, the Fund locked in strong U.S. dollar returns via sales in South African companies Anglo American plc and Sasol, and BHP Billiton in the United Kingdom. In terms of performance, the Fund's underweight position, relative to the MSCI Emerging Markets Index, in Russia, as well as overweight positions in Austria and Singapore were positive contributors. The Fund's decision not to hold Yukos in Russia helped its performance as that company's stock price continued to tumble on concerns of the Russian government's treatment of its assets. In Austria, the strongest contributors to performance were OMV and Bank Austria Creditanstalt. We believe both companies are well positioned to benefit from increasing integration with Central and Eastern Europe. However, the Fund's underweight positions in Brazil, Mexico, and South Africa were negative for relative performance. All three markets recorded strong U.S. dollar performances in 2004, resulting in increasingly expensive valuations. With regard to sector performance, the Fund's weighting in the energy sector, on par with the index, performed extremely well. The Fund's positions in MOL, OMV, and SK Corp. contributed to its performance from the energy sector. Overweight positions in the food, beverage and tobacco and diversified financials sectors also reaped significant benefits. Within the food, beverage and tobacco sector, SABMiller and Ambev accounted for the greatest relative performance. The Fund's underweight position in the banking sector and overweight holdings in the telecommunications sector resulted in negative attribution effects during the period. 4 | Annual Report In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2004, the U.S. dollar declined in value relative to most non-U.S. currencies. At the end of the period, the Fund's portfolio was invested predominantly in securities with non-U.S. currency exposure, which resulted in a positive effect on Fund performance. However, one cannot expect the same result in future periods. We thank you for your continued participation in the Fund and look forward to serving your investment needs. Sincerely, [PHOTO OMMITED] /s/ Mark Mobius, Mark Mobius, Ph.D. Managing Director Templeton Asset Management Ltd. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 PERFORMANCE SUMMARY AS OF 12/31/04 TOTAL RETURNS Your dividend income will vary depending on the dividends or interest paid by the securities in the Fund's portfolio. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. The unmanaged indices include reinvested dividends. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.
- --------------------------------------------------------------------------------------------------------------------------------- THREE FIVE TEN AVERAGE CUMULATIVE ONE YEAR YEAR YEAR ANNUAL SINCE YEAR AVERAGE AVERAGE AVERAGE SINCE INCEPTION(1),(2) CUMULATIVE(1),(2) ANNUAL(1),(3) ANNUAL(1),(3) ANNUAL(1),(3) INCEPTION(1),(3) (5/03/93) - --------------------------------------------------------------------------------------------------------------------------------- TIFI Emerging Markets Series 26.40% 25.62% 5.07% 5.52% 6.19% 101.56% - --------------------------------------------------------------------------------------------------------------------------------- S&P/IFCI Composite Index(4) 28.11% 24.59% 6.08% 4.10% 6.84% 116.42% - --------------------------------------------------------------------------------------------------------------------------------- MSCI Emerging Markets Index(5),(6) 25.95% 22.76% 4.62% 3.30% 6.55% 109.62% - ---------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] TIFI Emerging IFC Investable MSCI Emerging Inception Date Markets Series Composite Index Markets Index May-1993 * $5,000,000.00 $5,000,000.00 $ 5,000,000.00 May-93 5,010,000.00 5,109,019.23 5,187,255.63 Jun-93 5,030,000.00 5,254,042.96 5,341,071.39 Jul-93 5,040,000.00 5,417,169.52 5,482,149.37 Aug-93 5,415,000.00 5,857,068.15 5,945,052.77 Sep-93 5,590,000.00 6,092,807.14 6,162,494.18 Oct-93 5,840,000.00 6,605,720.49 6,715,410.45 Nov-93 6,040,000.00 7,024,499.16 7,012,583.31 Dec-93 6,646,553.30 8,224,515.25 8,171,734.77 Jan-94 6,726,995.70 8,281,438.57 8,320,409.84 Feb-94 6,596,276.80 8,066,417.25 8,172,393.18 Mar-94 6,256,984.66 7,252,795.88 7,432,879.70 Apr-94 5,912,191.34 7,115,013.28 7,284,204.64 May-94 5,917,261.83 7,282,363.83 7,533,503.17 Jun-94 5,775,288.11 7,021,683.16 7,325,849.35 Jul-94 5,993,319.18 7,526,148.52 7,781,358.26 Aug-94 6,485,156.71 8,493,643.90 8,747,125.77 Sep-94 6,556,143.57 8,704,441.23 8,846,533.70 Oct-94 6,373,605.93 8,418,215.46 8,686,956.81 Nov-94 6,130,222.41 8,101,013.76 8,235,284.44 Dec-94 5,889,313.63 7,237,911.34 7,573,856.38 Jan-95 5,458,516.38 6,270,415.96 6,768,070.95 Feb-95 5,342,934.63 6,189,355.54 6,594,477.42 Mar-95 5,516,645.80 6,173,264.14 6,636,375.38 Apr-95 5,706,148.90 6,432,335.67 6,934,092.70 May-95 5,895,652.00 6,673,103.23 7,302,982.11 Jun-95 5,937,763.80 6,713,130.58 7,324,583.17 Jul-95 6,211,490.50 6,926,743.91 7,488,996.88 Aug-95 6,043,043.30 6,741,089.39 7,312,592.43 Sep-95 5,995,667.53 6,689,999.20 7,277,886.39 Oct-95 5,779,844.55 6,437,565.37 6,999,288.41 Nov-95 5,742,996.73 6,405,382.57 6,874,468.20 Dec-95 5,817,158.25 6,628,248.45 7,179,364.78 Jan-96 6,374,523.18 7,183,602.86 7,689,686.70 Feb-96 6,271,473.40 7,024,096.87 7,567,424.18 Mar-96 6,347,425.50 7,126,679.54 7,626,364.94 Apr-96 6,515,605.15 7,414,112.16 7,931,286.85 May-96 6,624,108.15 7,348,941.99 7,895,871.74 Jun-96 6,634,958.45 7,436,237.83 7,945,176.86 Jul-96 6,331,150.05 6,947,662.72 7,402,174.79 Aug-96 6,461,353.65 7,163,086.33 7,591,646.24 Sep-96 6,580,706.95 7,268,887.28 7,657,411.72 Oct-96 6,564,431.50 7,112,800.71 7,453,189.26 Nov-96 6,776,012.35 7,217,797.09 7,578,072.77 Dec-96 6,914,456.10 7,249,376.46 7,612,348.31 Jan-97 7,425,403.86 7,761,485.24 8,131,584.15 Feb-97 7,708,423.28 8,141,644.54 8,479,822.13 Mar-97 7,552,472.52 7,937,686.06 8,257,075.42 Apr-97 7,624,878.23 7,802,920.59 8,271,661.84 May-97 7,986,906.78 8,068,227.53 8,508,399.85 Jun-97 8,276,529.62 8,416,606.32 8,963,744.15 Jul-97 8,655,267.18 8,497,867.89 9,097,554.24 Aug-97 7,886,652.72 7,412,905.30 7,939,896.88 Sep-97 8,254,250.94 7,654,276.29 8,159,895.97 Oct-97 6,717,022.02 6,398,342.59 6,820,959.36 Nov-97 6,221,321.39 6,100,450.56 6,572,078.67 Dec-97 6,131,713.60 6,181,108.70 6,730,452.69 Jan-98 5,635,027.06 5,775,806.58 6,202,581.49 Feb-98 6,190,842.95 6,365,556.36 6,849,980.25 Mar-98 6,433,876.04 6,615,174.19 7,147,241.75 Apr-98 6,445,746.66 6,633,075.87 7,069,384.23 May-98 5,537,644.23 5,805,575.67 6,100,590.55 Jun-98 5,003,466.33 5,210,596.19 5,460,662.26 Jul-98 5,039,078.19 5,418,376.38 5,633,799.96 Aug-98 3,869,822.12 3,895,124.31 4,004,844.41 Sep-98 4,065,687.35 4,082,589.11 4,258,891.13 Oct-98 4,677,024.28 4,551,452.25 4,707,360.06 Nov-98 5,181,525.63 4,893,796.77 5,098,863.48 Dec-98 5,026,104.06 4,820,782.04 5,024,969.11 Jan-99 4,784,173.66 4,709,349.10 4,943,895.48 Feb-99 4,784,173.66 4,793,225.52 4,991,985.07 Mar-99 5,452,933.09 5,347,171.94 5,649,880.47 Apr-99 6,518,100.93 6,076,313.46 6,348,888.80 May-99 6,342,590.32 5,929,278.30 6,311,954.28 Jun-99 6,959,903.50 6,618,392.47 7,028,309.29 Jul-99 6,651,246.91 6,522,246.36 6,837,381.74 Aug-99 6,415,215.40 6,592,646.23 6,899,589.25 Sep-99 6,130,767.17 6,409,003.14 6,666,092.66 Oct-99 6,306,277.78 6,518,022.37 6,808,031.64 Nov-99 6,838,861.70 7,103,950.44 7,418,470.55 Dec-99 7,870,057.80 8,056,158.98 8,361,953.26 Jan-00 7,516,210.24 8,067,624.10 8,411,790.18 Feb-00 7,247,774.16 8,059,779.55 8,522,884.97 Mar-00 7,342,709.00 8,177,649.05 8,564,479.04 Apr-00 6,707,927.84 7,331,643.74 7,752,628.59 May-00 6,170,805.32 7,127,484.11 7,432,119.99 Jun-00 6,628,580.19 7,329,230.03 7,693,915.74 Jul-00 6,347,811.60 6,976,828.39 7,298,221.27 Aug-00 6,469,884.90 7,003,178.05 7,334,104.86 Sep-00 5,835,103.74 6,376,820.34 6,693,720.75 Oct-00 5,346,810.54 5,860,487.57 6,208,405.93 Nov-00 5,066,041.95 5,342,746.80 5,665,581.13 Dec-00 5,350,568.01 5,497,425.38 5,802,366.75 Jan-01 5,956,059.54 6,203,435.51 6,601,352.79 Feb-01 5,486,494.68 5,725,520.96 6,084,459.39 Mar-01 4,973,680.43 5,232,319.58 5,486,846.90 Apr-01 5,233,176.80 5,542,079.01 5,757,961.75 May-01 5,418,531.35 5,709,831.84 5,826,690.10 Jun-01 5,393,817.41 5,606,444.61 5,707,086.57 Jul-01 5,078,714.67 5,223,268.16 5,346,452.67 Aug-01 5,097,250.13 5,152,264.86 5,293,716.19 Sep-01 4,460,866.17 4,353,528.04 4,474,357.29 Oct-01 4,596,792.84 4,623,461.26 4,752,030.96 Nov-01 4,874,824.67 5,165,137.98 5,248,158.97 Dec-01 5,083,257.28 5,594,778.34 5,664,732.78 Jan-02 5,347,486.00 5,794,512.83 5,856,698.61 Feb-02 5,341,194.84 5,906,348.06 5,952,915.76 Mar-02 5,661,423.04 6,317,885.59 6,310,991.98 Apr-02 5,850,557.44 6,376,418.05 6,351,952.96 May-02 5,812,730.56 6,272,025.10 6,250,747.05 Jun-02 5,447,070.72 5,819,454.50 5,781,803.95 Jul-02 5,157,064.64 5,450,961.46 5,342,021.03 Aug-02 5,144,455.68 5,521,562.47 5,424,322.85 Sep-02 4,766,186.88 4,908,077.88 4,839,131.60 Oct-02 4,892,276.48 5,223,268.16 5,153,132.03 Nov-02 5,289,458.72 5,585,928.07 5,507,840.20 Dec-02 5,182,639.20 5,374,728.46 5,324,838.94 Jan-03 5,125,054.32 5,379,153.59 5,301,655.15 Feb-03 5,118,656.00 5,220,049.88 5,158,563.95 Mar-03 4,933,401.60 5,028,361.09 5,012,294.63 Apr-03 5,447,297.60 5,541,877.87 5,458,750.33 May-03 5,768,482.60 5,927,266.88 5,850,684.24 Jun-03 5,961,193.60 6,294,150.78 6,183,981.28 Jul-03 6,218,141.60 6,632,472.44 6,571,103.71 Aug-03 6,513,631.80 7,110,990.43 7,012,330.08 Sep-03 6,706,342.80 7,188,631.43 7,063,737.06 Oct-03 7,226,662.50 7,772,346.93 7,664,844.21 Nov-03 7,374,407.60 7,872,314.75 7,759,048.14 Dec-03 7,973,126.82 8,446,375.41 8,321,536.74 Jan-04 8,228,633.76 8,735,014.88 8,617,076.23 Feb-04 8,530,000.92 9,155,804.97 9,014,581.35 Mar-04 8,521,264.80 9,324,764.66 9,130,411.66 Apr-04 8,041,286.15 8,621,369.38 8,383,934.18 May-04 7,942,660.40 8,504,304.45 8,218,811.41 Jun-04 8,107,036.65 8,504,706.73 8,256,353.70 Jul-04 7,982,110.70 8,329,712.77 8,110,362.94 Aug-04 8,251,687.75 8,702,027.52 8,449,864.27 Sep-04 8,679,066.00 9,204,481.45 8,937,901.38 Oct-04 8,935,492.95 9,470,592.97 9,152,025.38 Nov-04 9,619,298.15 10,293,466.89 9,999,734.10 Dec-04 10,078,173.39 10,821,063.64 10,481,136.42 6 | Annual Report PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1) Past fee waivers by the Fund's manager and administrator increased the Fund's total returns. Without these waivers, the Fund's total returns would have been lower. (2) Cumulative total return shows the change in value of an investment over the indicated periods. It assumes income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period, and the deduction of all applicable charges and fees. (3) Average annual total return represents the change in value of an investment over the indicated periods. (4) Source: Standard & Poor's Micropal. The S&P/International Finance Corporation Investable (IFCI) Composite Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity performance of global emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (5) Source: Standard & Poor's Micropal. The Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market performance in the global emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (6) All MSCI data is presented "as is." The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or distributing the MSCI data is strictly prohibited. Annual Report | 7 YOUR FUND'S EXPENSES As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE ON 6/30/04 VALUE ON 12/31/04 PERIOD* 6/30/04-12/31/04 - ----------------------------------------------------------------------------------------------------------- Actual $ 1,000.00 $ 1,243.10 $ 8.06 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000.00 $ 1,017.95 $ 7.25 - -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.43% multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. Annual Report | 9 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL HIGHLIGHTS EMERGING MARKETS SERIES
--------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 2002 2001 2000 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 12.18 $ 8.10 $ 8.08 $ 8.66 $ 12.90 --------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ................... .21 .24 .14 .15 .13 Net realized and unrealized gains (losses) . 2.97 4.10 .02 (.58) (4.26) --------------------------------------------------------------------------- Total from investment operations ............ 3.18 4.34 .16 (.43) (4.13) --------------------------------------------------------------------------- Less distributions from net investment income (.27) (.26) (.14) (.15) (.11) --------------------------------------------------------------------------- Redemption fees ............................. --(c) -- -- -- -- --------------------------------------------------------------------------- Net asset value, end of year ................ $ 15.09 $ 12.18 $ 8.10 $ 8.08 $ 8.66 =========================================================================== Total return(b) ............................. 26.40% 53.84% 1.96% (5.00)% (32.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $ 2,063,532 $ 2,092,229 $ 1,234,595 $ 1,274,579 $ 1,676,028 Ratios to average net assets: Expenses ................................... 1.45% 1.46% 1.49% 1.45% 1.47% Net investment income ...................... 1.62% 2.52% 1.67% 1.85% 1.21% Portfolio turnover rate ..................... 52.07% 46.83% 53.36% 64.92% 82.86%
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.001 per share. 10 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 94.0% ARGENTINA .3% Tenaris SA, ADR ........................ Energy Equipment & Services 124,701 $ 6,097,879 -------------- AUSTRIA 2.9% Bank Austria Creditanstalt ............. Commercial Banks 501,500 45,255,591 OMV AG ................................. Oil & Gas 48,632 14,630,120 -------------- 59,885,711 -------------- BELGIUM 2.2% Inbev .................................. Beverages 1,179,400 45,676,703 -------------- BRAZIL 1.5% Centrais Eletricas Brasileiras SA ...... Electric Utilities 523,418,000 7,587,195 Centrais Eletricas Brasileiras SA (Non-Taxable) Electric Utilities 82,221,000 1,191,833 Embraer-Empresa Brasileiras de Aeronautica SA ........................ Aerospace & Defense 78,058 464,351 Embraer-Empresa Brasileira de Aeronautica SA, ADR ................... Aerospace & Defense 1 11 Souza Cruz SA (Non-Taxable) ............ Tobacco 1,411,873 18,934,833 Unibanco Uniao de Bancos Brasileiros SA, GDR ................... Commercial Banks 90,700 2,877,004 -------------- 31,055,227 -------------- CHINA 7.4% (a) Air China Ltd., 144A .................. Airlines 3,836,000 1,480,547 Aluminum Corp. of China Ltd., H ........ Metals & Mining 13,566,000 8,028,458 Anhui Conch Cement Co. Ltd. ............ Construction Materials 6,384,000 6,940,202 China Mobile (Hong Kong) Ltd., fgn. .... Wireless Telecommunication Services 13,403,000 45,436,529 China Petroleum & Chemical Corp., H .... Oil & Gas 25,700,000 10,580,486 China Resources Enterprise Ltd. ........ Distributors 14,440,000 22,571,789 China Travel International Investment Hong Kong Ltd. ........................ Hotels Restaurants & Leisure 45,688,000 14,694,833 Denway Motors Ltd. ..................... Automobiles 10,393,000 3,710,448 Huadian Power International Corp. Ltd., H ............................... Electric Utilities 19,420,000 5,746,449 Lenovo Group Ltd. ...................... Computers & Peripherals 4,216,045 1,261,103 PetroChina Co. Ltd., H ................. Oil & Gas 26,032,000 13,898,827 Shanghai Industrial Holdings Ltd. ...... Industrial Conglomerates 5,814,000 12,416,684 Travelsky Technology Ltd., H ........... IT Services 6,334,000 5,133,826 -------------- 151,900,181 -------------- CROATIA .6% Pliva D D, GDR, Reg S .................. Pharmaceuticals 1,032,800 12,858,360 -------------- GREECE 1.4% Hellenic Telecommunications Organization SA (OTE) ................. Diversified Telecommunication Services 468,640 8,407,183 Titan Cement Co. ....................... Construction Materials 664,140 19,646,979 -------------- 28,054,162 --------------
Annual Report | 11 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) HONG KONG 3.2% Cheung Kong Holdings Ltd. .............. Real Estate 3,165,000 $ 31,557,161 Cheung Kong Infrastructure Holdings Ltd. Electric Utilities 2,382,000 6,879,876 Guoco Group Ltd. ....................... Diversified Financial Services 1,194,000 11,674,557 Henderson Investment Ltd. .............. Real Estate 4,770,000 6,965,251 MTR Corp. Ltd. ......................... Road & Rail 6,045,826 9,683,838 -------------- 66,760,683 -------------- HUNGARY 3.9% Egis RT ................................ Pharmaceuticals 22,359 1,348,717 Gedeon Richter Ltd. .................... Pharmaceuticals 105,988 13,314,486 Matav RT ............................... Diversified Telecommunication Services 3,946,593 18,892,103 MOL Magyar Olaj-Es Gazipari RT ......... Oil & Gas 650,154 45,730,256 -------------- 79,285,562 -------------- INDIA 3.3% Gail (India) Ltd. ...................... Gas Utilities 1,927,980 10,284,046 Hindustan Lever Ltd. ................... Household Products 6,636,800 22,020,365 Hindustan Petroleum Corp. Ltd. ......... Oil & Gas 2,709,000 25,085,653 Tata Motors Ltd. ....................... Automobiles 158,800 1,854,747 Tata Tea Ltd. .......................... Food Products 797,625 8,727,770 -------------- 67,972,581 -------------- INDONESIA PT Bank Danamon ........................ Commercial Banks 500,000 235,659 PT Perusahaan Gas Negara ............... Gas Utilities 350,000 71,640 -------------- 307,299 -------------- MALAYSIA 1.2% Kuala Lumpur Kepong Bhd. ............... Food Products 418,486 759,883 Resorts World Bhd. ..................... Hotels Restaurants & Leisure 3,836,000 10,094,737 SIME Darby Bhd. ........................ Industrial Conglomerates 3,895,600 6,150,947 Tanjong PLC ............................ Hotels Restaurants & Leisure 587,200 2,178,821 YTL Corp. Bhd. ......................... Electric Utilities 826,900 1,164,188 YTL Power International Bhd. ........... Water Utilities 8,343,900 3,952,374 -------------- 24,300,950 -------------- MEXICO 4.0% Fomento Economico Mexicano SA de CV Femsa, ADR ............................ Beverages 327,190 17,213,466 Kimberly Clark de Mexico SA de CV, A ... Household Products 15,955,381 55,166,786 Telefonos de Mexico SA de CV (Telmex), L, ADR ...................... Diversified Telecommunication Services 266,584 10,215,499 -------------- 82,595,751 -------------- PHILIPPINES 1.3% San Miguel Corp., B .................... Beverages 19,431,544 25,966,429 -------------- POLAND 3.2% Polski Koncern Naftowy Orlen SA ........ Oil & Gas 2,328,571 29,218,252 Telekomunikacja Polska SA .............. Diversified Telecommunication Services 5,635,193 37,037,949 -------------- 66,256,201 --------------
12 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) RUSSIA .8% (b) Lukoil Holdings, ADR ................... Oil & Gas 142,350 $ 17,281,290 -------------- SINGAPORE 8.0% Comfortdelgro Corp. Ltd. ............... Road & Rail 15,612,000 14,824,848 Dairy Farm International Holdings Ltd. . Food & Staples Retailing 3,171,319 7,674,592 Fraser & Neave Ltd. .................... Beverages 4,771,318 47,645,949 Keppel Corp. Ltd. ...................... Industrial Conglomerates 7,921,053 41,733,171 Singapore Press Holdings Ltd. .......... Media 3,232,500 9,109,539 Singapore Technologies Engineering Ltd. Aerospace & Defense 9,398,000 13,415,022 Singapore Telecommunications Ltd. ...... Diversified Telecommunication Services 19,195,428 27,988,188 (a) Suntec Real Estate Investment Trust .... Real Estate 3,308,000 2,249,513 -------------- 164,640,822 -------------- SOUTH AFRICA 12.1% Anglo American PLC ..................... Metals & Mining 2,713,904 63,955,196 Liberty Group Ltd. ..................... Insurance 61,975 728,603 Nedcor Ltd. ............................ Commercial Banks 1,053,819 14,472,572 Nedcor Ltd., 144A ...................... Commercial Banks 251,125 3,448,813 Old Mutual PLC ......................... Insurance 7,880,970 20,043,543 Remgro Ltd. ............................ Diversified Financial Services 3,137,613 52,262,165 SABMiller PLC .......................... Beverages 3,631,726 61,191,217 Sappi Ltd. ............................. Paper & Forest Products 917,500 13,442,630 Sasol Ltd. ............................. Oil & Gas 969,000 20,697,087 -------------- 250,241,826 -------------- SOUTH KOREA 17.7% CJ Corp. ............................... Food Products 386,390 26,426,209 (a) Daewoo Shipbuilding & Marine Engineering Co. Ltd. .................. Machinery 2,043,510 30,399,975 (a) Hite Brewery Co. Ltd. .................. Beverages 277,400 22,911,225 (a) Hyundai Development Co. ................ Construction & Engineering 1,717,910 27,381,680 (a) Kangwon Land Inc. ...................... Hotels Restaurants & Leisure 2,296,897 29,842,798 (a) Kia Motors Corp. ....................... Automobiles 565,830 5,957,831 Korea Gas Corp. ........................ Gas Utilities 361,170 11,199,340 LG Chem Ltd. ........................... Chemicals 461,590 18,393,149 LG Electronics Inc. .................... Household Durables 175,230 10,850,312 LG Household & Health Care Ltd. ........ Household Products 373,070 9,892,554 (a) LG International Corp. ................. Trading Companies & Distributors 629,590 4,895,865 (a) LG Petrochemical Co. Ltd. .............. Chemicals 285,220 7,163,562 POSCO .................................. Metals & Mining 78,360 14,155,062 Samsung Electronics Co. Ltd. ........... Semiconductors & Semiconductor Equipment 194,480 84,634,119 Samsung Fine Chemicals Co. Ltd. ........ Chemicals 848,500 14,589,741 Samsung Heavy Industries Co. Ltd. ...... Machinery 4,320,670 26,962,450 SK Corp. ............................... Oil & Gas 107,580 5,913,159 SK Telecom Co. Ltd. .................... Wireless Telecommunication Services 66,120 12,582,728 -------------- 364,151,759 --------------
Annual Report | 13 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SWEDEN .5% (a) Oriflame Cosmetics, IDR ................ Personal Products 439,100 $ 10,178,274 -------------- TAIWAN 13.0% Acer Inc. .............................. Computers & Peripherals 9,412,480 15,544,360 Chunghwa Telecom Co. Ltd. .............. Diversified Telecommunication Services 10,185,000 20,023,986 D-Link Corp. ........................... Communications Equipment 15,633,488 18,195,629 Delta Electronics Inc. ................. Electronic Equipment & Instruments 19,099,661 33,645,204 Elan Microelectronics Corp. ............ Semiconductors & Semiconductor Equipment 10,841,178 6,104,344 Kinpo Electronics Inc. ................. Office Electronics 4,926,360 2,146,275 Lite-on Technology Corp. ............... Computers & Peripherals 17,060,000 18,192,325 MediaTek Inc. .......................... Semiconductors & Semiconductor Equipment 1,591,000 10,810,192 Mega Financial Holdings Co. Ltd. ....... Commercial Banks 25,308,032 17,434,599 Premier Image Technology Corp. ......... Leisure Equipment & Products 3,021,000 2,974,435 President Chain Store Corp. ............ Food & Staples Retailing 6,175,010 9,906,433 Siliconware Precision Industries Co. Ltd. ................... Semiconductors & Semiconductor Equipment 9,059,000 7,466,052 Sunplus Technology Co. Ltd. ............ Semiconductors & Semiconductor Equipment 7,953,010 11,157,730 Synnex Technology International Corp. .. Electronic Equipment & Instruments 1,967,300 2,902,371 Taiwan Cellular Corp. .................. Wireless Telecommunication Services 38,611,878 43,118,014 Taiwan Semiconductor Manufacturing Co. . Semiconductors & Semiconductor Equipment 15,202,000 24,149,135 UNI-President Enterprises Corp. ........ Food Products 30,200,180 15,769,833 Yuanta Core Pacific Securities Co. ..... Capital Markets 11,817,321 8,958,711 -------------- 268,499,628 -------------- THAILAND .9% BEC World Public Co. Ltd., fgn. ........ Media 5,417,500 2,187,960 (a) Kasikornbank Public Co. Ltd., fgn. ..... Commercial Banks 3,122,500 4,498,122 Land and House Public Co. Ltd., fgn. ... Real Estate 4,872,400 1,416,322 Shin Corp. Public Co. Ltd., fgn. ....... Wireless Telecommunication Services 303,300 310,135 Siam Cement Public Co. Ltd., fgn. ...... Construction Materials 210,100 1,491,681 Thai Airways International Public Co. Ltd., fgn. ................. Airlines 339,400 423,442 (a) Thai Military Bank Public Co. Ltd., fgn. Commercial Banks 86,332,200 8,350,288 (a) True Corp., PLC, rts., 3/28/08 ........ Diversified Telecommunication Services 2,088,420 -- -------------- 18,677,950 -------------- TURKEY 2.8% (a) Arcelik AS, Br. ........................ Household Durables 4,144,860,210 25,357,877 Migros Turk T.A.S. ..................... Food & Staples Retailing 1,846,402,500 15,335,341 Tupras-Turkiye Petrol Rafineleri AS .... Oil & Gas 948,100,000 9,632,162 (a) Turk Hava Yollari Anonim Ortakligi (THY), 144A ................. Airlines 498,278,000 2,937,568 Turkiye Is Bankasi AS, C ............... Commercial Banks 923,229,000 5,100,523 -------------- 58,363,471 --------------
14 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) UNITED KINGDOM 1.8% HSBC Holdings PLC ...................... Commercial Banks 1,621,407 $ 27,743,816 Provident Financial PLC ................ Consumer Finance 755,730 9,747,985 -------------- 37,491,801 -------------- TOTAL COMMON STOCKS (COST $1,303,529,081).................. 1,938,500,500 -------------- PREFERRED STOCKS 5.8% BRAZIL 5.8% Banco Bradesco SA, ADR, pfd. ........... Commercial Banks 1,527,473 38,278,461 Cia de Bebidas das Americas (Ambev), ADR, pfd. .................... Beverages 1,658,000 46,971,140 Cia Vale do Rio Doce, A, ADR, pfd. ..... Metals & Mining 451,500 11,007,570 Petroleo Brasileiro SA, ADR, pfd. ...... Oil & Gas 471,955 17,089,491 Suzano Bahia Sul Papel e Cel, pfd., A .. Paper & Forest Products 403,005 2,083,305 Usinas Siderurgicas de Minas Gerais SA, pfd. Metals & Mining 239,370 4,862,203 -------------- TOTAL PREFERRED STOCKS (COST $85,484,411)..................... 120,292,170 -------------- TOTAL INVESTMENTS (COST $1,389,013,492) 99.8%............ 2,058,792,670 OTHER ASSETS, LESS LIABILITIES .2%...... 4,739,067 -------------- NET ASSETS 100.0%....................... $2,063,531,737 ==============
(a) Non-income producing. (b) See Note 7 regarding other considerations. Annual Report | See notes to financial statements. | 15 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2004 --------------- EMERGING MARKETS SERIES --------------- Assets: Investments in securities: Cost ...................................................... $ 1,389,013,492 =============== Value ..................................................... 2,058,792,670 Foreign currency, at value (cost $1,178,121) ............... 1,169,178 Receivables: Investment securities sold ................................ 21,183,452 Capital shares sold ....................................... 2,358,288 Dividends ................................................. 2,201,320 Foreign income tax receivable ............................. 1,196,587 --------------- Total assets .......................................... 2,086,901,495 --------------- Liabilities: Payables: Capital shares redeemed ................................... 3,036,398 Affiliates ................................................ 2,254,047 Funds advanced by custodian ................................ 16,989,718 Deferred tax ............................................... 823,690 Other liabilities .......................................... 265,905 --------------- Total liabilities ..................................... 23,369,758 --------------- Net assets, at value ................................ $ 2,063,531,737 =============== Net assets consist of: Distributions in excess of net investment income ........... $ (24,856,992) Net unrealized appreciation (depreciation) ................. 669,062,187 Accumulated net realized gain (loss) ....................... (357,265,668) Capital shares ............................................. 1,776,592,210 --------------- Net assets, at value ........................................ $ 2,063,531,737 =============== Shares outstanding .......................................... 136,784,855 =============== Net asset value per share(a) ................................ $ 15.09 =============== (a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 16 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2004 --------------- EMERGING MARKETS SERIES --------------- Investment income: Dividends (net of foreign taxes of $6,754,952) ............ $ 59,496,184 Interest (net of foreign taxes of $570) ................... 573,520 --------------- Total investment income ............................... 60,069,704 --------------- Expenses: Management fees (Note 3) ................................... 24,162,871 Administrative fees (Note 3) ............................... 1,634,663 Transfer agent fees (Note 3) ............................... 15,395 Custodian fees (Note 4) .................................... 2,027,509 Reports to shareholders .................................... 17,200 Registration and filing fees ............................... 200,290 Professional fees .......................................... 170,200 Directors' fees and expenses ............................... 54,717 Other ...................................................... 60,130 --------------- Total expenses ............................................ 28,342,975 Expense reductions (Note 4) ............................... (3,661) --------------- Net expenses .......................................... 28,339,314 --------------- Net investment income ............................... 31,730,390 --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments (net of foreign taxes of $6,579,346) .......... 273,346,139 Foreign currency transactions ............................. (1,120,140) --------------- Net realized gain (loss) .............................. 272,225,999 Net change in unrealized appreciation (depreciation) on: Investments ............................................... 144,192,988 Translation of assets and liabilities denominated in foreign currencies ....................................... (343,039) Deferred taxes ............................................ 7,834,479 --------------- Net change in unrealized appreciation (depreciation) .. 151,684,428 --------------- Net realized and unrealized gain (loss) ..................... 423,910,427 --------------- Net increase (decrease) in net assets resulting from operations ................................................. $ 455,640,817 =============== Annual Report | See notes to financial statements. | 17 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 2004 and 2003
---------------------------------- EMERGING MARKETS SERIES ---------------------------------- 2004 2003 ---------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................... $ 31,730,390 $ 37,583,452 Net realized gain (loss) from investments and foreign currency transactions .............. 272,225,999 86,593,773 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes ........... 151,684,428 568,161,877 ---------------------------------- Net increase (decrease) in net assets resulting from operations ...................... 455,640,817 692,339,102 Distributions to shareholders from net investment income .................................... (39,319,998) (43,484,955) Capital share transactions (Note 2) ......................................................... (445,018,905) 208,779,714 Redemption fees ............................................................................. 913 -- ---------------------------------- Net increase (decrease) in net assets ................................................ (28,697,173) 857,633,861 Net assets: Beginning of year .......................................................................... 2,092,228,910 1,234,595,049 ---------------------------------- End of year ................................................................................ $ 2,063,531,737 $ 2,092,228,910 ================================== Distributions in excess of net investment income included in net assets: End of year ................................................................................ $ (24,856,992) $ (12,907,170) ==================================
18 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Emerging Markets Series (the Fund) is a separate, diversified series of Templeton Institutional Funds, Inc. (the Company). The Company is an open-end investment company registered under the Investment Company Act of 1940. The Fund seeks to achieve long-term capital growth by investing at least 80% of its total assets in equity securities issued by emerging market companies. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System, are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. Annual Report | 19 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund's policy is to qualify as a regulated investment company under Sub Chapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. The Fund is subject to a tax imposed on net realized gains of securities of certain foreign countries. When the Fund invests in these securities, the Fund records an estimated deferred tax liability for net unrealized gains. 20 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Common expenses incurred by the Company are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. Other expenses are charged to each Fund on a specific identification basis. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses, during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES Effective June 1, 2004, redemptions and exchanges of Fund shares held five trading days or less may be subject to the Fund's redemption fee, which is 1% of the amount redeemed. Effective March 1, 2005, the fee will increase to 2%. Such fees are retained by the Fund and accounted for as additional paid-in capital as noted in the Statements of Changes in Net Assets. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. Annual Report | 21 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 2. CAPITAL STOCK At December 31, 2004, there were 1.14 billion shares authorized ($0.01 par value), for the Company, of which 325 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
-------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 -------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------- Shares sold ................... 38,933,946 $ 502,321,321 50,763,689 $ 484,473,625 Shares issued in reinvestment of distributions .............. 2,567,946 35,813,965 3,654,518 40,669,079 Shares redeemed ............... (76,560,769) (983,154,191) (34,900,576) (316,362,990) -------------------------------------------------------------- Net increase (decrease) ....... (35,058,877) $(445,018,905) 19,517,631 $ 208,779,714 ==============================================================
3. TRANSACTIONS WITH AFFILIATES Certain officers and directors of the Fund are also officers or directors of the following entities:
- -------------------------------------------------------------------------------------- ENTITY AFFILIATION - -------------------------------------------------------------------------------------- Templeton Asset Management Ltd. (TAML) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TAML based on the Fund's average daily net assets as follows: - ----------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ----------------------------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% Over $20 billion Prior to May 1, 2004, the Fund paid an investment management fee to TAML of 1.25% per year of the average daily net assets of the Fund. 22 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate daily net assets of certain funds within the Company as follows: - ------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% Over $1.2 billion C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $15,395, of which $2,999 was paid to Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2004, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At December 31, 2004 the Fund had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows: Capital loss carryovers expiring in: 2008 ................................................ $ 17,699,013 2009 ................................................ 248,561,095 2010................................................. 87,334,612 ------------- $ 353,594,720 ============= At December 31, 2004 the Fund had deferred currency losses occurring subsequent to October 31, 2004 of $108,607. For tax purposes, such losses will be reflected in the year ending December 31, 2005. Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, and foreign taxes paid on net realized gains. Annual Report | 23 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 5. INCOME TAXES (CONTINUED) Net realized losses differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, passive foreign investment company shares, and foreign taxes paid on net realized gains. At December 31, 2004, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows: Cost of investments .................................. $ 1,428,740,590 =============== Unrealized appreciation .............................. $ 638,195,924 Unrealized depreciation .............................. (8,143,844) --------------- Net unrealized appreciation (depreciation) ........... $ 630,052,080 =============== Distributable earnings - undistributed ordinary income ..................................... $ 11,307,765 =============== The tax character of distributions paid during the years ended December 31, 2004 and 2003, was as follows: --------------------------- 2004 2003 --------------------------- Distributions paid from - ordinary income. $ 39,319,998 $ 43,484,955 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the year ended December 31, 2004 aggregated $987,529,533 and $1,357,342,003, respectively. 7. OTHER CONSIDERATIONS Templeton Asset Management Ltd., as the Fund's Manager, may serve as a member on the board of directors of certain companies in which the Fund invests and/or may represent the Fund in certain corporate negotiations. At December 31, 2004, the Manager serves in one or more of these capacities for Lukoil Holdings. As a result of this involvement, the Manager may be in possession of certain material non-public information which, pursuant to the Fund's policies and the requirements of the federal securities laws, could prevent the Fund from trading in the securities of such companies for limited or extended periods of time. 24 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 8. REGULATORY MATTERS INVESTIGATIONS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, received subpoenas and/or requests for documents, information and/or testimony. The Company and its current employees provided documents and information in response to those requests and subpoenas. SETTLEMENTS Beginning in August 2004, the Company entered into settlements with certain regulators investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters described in this section is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary, Franklin Advisers, Inc., reached an agreement with the SEC that resolved the issues resulting from the SEC investigation into market timing activity. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the activities of a limited number of third parties that ended in 2000 and those that were the subject of the first Massachusetts administrative complaint described below. Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc. neither admitted nor denied any of the findings contained therein, Franklin Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. At this time, it is unclear which funds or which shareholders of any particular fund will receive distributions. The Order also required Franklin Advisers, Inc. to, among other things, enhance and periodically review compliance policies and procedures. Annual Report | 25 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) On September 20, 2004, Franklin Resources, Inc. announced that two of its subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the "State of Massachusetts") related to its administrative complaint filed on February 4, 2004, concerning one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as described above. Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a cease-and-desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts Consent Order included two different sections: "Statements of Fact" and "Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS admitted the facts in the Statements of Fact. On October 25, 2004, the State of Massachusetts filed a second administrative complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it described the Massachusetts Consent Order and stated that "Franklin did not admit or deny engaging in any wrongdoing") failed to state that Franklin Advisers, Inc. and FTAS admitted the Statements of Fact portion of the Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a second agreement with the State of Massachusetts on November 19, 2004, resolving the Second Complaint. As a result of the November 19, 2004 settlement, Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts Consent Order did not change and there was no monetary fine associated with this second settlement. On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the issues resulting from the CAGO's investigation concerning sales and marketing support payments. Under the terms of the settlement, FTDI neither admitted nor denied the allegations in the CAGO's complaint and agreed to pay $2 million to the State of California as a civil penalty, $14 million to the funds, to be allocated by an independent distribution consultant to be paid for by FTDI, and $2 million to the CAGO for its investigative costs. 26 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b) of the Securities Exchange Act of 1934" (the "Second Order"). Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc. neither admitted nor denied the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and Franklin Advisers, Inc. also agreed to implement certain measures and undertakings relating to marketing support payments to broker-dealers for the promotion or sale of fund shares, including making additional disclosures in the funds' Prospectuses and Statements of Additional Information. The Second Order further requires the appointment of an independent distribution consultant, at the Company's expense, who shall develop a plan for the distribution of the penalty and disgorgement to the funds. OTHER LEGAL PROCEEDINGS The Company, and other funds, and certain current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York and Florida, alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts administrative complaint and the findings in the SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc. Annual Report | 27 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 8. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) In addition, the Company, as well as certain current and former officers, employees, and directors, have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and/or payment of allegedly excessive advisory, commission, and distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds. The Company and fund management strongly believes that the claims made in each of the lawsuits identified above are without merit and intends to vigorously defend against them. The Company cannot predict with certainty, however, the eventual outcome of the remaining governmental investigations or private lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on the Company's future financial results. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. 28 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - EMERGING MARKETS SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Emerging Markets Series of Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 9, 2005 Annual Report | 29 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) EMERGING MARKETS SERIES Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby designates up to a maximum of $29,407,093 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In January 2005, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2004. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. At December 31, 2004 more than 50% of the Emerging Markets Series' total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund hereby designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 9, 2004, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, foreign qualified dividends, and adjusted foreign source income as designated by the Fund, to shareholders of record. As a service to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below reports foreign source income with the required adjustments to foreign source qualified dividends. This information is provided to simplify your reporting of foreign source income for line 1 of Form 1116. 30 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES - ------------------------------------------------------------------------ ADJUSTED FOREIGN FOREIGN FOREIGN FOREIGN TAX SOURCE QUALIFIED SOURCE PAID INCOME DIVIDENDS INCOME COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------ Austria ............. 0.0011 0.0043 0.0043 0.0018 Belgium ............. 0.0003 0.0011 0.0011 0.0005 Brazil .............. 0.0033 0.0216 0.0022 0.0203 China ............... 0.0000 0.0128 0.0057 0.0095 Croatia ............. 0.0000 0.0023 0.0000 0.0023 Czech Republic ...... 0.0006 0.0023 0.0023 0.0010 Egypt ............... 0.0000 0.0015 0.0015 0.0006 Greece .............. 0.0000 0.0041 0.0041 0.0018 Hong Kong ........... 0.0000 0.0212 0.0000 0.0212 Hungary ............. 0.0020 0.0076 0.0076 0.0033 India ............... 0.0477 0.0109 0.0109 0.0047 Indonesia ........... 0.0001 0.0004 0.0004 0.0002 Luxembourg .......... 0.0000 0.0017 0.0017 0.0007 Malaysia ............ 0.0017 0.0038 0.0000 0.0038 Mexico .............. 0.0000 0.0168 0.0164 0.0074 Philippines ......... 0.0009 0.0020 0.0020 0.0009 Poland .............. 0.0007 0.0025 0.0025 0.0011 Russia .............. 0.0003 0.0019 0.0017 0.0009 Singapore ........... 0.0071 0.0401 0.0000 0.0401 South Africa ........ 0.0019 0.0333 0.0221 0.0207 South Korea ......... 0.0097 0.0334 0.0319 0.0152 Spain ............... 0.0003 0.0012 0.0012 0.0005 Taiwan .............. 0.0186 0.0467 0.0000 0.0467 Thailand ............ 0.0001 0.0020 0.0020 0.0009 Turkey .............. 0.0000 0.0005 0.0005 0.0002 United Kingdom ...... 0.0001 0.0005 0.0005 0.0002 ------------------------------------------------ TOTAL ............... $ 0.0965 $ 0.2765 $ 0.1226 $ 0.2065 ================================================ Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit or deduction (assuming you held your shares in the Fund for a minimum of 16 days during the 30-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate). Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends without adjustment for the lower U.S. tax rates. Generally, this is the foreign source income to be reported by certain trusts and corporate shareholders. Annual Report | 31 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. If you are an individual shareholder who does not meet the qualified dividend holding period requirements, you may find this information helpful to calculate the foreign source income adjustment needed to complete line 1 of Form 1116. Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per share of foreign source income the Fund paid to you. These amounts reflect the Foreign Source Income reported in column 2 adjusted for the tax rate differential on foreign source qualified dividends that may be required for certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B). If you are an individual shareholder who meets the qualified dividend holding period requirements, generally, these Adjusted Foreign Source Income amounts may be reported directly on line 1 of Form 1116 without additional adjustment. In January 2005, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2004. The Foreign Source Income reported on Form 1099-DIV has been reduced to take into account the tax rate differential on foreign source qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B). Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2004 individual income tax returns. 32 | Annual Report BOARD MEMBERS AND OFFICERS The name, age, and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ----------------------------------------------------------------------------------------------------------------------------------- FRANK J. CROTHERS (60) Director Since 1990 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ----------------------------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO (72) Director Since 1992 143 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ----------------------------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas); H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Canadian National Railway (railroad); and White Mountains Insurance Group, Ltd. (holding company). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences 500 East Broward Blvd. Corporation; MedImmune, Inc. Suite 2100 (biotechnology); and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988- 2002), White Mountains Insurance Group, Ltd. (holding company) (1987- 2004), and Spacehab, Inc. (aerospace services) (1994-2003). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ----------------------------------------------------------------------------------------------------------------------------------- FRED R. MILLSAPS (75) Director Since 1992 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ----------------------------------------------------------------------------------------------------------------------------------- FRANK A. OLSON (72) Director Since 2003 21 Director, White Mountains Insurance 500 East Broward Blvd. Group Ltd. (holding company); Amerada Suite 2100 Hess Corporation (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas); and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Co. (medical technology), Cooper Industries (electrical products and tools and hardware), Health Net (formerly Foundation Health), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison) and UAL Corporation (airlines). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - -----------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- CONSTANTINE D. TSERETOPOULOS Director Since 1990 21 None (50) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- **NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas); Total Logistics, Inc. (formerly Fort Lauderdale, FL 33394-3091 C2, Inc. (operating and investment business)); and Weatherford International, Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ----------------------------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (71) Director, Director and Vice 142 None One Franklin Parkway Vice President since San Mateo, CA 94403-1906 President 1993 and and Chairman Chairman of the of the Board Board since 1995 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (59) Vice Since 1996 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ----------------------------------------------------------------------------------------------------------------------------------- JEFFREY A. EVERETT (40) Vice Since 2001 Not Applicable Not Applicable PO Box N-7759 President Lyford Cay, Nassau, Bahamas - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ----------------------------------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN (44) Vice Since 1990 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (57) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ----------------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (57) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor To THE Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ----------------------------------------------------------------------------------------------------------------------------------- RUPERT H. JOHNSON, JR. (64) Vice Since 1996 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- JOHN R. KAY (64) Vice Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- MICHAEL O. MAGDOL (67) Vice Since 2002 Not Applicable Not Applicable 600 Fifth Avenue President Rockefeller Center - AML New York, NY 10020-2302 Compliance - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- MARK MOBIUS (68) Vice Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House President 8 Connaught Road Central Hong Kong - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ----------------------------------------------------------------------------------------------------------------------------------- DONALD F. REED (60) President and President since Not Applicable Not Applicable 1 Adelaide Street East, Chief 1993 and Chief Suite 2101 Executive Executive Officer - Toronto, Ontario Canada Officer - Investment M5C 3B8 Investment Management Management since 2002 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel, LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of FTTrust Company. - ----------------------------------------------------------------------------------------------------------------------------------- ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ----------------------------------------------------------------------------------------------------------------------------------- GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ----------------------------------------------------------------------------------------------------------------------------------- MURRAY L. SIMPSON (67) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - -----------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- GALEN G. VETTER (53) Chief Since May 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, Chief FL 33394-3091 Accounting Officer - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP. - -----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of Templeton Institutional Funds, Inc. (TIFI) under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR. OLSON, WHO HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY CHAIRMAN FROM 1980-2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD. AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 39 TEMPLETON INSTITUTIONAL FUNDS, INC. SHAREHOLDER INFORMATION EMERGING MARKETS SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the Securities and Exchange Commission's website at sec.gov and reflect the 12-month period beginning July 1, 2003 and ending June 30, 2004. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 40 | Annual Report [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 FRANKLINTEMPLETONINSTITUTIONAL.COM ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES INVESTMENT MANAGER Templeton Asset Management Ltd. DISTRIBUTOR Franklin Templeton Distributors, Inc. FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 This report must be preceded or accompanied by the current Templeton Institutional Funds, Inc., Emerging Markets Series prospectus, which contains more complete information including charges, expenses, and risks factors. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT456 A2004 02/05 ANNUAL REPORT - -------------------------------------------------------------------------------- 12 31 2004 THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- ------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. ------------------------------------- Foreign Smaller Companies Series [GRAPHIC OMITTED] FRANKLIN[R] TEMPLETON[R] INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY Contents ANNUAL REPORT - -------------------------------------------------------------------------------- TIFI Foreign Smaller Companies Series ............................ 2 Performance Summary .............................................. 6 Your Fund's Expenses ............................................. 8 Financial Highlights and Statement of Investments ................ 10 Financial Statements ............................................. 15 Notes to Financial Statements .................................... 18 Report of Independent Registered Public Accounting Firm .......... 27 Tax Designation .................................................. 28 Board Members and Officers ....................................... 31 Shareholder Information .......................................... 38 ------------------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE ------------------------------------------------------------- Annual Report | 1 Annual Report TIFI Foreign Smaller Companies Series YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of smaller companies located outside the U.S., including emerging markets. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This is the Templeton Institutional Funds, Inc. (TIFI) Foreign Smaller Companies Series (the "Fund") annual report for the fiscal year ended December 31, 2004. PERFORMANCE OVERVIEW The Fund posted a 21.28% cumulative total return for the 12-month period ended December 31, 2004. The Fund underperformed its benchmark, the S&P/Citigroup Global ex-U.S. <$2 Billion Index 1, which returned 29.98% during the same period. ECONOMIC AND MARKET OVERVIEW The international equity markets were range-bound with relatively unimpressive returns for the first three quarters of the year, but rebounded in the fourth quarter. Several factors explain this pattern. The high price of oil (hovering around $43 a barrel as of the end of the period) triggered worries about inflation, decreased spending due to cautionary consumer and business sentiment, and slower economic and corporate profit growth. Global interest rates, which have remained historically low, have increased in several countries, including the U.S. and the UK. For other areas, such as the euro zone, the expectation was that short-term rates eventually should follow suit and begin to rise. The U.S. presidential election also added uncertainty to the markets during the year, creating a wait-and-see effect. Importantly, given our long-term, bottom-up investment strategy, we were able to take advantage of the recent volatility 1. Source: Standard & Poor's Micropal. The S&P/Citigroup Global ex-U.S. <$2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure the performance of global developed and emerging market equity securities, excluding the United States, with market capitalizations less than $2 billion. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. 2 | Annual Report in the equity markets by using short-term weakness to build positions of securities that we believe are attractively valued. INVESTMENT STRATEGY We take a long-term, value-oriented approach to investing. We focus our analysis primarily at the company level; we seek to identify when a company's value on the stock exchange is substantially below our estimate of the company's underlying worth. Our analysts determine the intrinsic value of a company first by understanding the company and the industry in which it operates, and then by forecasting long-term earnings and cash flow potential. We are patient investors; our typical holding period is five to seven years. In looking for opportunities, we put less emphasis on the current situation and more on what could materialize over the long term. Hence, the greatest opportunities are often in companies that are out of favor due to an adverse turn in the business cycle, a restructuring, or temporary difficulties to which our analysis indicates the market may be overreacting. MANAGER'S DISCUSSION During the period under review, the Fund benefited from the strong performance of several stocks. For example, we owned shares of Tokyo Individualized Educational Institute. Tokyo Individualized Educational Institute is a leading provider of private education in the Japanese market. The company is unique as it targets below-average students, a market that is often ignored in Japan as most education-related companies seek to attract only the brighter students. In the past, a shortage of managers constrained the company's growth. The company performed well as a result of a highly successful management-training program. This program allowed the company to improve upon the quality of services it provides, which has increased the company's ability to retain current students and improve upon enrollment growth. A rise in per-school enrollments is very important as it leads to revenue growth and improved operating margins. There are significant economies of scale in this business because fixed costs per student decrease sharply as new students are added. We continue to hold shares at the end of the period as we believe the market is still undervaluing the effects of future enrollment growth on the company's earnings. Kidde PLC, a leading fire and safety products manufacturer for aerospace, industrial, and retail markets, also performed well during the period. In aerospace and defense, the company holds the number one global position for fire safety systems located on aircrafts. In the company's residential and commercial division, it is the market leader for carbon monoxide alarms, a leading [graphic omitted] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS] GEOGRAPHIC DISTRIBUTION ON 12/31/042 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS Europe ................................. 34.6% Asia ................................... 30.4% North America .......................... 9.9% Australia & New Zealand ................ 6.5% Latin America .......................... 1.9% Middle East/Africa ..................... 1.3% Short-Term Investments & Other Net Assets ....................... 15.4% SECTOR DIVERSIFICATION ON 12/31/04 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS - ------------------------------------------ Industrials 22.2% - ------------------------------------------ Consumer Discretionary 20.2% - ------------------------------------------ Financials 12.6% - ------------------------------------------ Materials 7.0% - ------------------------------------------ Consumer Staples 6.7% - ------------------------------------------ Information Technology 5.7% - ------------------------------------------ Energy 4.0% - ------------------------------------------ Health Care 3.9% - ------------------------------------------ Utilities 1.2% - ------------------------------------------ Telecommunication Services 1.1% - ------------------------------------------ Short-Term Investments & Other Net Assets 15.4% - ------------------------------------------ Annual Report | 3 10 LARGEST EQUITY POSITIONS ON 12/31/04 PERCENTAGE OF TOTAL NET ASSETS - ---------------------------------------- Iluka Resources Ltd. 2.4% - ---------------------------------------- Amer Group Ltd., A 1.7% - ---------------------------------------- Aalberts Industries NV 1.5% - ---------------------------------------- Hansol Paper Co. Ltd. 1.4% - ---------------------------------------- Sol Melia SA 1.4% - ---------------------------------------- Geest PLC 1.4% - ---------------------------------------- Hugo Boss AG, pfd. 1.4% - ---------------------------------------- Bodycote International PLC, Common & Restricted 1.3% - ---------------------------------------- D. Carnegie & Co. AB 1.3% - ---------------------------------------- Techtronic Industries Co. Ltd. 1.3% - ---------------------------------------- [graphic omitted] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS] FUND ASSET ALLOCATION ON 12/31/04 Equity ............................... 84.6 Short-Term Investments & Other Net Assets ..................... 15.4 provider of fire blankets and escape ladders, and is one of the key players in the fire extinguisher market. The company has performed well as it operates in a growth industry driven by regulatory demand and increasing consumer awareness of the need for safety products and systems. During the period, Kidde announced that it accepted a takeover offer from United Technologies, a large U.S.-based multinational. As a result of the offer, the stock price increased materially, and we chose to sell our shares in the market. Another company that performed well during the period was Aalberts Industries NV, a Dutch engineering group that manufactures high-grade industrial products. The company is a strong beneficiary of improving economic conditions in the European economy, as it is a leading supplier to many European industrial companies. Operating margins are expected to improve as capacity utilization rates are expected to rise with the economic strengthening in the region. We also believe the company is attractive because it has an outstanding track record of finding accretive acquisitions. This trend should continue because of the fragmentation of the markets in which Aalberts operates. We believe the company has significant future earnings prospects and remains undervalued with a forward price-to-earnings ratio of just under 15x. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2004, the U.S. dollar declined in value relative to most non-U.S. currencies. At the end of the period, the Fund's portfolio was invested predominantly in securities with non-U.S. currency exposure, which resulted in a positive effect on Fund performance. However, one cannot expect the same result in future periods. Negatively affecting performance during the period was our holdings in Sons of Gwalia, Ltd. a gold and tantalum mining company with operations in Western Australia. This stock has been a large disappointment because of significant write-downs of its gold assets, as the company's over-leveraged balance sheet did not allow the company to develop production capability to cover its hedges. The stock was suspended from trading and we have written down our position as the company is in the hands of creditors. Also hindering performance during the period was Vestas Wind Systems, AS, Denmark's developer and manufacturer of windmills, as the company reduced earnings expectation for 2005 during the period. However, consistent with our focus on long-term value, we continue to hold the stock because of the 4 | Annual Report positive growth outlook for wind power. In addition, the company's competitive position remains strong, and we estimate that normal operating profitability is substantially higher than the low profitability the company generates currently. We thank you for your continued participation in the Fund and look forward to serving your investment needs. Sincerely, [PHOTO OMITTED] /s/Cindy L. Sweeting - -------------------- Cindy L. Sweeting [PHOTO OMITTED] /s/Simon Rudolph - ---------------- Simon Rudolph [PHOTO OMITTED] /s/Tucker Scott - --------------- Tucker Scott Portfolio Management Team TIFI Foreign Smaller Companies Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/04 TOTAL RETURNS Your dividend income will vary depending on the dividends or interest paid by the securities in the Fund's portfolio. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. The unmanaged index includes reinvested dividends. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index.
- --------------------------------------------------------------------------------------------------------------------------- AVERAGE CUMULATIVE ANNUAL SINCE ONE YEAR SINCE INCEPTION 1,2 CUMULATIVE 1,2 INCEPTION 1,3 (10/21/02) - --------------------------------------------------------------------------------------------------------------------------- TIFI Foreign Smaller Companies Series 21.28% 32.41% 85.22% - --------------------------------------------------------------------------------------------------------------------------- S&P/Citigroup Global ex-U.S. <$2 Billion Index4 29.98% 41.43% 114.06% - ---------------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT [graphic omitted] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS] TIFI - Foreign Smaller S&P/CitiGroup Global Companies Series ex U.S. < 2 Billion Index Inception Date Oct-2002 * $5,000,000.00 $ 5,000,000.00 Oct-02 5,060,000.00 5,013,199.00 Nov-02 5,160,000.00 5,196,018.84 Dec-02 5,050,000.00 5,172,103.64 Jan-03 4,895,000.00 5,176,886.80 Feb-03 4,730,000.00 5,121,084.10 Mar-03 4,750,000.00 5,057,841.28 Apr-03 5,110,000.00 5,426,138.61 May-03 5,535,000.00 5,892,223.30 Jun-03 5,765,000.00 6,193,026.01 Jul-03 6,090,000.00 6,428,460.09 Aug-03 6,435,000.00 6,830,238.84 Sep-03 6,585,000.00 7,175,152.24 Oct-03 7,060,000.00 7,701,822.77 Nov-03 7,155,000.00 7,737,429.84 Dec-03 7,636,009.88 8,234,338.41 Jan-04 7,901,255.38 8,555,867.92 Feb-04 8,120,593.00 8,866,768.48 Mar-04 8,019,733.32 9,210,087.09 Apr-04 7,834,305.96 8,830,098.24 May-04 7,849,758.24 8,703,080.81 Jun-04 8,096,994.72 9,025,672.69 Jul-04 7,875,512.04 8,722,212.42 Aug-04 7,860,059.76 8,841,257.54 Sep-04 8,112,447.00 9,176,604.67 Oct-04 8,313,326.64 9,454,655.79 Nov-04 8,895,362.52 10,197,025.91 Dec-04 9,261,194.88 10,703,055.36 6 | Annual Report Performance Summary (CONTINUED) ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 1. Past fee waivers by the Fund's manager and administrator increased the Fund's total returns. Without these waivers, the Fund's total returns would have been lower. 2. Cumulative total return shows the change in value of an investment over the indicated periods. It assumes income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period, and the deduction of all applicable charges and fees. 3. Average annual total return represents the change in value of an investment over the indicated periods. 4. Source: Standard & Poor's Micropal. The S&P/Citigroup Global ex-U.S. <$2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure the performance of global developed and emerging market equity securities, excluding the United States, with market capitalizations less than $2 billion. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Annual Report | 7 Your Fund's Expenses As a Fund Shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000 IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50 In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table below can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for the Fund and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in the shareholder reports of other funds. 8 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 6/30/04 VALUE 12/31/04 PERIOD* 6/30/04-12/31/04 - --------------------------------------------------------------------------------------------------------- Actual $1,000.00 $1,143.80 $5.12 - --------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,020.36 $4.82 - ---------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio, net of fee waivers, of 0.95% multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. Annual Report | 9 Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS FOREIGN SMALLER COMPANIES SERIES
----------------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 2002C ----------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................................................... $14.97 $10.10 $10.00 ----------------------------------------- Income from investment operations: Net investment income (loss) a ........................................................ .21 .17 (.01) Net realized and unrealized gains (losses) ............................................ 2.93 4.99 .11 ----------------------------------------- Total from investment operations ....................................................... 3.14 5.16 .10 ----------------------------------------- Less distributions from: Net investment income ................................................................. (.16) (.13) -- Net realized gains .................................................................... (.50) (.16) -- ----------------------------------------- Total distributions .................................................................... (.66) (.29) -- ----------------------------------------- Net asset value, end of year ........................................................... $17.45 $14.97 $10.10 ========================================= Total return b ......................................................................... 21.28% 51.21% 1.00% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................................................ $97,495 $33,583 $6,195 Ratios to average net assets: Expenses .............................................................................. 1.16% 1.58% 7.71%d Expenses, net of waiver and payments by affiliate ..................................... .95% .95% .95%d Net investment income (loss) .......................................................... 1.34% 1.40% (.55)%d Portfolio turnover rate ................................................................ 27.51% 12.58% --
aBased on average daily shares outstanding. bTotal return is not annualized for periods less than one year. cFor the period October 21, 2002 (commencement date) to December 31, 2002. dAnnualized. 10 | See notes to financial statements. | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------------------------------- FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 82.8% AUSTRALIA 6.5% APN News & Media Ltd. ........................ Media 121,050 $ 487,971 APN News & Media Ltd., 144A .................. Media 19,600 79,010 Billabong International Ltd. ................. Textiles Apparel & Luxury Goods 91,610 821,052 Iluka Resources Ltd. ......................... Metals & Mining 465,410 2,291,440 John Fairfax Holdings Ltd. ................... Media 222,990 794,180 Mayne Group Ltd. ............................. Health Care Providers & Services 205,910 686,608 Promina Group Ltd. ........................... Insurance 282,060 1,192,223 ------------ 6,352,484 ------------ BAHAMAS .6% a Steiner Leisure Ltd. ......................... Specialty Retail 18,100 540,828 ------------ BELGIUM 1.2% Barco NV ..................................... Electronic Equipment & Instruments 13,130 1,212,474 ------------ CANADA 9.3% CAE Inc. ..................................... Aerospace & Defense 224,800 946,546 a GSI Lumonics Inc. ............................ Machinery 48,780 558,020 Laurentian Bank of Canada .................... Commercial Banks 40,390 810,595 Legacy Hotels ................................ Real Estate 157,500 948,139 Linamar Corp. ................................ Auto Components 91,400 1,173,602 North West Company Fund ...................... Diversified Financial Services 46,480 1,121,938 a Precision Drilling Corp. ..................... Energy Equipment & Services 19,040 1,198,900 Quebecor World Inc. .......................... Commercial Services & Supplies 43,280 931,024 Sobeys Inc. .................................. Food & Staples Retailing 15,700 451,620 Torstar Corp., B ............................. Media 30,030 550,849 Transcontinental Inc., B ..................... Commercial Services & Supplies 22,000 426,114 ------------ 9,117,347 ------------ CHINA 2.7% a China Power International Development Ltd., 144A ........................................ Electric Utilities 583,000 215,640 China Resources Power Co. Ltd. ............... Electric Utilities 1,748,000 950,147 TCL International Holdings Inc. .............. Household Durables 2,158,000 555,269 Travelsky Technology Ltd., H ................. IT Services 231,000 187,230 Weiqiao Textile Co. Ltd. ..................... Textiles Apparel & Luxury Goods 372,000 586,275 Weiqiao Textile Co. Ltd., 144A ............... Textiles Apparel & Luxury Goods 82,000 129,233 ------------ 2,623,794 ------------ DENMARK 1.7% ISS AS ....................................... Commercial Services & Supplies 12,080 673,174 a Vestas Wind Systems AS ....................... Electrical Equipment 68,440 848,923 a Vestas Wind Systems AS, 144A ................. Electrical Equipment 14,740 182,833 ------------ 1,704,930 ------------ FINLAND 5.0% Amer Group Ltd., A ........................... Leisure Equipment & Products 93,720 1,637,417 Huhtamaki OYJ ................................ Containers & Packaging 52,280 839,976 KCI Konecranes International PLC ............. Machinery 8,920 395,270 Metso OYJ .................................... Machinery 67,060 1,065,159 Orion OYJ .................................... Pharmaceuticals 55,430 899,237 ------------ 4,837,059 ------------ Annual Report | 11 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) GERMANY 1.0% Celesio AG ................................... Health Care Providers & Services 4,710 $ 381,571 a Jenoptik AG .................................. Semiconductors & Semiconductor Equipment 51,890 550,643 ------------ 932,214 ------------ HONG KONG 11.7% Asia Satellite Telecommunications Holdings Ltd. ............................... Diversified Telecommunication Services 213,000 405,568 ASM Pacific Technology Ltd. .................. Semiconductors & Semiconductor Equipment 215,000 774,496 China Pharmaceutical Enterprise & Investment Corp. Ltd. .................................. Pharmaceuticals 2,730,975 720,268 Dah Sing Financial Holdings Ltd. ............. Commercial Banks 118,000 914,664 Fountain Set Holdings Ltd. ................... Textiles Apparel & Luxury Goods 976,000 634,109 Giordano International Ltd. .................. Specialty Retail 1,748,000 1,096,323 Hang Lung Group Ltd. ......................... Real Estate 305,000 600,363 Hopewell Holdings Ltd. ....................... Transportation Infrastructure 329,000 844,425 Lerado Group Holdings Co. Ltd. ............... Household Durables 1,607,186 246,057 Li & Fung Ltd. ............................... Distributors 162,000 273,029 Moulin International Holdings Ltd. ........... Personal Products 1,680,000 1,145,533 Ngai Lik Industrial Holding Ltd. ............. Household Durables 2,352,000 593,083 Techtronic Industries Co. Ltd. ............... Household Durables 584,000 1,273,518 Texwinca Holdings Ltd. ....................... Textiles Apparel & Luxury Goods 611,000 577,765 Wing Hang Bank Ltd. .......................... Commercial Banks 91,000 638,058 Wing Lung Bank Ltd. .......................... Commercial Banks 80,500 652,468 ------------ 11,389,727 ------------ INDIA 1.6% Satyam Computers Services Ltd. ............... IT Services 60,183 570,382 a Tata Motors Ltd., ADR ........................ Automobiles 83,060 990,075 ------------ 1,560,457 ------------ INDONESIA .7% PT Indosat (Persero) TBK ..................... Diversified Telecommunication Services 1,043,900 646,639 ------------ ISRAEL 1.3% a Orbotech Ltd. ................................ Electronic Equipment & Instruments 57,880 1,225,320 ------------ ITALY .5% Banca Popolare di Verona e SCRL .............. Commercial Banks 24,260 492,495 ------------ JAPAN 4.8% Japan Airport Terminal Co. Ltd. .............. Transportation Infrastructure 61,000 594,396 Kikkoman Corp. ............................... Food Products 56,000 534,192 Meitec Corp. ................................. Commercial Services & Supplies 25,200 939,895 Sangetsu Co. Ltd. ............................ Household Durables 25,300 617,555 Sohgo Security Services Co. Ltd. ............. Commercial Services & Supplies 70,700 1,038,203 Tokyo Individualized Educational Institute Inc. Commercial Services & Supplies 48,340 358,703 a Tokyo Individualized Educational Institute Inc., New Line ............................. Commercial Services & Supplies 96,680 567,318 ------------ 4,650,262 ------------ 12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) LUXEMBOURG .7% a Thiel Logistik AG ............................ IT Services 115,440 $ 646,973 ------------ MEXICO 1.5% Grupo Aeroportuario del Sureste SA de CV, ADR ......................................... Transportation Infrastructure 31,810 870,003 Grupo Continental SA ......................... Beverages 311,440 598,547 ------------ 1,468,550 ------------ NETHERLANDS 6.9% Aalberts Industries NV ....................... Industrial Conglomerates 29,747 1,441,090 Arcadis NV ................................... Construction & Engineering 17,400 323,482 Draka Holding NV ............................. Electrical Equipment 61,900 898,781 Draka Holding NV, 144A ....................... Electrical Equipment 15,715 228,180 IHC Caland NV ................................ Energy Equipment & Services 6,480 411,001 Imtech NV .................................... Construction & Engineering 29,970 1,055,368 OPG Groep NV ................................. Health Care Providers & Services 19,090 1,113,920 Vedior NV .................................... Commercial Services & Supplies 77,790 1,265,676 ------------ 6,737,498 ------------ NORWAY 1.2% Prosafe ASA .................................. Energy Equipment & Services 44,510 1,203,677 ------------ SINGAPORE 1.8% Huan Hsin Holdings Ltd. ...................... Communications Equipment 479,000 242,097 OSIM International Ltd. ...................... Personal Products 1,414,800 767,076 Want Want Holdings Ltd. ...................... Food Products 848,000 758,960 ------------ 1,768,133 ------------ SOUTH KOREA 4.4% a Bank of Pusan ................................ Commercial Banks 159,720 1,226,598 a Daegu Bank Co. Ltd. .......................... Commercial Banks 127,000 883,308 a Halla Climate Control Co. Ltd. ............... Auto Components 81,760 809,544 a Hansol Paper Co. Ltd. ........................ Paper & Forest Products 136,280 1,355,954 ------------ 4,275,404 ------------ SPAIN 2.5% Actividades de Construcciones y Servicios SA . Construction & Engineering 12,160 277,219 Sol Melia SA ................................. Hotels Restaurants & Leisure 135,760 1,344,851 Transportes Azkar SA ......................... Air Freight & Logistics 102,390 872,563 ------------ 2,494,633 ------------ SWEDEN 2.7% D. Carnegie & Co. AB ......................... Capital Markets 98,970 1,281,126 Kungsleden AB ................................ Real Estate 15,630 590,504 Observer AB .................................. Media 150,070 790,591 ------------ 2,662,221 ------------ SWITZERLAND 3.8% Gurit Heberlein AG, Br. ...................... Chemicals 1,150 938,013 Kuoni Reisen Holding AG, B ................... Hotels Restaurants & Leisure 340 149,260 Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SWITZERLAND (CONT.) Lindt & Spruengli Chocolate Works Ltd. ....... Food Products 700 $ 994,425 SIG Holding AG ............................... Machinery 3,440 785,285 Vontobel Holding AG .......................... Capital Markets 34,920 812,485 ------------ 3,679,468 ------------ TAIWAN 2.5% Fu Sheng Industrial .......................... Industrial Conglomerates 635,000 946,807 Giant Manufacturing Co. ...................... Leisure Equipment & Products 322,000 552,029 a KYE Systems Corp. ............................ Computers & Peripherals 227,000 167,805 Taiwan Fu Hsing .............................. Household Durables 525,000 571,406 a Taiwan Green Point Enterprises Co. Ltd. ...... Machinery 80,000 249,135 ------------ 2,487,182 ------------ THAILAND .2% BEC World Public Co. Ltd., fgn. .............. Media 447,000 180,529 ------------ UNITED KINGDOM 6.0% Bodycote International PLC ................... Machinery 378,950 1,189,265 Bodycote International PLC, 144A ............. Machinery 35,200 110,469 Burberry Group PLC ........................... Textiles Apparel & Luxury Goods 40,200 309,421 DS Smith PLC ................................. Containers & Packaging 309,210 924,401 Geest PLC .................................... Food Products 107,710 1,316,966 Homeserve .................................... Commercial Services & Supplies 59,846 875,324 John Wood Group .............................. Energy Equipment & Services 450,220 1,158,000 ------------ 5,883,846 ------------ TOTAL COMMON STOCKS (COST $61,834,972) ....... 80,774,144 ------------ PREFERRED STOCKS 1.8% BRAZIL .4% Aracruz Celulose SA, ADR, pfd. ............... Paper & Forest Products 11,480 432,796 ------------ GERMANY 1.4% Hugo Boss AG, pfd. ........................... Textiles Apparel & Luxury Goods 40,110 1,312,833 ------------ TOTAL PREFERRED STOCKS (COST $1,049,277) ..... 1,745,629 ------------ ------------------ PRINCIPAL AMOUNT ------------------ SHORT TERM INVESTMENTS (COST $7,803,938) 8.0% b U.S. Treasury Bills, 1/06/05 - 3/31/05 ....... $7,827,000 7,805,675 ------------ TOTAL INVESTMENTS (COST $70,688,187) 92.6% 90,325,448 OTHER ASSETS, LESS LIABILITIES 7.4% .......... 7,169,475 ------------ NET ASSETS 100.0% ............................ $97,494,923 ============
aNon-income producing. bSecurity is traded on a discount basis with no stated coupon rate. 14 | See notes to financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2004
------------------ FOREIGN SMALLER COMPANIES SERIES ------------------ Assets: Investments in securities: Cost .............................................................................................. $70,688,187 ================== Value ............................................................................................. 90,325,448 Foreign currency, at value (cost $837,678) ......................................................... 856,588 Receivables: Investment securities sold ........................................................................ 47,073 Capital shares sold ............................................................................... 6,331,434 Dividends ......................................................................................... 72,889 ------------------ Total assets .................................................................................. 97,633,432 ------------------ Liabilities: Payables: Investment securities purchased ................................................................... 54,128 Affiliates ........................................................................................ 40,737 Funds advanced by custodian ........................................................................ 3,743 Deferred tax ....................................................................................... 3,698 Other liabilities .................................................................................. 36,203 ------------------ Total liabilities ............................................................................. 138,509 ------------------ Net assets, at value ........................................................................ $97,494,923 ================== Net assets consist of: Distributions in excess of net investment income ................................................... $ (36,766) Net unrealized appreciation (depreciation) ......................................................... 19,654,558 Accumulated net realized gain (loss) ............................................................... 1,248,546 Capital shares ..................................................................................... 76,628,585 ------------------ Net assets, at value ................................................................................ $97,494,923 ================== Shares outstanding .................................................................................. 5,586,575 ================== Net asset value per share a ......................................................................... $17.45 ================== aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | See notes to financial statements. | 15 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2004 ------------------ FOREIGN SMALLER COMPANIES SERIES ------------------ Investment income: Dividends (net of foreign taxes of $123,167) ....................................................... $ 1,144,218 Interest (net of foreign taxes of $40) ............................................................. 62,804 ------------------ Total investment income ....................................................................... 1,207,022 ------------------ Expenses: Management fees (Note 3) ........................................................................... 396,608 Administrative fees (Note 3) ....................................................................... 105,762 Transfer agent fees (Note 3) ....................................................................... 12,082 Custodian fees (Note 4) ............................................................................ 21,200 Reports to shareholders ............................................................................ 28,200 Registration and filing fees ....................................................................... 21,940 Professional fees .................................................................................. 20,950 Directors' fees and expenses ....................................................................... 6,800 Other .............................................................................................. 4,650 ------------------ Total expenses ................................................................................ 618,192 Expenses waived/paid by affiliate (Note 3) .................................................... (112,542) Expense reductions (Note 4) ................................................................... (9,960) ------------------ Net expenses ............................................................................... 495,690 ------------------ Net investment income .................................................................... 711,332 ------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ....................................................................................... 3,098,838 Foreign currency transactions ..................................................................... (25,743) ------------------ Net realized gain (loss) ...................................................................... 3,073,095 Net change in unrealized appreciation (depreciation) on: Investments ....................................................................................... 10,379,121 Translation of assets and liabilities denominated in foreign currencies ........................... 21,663 Deferred taxes .................................................................................... 2,510 ------------------ Net change in unrealized appreciation (depreciation) .......................................... 10,403,294 ------------------ Net realized and unrealized gain (loss) ............................................................. 13,476,389 ------------------ Net increase (decrease) in net assets resulting from operations ..................................... $14,187,721 ================== 16 | See notes to financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 2004 and 2003 ------------------------------------ FOREIGN SMALLER COMPANIES SERIES ------------------------------------ 2004 2003 ------------------------------------ Increase (decrease) in net assets: Operations: Net investment income .............................................................. $ 711,332 $ 277,742 Net realized gain (loss) from investments and foreign currency transactions ........ 3,073,095 676,438 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes ........ 10,403,294 9,256,404 ------------------------------------ Net increase (decrease) in net assets resulting from operations ................. 14,187,721 10,210,584 Distributions to shareholders from: Net investment income .............................................................. (752,060) (271,177) Net realized gains ................................................................. (2,184,958) (354,366) ------------------------------------ Total distributions to shareholders ................................................. (2,937,018) (625,543) Capital share transactions (Note 2) ................................................. 52,661,504 17,802,794 ------------------------------------ Net increase (decrease) in net assets ........................................... 63,912,207 27,387,835 Net assets: Beginning of year ................................................................... 33,582,716 6,194,881 ------------------------------------ End of year ......................................................................... $97,494,923 $33,582,716 ==================================== Distributions in excess of net investment income/undistributed net investment income included in net assets: End of year ......................................................................... $ (36,766) $ 29,067 ====================================
Annual Report | See notes to financial statements. | 17 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Foreign Smaller Companies Series (the Fund) is a separate, diversified series of Templeton Institutional Funds, Inc. (the Company). The Company is an open-end investment company registered under the Investment Company Act of 1940. The Fund seeks long-term capital growth. Under normal conditions, the Fund invests at least 80% of its net assets in the equity securities of smaller companies located outside the United States, including emerging markets. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System, are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. U.S. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. 18 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund's policy is to qualify as a regulated investment company under Sub Chapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. Annual Report | 19 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME AND DEFERRED TAXES (CONTINUED) The Fund is subject to a tax imposed on net realized gains of securities of certain foreign countries. When the Fund invests in these securities, the Fund records an estimated deferred tax liability for net unrealized gains. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Common expenses incurred by the Company are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. Other expenses are charged to each Fund on a specific identification basis. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES Effective June 1, 2004, redemptions and exchanges of Fund shares held five trading days or less may be subject to the Fund's redemption fee, which is 1% of the amount redeemed. Effective March 1, 2005, the fee will increase to 2%. Such fees are retained by the Fund and accounted for as additional paid-in capital. There were no redemption fees for the year. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 2. CAPITAL STOCK At December 31, 2004, there were 1.14 billion shares authorized ($0.01 par value), for the Company, of which 60 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 ------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------- Shares sold ..................... 3,247,849 $51,064,194 1,664,949 $18,209,070 Shares issued in reinvestment of distributions ................ 149,768 2,467,773 36,517 524,024 Shares redeemed ................. (54,830) (870,463) (70,813) (930,300) ------------------------------------------------------------------- Net increase (decrease) ......... 3,342,787 $52,661,504 1,630,653 $17,802,794 ===================================================================
3. TRANSACTIONS WITH AFFILIATES Certain officers and directors of the Fund are also officers or directors of the following entities:
- --------------------------------------------------------------------------------------------------------------------------- ENTITY AFFILIATION - --------------------------------------------------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the Fund's average daily net assets as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.750% Up to and including $1 billion 0.730% Over $1 billion, up to and including $5 billion 0.710% Over $5 billion, up to and including $10 billion 0.690% Over $10 billion, up to and including $15 billion 0.670% Over $15 billion, up to and including $20 billion 0.650% Over $20 billion Prior to May 1, 2004, the Fund paid an investment management fee to TIC of .75% per year of the average daily net assets of the Fund. B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of .20% per year of the Fund's average daily net assets. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $12,082, of which $7,666 was paid to Investor Services. D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT The investment manager and administrator have agreed in advance to voluntarily waive their respective fees and assume payment of other expenses, through May 1, 2005, as noted in the Statement of Operations. Total expenses waived are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2004, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, and organization costs. Net realized gains differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At December 31, 2004, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments .................................... $70,825,810 ============= Unrealized appreciation ................................ $19,955,962 Unrealized depreciation ................................ (456,324) ------------- Net unrealized appreciation (depreciation) ............. $19,499,638 ============= Undistributed ordinary income .......................... $ 790,400 Undistributed long term capital gains .................. 559,508 ------------- Distributable earnings ................................. $ 1,349,908 ============= 22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 5. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended December 31, 2004 and 2003, was as follows: ------------------------- 2004 2003 ------------------------- Distributions paid from: Ordinary income ......................... $1,758,770 $625,543 Long term capital gain .................. 1,178,248 -- ------------------------- ......................................... $2,937,018 $625,543 ========================= 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the year ended December 31, 2004 aggregated $51,827,373 and $13,089,055, respectively. 7. REGULATORY MATTERS INVESTIGATIONS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, received subpoenas and/or requests for documents, information and/or testimony. The Company and its current employees provided documents and information in response to those requests and subpoenas. SETTLEMENTS Beginning in August 2004, the Company entered into settlements with certain regulators investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters described in this section is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). Annual Report | 23 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 7. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary, Franklin Advisers, Inc., reached an agreement with the SEC that resolved the issues resulting from the SEC investigation into market timing activity. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the activities of a limited number of third parties that ended in 2000 and those that were the subject of the first Massachusetts administrative complaint described below. Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc. neither admitted nor denied any of the findings contained therein, Franklin Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. At this time, it is unclear which funds or which shareholders of any particular fund will receive distributions. The Order also required Franklin Advisers, Inc. to, among other things, enhance and periodically review compliance policies and procedures. On September 20, 2004, Franklin Resources, Inc. announced that two of its subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the "State of Massachusetts") related to its administrative complaint filed on February 4, 2004, concerning one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as described above. Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a cease-and-desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts Consent Order included two different sections: "Statements of Fact" and "Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS admitted the facts in the Statements of Fact. 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 7. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) On October 25, 2004, the State of Massachusetts filed a second administrative complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it described the Massachusetts Consent Order and stated that "Franklin did not admit or deny engaging in any wrongdoing") failed to state that Franklin Advisers, Inc. and FTAS admitted the Statements of Fact portion of the Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a second agreement with the State of Massachusetts on November 19, 2004, resolving the Second Complaint. As a result of the November 19, 2004 settlement, Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts Consent Order did not change and there was no monetary fine associated with this second settlement. On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the issues resulting from the CAGO's investigation concerning sales and marketing support payments. Under the terms of the settlement, FTDI neither admitted nor denied the allegations in the CAGO's complaint and agreed to pay $2 million to the State of California as a civil penalty, $14 million to the funds, to be allocated by an independent distribution consultant to be paid for by FTDI, and $2 million to the CAGO for its investigative costs. On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b) of the Securities Exchange Act of 1934" (the "Second Order"). Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc. neither admitted nor denied the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and Franklin Advisers, Inc. also agreed to implement certain measures and undertakings relating to marketing support payments to broker-dealers for the promotion or sale of fund shares, including making additional disclosures in the funds' Prospectuses and Statements of Additional Information. The Second Order further requires the appointment of an independent distribution consultant, at the Company's expense, who shall develop a plan for the distribution of the penalty and disgorgement to the funds. Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 7. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS The Company, and other funds, and certain current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York and Florida, alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts administrative complaint and the findings in the SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc. In addition, the Company, as well as certain current and former officers, employees, and directors, have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and/or payment of allegedly excessive advisory, commission, and distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds. The Company and fund management strongly believes that the claims made in each of the lawsuits identified above are without merit and intends to vigorously defend against them. The Company cannot predict with certainty, however, the eventual outcome of the remaining governmental investigations or private lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on the Company's future financial results. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. 26 | Annual Report Templeton Institutional Funds, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FOREIGN SMALLER COMPANIES SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Foreign Smaller Companies Series of Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period from October 21, 2002 (commencement date) to December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 9, 2005 Annual Report | 27 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) FOREIGN SMALLER COMPANIES SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby designates $1,716,508 as a capital gain dividend for the fiscal year ended December 31, 2004. Under Section 854(b)(2) of the Code, the Fund hereby designates up to a maximum of $928,143 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In January 2005, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2004. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. At December 31, 2004, more than 50% of the Foreign Smaller Companies Series' total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund hereby designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 9, 2004, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, foreign qualified dividends, and adjusted foreign source income as designated by the Fund, to shareholders of record. As a service to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below reports foreign source income with the required adjustments to foreign source qualified dividends. This information is provided to simplify your reporting of foreign source income for line 1 of Form 1116. 28 | Annual Report Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES
- ---------------------------------------------------------------------------------------------------------- FOREIGN ADJUSTED FOREIGN TAX FOREIGN QUALIFIED FOREIGN PAID SOURCE INCOME DIVIDENDS SOURCE INCOME COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE - ---------------------------------------------------------------------------------------------------------- Australia .................................. 0.0012 0.0222 0.0222 0.0095 Belgium .................................... 0.0005 0.0027 0.0027 0.0012 Bermuda .................................... 0.0000 0.0005 0.0004 0.0003 Brazil ..................................... 0.0002 0.0029 0.0025 0.0015 Canada ..................................... 0.0047 0.0244 0.0125 0.0173 China ...................................... 0.0000 0.0013 0.0000 0.0013 Denmark .................................... 0.0001 0.0007 0.0007 0.0003 Finland .................................... 0.0037 0.0200 0.0200 0.0086 France ..................................... 0.0000 0.0001 0.0001 0.0000 Germany .................................... 0.0006 0.0040 0.0008 0.0035 Hong Kong .................................. 0.0000 0.0304 0.0000 0.0304 India ...................................... 0.0000 0.0020 0.0020 0.0009 Indonesia .................................. 0.0003 0.0015 0.0015 0.0006 Italy ...................................... 0.0002 0.0010 0.0010 0.0004 Japan ...................................... 0.0006 0.0072 0.0070 0.0032 Mexico ..................................... 0.0000 0.0039 0.0039 0.0017 Netherlands ................................ 0.0022 0.0121 0.0121 0.0052 New Zealand ................................ 0.0003 0.0018 0.0018 0.0008 Norway ..................................... 0.0016 0.0087 0.0087 0.0037 Singapore .................................. 0.0001 0.0029 0.0000 0.0029 South Korea ................................ 0.0013 0.0064 0.0064 0.0027 Spain ...................................... 0.0004 0.0024 0.0024 0.0010 Sweden ..................................... 0.0006 0.0032 0.0032 0.0014 Switzerland ................................ 0.0008 0.0044 0.0044 0.0019 Taiwan ..................................... 0.0006 0.0023 0.0000 0.0023 Thailand ................................... 0.0003 0.0024 0.0024 0.0010 United Kingdom ............................. 0.0039 0.0314 0.0297 0.0144 ------------------------------------------------------ TOTAL ...................................... $0.0242 $0.2028 $0.1484 $0.1180 ======================================================
Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit or deduction (assuming you held your shares in the Fund for a minimum of 16 days during the 30-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate). Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends without adjustment for the lower U.S. tax rates. Generally, this is the foreign source income to be reported by certain trusts and corporate shareholders. Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. If you are an individual shareholder who does not meet the qualified dividend holding period requirements, you may find this information helpful to calculate the foreign source income adjustment needed to complete line 1 of Form 1116. Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per share of foreign source income the Fund paid to you. These amounts reflect the Foreign Source Income reported in column 2 adjusted for the tax rate differential on foreign source qualified dividends that may be required for certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B). If you are an individual shareholder who meets the qualified dividend holding period requirements, generally, these Adjusted Foreign Source Income amounts may be reported directly on line 1 of Form 1116 without additional adjustment. In January 2005, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2004. The Foreign Source Income reported on Form 1099-DIV has been reduced to take into account the tax rate differential on foreign source qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B). Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2004 individual income tax returns. 30 | Annual Report Board Members and Officers The name, age, and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat 500 East Broward Blvd. packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (60) Director Since 1990 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (72) Director Since 1992 143 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess 500 East Broward Blvd. Corporation (exploration and Suite 2100 refining of oil and gas); H.J. Fort Lauderdale, FL 33394-3091 Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Canadian National Railway (railroad); and White Mountains Insurance Group, Ltd. (holding company). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------ Annual Report | 31 - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences 500 East Broward Blvd. Corporation; MedImmune, Inc. Suite 2100 (biotechnology); and Fort Lauderdale, FL 33394-3091 Overstock.com (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding company) (1987-2004), and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ FRED R. MILLSAPS (75) Director Since 1992 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ---------------------------------------------------------------------------------------------------------------------------------- FRANK A. OLSON (72) Director Since 2003 21 Director, White Mountains 500 East Broward Blvd. Insurance Group Ltd. (holding Suite 2100 company); Amerada Hess Fort Lauderdale, FL 33394-3091 Corporation (exploration and refining of oil and gas); and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Co. (medical technology), Cooper Industries (electrical products and tools and hardware), Health Net (formerly Foundation Health), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison) and UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ 32 | Annual Report - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS (50) Director Since 1990 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED BOARD MEMBERS AND OFFICERS - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess 500 East Broward Blvd. Corporation (exploration and Suite 2100 refining of oil and gas); Fort Lauderdale, FL 33394-3091 Total Logistics, Inc. (formerly C2, Inc. (operating and investment business)); and Weatherford International, Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (71) Director, Vice Director and Vice 142 None One Franklin Parkway President President since San Mateo, CA 94403-1906 and Chairman 1993 and of the Board Chairman of the Board since 1995 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ Annual Report | 33 - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (59) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (40) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ------------------------------------------------------------------------------------------------------------------------------------ MARTIN L. FLANAGAN (44) Vice President Since 1990 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ 34 | Annual Report - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (64) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (64) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable. 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-2302 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ Annual Report | 35 - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (68) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ DONALD F. REED (60) President and President since Not Applicable Not Applicable 1 Adelaide Street East, Chief Executive 1993 and Chief Suite 2101 Officer - Executive Officer - Toronto, Ontario Canada Investment Investment M5C 3B8 Management Management since 2002 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel, LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of FTTrust Company. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - ------------------------------------------------------------------------------------------------------------------------------------ 36 | Annual Report - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP. - ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson is considered to be an interested person of Templeton Institutional Funds, Inc. (TIFI) under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR. OLSON, WHO HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY CHAIRMAN FROM 1980-2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD. AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 37 Templeton Institutional Funds, Inc. SHAREHOLDER INFORMATION FOREIGN SMALLER COMPANIES SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the Securities and Exchange Commission's website at sec.gov and reflect the 12-month period beginning July 1, 2003 and ending June 30, 2004. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 38 | Annual Report This page intentionally left blank. This page intentionally left blank. [GRAPHIC OMITTED] FRANKLIN[R] TEMPLETON[R] INSTITUTIONAL FRANKLIN TEMPLETON INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 FRANKLINTEMPLETONINSTITUTIONAL.COM ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 This report must be preceded or accompanied by the current Templeton Institutional Funds, Inc., Foreign Smaller Companies Series prospectus, which contains more complete information including charges, expenses, and risk factors. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT458 A2004 02/05 ANNUAL REPORT | 12 31 2004 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. - -------------------------------------------------------------------------------- Franklin Templeton Non-U.S. Core Equity Series [LOGO OMITTED] FRANKLIN[R] TEMPLETON[R] INSTITUTIONAL FRANKLIN O TEMPLETON O FIUCIARY Contents ANNUAL REPORT - -------------------------------------------------------------------------------- TIFI Franklin Templeton Non-U.S. Core Equity Series ............... 2 Performance Summary ............................................... 7 Your Fund's Expenses............................................... 9 Financial Highlights and Statement of Investments ................. 11 Financial Statements .............................................. 17 Notes to Financial Statements ..................................... 20 Report of Independent Registered Public Accounting Firm ........... 29 Tax Designation ................................................... 30 Board Members and Officers ........................................ 33 Shareholder Information............................................ 40 ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE ----------------------------------------------------- Annual Report | 1 Annual Report TIFI Franklin Templeton Non-U.S. Core Equity Series YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: The Fund's investment goal is long-term capital growth. The Fund invests primarily in the equity securities of companies located outside the U.S., including emerging markets. Under normal conditions, the Fund will invest at least 80% of its net assets in foreign (non-U.S.) equity securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This is the Templeton Institutional Funds, Inc. (TIFI) Franklin Templeton Non-U.S. Core Equity Series (the "Fund") annual report for the fiscal year ended December 31, 2004. PERFORMANCE OVERVIEW The Fund posted a 18.77% cumulative total return for the 12-month period ended December 31, 2004. The Fund underperformed its benchmark, the MSCI EAFE Index 1,2, which returned 20.70% during the same period. ECONOMIC AND MARKET OVERVIEW The global economic recovery continued through 2004, and global equity markets rose for the second year in a row. The majority of performance for the year came in the fourth quarter after the conclusion of the presidential election in the United States. For most of the year, the markets were concerned about rising energy prices and interest rates, as well as the uncertainty surrounding the U.S. presidential election. For the year, the MSCI EAFE Index returned 20.70% (in US dollars), of which 15.36% was during the fourth quarter. Value 1. Souce: Standard & Poor's Micropal. The Morgan Stanley Capital International (MSCI) Europe, Australasia, and Far East (EAFE) Index is a free float-adjusted, capitalization-weighted index that is designed to measure equity market performance in the global developed markets, excluding the United States and Canada. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. All MSCI data is presented "as is." The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or distributing the MSCI data is strictly prohibited. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12. 2 | Annual Report outpaced growth again in 2004, as the MSCI EAFE Value Index 2,3 returned 24.88% versus only 16.48% for the MSCI EAFE Growth 2,4 Index. Geographically, the Asia Pacific (ex-Japan) region was a strong performing area of the MSCI EAFE Index in 2004, returning 29.6%. This region was led by New Zealand (37.5%) and Australia (32.0%). Europe dominated the list of best performing countries in the MSCI EAFE Index 1,2, with Austria the top performer at 72.3% for the year. Norway was second, as the country benefited from high oil prices. Greece, Belgium, and Ireland rounded out the top five. Relative sector performance paralleled the gap between growth and value style performance. Sectors that are more heavily weighted in the MSCI EAFE Value Index, including the utilities and financials sectors, significantly outperformed mainstay growth sectors such as technology and health care. The continued lack of capital spending, compounded by overcapacity issues in the semiconductor industry, hindered the performance of the technology sector. Meanwhile, the health care sector suffered from regulatory and drug-specific issues in the large cap pharmaceuticals group. Energy was one of the top performing sectors of 2004, as continued unrest in the Middle East and speculative buying helped push the price per barrel of oil up to $56 in October. While prices fell from their October high to close the year at $43 per barrel, oil prices rose almost 34% in 2004. This rise in oil prices triggered investor worries about inflation, decreased spending (due to cautionary consumer and business sentiment), and slower economic and corporate profit growth. During the last few weeks of 2004, the U.S. dollar fell to its lowest price against the euro since the euro was introduced in 1999, and to a five-year low GEOGRAPHIC DISTRIBUTION ON 12/31/04 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS [PIE CHART OMITTED] EDGAR REPRESENTATION OF PLOT POINTS TO FOLLOW: Europe 62.0% Asia 25.7% Australia & New Zealand 3.1% North America 3.0% Latin America 2.9% MIddle East/Africa 1.8% Short-Term Investments & Other Net Assets 1.5% SECTOR DIVERSIFICATION ON 12/31/04 EQUITY ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS - -------------------------------------- Financials 24.8% - -------------------------------------- Consumer Discretionary 13.8% - -------------------------------------- Industrials 12.0% - -------------------------------------- Telecommunication Services 9.8% - -------------------------------------- Information Technology 9.2% - -------------------------------------- Health Care 8.4% - -------------------------------------- Materials 7.2% - -------------------------------------- Energy 5.2% - -------------------------------------- Consumer Staples 4.8% - -------------------------------------- Utilities 3.3% - -------------------------------------- Short-Term Investments & Other Net Assets 1.5% - -------------------------------------- 3. Source: Standard & Poor's Micropal. The MSCI EAFE Value Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index designed to measure the performance of value-oriented equity securities from global developed markets, excluding the U.S. and Canada. The index is constructed based on a two-dimensional framework for style segmentation utilizing eight valuation attributes and is designed to divide 50% of the free float-adjusted market capitalization of the underlying MSCI EAFE Index into each a value index and a growth index. 4. Source: Standard & Poor's Micropal. The MSCI EAFE Growth Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index designed to measure the performance of growth-oriented equity securities from global developed markets, excluding the U.S. and Canada. The index is constructed based on a two-dimensional framework for style segmentation utilizing eight valuation attributes and is designed to divide 50% of the free float-adjusted market capitalization of the underlying MSCI EAFE Index into each a value index and a growth index. Annual Report | 3 versus the yen. The dollar fell against most of the world's major currencies in 2004, making American exports more affordable around the world, but hindering the European and Japanese economies that are dependent upon exports to the United States. The effects of the weak dollar were felt acutely in Japan, where a slowdown in exports caused a 0.6% contraction in GDP for the second quarter of 2004, followed by a disappointing 0.0% growth rate in the third quarter of 2004. INVESTMENT STRATEGY The Fund invests primarily in equity securities of foreign companies located outside of the United States, including emerging markets. The Fund pursues a disciplined "blend" of growth and value strategies by allocating approximately 50% of the portfolio to each strategy. The growth and value allocations are rebalanced whenever changes in market values cause one strategy to comprise more than 55% of the portfolio. The value manager focuses on bottom-up valuation analysis of the equity securities, while the growth manager utilizes both bottom-up as well as top-down macroeconomic and thematic evaluations of market sectors. MANAGER'S DISCUSSION Currency exposures were an important driver of the Fund's performance for 2004. The decline in the U.S. dollar benefited U.S.-based fund investors as foreign assets appreciated in U.S. dollar terms. For example, the MSCI EAFE Index returned 13.1% in local currency terms, but 20.7% in U.S. dollars. Likewise, about a third of the Fund's performance in 2004 was driven by currency gains. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2004, the U.S. dollar declined in value relative to most non-U.S. currencies. At the end of the period, the Fund's portfolio was invested predominantly in securities with non-U.S. currency exposure, which resulted in a positive effect on Fund performance. However, one cannot expect the same result in future periods. 10 LARGEST EQUITY POSITIONS ON 12/31/04 PERCENTAGE OF TOTAL NET ASSETS - -------------------------------------- Telefonica SA 1.6% - -------------------------------------- Esprit Holdings 1.5% - -------------------------------------- Atlas Copco AB, A 1.4% - -------------------------------------- Smith & Nephew PLC 1.4% - -------------------------------------- Sompo Japan Insurance Inc. 1.4% - -------------------------------------- Tesco PLC 1.4% - -------------------------------------- Sun Hung Kai Properties Ltd. 1.4% - -------------------------------------- ING Groep NV 1.4% - -------------------------------------- Anglo Irish Bank Corp. PLC 1.4% - -------------------------------------- Sanofi-Aventis 1.3% - -------------------------------------- FUND ASSET ALLOCATION ON 12/31/04 [PIE CHART OMITTED] EDGAR REPRESENTATION OF PLOT POINTS TO FOLLOW: Equity 98.5% Short-Term Investments & Other Net Assets 1.5% 4 | Annual Report The Fund's allocation between the growth and value portions was not altered over the course of the year. The value portion of the Fund has increased relative to the growth portion, but not sufficiently to require a rebalancing. In the growth portion of the portfolio, both sector allocations and stock selection contributed positively to relative performance versus the MSCI EAFE Growth Index. An overweighting in the financials sector was the largest positive sector contribution to relative performance, while an underweighting to the materials sector was the largest negative contributor to performance, but relatively small in magnitude. Within the financials sector, the majority of outperformance came from real estate companies in Hong Kong, which posted very strong gains in 2004 in large part due to the strong economic growth in China. Stock selection in the growth portion of the Fund was particularly strong in the consumer staples, energy, financials and telecommunications sectors, but was partially offset by poor stock selection in the industrials sector. The poor stock selection in the industrials sector stemmed from holdings in Japan and Europe that suffered from lower than expected global capital expenditure spending in 2004. Some positions in this sector were reduced during the fourth quarter. The value portion of the Fund benefited from its sector and geographical diversification, generating positive returns in all major sectors and areas of the world. On a sector basis, the largest contributions to returns came from the industrials, financials, health care, and materials sectors. Excluding financials, the value portion of the Fund maintained overweight positions in all of these sectors relative to the MSCI EAFE Value Index, which contributed to provide excess returns. On the negative side, the value portion of the Fund underperformed due to poor stock selection in the consumer discretionary sector, but this was mitigated by an underweighting in the sector. Underweighted positions in the technology and utilities sectors also detracted from relative performance, but were offset by strong stock selection in both of the sectors. Annual Report | 5 We thank you for your continued participation in the Fund and look forward to serving your investment needs. Sincerely, Gary P. Motyl, CFA John P. Remmert Canyon A. Chan, CFA Portfolio Managers TIFI Franklin Templeton Non-U.S. Core Equity Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Annual Report Performance Summary as of 12/31/04 TOTAL RETURNS Your dividend income will vary depending on the dividends or interest paid by the securities in the Fund's portfolio. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. The unmanaged index includes reinvested dividends. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index.
- --------------------------------------------------------------------------------------------------------- CUMULATIVE AVERAGE SINCE ONE YEAR ANNUAL SINCE INCEPTION 1,2 CUMULATIVE 1,2 INCEPTION 1,3 (9/03/02) - --------------------------------------------------------------------------------------------------------- TIFI Franklin Templeton Non-U.S. Core Equity Series 18.77% 19.75% 52.11% - --------------------------------------------------------------------------------------------------------- MSCI EAFE Index 4,5 20.70% 24.22% 65.64% - ---------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $5,000,000 INVESTMENT (9/03/02-12/31/04) Millions [LINE CHART OMITTED]
TIFI Franklin Templeton Non-U.S. Core Equity Series MSCI EAFE Index Sep-02 $5,000,000.00 $5,000,000.00 Oct-02 4,670,000.00 4,630,500.00 Nov-02 4,795,000.00 4,879,620.00 Dec-02 5,015,000.00 5,101,640.00 Jan-03 4,747,450.00 4,930,740.00 Feb-03 4,516,360.00 4,725,130.00 Mar-03 4,395,790.00 4,616,920.00 Apr-03 4,295,610.00 4,529,660.00 May-03 4,768,430.00 4,979,000.00 Jun-03 5,045,080.00 5,285,210.00 Jul-03 5,115,500.00 5,415,760.00 Aug-03 5,271,430.00 5,547,900.00 Sep-03 5,417,300.00 5,682,720.00 Oct-03 5,482,690.00 5,858,880.00 Nov-03 5,844,850.00 6,224,470.00 Dec-03 5,975,630.00 6,363,900.00 Jan-04 6,403,740.00 6,861,560.00 Feb-04 6,547,640.00 6,958,990.00 Mar-04 6,696,680.00 7,121,140.00 Apr-04 6,635,010.00 7,163,870.00 May-04 6,485,970.00 7,007,690.00 Jun-04 6,501,390.00 7,037,830.00 Jul-04 6,614,450.00 7,194,770.00 Aug-04 6,393,460.00 6,962,380.00 Sep-04 6,393,460.00 6,994,410.00 Oct-04 6,578,480.00 7,178,360.00 Nov-04 6,820,030.00 7,423,860.00 Dec-04 7,318,560.00 7,933,130.00 7,605,572.00 8,281,400.00
Annual Report | 7 Performance Summary (CONTINUED) ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 1. Past fee waivers by the Fund's manager and administrator increased the Fund's total returns. Without these waivers, the Fund's total returns would have been lower. 2. Cumulative total return shows the change in value of an investment over the indicated periods. It assumes income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period, and the deduction of all applicable charges and fees. 3. Average annual total return represents the change in value of an investment over the indicated periods. 4. The MSCI Europe, Australasia, and Far East (EAFE) Index is a free float-adjusted, capitalization-weighted index that is designed to measure equity market performance in the global developed markets, excluding the United States and Canada. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 5. All MSCI data is presented "as is." The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or distributing the MSCI data is strictly prohibited. 8 | Annual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 9 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE ON 6/30/04 VALUE ON 12/31/04 PERIOD* 6/30/04-12/31/04 - ------------------------------------------------------------------------------------------------------- Actual $1,000.00 $1,149.80 $4.54 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,020.91 $4.27 - -------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio, net of fee waivers, of 0.84% multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. 10 | Annual Report Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
---------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 2002 C ---------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $12.46 $9.45 $10.00 ---------------------------------- Income from investment operations: Net investment income a .................................... .19 .19 .01 Net realized and unrealized gains (losses) ................. 2.12 3.09 (.51) ---------------------------------- Total from investment operations ............................ 2.31 3.28 (.50) ---------------------------------- Less distributions from: Net investment income ...................................... (.17) (.27) (.05) Net realized gains ......................................... (.37) -- -- ---------------------------------- Total distributions ......................................... (.54) (.27) (.05) ---------------------------------- Net asset value, end of year ................................ $14.23 $12.46 $ 9.45 ---------------------------------- Total return b .............................................. 18.77% 34.89% (5.05)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $2,846 $2,493 $2,942 Ratios to average net assets: Expenses ................................................... 2.53% 5.31% 5.47%d Expenses, net of waiver and payments by affiliate .......... .84% .84% .84%d Net investment income ...................................... 1.45% 1.87% .28%d Portfolio turnover rate ..................................... 24.45% 39.97% 6.36% a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c For the period September 3, 2002 (commencement date) to December 31, 2002. d Annualized.
Annual Report | See notes to financial statements. | 11 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 98.5% AUSTRALIA 3.1% AMP Ltd. ............................................. Insurance 1,370 $ 7,785 Qantas Airways Ltd. .................................. Airlines 4,970 14,433 QBE Insurance Group Ltd. ............................. Insurance 2,000 24,030 St. George Bank Ltd. ................................. Commercial Banks 1,500 29,647 Woodside Petroleum Ltd. .............................. Oil & Gas 800 12,587 ----------- 88,482 ----------- AUSTRIA 1.1% Erste Bank der Oester Sparkassen AG .................. Commercial Banks 600 31,998 ----------- BERMUDA 1.0% ACE Ltd. ............................................. Insurance 640 27,360 ----------- CANADA 2.0% Alcan Inc. ........................................... Metals & Mining 300 14,708 BCE Inc. ............................................. Diversified Telecommunication Services 1,060 25,560 Encana Corp. ......................................... Oil & Gas 300 17,109 ----------- 57,377 ----------- CHINA 1.1% China Mobile (Hong Kong) Ltd., fgn. .................. Wireless Telecommunication Services 4,450 15,086 Huaneng Power International Inc., H .................. Electric Utilities 20,000 14,924 ----------- 30,010 ----------- DENMARK .4% TDC AS ............................................... Diversified Telecommunication Services 140 5,918 a Vestas Wind Systems AS ............................... Electrical Equipment 370 4,589 a Vestas Wind Systems AS, 144A ......................... Electrical Equipment 123 1,526 ----------- 12,033 ----------- FINLAND 1.0% Stora Enso OYJ, R (EUR/FIM Traded) ................... Paper & Forest Products 1,820 27,809 ----------- FRANCE 5.3% Accor SA ............................................. Hotels Restaurants & Leisure 140 6,119 AXA SA ............................................... Insurance 610 15,049 Dassault Systemes SA ................................. Software 350 17,621 Essilor International SA ............................. Health Care Equipment & Supplies 100 7,823 Michelin SA, B ....................................... Auto Components 530 33,939 Sanofi-Aventis ....................................... Pharmaceuticals 480 38,300 Suez SA .............................................. Multi-Utilities & Unregulated Power 1,190 31,683 ----------- 150,534 ----------- GERMANY 8.9% BASF AG .............................................. Chemicals 350 25,134 Bayer AG, Br. ........................................ Chemicals 510 17,232 Celesio AG ........................................... Health Care Providers & Services 460 37,266 Deutsche Post AG ..................................... Air Freight & Logistics 1,520 34,776 E.ON AG .............................................. Electric Utilities 260 23,702
12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) GERMANY (CONT.) Puma AG .............................................. Textiles Apparel & Luxury Goods 120 $ 32,715 SAP AG ............................................... Software 150 26,706 Siemens AG ........................................... Industrial Conglomerates 400 33,849 Volkswagen AG ........................................ Automobiles 460 20,818 ----------- 252,198 ----------- HONG KONG 5.7% Esprit Holdings ...................................... Specialty Retail 7,000 42,327 Hang Seng Bank ....................................... Commercial Banks 900 12,505 Sun Hung Kai Properties Ltd. ......................... Real Estate 4,000 40,012 Swire Pacific Ltd., A ................................ Industrial Conglomerates 2,000 16,725 Television Broadcasts Ltd. ........................... Media 5,000 23,222 Wharf Holdings Ltd. .................................. Real Estate 8,000 27,995 ----------- 162,786 ----------- IRISH REPUBLIC 1.4% Anglo Irish Bank Corp. PLC ........................... Commercial Banks 1,600 38,713 ----------- ISRAEL 1.8% a Check Point Software Technologies Ltd. ............... Software 1,160 28,571 Teva Pharmaceutical Industries Ltd., ADR ............. Pharmaceuticals 800 23,888 ----------- 52,459 ----------- ITALY 4.6% Arnoldo Mondadori Editore SpA ........................ Media 2,100 24,194 Eni SpA .............................................. Oil & Gas 780 19,497 Luxottica Group SpA, ADR ............................. Textiles Apparel & Luxury Goods 700 14,273 Mediaset SpA ......................................... Media 2,000 25,322 Riunione Adriatica di Sicurta SpA .................... Insurance 1,294 29,219 Saipem SpA ........................................... Energy Equipment & Services 1,500 18,014 ----------- 130,519 ----------- JAPAN 13.8% Acom Co. Ltd. ........................................ Consumer Finance 300 22,466 Asahi Glass Co. Ltd. ................................. Building Products 3,000 33,099 Canon Inc., ADR ...................................... Office Electronics 350 18,991 East Japan Railway Co. ............................... Road & Rail 5 27,827 Fanuc Ltd. ........................................... Machinery 200 13,083 Fast Retailing Co. Ltd. .............................. Specialty Retail 500 38,078 Fujitsu Ltd. ......................................... Computers & Peripherals 2,000 13,025 KAO Corp. ............................................ Household Products 600 15,349 Mitsui Fudosan Co. Ltd. .............................. Real Estate 1,000 12,156 Net One Systems Co. Ltd. ............................. IT Services 4 16,676 Nintendo Co. Ltd. .................................... Software 100 12,566 Nippon Telegraph & Telephone Corp. ................... Diversified Telecommunication Services 6 26,948 Seiko Epson Corp. .................................... Computers & Peripherals 400 17,809 SMC Corp. ............................................ Machinery 100 11,453
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) JAPAN (CONT.) Sompo Japan Insurance Inc. ........................... Insurance 4,000 $ 40,773 Sony Corp. ........................................... Household Durables 900 34,798 Takeda Pharmaceutical Co. Ltd. ....................... Pharmaceuticals 200 10,076 Trend Micro Inc. ..................................... Software 500 26,997 ----------- 392,170 ----------- MEXICO 2.9% America Movil SA de CV, L, ADR ....................... Wireless Telecommunication Services 600 31,410 Grupo Financiero Banorte SA de CV, O ................. Commercial Banks 4,000 25,218 Telefonos de Mexico SA de CV (Telmex), L, ADR ........ Diversified Telecommunication Services 650 24,908 ----------- 81,536 ----------- NETHERLANDS 4.3% Akzo Nobel NV ........................................ Chemicals 630 26,827 IHC Caland NV ........................................ Energy Equipment & Services 410 26,004 ING Groep NV ......................................... Diversified Financial Services 1,290 38,967 Koninklijke Philips Electronics NV ................... Household Durables 1,130 29,917 ----------- 121,715 ----------- NORWAY 1.0% Norske Skogindustrier ASA, A ......................... Paper & Forest Products 1,340 28,946 ----------- PORTUGAL 1.0% Portugal Telecom SA, SGPS ............................ Diversified Telecommunication Services 2,310 28,526 ----------- RUSSIA .6% b Lukoil Holdings, ADR ................................. Oil & Gas 140 17,150 ----------- SINGAPORE .3% DBS Group Holdings Ltd. .............................. Commercial Banks 1,000 9,863 ----------- SOUTH KOREA 3.3% a Kookmin Bank, ADR .................................... Commercial Banks 740 28,919 KT Corp., ADR ........................................ Diversified Telecommunication Services 1,100 23,991 POSCO, ADR ........................................... Metals & Mining 300 13,359 Samsung Electronics Co. Ltd., GDR, 144A .............. Semiconductors & Semiconductor Equipment 130 28,405 ----------- 94,674 ----------- SPAIN 3.7% Banco Santander Central Hispano SA ................... Commercial Banks 2,950 36,549 Telefonica Moviles SA ................................ Wireless Telecommunication Services 2,000 25,131 Telefonica SA ........................................ Diversified Telecommunication Services 2,370 44,575 ----------- 106,255 ----------- SWEDEN 3.7% Atlas Copco AB, A .................................... Machinery 910 41,092 Nordea Bank AB, FDR .................................. Commercial Banks 2,260 22,863 Securitas AB, B ...................................... Commercial Services & Supplies 480 8,236 Volvo AB, B .......................................... Machinery 840 33,316 ----------- 105,507 -----------
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SWITZERLAND 5.1% Adecco SA ............................................ Commercial Services & Supplies 100 $ 5,066 Credit Suisse Group .................................. Capital Markets 300 12,591 Lonza Group AG ....................................... Chemicals 110 6,181 Roche Holding AG ..................................... Pharmaceuticals 300 34,295 Swiss Reinsurance Co. ................................ Insurance 340 24,120 Syngenta AG .......................................... Chemicals 200 21,212 Synthes Inc. ......................................... Health Care Equipment & Supplies 180 20,150 UBS AG ............................................... Capital Markets 250 20,853 ----------- 144,468 ----------- TAIWAN 1.5% Chunghwa Telecom Co. Ltd., ADR ....................... Diversified Telecommunication Services 700 14,735 Compal Electronics Inc., 144A ........................ Computers & Peripherals 400 1,992 Compal Electronics Inc., GDR, Reg S .................. Computers & Peripherals 1,000 4,980 Taiwan Semiconductor Manufacturing Co. Ltd., ADR ..... Semiconductors & Semiconductor Equipment 2,500 21,225 ----------- 42,932 ----------- UNITED KINGDOM 19.9% BAE Systems PLC ...................................... Aerospace & Defense 6,900 30,528 BHP Billiton PLC ..................................... Metals & Mining 2,010 23,554 BP PLC ............................................... Oil & Gas 1,560 15,211 Cadbury Schweppes PLC ................................ Food Products 3,700 34,445 Compass Group PLC .................................... Hotels Restaurants & Leisure 2,870 13,565 Diageo PLC ........................................... Beverages 1,800 25,671 Exel PLC ............................................. Air Freight & Logistics 500 6,939 HBOS PLC ............................................. Commercial Banks 1,500 24,401 HSBC Holdings PLC .................................... Commercial Banks 1,200 20,533 Man Group PLC ........................................ Capital Markets 800 22,604 National Grid Transco PLC ............................ Multi-Utilities & Unregulated Power 2,350 22,396 Next PLC ............................................. Multiline Retail 500 15,835 Pearson PLC .......................................... Media 600 7,238 Reckitt Benckiser PLC ................................ Household Products 700 21,149 Rentokil Initial PLC ................................. Commercial Services & Supplies 1,570 4,452 Royal Bank of Scotland Group PLC ..................... Commercial Banks 800 26,903 Shell Transport & Trading Co. PLC .................... Oil & Gas 2,790 23,777 Shire Pharmaceuticals Group PLC ...................... Pharmaceuticals 2,870 30,133 Smith & Nephew PLC ................................... Health Care Equipment & Supplies 4,000 40,923 Smiths Group PLC ..................................... Industrial Conglomerates 1,290 20,354 Standard Chartered PLC ............................... Commercial Banks 1,630 30,302 Tesco PLC ............................................ Food & Staples Retailing 6,500 40,143 The Sage Group PLC ................................... Software 6,700 26,010 Vodafone Group PLC ................................... Wireless Telecommunication Services 3,990 10,818
Annual Report | 15 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) UNITED KINGDOM (CONT.) WPP Group PLC ........................................ Media 2,200 $ 24,197 Yell Group PLC ....................................... Media 670 5,659 ----------- 567,740 ----------- TOTAL COMMON STOCKS (COST $1,882,447) 98.5% .......... 2,803,760 OTHER ASSETS, LESS LIABILITIES 1.5% .................. 42,204 ----------- NET ASSETS 100.0% .................................... $2,845,964 =========== CURRENCY ABBREVIATIONS: | EUR - Euro | FIM - Finnish Markka a Non-income producing. b See Note 7 regarding other considerations.
16 | See notes to financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2004
------------------ FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES ------------------ Assets: Investments in securities: Cost ............................................................... $1,882,447 ------------------ Value .............................................................. 2,803,760 Cash ................................................................ 37,665 Foreign currency, at value (cost $11,773) ........................... 13,054 Receivables: Dividends .......................................................... 4,567 Affiliates ......................................................... 11,378 ------------------ Total assets ................................................... 2,870,424 ------------------ Liabilities: Other liabilities ................................................... 24,460 ------------------ Net assets, at value .......................................... $2,845,964 ------------------ Net assets consist of: Undistributed net investment income ................................. $ 1,938 Net unrealized appreciation (depreciation) .......................... 922,813 Accumulated net realized gain (loss) ................................ 8,736 Capital shares ...................................................... 1,912,477 ------------------ Net assets, at value ................................................. $2,845,964 ------------------ Shares outstanding ................................................... 200,000 ------------------ Net asset value per share a .......................................... $14.23 ------------------ a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 17 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2004
------------------ FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES ------------------ Investment income: Dividends (net of foreign taxes of $6,774) ..................................... $ 57,859 Interest ....................................................................... 952 ------------------ Total investment income ................................................... 58,811 ------------------ Expenses: Management fees (Note 3) ....................................................... 18,124 Administrative fees (Note 3) ................................................... 5,178 Transfer agent fees (Note 3) ................................................... 130 Custodian fees (Note 4) ........................................................ 800 Registration and filing fees ................................................... 16,672 Professional fees .............................................................. 16,550 Directors' fees and expenses ................................................... 5,500 Other .......................................................................... 2,600 ------------------ Total expenses ............................................................ 65,554 Expenses waived/paid by affiliate (Note 3) ................................ (43,796) Expense reductions (Note 4) ............................................... (413) ------------------ Net expenses .......................................................... 21,345 ------------------ Net investment income ............................................... 37,466 ------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................................... 123,463 Foreign currency transactions ................................................. 237 ------------------ Net realized gain (loss) .................................................. 123,700 Net change in unrealized appreciation (depreciation) on: Investments ................................................................... 298,823 Translation of assets and liabilities denominated in foreign currencies ....... 1,259 ------------------ Net change in unrealized appreciation (depreciation) ...................... 300,082 ------------------ Net realized and unrealized gain (loss) ......................................... 423,782 ------------------ Net increase (decrease) in net assets resulting from operations ................. $461,248 ------------------
18 | See notes to financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 2004 and 2003
------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES ------------------------------- 2004 2003 ------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................. $ 37,466 $ 45,545 Net realized gain (loss) from investments and foreign currency transactions ............ 123,700 (29,945) Net change in unrealized appreciation (depreciation) on investments and translation of asset and liabilities denominated in foreign currencies ............................... 300,082 672,942 ------------------------------- Net increase (decrease) in net assets resulting from operations .................... 461,248 688,542 Distributions to shareholders from: Net investment income .................................................................. (34,900) (55,229) Net realized gains ..................................................................... (73,360) -- ------------------------------- Total distributions to shareholders ..................................................... (108,260) (55,229) Capital share transactions (Note 2) ..................................................... -- (1,082,722) ------------------------------- Net increase (decrease) in net assets .............................................. 352,988 (449,409) Net assets Beginning of year ....................................................................... 2,492,976 2,942,385 ------------------------------- End of year ............................................................................. $2,845,964 $2,492,976 ------------------------------- Undistributed net investment income/distributions in excess of net investment income included in net assets: End of year ............................................................................. $ 1,938 $ (541) -------------------------------
Annual Report | See notes to financial statements. | 19 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Non-U.S. Core Equity Series (the Fund) is a separate, diversified series of Templeton Institutional Funds, Inc. (the Company). The Company is an open-end investment company registered under the Investment Company Act of 1940. The Fund seeks long-term capital growth. Under normal conditions, the Fund invests at least 80% of its net assets in foreign (non-U.S.) equity securities. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System, are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to qualify as a regulated investment company under Sub Chapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Common expenses incurred by the Company are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. Other expenses are charged to each Fund on a specific identification basis. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES Effective June 1, 2004, redemptions and exchanges of Fund shares held five trading days or less may be subject to the Fund's redemption fee, which is 1% of the amount redeemed. Effective March 1, 2005 the fee will increase to 2%. Such fees are retained by the Fund and accounted for as additional paid-in capital. There were no redemption fees for the year. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2004, there were 1.14 billion shares authorized ($0.01 par value), for the Company, of which 60 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
-------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004 2003 -------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------- Shares sold .................... -- $ -- -- $ -- Shares issued in reinvestment of distributions ............... -- -- 667 6,169 Shares redeemed ................ -- -- (112,026) (1,088,891) -------------------------------------------------------------- Net increase (decrease) ........ -- $ -- (111,359) $(1,082,722) --------------------------------------------------------------
Franklin Advisers, Inc. (an affiliate of the Fund's investment manager) is the record owner of 100% of the Fund shares as of December 31, 2004. 22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES Certain officers and directors of the Fund are also officers and directors of the following entities:
- --------------------------------------------------------------------------------------- ENTITY AFFILIATION - --------------------------------------------------------------------------------------- Franklin Templeton Asset Strategies, LLC (Asset Strategies) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin/Templeton Distributors, Inc (Distributors) Principal underwriter Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to Asset Strategies based on the Fund's average daily net assets as follows: - --------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - --------------------------------------------------------------------------- 0.70% Up to and including $1 billion 0.68% Over $1 billion, up to and including $5 billion 0.66% Over $5 billion, up to and including $10 billion 0.64% Over $10 billion, up to and including $15 billion 0.62% Over $15 billion, up to and including $20 billion 0.60% Over $20 billion Prior to May 1, 2004, the Fund paid an investment management fee to Asset Strategies of 0.70% per year of the average daily net assets of the Fund. B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of .20% per year of the Fund's average daily net assets. C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $130, of which $24 was paid to Investor Services. D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT The investment manager and administrator have agreed in advance to voluntarily waive their respective fees and assume payment of other expenses, through May 1, 2005, as noted in the Statement of Operations. Total expenses waived are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. Annual Report | 23 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2004, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, and organization costs. Net realized gains differ for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and wash sales. At December 31, 2004, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments .................................... $1,894,569 ----------- Unrealized appreciation ................................ $ 913,174 Unrealized depreciation ................................ (3,983) ----------- Net unrealized appreciation (depreciation) ............. $ 909,191 ----------- Undistributed ordinary income .......................... $ 5,575 Undistributed long term capital gains .................. 17,614 ----------- Distributable earnings ................................. $ 23,189 ----------- The tax character of distributions paid during the years ended December 31, 2004 and 2003, was as follows: ------------------------ 2004 2003 ------------------------ Distributions paid from: Ordinary income .......................... $ 34,900 $55,229 Long term capital gain ................... 73,360 -- ------------------------ $108,260 $55,229 ------------------------ 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the year ended December 31, 2004 aggregated $612,111 and $694,435, respectively. 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 7. OTHER CONSIDERATIONS An officer of Templeton Institutional Funds, Inc. may serve as a member on the board of directors of certain companies in which the Fund invests and/or may represent the Fund in certain corporate negotiations. At December 31, 2004, an officer serves in one or more of these capacities for Lukoil Holdings. As a result of this involvement, the officer may be in possession of certain material non-public information which, pursuant to the Fund's policies and the requirements of the federal securities laws, could prevent the Fund from trading in the securities of such companies for limited or extended periods of time. 8. REGULATORY MATTERS INVESTIGATIONS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, received subpoenas and/or requests for documents, information and/or testimony. The Company and its current employees provided documents and information in response to those requests and subpoenas. SETTLEMENTS Beginning in August 2004, the Company entered into settlements with certain regulators investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters described in this section is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary, Franklin Advisers, Inc., reached an agreement with the SEC that resolved the issues resulting from the SEC investigation into market timing activity. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the activities of a limited number of third parties that ended in 2000 and those that were the subject of the first Massachusetts administrative complaint described below. Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc. neither admitted nor denied any of the findings contained therein, Franklin Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. At this time, it is unclear which funds or which shareholders of any particular fund will receive distributions. The Order also required Franklin Advisers, Inc. to, among other things, enhance and periodically review compliance policies and procedures. On September 20, 2004, Franklin Resources, Inc. announced that two of its subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the "State of Massachusetts") related to its administrative complaint filed on February 4, 2004, concerning one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as described above. Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a cease-and-desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts Consent Order included two different sections: "Statements of Fact" and "Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS admitted the facts in the Statements of Fact. On October 25, 2004, the State of Massachusetts filed a second administrative complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it described the Massachusetts Consent Order and stated that "Franklin did not admit or deny engaging in any wrongdoing") failed to state that Franklin Advisers, Inc. and FTAS admitted the Statements of Fact portion of the Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a second agreement with the State of Massachusetts on November 19, 2004, resolving the Second Complaint. As a result of the November 19, 2004 settlement, Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts Consent Order did not change and there was no monetary fine associated with this second settlement. On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the issues resulting from the CAGO's investigation concerning sales and marketing support payments. Under the terms of the settlement, FTDI neither admitted nor denied the allegations in the CAGO's complaint and agreed to pay $2 million to the State of California as a civil penalty, 26 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) $14 million to the funds, to be allocated by an independent distribution consultant to be paid for by FTDI, and $2 million to the CAGO for its investigative costs. On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b) of the Securities Exchange Act of 1934" (the "Second Order"). Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc. neither admitted nor denied the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and Franklin Advisers, Inc. also agreed to implement certain measures and undertakings relating to marketing support payments to broker-dealers for the promotion or sale of fund shares, including making additional disclosures in the funds' Prospectuses and Statements of Additional Information. The Second Order further requires the appointment of an independent distribution consultant, at the Company's expense, who shall develop a plan for the distribution of the penalty and disgorgement to the funds. OTHER LEGAL PROCEEDINGS The Company, and other funds, and certain current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York and Florida, alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts administrative complaint and the findings in the SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc. Annual Report | 27 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 8. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) In addition, the Company, as well as certain current and former officers, employees, and directors, have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and/or payment of allegedly excessive advisory, commission, and distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds. The Company's management strongly believes that the claims made in each of the lawsuits identified above are without merit and intends to vigorously defend against them. The Company cannot predict with certainty, however, the eventual outcome of the remaining governmental investigations or private lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on the Company's future financial results. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. 28 | Annual Report Templeton Institutional Funds, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Franklin Templeton Non-U.S. Core Equity Series of Templeton Institutional Funds, Inc. (the "Fund") at December 31, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period September 3, 2002 (commencement date) to December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 9, 2005 Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby designates $90,974 as a capital gain dividend for the fiscal year ended December 31, 2004. Under Section 854(b)(2) of the Code, the Fund hereby designates up to a maximum of $58,685 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In January 2005, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2004. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. At December 31, 2004, more than 50% of the Franklin Templeton Non-U.S. Core Equity Series' total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund hereby designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 9, 2004, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, foreign qualified dividends, and adjusted foreign source income as designated by the Fund, to shareholders of record. As a service to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below reports foreign source income with the required adjustments to foreign source qualified dividends. This information is provided to simplify your reporting of foreign source income for line 1 of Form 1116. 30 | Annual Report Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
- ---------------------------------------------------------------------------------------------- ADJUSTED FOREIGN TAX FOREIGN FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE - ---------------------------------------------------------------------------------------------- Australia ..................... 0.0002 0.0094 0.0094 0.0040 Austria ....................... 0.0001 0.0006 0.0006 0.0003 Bermuda ....................... 0.0000 0.0018 0.0018 0.0008 Canada ........................ 0.0010 0.0047 0.0047 0.0020 China ......................... 0.0000 0.0018 0.0015 0.0009 Denmark ....................... 0.0002 0.0010 0.0010 0.0004 Finland ....................... 0.0008 0.0035 0.0035 0.0015 France ........................ 0.0028 0.0134 0.0131 0.0059 Germany ....................... 0.0028 0.0159 0.0159 0.0068 Hong Kong ..................... 0.0000 0.0175 0.0000 0.0175 Ireland ....................... 0.0000 0.0016 0.0016 0.0007 Israel ........................ 0.0001 0.0001 0.0001 0.0000 Italy ......................... 0.0028 0.0131 0.0131 0.0056 Japan ......................... 0.0011 0.0105 0.0100 0.0048 Mexico ........................ 0.0000 0.0043 0.0043 0.0018 Netherlands ................... 0.0026 0.0122 0.0122 0.0052 Norway ........................ 0.0009 0.0041 0.0041 0.0018 Portugal ...................... 0.0004 0.0021 0.0021 0.0009 Russia ........................ 0.0003 0.0024 0.0024 0.0010 Singapore ..................... 0.0002 0.0007 0.0000 0.0007 South Korea ................... 0.0023 0.0096 0.0096 0.0041 Spain ......................... 0.0014 0.0093 0.0083 0.0046 Sweden ........................ 0.0036 0.0168 0.0168 0.0072 Switzerland ................... 0.0012 0.0061 0.0057 0.0028 Taiwan ........................ 0.0015 0.0038 0.0038 0.0016 United Kingdom ................ 0.0076 0.0596 0.0596 0.0255 --------------------------------------------------------- TOTAL ......................... $0.0339 $0.2259 $0.2052 $0.1084 ---------------------------------------------------------
Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit or deduction (assuming you held your shares in the Fund for a minimum of 16 days during the 30-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate). Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends without adjustment for the lower U.S. tax rates. Generally, this is the foreign source income to be reported by certain trusts and corporate shareholders. Annual Report | 31 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. If you are an individual shareholder who does not meet the qualified dividend holding period requirements, you may find this information helpful to calculate the foreign source income adjustment needed to complete line 1 of Form 1116. Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per share of foreign source income the Fund paid to you. These amounts reflect the Foreign Source Income reported in column 2 adjusted for the tax rate differential on foreign source qualified dividends that may be required for certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B). If you are an individual shareholder who meets the qualified dividend holding period requirements, generally, these Adjusted Foreign Source Income amounts may be reported directly on line 1 of Form 1116 without additional adjustment. In January 2005, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2004. The Foreign Source Income reported on Form 1099-DIV has been reduced to take into account the tax rate differential on foreign source qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B). Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2004 individual income tax returns. 32 | Annual Report Board Members and Officers The name, age, and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (72) Director Since 1992 142 Director, Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (60) Director Since 1990 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (72) Director Since 1992 143 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas); H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Canadian National Railway (railroad); and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (76) Director Since 1993 142 Director, Martek Biosciences 500 East Broward Blvd. Corporation; MedImmune, Inc. Suite 2100 (biotechnology); and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding company) (1987-2004), and Spacehab, Inc. (aerospace services) (1994-2003). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ FRED R. MILLSAPS (75) Director Since 1992 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (72) Director Since 2003 21 Director, White Mountains Insurance 500 East Broward Blvd. Group Ltd. (holding company); Suite 2100 Amerada Hess Corporation (exploration Fort Lauderdale, FL 33394-3091 and refining of oil and gas); and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Co. (medical technology), Cooper Industries (electrical products and tools and hardware), Health Net (formerly Foundation Health), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison) and UAL Corporation (airlines). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 21 None (50) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED BOARD MEMBERS AND OFFICERS - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (74) Director Since 1993 18 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil Suite 2100 and gas); Total Logistics, Inc. Fort Lauderdale, FL 33394-3091 (formerly C2, Inc. (operating and investment business)); and Weatherford International, Ltd. (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (71) Director, Vice Director and 142 None One Franklin Parkway President Vice President San Mateo, CA 94403-1906 and Chairman since 1993 and of the Board Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (59) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (40) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ------------------------------------------------------------------------------------------------------------------------------------ MARTIN L. FLANAGAN (44) Vice President Since 1990 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (64) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (64) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-2302 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (68) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ DONALD F. REED (60) President and President since Not Applicable Not Applicable 1 Adelaide Street East, Chief 1993 and Chief Suite 2101 Executive Executive Toronto, Ontario Canada Officer - Officer - M5C 3B8 Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and Director, Templeton Worldwide, Inc.; Chief Executive Officer, Templeton Investment Counsel, LLC; President, Chief Executive Officer and Director, Franklin Templeton Investments Corp.; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Chairman and Director of FTTrust Company. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable 500 East Broward Blvd. 2004 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - ------------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP. - ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson is considered to be an interested person of Templeton Institutional Funds, Inc. (TIFI) under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE SINCE 1992 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR. OLSON, WHO HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY CHAIRMAN FROM 1980-2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999, IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD. AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVE THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 39 Templeton Institutional Funds, Inc. SHAREHOLDER INFORMATION FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the Securities and Exchange Commission's website at sec.gov and reflect the 12-month period beginning July 1, 2003 and ending June 30, 2004. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 40 | Annual Report [LOGO OMITTED] FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN[R] TEMPLETON[R] 600 Fifth Avenue INSTITUTIONAL NEW YORK, NEW YORK 10020 FRANKLINTEMPLETONINSTITUTIONAL.COM ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INVESTMENT MANAGER Franklin Templeton Alternative Strategies, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 This report must be preceded or accompanied by the current Templeton Institutional Funds, Inc., Franklin Templeton Non-U.S. Core Equity Series prospectus, which contains more complete information including charges, expenses, and risk factors. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT459 A2004 02/05 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 11(a), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Fred R. Millsaps and Frank A. Olson and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $131,082 for the fiscal year ended December 31, 2004 and $232,130 for the fiscal year ended December 31, 2003. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements were $48,949 for the fiscal year ended December 31, 2004 and $3,134 for the fiscal year ended December 31, 2003. The services for which these fees were paid included attestation services. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $2,813 for the fiscal year ended December 31, 2004 and $0 for the fiscal year ended December 31, 2003. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $97,187 for the fiscal year ended December 31, 2004 and $12,000 for the fiscal year ended December 31, 2003. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and a review of an ICI transfer agent survey. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $148,949 for the fiscal year ended December 31, 2004 and $15,134 for the fiscal year ended December 31, 2003. (h) No disclosures are required by this Item 4(h). ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosures herein. ITEM 10. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 11. EXHIBITS. (A) Code of Ethics (B)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (B)(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON INSTITUTIONAL FUNDS, INC. By /s/JIMMY D. GAMBILL ------------------------ Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: April 25, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL ------------------------ Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: April 25, 2005 By /s/GALEN G. VETTER ------------------------- Galen G. Vetter Chief Financial Officer Date: April 25, 2005 EX-99.CODE ETH 2 ncsr-code704.txt N-CSR CODE OF ETHICS CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Dated July 2004 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics August 2004 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM JULY 2004 FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment - ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3 Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5 See Part X. EX-99.CERT 3 tifi1204-302_amd.txt CERTIFICATIONS PURSUANT TO SECTION 302 Exhibit B(1) I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of Templeton Institutional Funds, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. April 25, 2005 S\JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of Templeton Institutional Funds, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. April 25, 2005 S\GALEN G. VETTER Galen G. Vetter Chief Financial Officer EX-99.906 CERT 4 ex99-906cert_14648.txt CERTIFICATIONS PURSUANT TO SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the TEMPLETON INSTITUTIONAL FUNDS, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 12/31/04 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: February 18, 2005 S\GALEN G. VETTER Galen G. Vetter Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO REGISTRANT AND WILL BE RETAINED BY REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the TEMPLETON INSTITUTIONAL FUNDS, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 12/31/04 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: February 18, 2005 S\JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO REGISTRANT AND WILL BE RETAINED BY REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----